<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
COMMISSION FILE NUMBER 33-13646
-------------------------------
WESTCORP
----------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
-----------------------------------------
(Address of principal executive offices)
(714) 727-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
As of July 31, 1995, the registrant had 24,486,548 outstanding shares of common
stock, $1.00 par value. The shares of common stock represent the only class of
common stock of the registrant.
The total number of sequentially numbered pages is 30.
<PAGE> 2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1995
TABLE OF CONTENTS
_____________________________
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1995 and December 31, 1994 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1995 and 1994 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------------ ------------
(Dollars in thousands, except per-share
amounts)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short term investments $ 169,367 $ 166,293
Investment securities held to maturity (fair value 1995: $1,469) 1,508
Investment securities available for sale 119,978 114,764
Mortgage-backed securities held to maturity (fair value 1995: $456,012; 1994:
$305,466) 450,662 316,511
Mortgage-backed securities available for sale 222,325 154,158
Loans receivable, net of allowance for loan losses (1995: $41,256;
1994: $41,323) 1,448,499 1,411,052
Loans held for sale 233,246 304,506
Premises and equipment, net 65,460 66,465
Real estate owned, net 13,279 23,927
Accrued interest receivable 15,474 13,309
Excess of purchase cost over net assets acquired 1,057 1,099
Federal Home Loan Bank stock 23,824 24,474
Other assets 185,244 145,731
---------- ----------
$2,949,923 $2,742,289
========== ==========
LIABILITIES
Savings deposits $1,770,945 $1,632,782
Securities sold under agreements to repurchase 309,080 246,074
Short term borrowings 151,756 210,578
Federal Home Loan Bank advances 76,000 89,000
Amounts held on behalf of trustee 277,312 216,204
Unearned insurance premiums and insurance reserves 3,762 5,096
Other liabilities 28,545 26,392
---------- ----------
2,617,400 2,426,126
SUBORDINATED DEBENTURES 104,100 103,851
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 24,480,058
shares in 1995 and 23,145,640 shares in 1994 24,480 23,146
Paid-in capital 114,111 102,376
Retained earnings 91,570 92,788
Unrealized loss on securities available for sale, net of tax (1,738) (5,998)
---------- ----------
228,423 212,312
---------- ----------
$2,949,923 $2,742,289
========== ==========
</TABLE>
____________________
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Dollars in thousands, except per-share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 40,128 $ 27,768 $ 77,213 $ 58,248
Mortgage-backed securities 11,794 1,443 20,249 2,705
Investment securities 1,644 1,402 3,278 2,881
Other 1,369 930 3,251 1,798
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 54,935 31,543 103,991 65,632
Interest expense:
Savings deposits 25,737 15,519 48,623 30,127
Securities sold under agreements to repurchase 4,501 7,553
Federal Home Loan Bank advances and other borrowings 4,423 3,445 9,317 9,515
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 34,661 18,964 65,493 39,642
---------- ---------- ---------- ----------
NET INTEREST INCOME 20,274 12,579 38,498 25,990
Provision for loan losses 4,094 2,512 4,732 6,754
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 16,180 10,067 33,766 19,236
Other income:
Automobile lending 21,058 17,858 38,192 38,144
Mortgage banking 578 (740) 2,032 285
Investment and mortgage-backed securities gains (21) 448 486 448
Insurance income 1,833 2,115 2,409 4,233
Real estate operations 145 941 668 (1,026)
Rental operations (100) (132) (158) (296)
Miscellaneous 163 104 269 238
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 23,656 20,594 43,898 42,026
Other expenses:
Salaries and employee benefits 14,619 13,445 29,326 26,684
Occupancy 2,346 2,067 4,653 4,025
Insurance 1,336 1,278 2,957 2,709
Miscellaneous 7,856 7,080 15,716 13,877
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSES 26,157 23,870 52,652 47,295
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 13,679 6,791 25,012 13,967
Income taxes 5,656 2,692 10,378 5,940
---------- ---------- ---------- ----------
NET INCOME $ 8,023 $ 4,099 $ 14,634 $ 8,027
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENT $ 0.32 $ 0.17 $ 0.59 $ 0.33
========== ========== ========== ==========
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ 0.090 $ 0.075 $ 0.180 $ 0.150
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
AND COMMON SHARE EQUIVALENTS 24,692,589 24,269,656 24,619,122 24,233,913
========== ========== ========== ==========
</TABLE>
---------------------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1995 1994
-------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,634 $ 8,027
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses 4,632 5,254
Depreciation and amortization 3,654 3,414
Amortization of deferred fees 1,587 (666)
Amortization of issuance costs 249 276
(Increase) decrease in interest receivable (2,165) 1,500
(Gains) losses on nonoperating activities (10,137) 4,049
Decrease in interest payable (1,133) (816)
Decrease in unearned insurance (1,334) (13)
Other, net (30,983) 11,615
Net change in loans available for sale 77,276 37,707
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 56,280 70,347
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of investment securities 5,000
Purchase of mortgage-backed securities available for sale (167,905) (104,031)
Purchase of mortgage-backed securities held to maturity (137,321)
Proceeds from sale of mortgage-backed securities available for sale 98,500
Payments on mortgage-backed securities 7,230 5,574
Net change in loans (48,580) (4,876)
Additions to premises and equipment (2,604) (4,340)
Disposition of real estate owned 17,605 23,641
Purchase of FHLB stock (557) (340)
Proceeds from sales of FHLB stock 1,207
Net increase in trust receivable (8,460) (11,735)
Net increase in trustee accounts 61,108 32,467
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (179,777) (58,640)
</TABLE>
____________________
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1995 1994
-------- --------
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $138,163 $ 80,206
Increase in securities sold under agreements to repurchase 63,006
Decrease in FHLB advances, net (13,000) (29,000)
Decrease in short-term borrowings, net (58,814) (108,539)
Repayment of other borrowings (26,333)
Redemption of subordinated debentures (4,750)
Proceeds from sale of common stock 1,496 526
Cash dividends (4,280) (3,371)
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 126,571 (91,261)
-------- ---------
Net increase (decrease) in cash and equivalents 3,074 (79,554)
Cash and equivalents at beginning of period 166,293 162,557
Cash and equivalents at end of period $169,367 $ 83,003
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $66,626 $40,457
Income taxes 6,212 1,750
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $13,412 $15,058
____________________
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1995 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1995. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in Westcorp's annual report on Form 10-K for the year ended December
31, 1994.
Certain amounts from the 1994 consolidated financial statement amounts have
been reclassified to conform to the 1995 presentation.
7
<PAGE> 8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
---------- ------------
(Dollars in thousands)
<S> <C> <C>
Real estate:
Mortgage $1,344,865 $1,308,585
Construction 10,217 19,813
---------- ----------
1,355,082 1,328,398
Less: Undisbursed loan proceeds 2,504 7,614
---------- ----------
1,352,578 1,320,784
Consumer:
Sales contracts 418,373 513,470
Less: Unearned discounts 48,889 82,762
---------- ----------
369,484 430,708
---------- ----------
1,722,062 1,751,492
Allowance for loan losses (41,256) (41,323)
Deferred loan fees (7,699) (5,141)
Other 8,638 10,530
---------- ----------
1,681,745 1,715,558
Less: Loans held for sale:
Mortgage 40,224 2,954
Consumer 193,022 301,552
---------- ----------
233,246 304,506
---------- ----------
Total $1,448,499 $1,411,052
========== ==========
</TABLE>
Loans serviced by Westcorp for the benefit of others totalled approximately
$3.6 billion and $2.9 billion at June 30, 1995 and December 31, 1994,
respectively. These amounts are not reflected in the accompanying consolidated
financial statements.
8
<PAGE> 9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
June 30, 1995
Held to Maturity Securities
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
--------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and corporations $1,508 $39 $1,469
------ ------ --- ------
$1,508 $39 $1,469
====== ====== === ======
</TABLE>
9
<PAGE> 10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - INVESTMENT SECURITIES AVAILABLE FOR SALE
The aggregated amortized cost and approximate fair value of investment
securities available for sale were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995
AVAILABLE FOR SALE SECURITIES
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and corporations $118,302 $219 $1,934 $116,587
Obligations of states and political
subdivisions 3,522 156 3,366
Other 25 25
-------- ---------- ---------- --------
$121,849 $219 $2,090 $119,978
======== ========== ========== ========
<CAPTION>
DECEMBER 31, 1994
AVAILABLE FOR SALE SECURITIES
-------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and corporations $119,013 $7,336 $111,677
Obligations of states and political
subdivisions 3,524 462 3,062
Other 25 25
-------- ---------- ---------- --------
$122,562 $7,798 $114,764
======== ========== ========== ========
</TABLE>
10
<PAGE> 11
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1995
HELD TO MATURITY SECURITIES
----------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $334,490 $7,332 $1,777 $340,045
FNMA participation certificates 105,996 265 105,731
FHLMC participation certificates 10,011 60 10,071
Other participation certificates 165 165
--------- ---------- ---------- --------
$450,662 $7,392 $2,042 $456,012
========= ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
HELD TO MATURITY SECURITIES
----------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $208,307 $246 $ 6,539 $202,014
FNMA participation certificates 108,033 4,752 103,281
Other participation certificates 171 171
--------- ---------- ---------- ---------
$316,511 $246 $11,291 $305,466
========= ========== ========== =========
</TABLE>
NOTE F - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The aggregated amortized cost and approximate fair value of mortgage-backed
securities available for sale were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995
AVAILABLE FOR SALE SECURITIES
----------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 33,788 $1,242 $1,611 $ 33,419
FNMA participation certificates 90,776 479 349 90,906
FHLMC participation certificates 76,902 718 1,823 75,797
Collateralized mortgage
obligations 22,037 327 161 22,203
--------- ---------- ---------- ---------
$223,503 $2,766 $3,944 $222,325
========= ========== ========== =========
</TABLE>
11
<PAGE> 12
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
AVAILABLE FOR SALE SECURITIES
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GNMA certificates $ 50,637 $ 1,572 $ 1,036 $ 51,173
FNMA certificates 80,622 2,788 77,834
FHLMC participation certificates 3,082 85 2,997
Other participation certificates 22,543 389 22,154
-------- -------- -------- --------
$156,884 $ 1,572 $ 4,298 $154,158
======== ======== ======== ========
</TABLE>
NOTE G - DIVIDENDS
On March 13, 1995 and June 8, 1995, Westcorp paid a cash dividend of $0.09 per
share. In addition, Westcorp paid a 5% stock dividend on April 12, 1995. The
per share amounts for all periods presented have been restated to reflect the
increased shares outstanding. On July 25, 1995, Westcorp announced a cash
dividend of $0.09 per share for shareholders of record as of August 8, 1995,
payable August 14, 1995.
NOTE H - OTHER EVENTS
Effective May 1, 1995, Westcorp transferred the automobile lending operations
of Western Financial Savings Bank, F.S.B. (the "Bank") to one of its
wholly-owned subsidiaries, WFS Financial Inc ("WFS"). WFS was known as
Westcorp Financial Services, Inc. prior to April 28, 1995.
Effective August 8, 1995, WFS sold to the public 4.6 million shares of common
stock at a price of $16.50 per share raising approximately $70 million in
additional capital. The Bank retained an ownership interest in WFS of 80.3%.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $208 million or 7.6% to $2.9 billion at June 30, 1995
from $2.7 billion at December 31, 1994. This increase is primarily the result
of the purchase of mortgage-backed securities.
LOANS
Loans (including those held for sale), net of unearned discounts and
undisbursed loan proceeds, decreased $29.4 million or 1.68% since December 31,
1994. The decrease is the result of the differential between loans originated
and sold during the six month period ended June 30, 1995. Westcorp has
retained the servicing on almost all loans sold and receives a servicing fee
therefrom. Included in the portfolio are loans held for sale of which $40.2
million are mortgage loans secured primarily by single family residences and
$193 million which are retail installment sales contracts secured by motor
vehicles. Since December 31, 1994, Westcorp has increased the amount of
consumer loans securitized, thereby reducing the overall amount of loans held
on the balance sheet.
Consumer loan originations were 24.5% and 21.3% higher for the three and six
months ended June 30, 1995 compared to the same periods in 1994. This increase
was primarily the result of Westcorp's continued expansion throughout 1994 and
into 1995 of its dealer center and branch network and favorable market
conditions for automobile sales in California, Oregon, Nevada, Arizona, Texas,
New Mexico, Washington, Idaho, Utah, Kansas and Colorado - the states in which
Westcorp maintains offices.
Real estate originations were lower during the first three and six month
periods of 1995 compared to the same periods a year ago. The decrease in real
estate originations is reflective of the lower level of refinancings due to the
general increase in interest rates compared to the same periods of 1994 and the
continued sluggish California economy. The following table sets forth the loan
origination, purchase and sale activity of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
1995 1994
---------------------------------------- ------------------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Beginning balance $1,320,784 $ 430,708 $1,326,797 $230,351
Originations (1) 120,438 697,151 369,411 574,733
Purchases 201 18
Sales (20,515) (680,000) (374,660) (430,000)
Principal reductions (2) (68,330) (78,375) (112,687) (77,127)
---------- --------- ---------- --------
Ending balance $1,352,578 $ 369,484 $1,208,879 $297,957
========== ========= ========== ========
</TABLE>
(1) Includes automobile loans purchased from automobile dealers.
(2) Includes scheduled payments, prepayments and chargeoffs.
13
<PAGE> 14
The real estate loan portfolio (including those classified as held for sale)
consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------------------------ --------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 751,700 55.6% $ 718,924 54.4%
Second trust deeds 120,863 8.9 126,365 9.6
---------- ----- ---------- -----
872,563 64.5 845,289 64.0
Multifamily residential loans 468,996 34.7 459,883 34.8
Construction loans 10,217 0.8 19,813 1.5
Commercial loans 3,306 0.2 3,413 0.3
---------- ----- ---------- -----
1,355,082 1,328,398
Less: Undisbursed loan proceeds 2,504 0.2 7,614 0.6
---------- ----- ---------- -----
$1,352,578 100.0% $1,320,784 100.0%
========== ===== ========== =====
</TABLE>
Westcorp's real estate portfolio consisted primarily of adjustable rate
mortgage loans as shown below:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------------------------ --------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family $ 117,941 8.7% $ 103,189 7.8%
Multifamily 392 0.1 394 0.1
Adjustable rate loans:
Negative amortizing 922,709 68.2 916,916 69.3
No negative amortizing 311,536 23.0 300,285 22.8
---------- ----- ---------- -----
$1,352,578 100.0% $1,320,784 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1994
------------------------------ --------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Automobile loans, net $ 364,461 98.6% $ 427,175 99.2%
Other 5,023 1.4 3,533 0.8
---------- ----- ---------- -----
Total portfolio $ 369,484 100.0% $ 430,708 100.0%
========== ===== ========== =====
</TABLE>
MORTGAGE-BACKED SECURITIES
During the first half of 1995, Westcorp purchased mortgage-backed securities
totalling $305.2 million. This is part of Westcorp's overall strategy to fully
employ capital and enhance net interest income.
14
<PAGE> 15
ASSET QUALITY
GENERAL
Westcorp's real estate loan portfolio delinquency has increased over the past
year. From mid-1992 through early 1994, the economy in California, where
substantially all of the collateral for Westcorp's real estate loans is
located, experienced severe downturns in the market values of real estate, high
levels of unemployment and a continued slump in residential construction and
new home sales. The problems created by this economic slump have been
especially noticeable in the multifamily mortgage portfolio. While the economy
has not fully recovered, the downward spiral appears to have stabilized.
DELINQUENCY
The percent of loans 60 days or more delinquent increased to 1.3% at June 30,
1995 compared to 1.0% at December 31, 1994. Delinquent loans by type of loan
and as a percentage of loans by type are summarized as follows at June 30, 1995
and December 31, 1994:
<TABLE>
<CAPTION>
JUNE 30, 1995
NUMBER OF DAYS DELINQUENT
-------------------------------------------------------------------------------
60-89 90 OR MORE TOTAL
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family residential homes $2,005 0.2% $12,897 1.5% $14,902 1.7%
Multifamily residential homes 3,924 0.8 1,955 0.4 5,879 1.2
Consumer 828 0.2 351 0.1 1,179 0.3
------ --- ------- --- ------- ---
Total $6,757 0.4% $15,203 0.9% $21,960 1.3%
====== === ======= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1994
NUMBER OF DAYS DELINQUENT
-------------------------------------------------------------------------------
60-89 90 OR MORE TOTAL
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Single family residential homes $ 899 0.1% $13,253 1.6% $14,152 1.7%
Multifamily residential homes 317 0.1 1,393 0.3 1,710 0.4
Consumer 576 0.1 228 0.1 804 0.2
------ --- ------- --- ------- ---
Total $1,792 0.1% $14,874 0.8% $16,666 1.0%
====== === ======= === ======= ===
</TABLE>
15
<PAGE> 16
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") decreased 18.3% to $35.4 million at June 30,
1995 compared to $43.3 million at December 31, 1994. The overall decrease is
primarily attributable to an effective nonperforming asset disposition process
and improving overall asset quality. At June 30, 1995, NPAs represented 1.2%
of total assets compared to 1.6% at December 31, 1994.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are accounted for at fair value. NPLs are defined
as all loans on nonaccrual that are mortgage loans 90 days or more past due or
performing loans where full collection of principal and interest is not
reasonably assured. When a loan is designated as nonaccrual, all previous
accrued interest is reversed. At June 30, 1995, interest on nonperforming
loans excluded from interest income was $1.0 million compared to $6.9 million
at June 30, 1994.
As a result of the adoption of SFAS No. 114, Westcorp reclassified $3.0 million
of NPAs back to NPLs. A loan is impaired when, based on current information
and events, it is probable that Westcorp will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Westcorp
measures impairment based on the fair value of the loan's collateral. Changes
in the fair value are recorded through the allowance for loan losses. At June
30, 1995, $6.1 million in loans were considered impaired.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------- -----------
(Dollars in thousands)
<S> <C> <C>
Loans 90 days or more past due $14,751 $13,950
Performing, nonaccrual loans 6,546 3,717
------- -------
Total nonperforming loans $21,297 $17,667
======= =======
</TABLE>
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------- -----------
(Dollars in thousands)
<S> <C> <C>
Single family residential $14,025 $13,856
Multifamily 5-36 units 3,596 2,616
Multifamily 37+ units 2,383 59
Other 1,293 1,136
------- -------
Total nonperforming loans $21,297 $17,667
======= =======
</TABLE>
16
<PAGE> 17
The migration of nonperforming loans and real estate owned from December 31,
1994 to June 30, 1995 is shown below.
NONPERFORMING LOANS
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
---------- --------------- ---------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/94 $ 17,667 $ 13,856 $ 2,616 $ 59 $ 1,136
New nonperforming loans 11,124 8,487 2,637
Adjustment for impaired loans 3,006 350 2,390 266
REO (5,739) (4,677) (1,003) (59)
Cures and payoffs (3,186) (2,616) (454) (7) (109)
Chargeoffs (1,575) (1,025) (550)
-------- -------- -------- -------- --------
Balance, 6/30/95 $ 21,297 $ 14,025 $ 3,596 $ 2,383 $ 1,293
======== ======== ======== ======== ========
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
---------- --------------- ---------------- -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, 12/31/94 $ 20,737 $ 5,271 $ 4,028 $ 10,499 $ 939
New REO 13,412 6,233 5,560 1,619
Sales (15,158) ( 5,210) (4,548) (5,400)
Writedowns (4,927) (1,233) (2,122) (948) (624)
-------- -------- -------- -------- --------
Balance, 6/30/95 $ 14,064 $ 5,061 $ 2,918 $ 5,770 $315
======== ======== ======== ======== ========
</TABLE>
For nonperforming assets other than nonperforming loans, assets secured by
multifamily residential properties continued to be the dominant asset type
consisting of $8.7 million or 61.8% of these assets. Of the multifamily
residential properties, $5.8 million are properties of 37 units or greater.
17
<PAGE> 18
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp retained its allowance for loan losses at $41.3
million for June 30, 1995 and at December 31, 1994. While Westcorp's
nonperforming assets are mainly multifamily and construction loans, no single
loan, borrower or series of such loans predominate. The provision and
allowance for loan losses are indicative of loan volumes, loss trends and
management's analysis of market conditions. The allowance for loan losses is
maintained at a level believed adequate by management to absorb potential
losses in the loan portfolio.
The following table presents summarized data relative to the allowance for loan
losses.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Total loans $ 1,722,062 $ 1,751,492
Allowance for loan losses 41,256 41,323
Allowance for real estate losses 784 1,684
Loans past due 60 days or more 21,961 16,666
Nonperforming loans 21,296 17,667
Nonperforming assets 35,360 43,278
Allowance for loan losses as a percent of:
Total loans 2.4% 2.4%
Loans past due 60 days or more 187.9 247.9
Nonperforming loans 193.7 233.9
Total allowance as a percent of nonperforming assets 118.9 99.4
Nonperforming loans as a percent of total loans 1.2 1.0
Nonperforming assets as a percent of total assets 1.2 1.6
</TABLE>
18
<PAGE> 19
The table below provides a historical analysis of the allowance for loan
losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -----------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 40,670 $ 41,065 $ 41,323 $ 39,677
Chargeoffs:
Real estate (1,617) (1,176) (2,358) (3,038)
Consumer (3,086) (2,389) (5,397) (4,818)
-------- -------- -------- --------
(4,703) (3,565) (7,755) (7,856)
Recoveries:
Real estate 59 126 127 296
Consumer 1,136 1,510 2,029 2,777
--------- --------- --------- ---------
1,195 1,636 2,156 3,073
--------- --------- --------- ---------
Net chargeoffs (3,508) (1,929) (5,599) (4,783)
Transfers from the allowance for real
estate losses 800
Provision for loan losses 4,094 2,512 4,732 6,754
--------- --------- --------- ---------
Balance at end of period $ 41,256 $ 41,648 $ 41,256 $ 41,648
========= ========= ========= =========
Ratio of net chargeoffs during
period to average loans outstanding
during the period (annualized) .80% .53% .65% .64%
========= ========= ========= =========
Changes in the allowance for real estate losses were as follows:
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -----------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 784 $ 3,470 $ 1,684 $ 3,508
Provision for real estate losses (1,500) (100) (1,500)
Chargeoffs, net 541 503
Transfers to the allowance for loan
losses (800)
--------- --------- -------- ---------
Balance at end of period $ 784 $ 2,511 $ 784 $ 2,511
========= ========= ======== =========
</TABLE>
Westcorp transferred $0.8 million of allowance for real estate losses to
allowance for loan losses at March 31, 1995 as part of implementing SFAS 114.
19
<PAGE> 20
RECENT EVENTS
Effective May 1, 1995, Westcorp transferred the automobile lending operations
of the Bank to one of its wholly-owned subsidiaries, WFS. WFS was known as
Westcorp Financial Services, Inc. prior to April 28, 1995.
Effective August 8, 1995, WFS sold to the public 4.6 million shares of common
stock at a price of $16.50 per share raising approximately $70 million in
additional capital. The Bank retained an ownership interest in WFS of 80.3%
RESULTS OF OPERATIONS
SUMMARY
Westcorp reported net income of $8.0 million and $14.6 million for the three
and six months ended June 30, 1995, compared to $4.1 million and $8.0 million
for the respective periods of 1994. Return on average assets was 1.2% and 1.1%
for the three and six months ended June 30, 1995, compared to 0.8% for the same
periods of 1994. Return on average equity was 14.6% and 13.3% for the three
and six months ended June 30, 1995, compared to 8.0% and 7.8% for the
respective periods of 1994. The increase in net income was most affected by
the following three factors:
- Net interest income increased as interest margins widened and interest
earning assets increased.
- Provision for loan losses decreased due to a lower level of
loans receivable held on the balance sheet.
- Other expenses increased as a result of continued expansion into other
states and expansion of servicing portfolios.
NET INTEREST INCOME
Net interest income for the three and six months ended June 30, 1995 was $20.3
million and $38.5 million. For the same periods of 1994, net interest income
totalled $12.6 million and $26.0 million.
Overall net interest margins increased 13 basis points for the six months ended
June 30, 1995, compared to the same period of 1994 due to an increase of 98
basis points in the yield on interest earning assets while the cost of funds
increased 85 basis points for the same period.
The increase in yield on interest earning assets for the six months ended June
30, 1995, compared to the same period of 1994 was affected by a 175 basis point
increase in the consumer loan portfolio, which is due to increased originations
of contracts with higher yields. Additionally, the yield on mortgage backed
securities increased 185 basis points due to the reinvestment of funds into
mortgage-backed securities at higher rates than the rates on those assets sold
or repaid as well as an increase in the overall amount of securities held.
The increase in the cost of funds was affected by a 120 basis point increase in
the cost of savings deposits and a $138 million increase in the amount of
savings deposits for which interest was paid for the six months ended June 30,
1995 compared to the same period of 1994. This increase reflects a continued
replacement of lower costing deposits with higher costing ones.
20
<PAGE> 21
Interest rates earned and paid for the three and six months ended June 30, 1995
and 1994 are summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1995 1994 1995 1994
-------- --------- -------- --------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Interest-earning assets:
Investment securities 5.51% 5.11% 5.52% 5.18%
Mortgage-backed securities (1) 7.61 5.47 7.25 5.45
Loans:
Consumer 14.50 13.18 14.76 13.01
Mortgage 7.54 6.46 7.23 6.61
Other 5.48 4.30 5.68 4.07
----- ----- ----- -----
Total interest-earning assets 8.50 7.18 8.27 7.29
Interest-bearing liabilities:
Savings deposits 5.81 4.47 5.65 4.45
Public debt offerings (2) 7.29 8.71 7.31 7.46
Repurchase agreements 5.85 5.53
FHLB advances and other
borrowings 7.47 7.55 7.46 7.64
----- ----- ----- -----
Total interest-bearing liabilities 6.03 4.97 5.86 5.01
Interest rate spread 2.47% 2.21% 2.41% 2.28%
===== ===== ===== =====
Net yield on average interest
earning assets 3.25% 2.85% 3.19% 2.86%
===== ===== ===== =====
</TABLE>
______________
(1) Includes collateralized mortgage obligations.
(2) Includes subordinated debentures, commercial paper and
collateralized bonds.
21
<PAGE> 22
ASSET/LIABILITY MANAGEMENT
The continued profitability of Westcorp is dependent upon, among other factors,
the extent to which the effect of changes in interest rates on its earnings are
minimized. Thus, a major objective of Westcorp's asset/liability management
program has been to control interest rate risk through matching the maturity
and repricing characteristics of its interest-earning assets with those of its
interest-bearing liabilities.
Westcorp originates both adjustable-rate mortgages ("ARM") and fixed-rate
mortgages. To minimize the interest rate risk associated with its real
estate loan portfolio, Westcorp generally retains the ARMs in its own
loan portfolio and sells its fixed-rate loans in the secondary market with
servicing rights retained Westcorp has also purchased mortgage servicing
rights (PMSR) which act as a potential hedge against rising interest rates.
During the first half of 1995, Westcorp purchased rights to service $520
million of single family residential mortgage loans for $5.0 million.
Subsequent to quarter-end, Westcorp purchased rights to service $1.0 billion of
single family residential mortgage loans for $10.2 million. At June 30, 1995,
Westcorp serviced $2.1 billion in mortgage real estate loans for others. ARMs
and adjustable-rate mortgage-backed securities ("MBS") amounted to 73.7% of the
total mortgage loans and MBS held by Westcorp at June 30, 1995. Interest rates
generally adjust on a monthly, semiannual or annual basis with 95.7% of
Westcorp's adjustable products adjusting monthly.
Westcorp also originates fixed-rate consumer loans. To minimize interest
rate risk associated with its consumer loan portfolio, Westcorp has sold
approximately two-thirds of its consumer loan production and retained the
servicing rights in securitization transactions. The interest rate passed
through to the purchasers of those consumer loans is fixed, which provides off
balance sheet match funding for the majority of Westcorp's consumer loans. At
June 30, 1995, Westcorp serviced $1.5 billion in consumer loans for others.
Approximately 25% of Westcorp's other borrowed funds at June 30, 1995 had fixed
rates and maturities greater than one year. Subordinated debentures, which
represent 65% of this total, are redeemable in five years and mature in eight
years.
Westcorp has entered into or committed to interest rate swaps and interest rate
caps as hedges against market value changes in designated portions of its MBS
portfolio. At June 30, 1995, swaps with a notional amount of $110 million and
caps totalling $220 million were outstanding. Westcorp also uses two-year
Treasury securities forward agreements as hedges against market value changes
in its consumer loan portfolio. These agreements are entered into by Westcorp
in numbers and amounts which generally correspond to the principal amount of
the securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying loans.
Because of this inverse relationship, Westcorp can effectively lock in its
gross interest rate spread at the time the hedge transaction is entered into.
Gains and losses relative to these agreements are deferred and recognized in
full at the time of securitization as an adjustment to the gain or loss on the
sale of consumer loans. Westcorp uses only highly rated counterparties and
further reduces its risk by avoiding any material concentration with a single
counterparty. Credit exposure is limited to those agreements with a positive
fair value and only to the extent of that fair value.
The sensitivity of earnings to interest rate changes may be measured by the
difference, or gap, between the amount of assets and liabilities scheduled to
reprice, based on certain assumptions, within the same period expressed as a
percentage of interest-earning assets. Conceptually, the lower the amount of
this gap, the less sensitive earnings are to interest rate changes. A positive
gap means an excess of assets over liabilities
22
<PAGE> 23
repricing during the same period. However, this method of measuring interest
rate sensitivity does not take into account the differing repricing
characteristics of various types of assets and liabilities. Thus, certain
assets and liabilities that have similar maturities or periods to repricing may
react in different ways to changes in market interest rates. For instance,
Westcorp's ARMs are mainly tied to the Eleventh District Cost of Funds (COFI)
which typically lags the market, and also generally have restrictions on the
maximum amounts of periodic and/or total changes in interest rates and
payments. On the other hand, maturing borrowings have no such restrictions and
may reprice at current market rates.
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at June 30, 1995. The interest rate sensitivity of Westcorp's assets
and liabilities illustrated in the following table could vary substantially if
different assumptions were used or actual experience differs from the
assumptions set forth.
23
<PAGE> 24
INTEREST RATE SENSITIVITY ANALYSIS
AT JUNE 30, 1995
<TABLE>
<CAPTION>
WITHIN 3 MONTHS 1 YEAR TO 3 YEARS TO AFTER 5
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS YEARS TOTAL
----------- ---------- ---------- ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities $ 18,237 $ 100,217 $ 3,032 $ 121,486
Other investments $ 174,160 $ 571 174,731
Mortgage-backed securities 31,711 245,077 55,368 54,243 286,588 672,987
Consumer loans (1) 46,121 107,464 155,011 56,339 4,549 369,484
Mortgage loans:
Adjustable rate (2) 967,779 242,526 15,568 660 1,226,533
Fixed rate (2) 5,042 16,014 34,336 22,490 40,450 118,332
Construction (2) 7,713 7,713
----------- ---------- ---------- ---------- ---------- ------------
Total interest earning assets 1,232,526 611,652 278,520 233,949 334,619 2,691,266
Interest bearing liabilities:
Savings deposits:
Passbook/statement
accounts (3) 4,034 10,825 21,447 13,771 24,748 74,825
Money market deposit
accounts (3) 32 87 172 110 196 597
Certificate accounts (4) 493,680 727,350 438,176 36,185 132 1,695,523
FHLB advances (4) 4,000 16,000 43,000 6,500 6,500 76,000
Other borrowings (4) 460,794 13 26 104,100 564,933
----------- ---------- ---------- ---------- ---------- ------------
Total interest bearing
liabilities 962,540 754,275 502,821 56,566 135,676 2,411,878
----------- ---------- ---------- ---------- ---------- ------------
Excess interest earning
assets (liabilities) 269,986 (142,623) (224,301) 177,383 198,943 279,388
Effect of hedging activities 85,500 (37,500) (33,000) (15,000)
----------- ---------- ---------- ---------- ---------- ------------
Hedged excess $ 355,486 $ (142,623) $ (261,801) $ 144,383 $ 183,943 $ 279,388
=========== ========== ========== ========== ========== ===========
Cumulative excess $ 355,486 $ 212,863 $ (48,938) $ 95,445 $ 279,388 $ 279,388
=========== ========== ========== ========== ========== ===========
Cumulative excess as a
percentage of total assets 12.05% 7.21% (1.66)% 3.24% 9.47% 9.47%
</TABLE>
(1) Based on contractual maturities adjusted by Westcorp's historical
prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the Office of Thrift Supervision.
(4) Based on contractual maturity.
24
<PAGE> 25
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and six months ended June 30, 1995
was $4.1 million and $4.7 million compared to $2.5 million and $6.8 million
during the comparable periods of 1994. Westcorp recorded lower provisions for
loan losses for the first six months of 1995 compared to 1994 as a result of a
lower level of loans receivable held on the balance sheet.
OTHER INCOME
Total other income for the three and six months ended June 30, 1995 was $23.7
million and $43.9 million compared to $20.6 million and $42.0 million during
the comparable periods of 1994. Other income is generated from automobile
lending activities, mortgage banking activities, and other ancillary sources.
AUTOMOBILE LENDING
Westcorp originates and sells automobile sales contracts with servicing rights
retained in the secondary market. Income from automobile lending includes
gain or loss from the sale of loans, loan servicing income net of amortization
of capitalized servicing and other related income such as document fees and
late charges. For the three and six months ended June 30, 1995, automobile
lending generated income of $21.1 million and $38.2 million compared to $17.9
million and $38.1 million for the same periods of 1994.
During the three and six months ended June 30, 1995, net gain on automobile
loan sales totalled $5.4 million and $6.5 million. This compares to loss from
loan sales of $1.1 million and gain from loan sales of $1.1 million for the
three and six months ended June 30, 1994. The higher gain on sales during 1995
are a result of wider interest margins driven by rising yields on loans sold,
which affects the pricing of loan sales. Automobile loans sold during the first
half of 1995 totalled $680 million compared to $430 million during the first
half of 1994.
Net loan servicing income totalled $10.8 million and $22.0 million for the
three and six months ended June 30, 1995, compared to $16.0 million and $31.1
million for the comparable periods of 1994. Westcorp regularly evaluates the
methods and assumptions used to estimate its excess servicing asset. In 1994,
Westcorp made an adjustment to servicing income earned on securitized consumer
loans. Prior to 1994, regulatory guidance provided by the OTS regarding losses
to be expected from auto financing activities precluded full recognition of
cash flows received from securitized consumer loans as income. As a result of
subsequent regulatory guidance on this issue, and not because of a result in
changes in the underlying assumptions used by Westcorp, Westcorp recognized an
additional $3.3 million of additional servicing income in each of the first two
quarters of 1994. Absent such adjustment, servicing income would have been
$24.5 million for the first half of 1994. Westcorp serviced $1.5 billion of
automobile loans for others at June 30, 1995 compared to $1.1 billion at June
30, 1994.
25
<PAGE> 26
Automobile lending income for the three and six months ended June 30, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -------------------------------
1995 1994 1995 1994
------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net gain (loss) from sale of
automobile loans $ 5,416 $(1,140) $ 6,542 $ 1,064
Loan servicing income, net 10,771 15,973 21,968 31,149
Other 4,871 3,025 9,682 5,931
------- ------- ------- -------
$21,058 $17,858 $38,192 $38,144
======= ======= ======= =======
</TABLE>
MORTGAGE BANKING
Westcorp originates mortgage loans for sale in the secondary market. Mortgage
banking operations include gain and loss on the sale of loans, loan servicing
income net of amortization of capitalized servicing and other income which is
primarily late charges. During the three and six months ended June 30, 1995,
mortgage banking generated income of $0.6 million and $2.0 million compared to
loss of $0.7 million and gain of $0.3 million for the comparable periods of
1994.
Loss on sales of mortgage loans for the three and six months ended June 30,
1995 totalled $437 thousand and $526 thousand compared to loss on sales of
mortgage loans of $2.0 million and $1.9 million during the comparable periods
of 1994. Gain and loss on mortgage loan sales are directly related to the
overall interest rate environment. During 1995, interest rates have increased
for mortgage loans in contrast to the declining interest rate environment
during 1993 and early 1994. This change in the interest rate environment has
adversely affected loan volumes and the pricing of mortgage loans. Loans sold
during the first half of 1995 totalled $20.5 million compared to $374.7 million
for the first half of 1994. Mortgage loans held for sale increased from $3.0
million at December 31, 1994 to $40.2 million at June 30, 1995.
Net loan servicing income was $0.8 million and $2.1 million for the three and
six months ended June 30, 1995 compared to $1.1 million and $1.6 million for
the comparable periods of 1994 as a result of a larger servicing portfolio. At
June 30, 1995, Westcorp serviced $2.1 billion of mortgage loans for others
compared to $1.4 billion at June 30, 1994.
Mortgage banking income for the three and six months ended June 30, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ------------------------------
1995 1994 1995 1994
----- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net loss from sale of
mortgage loans $(437) $(2,035) $ (526) $(1,893)
Loan servicing income, net 781 1,051 2,060 1,621
Other 234 244 498 557
----- ------- ------ -------
$ 578 $ (740) $2,032 $ 285
===== ======= ====== =======
</TABLE>
26
<PAGE> 27
MISCELLANEOUS
Other sources of income include insurance income and real estate operations.
Insurance income is generated primarily from commissions earned on the sale of
loan-related insurance products as well as insurance-related investment
products. Insurance income for the three and six months ended June 30, 1995,
totalled $1.8 million and $2.4 million compared to $2.1 million and $4.2
million for the same periods in 1994.
Real estate operations include the ongoing costs of operation and disposition
associated with Westcorp's investments in joint ventures and REO. Real estate
operations earned $0.1 million and $0.7 million in the three and six months
ended June 30, 1995 compared to $0.9 million and loss of $1.0 million for the
same periods in 1994. The changes between quarters is primarily a result of
reduced expenses on nonperforming assets and increased gain on sales of REO.
OTHER EXPENSES
Other expenses consist of compensation and benefits, occupancy expense,
insurance and other operating expenses. Other expenses increased to $26.2
million and $52.7 million for the three and six months ended June 30, 1995
compared to $23.9 million and $47.3 million for the same periods in 1994. The
increase is primarily in compensation and benefits and is a function of
increased loan servicing portfolios and expansion of operations into additional
states. The ratio of annualized operating expense to average serviced loans
was 2.2% for the six months ended June 30, 1995 compared to 2.4% for the six
months ended June 30, 1994.
INCOME TAXES
The effective tax rates for the six months ended June 30, 1995 and 1994 were
41.5% and 42.5%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp has diversified sources of funds generated through its operations.
Primary sources include deposits, loan principal and interest payments
received, sale of mortgage loans and consumer loans, sale of MBS and the
maturity or sale of investment securities. Other sources include commercial
paper, Federal Home Loan Bank advances and reverse repurchase agreements.
Prepayments on loans and mortgage-backed securities and deposit inflows and
outflows are affected significantly by interest rates, real estate sales
activity and general economic conditions.
Westcorp uses these sources to meet its business needs which include funding
maturing certificates of deposits and savings withdrawals, repayment of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses and maintaining minimum regulatory liquidity and
capital levels.
During the first half of 1995, Westcorp purchased $305.2 million of MBS to more
profitably employ its excess capital and enhance interest spreads. These
securities have been segregated, on an individual security basis, into the
available for sale portfolio and the held to maturity portfolio in the
financial statements in accordance with management's intent and ability to hold
to maturity. These purchases included both fixed and adjustable rate MBS.
27
<PAGE> 28
Westcorp's wholly-owned subsidiary, the Bank is a federally chartered
savings bank. As such, it is subject to certain minimum capital requirements.
The Federal Deposit Insurance Corporation Improvement Act of 1991 separates all
financial institutions into one of five capital categories: "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". In order to be considered
"well capitalized", an institution must have a total risk-based capital ratio
of 10% or greater, a Tier 1 (i.e., core) risk-based capital ratio of 6% or
greater, a leverage ratio (i.e., core) of 5% or greater and not be subject to
any OTS order or directive to meet and maintain a specific capital level for
any capital measure. At June 30, 1995 the Bank had a total risk-based capital
ratio of 11.57%, a Tier 1 risk-based capital ratio of 9.64% and a leverage
ratio of 6.40%. The Bank currently meets all the requirements of a "well
capitalized" institution. Its regulatory capital position at June 30, 1995 was
as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
----------------- ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $189,986 6.40%(1) $189,986 6.40%(1) $228,185 11.57%(2)
Minimum OTS capital
requirement 44,534 1.50% 89,069 3.00% 157,718 8.00%
-------- ---- -------- ---- -------- ----
Excess capital $145,452 4.90% $100,917 3.40% $ 70,467 3.57%
======== ==== ======== ==== ======== ====
</TABLE>
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
As a member of the Federal Home Loan Bank System, the Bank is required to
maintain a specified ratio of cash, short-term United States government and
other qualifying securities to net withdrawable accounts and borrowings payable
in a year or less. The required liquidity ratio is currently 5%. The Bank has
maintained liquidity in excess of the required amount in 1995.
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1994, WFS, the consumer lending subsidiary of the Bank, was
served with a lawsuit on behalf of the general public that seeks
injunctive relief, restitution and damages for alleged violations
of certain consumer protection and Business and Profession Codes
involving the placement of collateral protection insurance by the
lender under the contractual provisions on its automobile loans.
The class has been certified and WFS is vigorously defending. In
addition, the Bank has been served with a class action lawsuit,
Charles Hubbard suing individually, on behalf of the general
public and on behalf of all other similarly situated v. Western
Financial Savings Bank, Los Angeles County Superior Court Case
No. BC131541, filed on July 18, 1995. The lawsuit asserts
certain allegations relating to the "forced placement" of
collateral protection insurance, similar to the lawsuit pending
against WFS. The Bank has not yet responded to this lawsuit. It
is not yet possible to estimate potential liability for either
lawsuit or the likelihood thereof.
Westcorp or its subsidiaries are also involved as parties to
certain legal proceedings incidental to their businesses.
Westcorp believes that the outcome of such proceedings will not
have a material effect upon Westcorp's business or financial
condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 23, 1995.
At the meeting, the shareholders approved the election of Alan L.
Milligan and William J. Crawford to the Board of Directors, each
for a term of two years.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27. Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTCORP
(Registrant)
Date: August 14, 1995 By: /s/ JOY SCHAEFER
-------------------- ------------------------------------------
Joy Schaefer
Vice President and
Chief Operating Officer
Date: August 14, 1995 By: /s/ LEE A. WHATCOTT
-------------------- ------------------------------------------
Lee A. Whatcott
Assistant Vice President, Controller
and Chief Financial Officer
(Principal Financial and Accounting Officer)
30
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 168,795
<INT-BEARING-DEPOSITS> 572
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 342,303
<INVESTMENTS-CARRYING> 452,170
<INVESTMENTS-MARKET> 457,481
<LOANS> 1,722,062
<ALLOWANCE> 41,256
<TOTAL-ASSETS> 2,949,923
<DEPOSITS> 1,770,945
<SHORT-TERM> 460,836
<LIABILITIES-OTHER> 309,619
<LONG-TERM> 180,100
<COMMON> 24,480
0
0
<OTHER-SE> 203,943
<TOTAL-LIABILITIES-AND-EQUITY> 2,949,923
<INTEREST-LOAN> 77,213
<INTEREST-INVEST> 23,527
<INTEREST-OTHER> 3,251
<INTEREST-TOTAL> 103,991
<INTEREST-DEPOSIT> 48,623
<INTEREST-EXPENSE> 65,493
<INTEREST-INCOME-NET> 38,498
<LOAN-LOSSES> 4,732
<SECURITIES-GAINS> 486
<EXPENSE-OTHER> 52,652
<INCOME-PRETAX> 25,012
<INCOME-PRE-EXTRAORDINARY> 14,634
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,634
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 3.19
<LOANS-NON> 21,297
<LOANS-PAST> 351
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 41,323
<CHARGE-OFFS> 7,755
<RECOVERIES> 2,956
<ALLOWANCE-CLOSE> 41,256
<ALLOWANCE-DOMESTIC> 41,256
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
