<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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 1-9910
-----------------------------
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 92618-3816
-----------------------------------------
(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 September 30, 1996, the registrant had 25,985,142 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 31.
<PAGE> 2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1996
TABLE OF CONTENTS
_____________________________
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
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
Exhibit 11 Computation of Earnings Per Share 31
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other financial
institutions and other short-term investments $ 70,632 $ 162,885
Investment securities held to maturity
(fair value 1996: $2,648; 1995: $1,493) 2,681 1,506
Investment securities available for sale 141,479 133,518
Mortgage-backed securities held to maturity
(fair value 1996: $449,848; 1995: $522,529) 449,591 512,218
Mortgage-backed securities available for sale 413,798 340,334
Loans receivable, net of allowance for loan losses
(1996: $41,224; 1995: $39,260) 1,227,088 1,339,423
Loans held for sale 390,289 368,533
Capitalized servicing 129,549 96,948
Premises and equipment, net 76,957 70,052
Real estate owned, net 11,045 10,044
Interest receivable 15,466 17,476
Excess of purchase cost over net assets acquired 951 1,015
Federal Home Loan Bank stock 31,474 29,624
Other assets 220,347 139,361
---------- ----------
$3,181,347 $3,222,937
========== ==========
LIABILITIES
Deposits $1,721,450 $1,753,475
Securities sold under agreements to repurchase 188,630 354,024
Short-term borrowings 154,919 112,330
Federal Home Loan Bank advances 225,000 192,000
Amounts held on behalf of trustee 394,270 341,693
Unearned insurance premiums and insurance reserves 3,881 5,102
Other liabilities 47,713 40,249
---------- ----------
2,735,863 2,798,873
SUBORDINATED DEBENTURES 104,774 104,360
MINORITY INTEREST 26,406 21,965
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 25,985,142
shares in 1996 and 24,563,419 shares in 1995 25,985 24,563
Paid-in capital 188,813 167,039
Retained earnings 99,914 105,951
Unrealized gain (loss) on securities available for sale, net of tax (408) 186
---------- ----------
314,304 297,739
---------- ----------
$3,181,347 $3,222,937
========== ==========
</TABLE>
- -----------------------
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1996 1995 1996 1995
------- ------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 42,861 $ 41,958 $ 127,437 $ 119,171
Mortgage-backed securities 15,055 13,451 41,662 33,700
Investment securities 2,056 1,628 5,680 4,906
Other 1,259 1,157 4,380 4,408
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 61,231 58,194 179,159 162,185
Interest expense:
Deposits 24,447 26,421 74,143 75,044
Federal Home Loan Bank advances and
other borrowings 6,048 4,617 17,236 13,934
Securities sold under agreements to repurchase 3,587 5,557 11,561 13,109
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 34,082 36,595 102,940 102,087
----------- ----------- ----------- -----------
NET INTEREST INCOME 27,149 21,599 76,219 60,098
Provision for loan losses 3,097 3,641 10,150 8,374
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 24,052 17,958 66,069 51,724
Noninterest income:
Automobile lending 38,728 25,115 111,393 63,306
Mortgage banking 4,629 742 14,370 2,774
Investment and mortgage-backed securities gains (losses) (146) 698 (2,029) 1,184
Insurance income 4,935 1,853 10,621 4,261
Real estate operations (905) (206) (2,256) 462
Rental operations (128) (33) (212) (191)
Miscellaneous 216 200 1,215 469
----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME 47,329 28,369 133,102 72,265
Noninterest expense:
Salaries and employee benefits 27,564 16,858 78,895 46,183
Occupancy 2,916 1,868 8,133 5,193
Insurance* 13,197 1,350 15,596 4,307
Miscellaneous 18,001 8,893 45,540 25,936
----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSE 61,678 28,969 148,164 81,619
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 9,703 17,358 51,007 42,370
Income taxes 4,237 7,125 21,401 17,503
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST 5,466 10,233 29,606 24,867
Minority interest in earnings of subsidiaries 1,987 1,160 5,603 1,160
----------- ----------- ----------- -----------
NET INCOME $ 3,479 $ 9,073 $ 24,003 $ 23,707
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.13 $ 0.35 $ 0.92 $ 0.92
=========== =========== =========== ===========
CASH DIVIDENDS DECLARED PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.10 $ 0.09 $ 0.30 $ 0.27
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS 26,265,693 26,065,752 26,186,500 25,874,205
=========== =========== =========== ===========
</TABLE>
* Includes the $12.0 million one-time assessment to recapitalize the Savings
Association Insurance Fund in the third quarter of 1996.
- -------------------------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1995
-------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,003 $ 23,707
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 10,150 8,374
Depreciation and amortization 6,627 5,593
Amortization of deferred fees 351 1,702
Amortization of capitalized servicing 54,739 32,443
Amortization of bond issuance costs and discount 414 379
Decrease (increase) in interest receivable 2,010 (2,430)
Loss (gain) on sale of investment securities and mortgage-backed securities 2,116 (2,985)
Gain on sale of loans (23,193) (10,281)
Gain on sale of real estate owned (1,458) (3,087)
Decrease in interest payable (1,208) (3,392)
(Decrease) increase in unearned insurance (1,221) 766
Net change in loans held for sale 44,949 30,673
Other, net (11,553) 283
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 106,726 81,745
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment securities held to maturity:
Purchases (1,175)
Investment securities available for sale:
Purchases (42,774) (14,198)
Proceeds from sales 1,915
Proceeds from maturities 33,000 20,000
Mortgage-backed securities held to maturity:
Purchases (336) (245,375)
Proceeds from maturities 61,399 23,512
Mortgage-backed securities available for sale:
Purchases (299,311) (200,753)
Proceeds from sales 197,137 164,722
Proceeds from maturities 25,903 6,921
Net change in loans receivable 44,729 (16,785)
Increase in capitalized servicing (77,452) (55,087)
Purchase of mortgage servicing rights (9,888) (13,384)
Additions to premises and equipment (13,479) (4,322)
Disposition of real estate owned 14,806 27,238
Purchase of FHLB stock (3,621) (842)
Proceeds from sale of FHLB stock 1,771 1,692
Net increase in trust receivable (60,230) (22,342)
Net increase in trustee accounts 52,577 91,645
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (75,029) (237,358)
</TABLE>
- --------------------------
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits $ (32,025) $140,881
(Decrease) increase in securities sold under agreements to repurchase (165,394) 127,529
Increase (decrease) in FHLB advances, net 33,000 (17,000)
Increase (decrease) in short-term borrowings 42,589 (203,630)
Increase in minority interest 4,441 1,160
Proceeds from issuance of common stock 962 1,813
Proceeds from public stock offering 70,207
Cash dividends (7,523) (6,484)
--------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (123,950) 114,476
--------- --------
Net decrease in cash and equivalents (92,253) (41,137)
Cash and equivalents at beginning of period 162,885 166,293
--------- --------
Cash and equivalents at end of period $ 70,632 $125,156
========= ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 104,146 $105,479
Income taxes 17,884 12,050
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 19,088 $ 25,098
</TABLE>
- -------------------------
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995.
Certain amounts from the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
7
<PAGE> 8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - INVESTMENT SECURITIES HELD TO MATURITY
- -----------------------------------------------
Investment securities held to maturity were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------
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 $ 1,505 $ 33 $ 1,472
Other 1,176 1,176
-------- ---- ------ --------
$ 2,681 $ 33 $ 2,648
======== ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------
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 $ 1,506 $ 13 $ 1,493
-------- ---- ------ --------
$ 1,506 $ 13 $ 1,493
======== ==== ====== ========
</TABLE>
NOTE C - INVESTMENT SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------
Investment securities available for sale were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------
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 $141,443 $142 $1,613 $139,972
Obligations of states and political
subdivisions 1,520 38 1,482
Other 25 25
-------- ---- ------ --------
$142,988 $142 $1,651 $141,479
======== ==== ====== ========
</TABLE>
8
<PAGE> 9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------
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 $130,306 $265 $519 $130,052
Obligations of states and political
subdivisions 3,521 80 3,441
Other 25 25
-------- ------ ------ --------
$133,852 $265 $599 $133,518
======== ====== ====== ========
</TABLE>
NOTE D - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- ----------------------------------------------------
Mortgage-backed securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $355,152 $1,910 $1,707 $355,355
FNMA participation certificates 86,417 81 86,336
FHLMC participation certificates 7,821 135 7,956
Other participation certificates 201 201
-------- ------ ------ --------
$449,591 $2,045 $1,788 $449,848
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $405,582 $10,943 $2,246 $414,279
FNMA participation certificates 97,352 1,460 98,812
FHLMC participation certificates 9,120 154 9,274
Other participation certificates 164 164
-------- ------ ------ --------
$512,218 $12,557 $2,246 $522,529
======== ====== ====== ========
</TABLE>
9
<PAGE> 10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------
Mortgage-backed securities available for sale were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------------- ---------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $320,963 $3,996 $3,072 $321,887
FNMA participation certificates 74,339 50 525 73,864
FHLMC participation certificates 18,043 114 110 18,047
-------- ------ ------ --------
$413,345 $4,160 $3,707 $413,798
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------------- ---------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $138,175 $2,017 $4,291 $135,901
FNMA participation certificates 99,859 1,485 101,344
FHLMC participation certificates 101,639 2,121 671 103,089
-------- ------ ------ --------
$339,673 $5,623 $4,962 $340,334
======== ====== ====== ========
</TABLE>
10
<PAGE> 11
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - NET LOANS RECEIVABLE
- -----------------------------
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Real estate:
Mortgage $1,338,035 $1,406,167
Construction 9,459 8,469
---------- ----------
1,347,494 1,414,636
Less: Undisbursed loan proceeds 6,068 4,672
---------- ----------
1,341,426 1,409,964
Consumer:
Sales contracts 316,121 355,058
Other 45,675 19,195
Less: Unearned discounts 45,580 38,628
---------- ----------
316,216 335,625
---------- ----------
1,657,642 1,745,589
Allowance for loan losses (41,224) (39,260)
Net deferred loan costs 959 1,627
---------- ----------
1,617,377 1,707,956
Less: Loans held for sale
Mortgage 159,738 148,616
Consumer 230,551 219,917
---------- ----------
390,289 368,533
---------- ----------
$1,227,088 $1,339,423
========== ==========
</TABLE>
Loans serviced by Westcorp for the benefit of others totalled approximately
$7.0 billion and $5.6 billion at September 30, 1996 and December 31, 1995,
respectively. These amounts are not reflected in the accompanying consolidated
statement of financial condition.
NOTE G - CAPITALIZED SERVICING
- ------------------------------
Capitalized servicing consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Excess consumer servicing $102,453 $78,045
Excess mortgage servicing 206 1,843
Purchased mortgage servicing rights 22,609 12,843
Originated mortgage servicing rights 4,281 4,217
-------- -------
$129,549 $96,948
======== =======
</TABLE>
11
<PAGE> 12
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EXCESS CONSUMER SERVICING
Excess consumer servicing consists of the present value of estimated future cash
flows to be received by Westcorp from the excess spread created in
securitizations. The estimated future cash flows are determined by taking into
account certain assumptions principally regarding prepayments, credit losses and
servicing costs. These cash flows are then discounted at a rate management
believes to be at market. The balance of the excess consumer servicing is then
amortized against actual servicing income on a monthly basis. The assumptions
used are evaluated each quarter and adjusted, if appropriate, to reflect
performance of the contracts. The following table shows the activity of the
excess consumer servicing.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $ 93,765 $ 58,518 $ 78,045 $ 43,426
Additions 27,197 19,572 75,191 54,762
Amortization (18,509) (10,980) (50,783) (31,078)
-------- -------- -------- --------
Ending balance $102,453 $ 67,110 $102,453 $ 67,110
======== ======== ======== ========
</TABLE>
Additions to excess consumer servicing result from new securitizations and
reflect the initial estimate of the present value of the future cash flows of
the contracts securitized. The amortization of excess consumer servicing
represents the decline in the excess consumer servicing for the respective
periods based upon the present value of the remaining estimated future cash
flows at the end of the period.
In initially valuing its excess consumer servicing, Westcorp establishes an off
balance sheet allowance for expected losses under the spread account provisions
of the securitization transactions and this allowance is included as a
component in calculating the excess consumer servicing. The allowance is based
upon historical experience and management's estimate of future performance
regarding primarily prepayment, credit losses, and servicing costs. The amount
is reviewed periodically and adjustments are made if actual experience or other
factors indicate that future performance may differ from management's prior
expectations.
The following table presents the estimated future undiscounted cash flows to be
received from securitizations, net of estimated costs to service and after
giving effect to estimated prepayments. To arrive at the excess consumer
servicing, this amount is reduced by the off balance sheet allowance
established for future losses and by discounting these cash flows to present
value.
12
<PAGE> 13
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Estimated net undiscounted cash flows $ 269,849
Allowance for losses (150,272)
Discount to present value (17,124)
----------
Excess consumer servicing $ 102,453
==========
Outstanding balance of contracts sold through securitizations $2,593,947
Allowance for losses as a percent of contracts sold through
securitizations 5.79%
</TABLE>
MORTGAGE SERVICING RIGHTS
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights", ("SFAS 122") which amended Statement of Financial Accounting
Standards No. 65. "Accounting for Certain Mortgage Banking Activities", ("SFAS
65") was adopted by Westcorp as of January 1, 1996. SFAS 122 requires
allocation of the cost of originated or purchased mortgage loans between the
servicing rights and the loans based upon their relative fair values at the
date the loans are purchased or originated.
During the three and nine months ended September 30, 1996, Westcorp capitalized
$2.4 million and $16.5 million, respectively, compared to $8.5 million and
$13.7 million for the comparable periods of 1995 in connection with originating
or purchasing the right to service mortgage loans. The mortgage servicing
rights are included in capitalized servicing and as a component of mortgage
banking in noninterest income. At September 30, 1996, the amortized cost basis
and the fair value of mortgage servicing rights capitalized in accordance with
SFAS 122 was $27.1 million. Fair value was determined based on the present
value of estimated future cash flows. Significant assumptions were based upon
loan type, loan coupon, loan term, market assumptions regarding prepayment,
default, servicing cost and discount rate.
Amortization of mortgage servicing rights are reflected as a component of
mortgage banking in noninterest income. Amortization expense for the three and
nine months ended September 30, 1996 was $1.4 million and $4.0 million,
respectively, compared to $0.5 million and $1.4 million for the comparable
periods of 1995.
NOTE H - DIVIDENDS
- ------------------
Westcorp paid cash dividends of $0.10 per share on March 1, 1996, May 24, 1996
and August 29, 1996. In addition, Westcorp paid a 5% stock dividend on June
17, 1996. The per share amounts for all periods presented have been restated
to reflect the increased shares outstanding. On October 29, 1996, Westcorp
announced a cash dividend of $0.10 per share for shareholders of record on
November 13, 1996, payable November 27, 1996.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets and total liabilities decreased $41.6 million or 1.3% to $3.18
billion at September 30, 1996 from $3.22 billion at December 31, 1995. This
decrease is primarily the result of a decrease in other short-term securities
and loans receivable as well as securities sold under agreements to repurchase.
On October 1, 1996, Westcorp's wholly-owned subsidiary, Western Financial Bank,
F.S.B. (formerly Western Financial Savings Bank, F.S.B.) ("the Bank") changed
its name to more clearly identify the Bank's expansion into a broader spectrum
of banking opportunities.
LOANS
- -----
Loans (including loans held for sale), net of unearned discounts and
undisbursed loan proceeds, decreased $88.6 million or 5.1% since December 31,
1995. The decrease is the result of the differential between loans originated
and loans sold, as well as principal reductions during the nine month period
ended September 30, 1996. Westcorp has retained the servicing on substantially
all loans sold and receives a servicing fee therefrom. Included in the
portfolio are loans held for sale of which $160 million are mortgage loans
secured primarily by single family residences and $230 million which are
consumer loans secured by motor vehicles.
Consumer loan originations increased $138 million and $472 million to $561
million and $1.6 billion for the three and nine months ended September 30, 1996
from $423 million and $1.1 billion for the same periods in 1995. This increase
was primarily the result of Westcorp's continued expansion of its dealer center
and branch network and favorable market conditions for automobile sales.
Westcorp currently conducts its consumer finance operations through 125 offices
in 27 states compared to 89 offices in 15 states at December 31, 1995.
Real estate originations increased $146 million and $586 million to $294
million and $854 million for the three and nine months ended September 30, 1996
from $148 million and $268 million for the same periods in 1995. The increase
in real estate originations is the result of a more favorable market
environment in California and a better utilization of our expanding origination
capacity. The following table sets forth the loan origination, purchase and
sale activity of Westcorp for the periods indicated, excluding net deferred
loan costs:
14
<PAGE> 15
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $1,329,369 $ 306,719 $1,352,578 $ 369,484
Originations (1) 294,071 560,732 147,899 422,547
Purchases 15 2
Sales (2) (225,296) (535,000) (112,264) (375,000)
Principal reductions (3) (56,733) (16,235) (33,778) (46,116)
---------- --------- ---------- ---------
Ending balance $1,341,426 $ 316,216 $1,354,437 $ 370,915
========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1996 1995
------------------------------ ------------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $1,409,964 $ 335,625 $1,320,784 $ 430,708
Originations (1) 854,308 1,592,064 268,337 1,119,698
Purchases 154 203
Sales (2) (747,206) (1,545,000) (132,779) (1,055,000)
Principal reductions (3) (175,794) (66,473) (102,108) (124,491)
---------- ----------- ---------- -----------
Ending balance $1,341,426 $ 316,216 $1,354,437 $ 370,915
========== =========== ========== ===========
</TABLE>
- ---------------
(1) Includes sales contracts purchased from automobile dealers.
(2) Loans sold or securitized for which Westcorp generally retains servicing.
(3) Includes scheduled payments, prepayments and chargeoffs.
The real estate loan portfolio (including those classified as held for sale and
excluding net deferred loan costs) consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
----------------------------- -----------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 824,305 61.5% $ 816,948 57.9%
Second trust deeds 54,331 4.1 116,132 8.3
---------- ----- ---------- -----
878,636 65.6 933,080 66.2
Multifamily residential loans 456,381 34.0 469,951 33.3
Construction loans 9,459 0.7 8,469 0.6
Commercial loans 3,018 0.2 3,136 0.2
---------- ----- ---------- -----
1,347,494 100.5 1,414,636 100.3
Less: undisbursed loan proceeds (6,068) (0.5) (4,672) (0.3)
---------- ----- ---------- -----
$1,341,426 100.0% $1,409,964 100.0%
========== ===== ========== =====
</TABLE>
15
<PAGE> 16
Westcorp's real estate portfolio consisted primarily of adjustable rate
mortgage loans (excluding net deferred loan costs) as shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
----------------------------- ----------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family $ 179,621 13.4% $ 160,699 11.4%
Multifamily 768 0.1 668 0.1
Adjustable rate loans:
Negative amortization 846,234 63.0 892,295 63.3
Without negative amortization 314,803 23.5 356,302 25.2
---------- ----- ---------- -----
$1,341,426 100.0% $1,409,964 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
--------------------------- ---------------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales contracts, net $270,541 85.6% $316,430 94.3%
Other 45,675 14.4 19,195 5.7
-------- ----- -------- -----
$316,216 100.0% $335,625 100.0%
======== ===== ======== =====
</TABLE>
MORTGAGE-BACKED SECURITIES
- --------------------------
During the first nine months of 1996, Westcorp purchased $299.6 million and
sold $197.1 million of mortgage-backed securities ("MBS"). This is part of
Westcorp's continuing strategy to fully employ capital and enhance net interest
income.
ASSET QUALITY
- -------------
DELINQUENCY
The percent of loans 60 days or more delinquent increased to 1.3% at September
30, 1996 compared to 1.2% at December 31, 1995. Delinquent loans by type of
loan and as a percentage of loans by type are summarized as follows at
September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
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 $2,821 0.3% $14,101 1.6% $16,922 1.9%
Multifamily residential homes 291 0.1 1,748 0.4 2,039 0.4
Consumer 1,385 0.4 1,124 0.4 2,509 0.8
------ --- ------- --- ------- ---
$4,497 0.3% $16,973 1.0% $21,470 1.3%
====== === ======= === ======= ===
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, 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 $4,416 0.5% $10,769 1.2% $15,185 1.6%
Multifamily residential homes 1,215 0.3 1,693 0.4 2,908 0.6
Consumer 1,529 0.5 526 0.2 2,055 0.6
Construction 107 1.6 107 1.6
------ --- ------- --- ------- ---
$7,160 0.4% $13,095 0.8% $20,255 1.2%
====== === ======= === ======= ===
</TABLE>
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") increased $6.6 million or 22.3% to $35.8
million at September 30, 1996 compared to $29.2 million at December 31, 1995
and $34.6 million at September 30, 1995. During the last quarter of 1995, $5.7
million of real estate acquired through foreclosure was sold which caused the
NPA balance to appear unusually low. The September 30, 1996 amount is more
comparable to the September 30, 1995 amount as noted above. At September 30,
1996, NPAs represented 1.1% of total assets compared to 0.9% at December 31,
1995 and 1.2% at September 30, 1995.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are carried at fair value. NPLs are defined as all
loans on nonaccrual, which include mortgage loans 90 days or more past due or
performing loans where full collection of principal and interest is not
reasonably assured. NPLs include loans categorized as impaired. When a loan
is designated as nonaccrual, all previously accrued interest is reversed.
Interest on nonperforming loans excluded from interest income was $1.1 million
at September 30, 1996 compared to $1.0 million at September 30, 1995.
As a result of the adoption of Statement of Financial Accounting Standards No.
114, a loan is considered 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, among other factors, the fair value of the loan's
collateral. Changes in the fair value of loans are recorded through the
allowance for loan losses. At September 30, 1996 and December 31, 1995,
impaired loans were $8.8 million and $7.5 million, respectively.
NONPERFORMING LOANS
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Single family residential homes $14,319 $9,934
Multifamily 5-36 units 4,619 5,993
Multifamily 37+ units 4,993 2,366
Other 107
------- -------
$23,931 $18,400
======= =======
</TABLE>
17
<PAGE> 18
The migration of nonperforming loans and real estate owned from December 31,
1995 to September 30, 1996 is shown below:
<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, December 31, 1995 $18,400 $9,934 $5,993 $2,366 $ 107
New nonperforming loans 29,632 19,083 6,041 4,508
REO (14,194) (7,447) (5,077) (1,563) (107)
Cures and payoffs (9,307) (6,651) (2,338) (318)
Chargeoffs (600) (600)
------- ------- ------ ------ -----
Balance, September 30, 1996 $23,931 $14,319 $4,619 $4,993 $ 0
======= ======= ====== ====== =====
</TABLE>
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
-------- ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 10,831 $ 7,235 $ 2,913 $ 683
New REO 19,088 10,131 8,872 85
Sales (14,323) (8,386) (5,937)
Writedowns (3,767) (1,584) (1,785) (398)
-------- ------- ------- ---------- -----
Balance, September 30, 1996 $ 11,829 $ 7,396 $ 4,063 $ 370
======== ======= ======= ========== =====
</TABLE>
Assets secured by single family residential properties comprised the largest
portion of nonperforming assets. As of September 30, 1996, $14.3 million or
60% of NPLs and $7.4 million or 63% of REOs were secured by single family
residential properties.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp increased its allowance for loan losses to $41.2
million for September 30, 1996 compared to $39.3 million for December 31, 1995.
While Westcorp's portfolio consists primarily of single family loans, no single
loan, borrower or series of such loans comprise a significant portion of the
total portfolio. 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 by management to be
adequate to absorb potential losses in the loan portfolio.
18
<PAGE> 19
The following table presents summarized data relative to the allowance for loan
losses:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Total loans $1,657,642 $1,745,589
Allowance for loan losses 41,224 39,260
Allowance for real estate losses 784 784
Loans past due 60 days or more 21,470 20,255
Nonperforming loans 23,931 18,400
Nonperforming assets (1) 35,760 29,231
Allowance for loan losses as a percent of:
Total loans (2) 2.5% 2.2%
Loans past due 60 days or more 192.0% 193.8%
Nonperforming loans 172.3% 213.4%
Total allowance as a percent of nonperforming assets 117.5% 137.0%
Nonperforming loans as a percent of total loans 1.4% 1.1%
Nonperforming assets as a percent of total assets 1.1% 0.9%
</TABLE>
- --------------
(1) Nonperforming loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
19
<PAGE> 20
The table below provides a historical analysis of the allowance for loan
losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1996 1995 1996 1995
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $42,066 $41,256 $39,260 $41,323
Chargeoffs:
Mortgage loans (1,888) (2,653) (4,324) (5,011)
Consumer loans (3,293) (3,549) (11,322) (8,946)
------- ------- -------- --------
(5,181) (6,202) (15,646) (13,957)
Recoveries:
Mortgage loans 55 57 2,008 184
Consumer loans 1,187 1,277 3,982 3,305
------- ------- -------- --------
1,242 1,334 5,990 3,489
------- ------- -------- --------
Net chargeoffs (3,939) (4,868) (9,656) (10,468)
Adjustments 1,470 (1) 800 (2)
Provision for loan losses 3,097 3,641 10,150 8,374
------- ------- -------- --------
Balance at end of period $41,224 $40,029 $ 41,224 $ 40,029
======= ======= ======== ========
Ratio of net chargeoffs during period to average
loans outstanding during the period
(annualized) 0.90% 1.10% 0.73% 0.80%
======= ======= ======== ========
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
1996 1995 1996 1995
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 784 $ 784 $ 784 $ 1,684
Provision for real estate losses (100)
Transfer to the allowance for loan losses (800)(2)
------- ------- -------- --------
Balance at end of period $ 784 $ 784 $ 784 $ 784
======= ======= ======== ========
</TABLE>
- ---------------
(1) Purchase accounting adjustments related to the acquisition of The Hammond
Company and its subsidiaries.
(2) Transfer from the allowance for real estate losses to the allowance for
loan losses as part of implementing SFAS 114.
20
<PAGE> 21
RESULTS OF OPERATIONS
SUMMARY
- -------
Westcorp reported net income of $3.5 million and $24.0 million for the three
and nine months ended September 30, 1996, compared to $9.1 million and $23.7
million for the comparable periods of 1995. The September 30, 1996 quarter's
results included a one-time pre-tax charge of $12.0 million for the special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF").
Return on average assets was 0.44% and 0.99% for the three and nine months
ended September 30, 1996, compared to 1.30% and 1.13% for the same periods of
1995. Return on average equity was 4.45% and 10.44% for the three and nine
months ended September 30, 1996, compared to 15.51% and 13.51% for the
comparable periods of 1995. Net income was primarily affected by the following
factors:
o Net interest income increased as Westcorp increased its purchases of
mortgage-backed securities and as originations of loans increased.
o The automobile lending income increase is primarily due to an increase in
the amounts securitized, wider interest rate spreads and an increase in
the overall servicing portfolio.
o The mortgage banking income increase is the result of the adoption of
SFAS 122 which recognizes the value of originated mortgage servicing
rights as well as the initiation of a program to sell certain loans with
servicing rights released.
o As mentioned above, insurance expense increased as a result of a one-time
$12.0 million assessment to recapitalize SAIF.
o Miscellaneous expense increased primarily as a result of expansion of
operations in both the automobile lending and mortgage banking
businesses.
NET INTEREST INCOME
- -------------------
Net interest income for the three and nine months ended September 30, 1996 was
$27.1 million and $76.2 million, respectively. For the same periods of 1995,
net interest income totalled $21.6 million and $60.1 million.
The total interest rate spread increased 37 basis points for the nine months
ended September 30, 1996, compared to the same period of 1995 due to an
increase of 17 basis points in the yield on interest earning assets while the
cost of funds decreased by 20 basis points.
The increase in yield on interest earning assets for the nine months ended
September 30, 1996, compared to the same period of 1995 was affected by a 122
basis point increase in the yield on the consumer loan portfolio, which is due
to a shift in product mix to higher yielding loans and a 26 basis point
increase in the yield on mortgage loans due to both increased yields and
volume.
The decrease in the cost of funds was affected by a 43 basis point decrease in
public debt offerings, a 63 basis point decrease in the rate paid on repurchase
agreements and a 132 basis point decrease in the rate paid on FHLB advances and
other borrowings for the nine months ended September 30, 1996 compared to the
same period of 1995 due to lower borrowing rates.
21
<PAGE> 22
Interest rates for interest earning assets and liabilities for the three and
nine months ended September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest earning assets:
5.68% 5.42% 5.51% 5.48%
Investment securities (1)
Mortgage-backed securities (1) 7.42 7.55 7.26 7.31
Loans:
Consumer 16.64 14.35 15.83 14.61
Mortgage (2) 7.75 7.91 7.72 7.46
Other 5.28 5.67 5.50 5.67
----- ----- ----- -----
Total interest earning assets 8.78 8.66 8.56 8.39
Interest bearing liabilities:
Savings deposits 5.53 5.92 5.64 5.74
Public debt offerings 6.63 6.99 6.76 7.19
Repurchase agreements 5.17 5.86 5.03 5.66
FHLB advances and other borrowings 6.73 7.61 6.19 7.51
----- ----- ----- -----
Total interest bearing liabilities 5.67 6.11 5.75 5.95
Interest rate spread 3.11% 2.55% 2.81% 2.44%
===== ===== ===== =====
Net yield on average interest
earning assets 3.91% 3.29% 3.65% 3.21%
===== ===== ===== =====
</TABLE>
- ---------------
(1) Includes both 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.
22
<PAGE> 23
ASSET/LIABILITY MANAGEMENT
- --------------------------
One of the key components to Westcorp's ongoing profitability is, 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. During the first nine months of 1996, Westcorp purchased rights to
service $1.2 billion of single family residential mortgage loans for $9.9
million. At September 30, 1996, Westcorp serviced $4.4 billion in mortgage
real estate loans for others. ARMs and adjustable-rate mortgage-backed
securities ("MBS") amounted to 63% of the total mortgage loans and MBS held by
Westcorp at September 30, 1996. Interest rates generally adjust on a monthly,
semi-annual or annual basis with 88% of Westcorp's adjustable mortgage loans
adjusting monthly.
Westcorp also originates fixed-rate consumer loans. To minimize interest rate
risk associated with its consumer loan portfolio, Westcorp has sold
substantially all of its consumer loan production in securitization
transactions in which it has retained the servicing rights. The interest rate
passed through to the purchasers of those consumer loans is fixed, which
provides off balance sheet matched funding for the majority of Westcorp's
consumer loans. At September 30, 1996, Westcorp serviced $2.6 billion in
consumer loans for others.
Approximately 17% of Westcorp's other borrowed funds at September 30, 1996 had
fixed rates and maturities greater than one year. Of that amount, 89% were
subordinated debentures redeemable in four years and mature in seven years.
Westcorp has entered into or committed to interest rate caps and swaps as
hedges against market value changes in designated portions of its MBS
portfolio. At September 30, 1996, caps with notional amounts totalling $150
million and a swap of $50 million were outstanding. The cap agreements have
strike rates of 8.0% and 7.5% and expire in September, 1999 and 2003,
respectively. The swap has a pay rate of 5.9% and expires in December, 2002.
Westcorp uses only counterparties with high credit ratings 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 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 reprice may react differently to changes in market
interest rates. For instance, Westcorp's ARMs are mainly tied to the Eleventh
District Cost of Funds 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.
23
<PAGE> 24
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at September 30, 1996. 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.
INTEREST RATE SENSITIVITY ANALYSIS
AT SEPTEMBER 30, 1996
<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 $ 10,351 $ 50,160 $ 83,649 $ 144,160
Other investments 70,122 510 70,632
Mortgage-backed securities 224,804 26,071 155,049 $140,718 $ 316,747 863,389
Consumer loans (1) 65,535 83,906 126,897 37,541 2,337 316,216
Mortgage loans:
Adjustable rate (2) 916,168 226,375 9,036 1,151,579
Fixed rate (2) 14,328 4,146 18,528 18,029 125,357 180,388
Construction (2) 9,459 9,459
---------- ---------- -------- -------- --------- ----------
Total interest earning assets 1,310,767 391,168 393,159 196,288 444,441 2,735,823
Interest bearing liabilities:
Savings deposits:
Passbook/statement accounts(3) 2,533 6,805 13,468 8,642 15,519 46,967
Money market deposit accounts (3) 21 56 111 71 126 385
Certificate accounts (4) 438,376 916,649 235,209 32,037 1,622,271
FHLB advances (4) 120,000 92,000 6,500 6,500 225,000
Other borrowings (4) 343,061 488 104,774 448,323
---------- ---------- -------- -------- --------- ----------
Total interest bearing liabilities 903,991 1,015,998 255,288 40,750 126,919 2,342,946
---------- ---------- -------- -------- --------- ----------
Excess interest earning assets
(liabilities) 406,776 (624,830) 137,871 155,538 317,522 392,877
Effect of hedging activities 50,000 (50,000)
---------- --------- -------- -------- --------- ----------
Hedged excess $ 456,776 $(624,830) $137,871 $155,538 $ 267,522 $ 392,877
========== ========= ======== ======== ========= ==========
Cumulative excess $ 456,776 $(168,054) $(30,183) $125,355 $ 392,877 $ 392,877
========== ========= ======== ======== ========= ==========
Cumulative excess as a percentage
of total interest earning assets 16.70% (6.14)% (1.10)% 4.58% 14.36% 14.36%
</TABLE>
- ----------------------
(1) Based on contractual maturities adjusted by Westcorp's historical
prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the Office of Thrift Supervision
("OTS").
(4) Based on contractual maturity.
24
<PAGE> 25
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the three and nine months ended September 30,
1996 was $3.1 million and $10.1 million compared to $3.6 million and $8.4
million during the comparable periods of 1995. Westcorp recorded a lower
provision for loan losses for the third quarter of 1996 compared to 1995 as a
result of a lower level of loans receivable outstanding.
NONINTEREST INCOME
- ------------------
Total noninterest income for the three and nine months ended September 30, 1996
was $47.3 million and $133.1 million compared to $28.4 million and $72.3
million during the comparable periods of 1995. Noninterest income is generated
from automobile lending activities, mortgage banking activities, and other
ancillary sources.
AUTOMOBILE LENDING
Westcorp originates and subsequently sells automobile sales contracts in the
secondary market with servicing rights retained. Income from automobile
lending includes gain from the sale of loans, as well as loan servicing income
net of amortization of capitalized servicing and other related income such as
document fees and late charges. For the three and nine months ended September
30, 1996, automobile lending generated income of $38.7 million and $111.4
million compared to $25.1 million and $63.3 million for the same periods of
1995.
During the three and nine months ended September 30, 1996, net gain from sale
of contracts totalled $9.4 million and $31.7 million compared to $5.3 million
and $11.8 million for the same periods of 1995. The increase in the gain on
sale reported in 1996 is primarily the result of increases in both the amounts
securitized and wider interest rate spreads. Contracts sold during the third
quarter of 1996 totalled $535 million and $1.5 billion for the three and nine
months ended September 30, 1996 compared to $375 million and $1.1 billion
during the same periods of 1995.
While the assumptions used in determining gain on sale of contracts have not
materially changed during the last three years, the gain on sale of contracts
has fluctuated as a result of changes in the gross interest rate spread of
contracts securitized. The gross interest rate spread is affected by general
market conditions and overall market interest rates. The risks inherent in
interest rate fluctuations are substantially reduced through hedging
activities.
Net loan servicing income totalled $21.0 million and $56.9 million for the
three and nine months ended September 30, 1996, compared to $14.2 million and
$36.2 million for the comparable periods of 1995. Westcorp serviced $2.6
billion of consumer loans for others at September 30, 1996 compared to $1.7
billion at September 30, 1995.
25
<PAGE> 26
Automobile lending income for the three and nine months ended September 30,
1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gains from sale of contracts $ 9,421 $ 5,303 $ 31,728 $11,845
Loan servicing income 21,011 14,229 56,887 36,197
Other fee income 8,296 5,583 22,778 15,264
------- ------- -------- -------
$38,728 $25,115 $111,393 $63,306
======= ======= ======== =======
</TABLE>
MORTGAGE BANKING
Westcorp originates mortgage loans for sale in the secondary market. Mortgage
banking operations include gains and losses on the sale of loans, loan
servicing income net of amortization of capitalized servicing and other income
(primarily late charges). During the three and nine months ended September 30,
1996, mortgage banking generated income of $4.6 million and $14.4 million
compared to $0.7 million and $2.8 million for the comparable periods of 1995.
Gains on sale of mortgage loans for the three and nine months ended September
30, 1996 totalled $2.1 million and $8.5 million compared to losses from sale of
mortgage loans of $1.0 million and $1.6 million during the comparable periods
of 1995. The increase in gain on sale of mortgage loans is a result of the
adoption of SFAS 122 which recognizes the value of originated servicing rights
as well as the initiation of a program to sell certain loans with servicing
rights released. Loans sold during the third quarter of 1996 totalled $225
million and $747 million for the three and nine months ended September 30, 1996
compared to $112 million and $133 million for the same periods of 1995.
Mortgage loans held for sale increased from $149 million at December 31, 1995
to $160 million at September 30, 1996.
Net loan servicing income was $2.1 million and $4.4 million for the three and
nine months ended September 30, 1996 compared to $1.5 million and $3.6 million
for the comparable periods of 1995. At September 30, 1996, Westcorp serviced
$4.4 billion of mortgage loans for others compared to $3.2 billion at September
30, 1995. Net loan servicing income did not increase proportionately with the
servicing portfolio, due to the amortization of originated and purchased
mortgage servicing rights which amounted to $1.4 million and $3.9 million for
the three and nine months ended September 30, 1996 compared to $0.4 million and
$1.3 million for the comparable periods of 1995.
Mortgage banking income for the three and nine months ended September 30, 1996
and 1995 is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net gains (losses) from sale of mortgage loans $2,057 $(1,037) $ 8,535 $(1,564)
Loan servicing income 2,094 1,506 4,350 3,566
Other 478 273 1,485 772
------ ------- ------- -------
$4,629 $ 742 $14,370 $ 2,774
====== ======= ======= =======
</TABLE>
26
<PAGE> 27
MISCELLANEOUS
Other sources of income include insurance income and real estate operations.
Insurance income is generated primarily from commissions earned on the sale of
loan-related insurance products as well as insurance-related investment
products. Insurance income for the three and nine months ended September 30,
1996 totalled $4.9 million and $10.6 million compared to $1.9 million and $4.3
million for the same periods in 1995.
Real estate operations include the ongoing costs of operation and disposition
associated with Westcorp's REOs. Real estate operations had losses of $0.9
million and $2.3 million for the three and nine months ended September 30, 1996
compared to losses of $0.2 million and income of $0.5 million for the same
periods in 1995.
NONINTEREST EXPENSE
- -------------------
Noninterest expense consists of salaries and employee benefits, occupancy
expense, insurance and other operating expenses. Noninterest expense increased
to $61.7 million and $148.2 million for the three and nine months ended
September 30, 1996 compared to $29.0 million and $81.6 million for the same
periods in 1995. As discussed in the summary section, $12.0 million of this
increase is in insurance expense which relates to the accrual for the SAIF
insurance fund recapitalization. SAIF-insured institutions will benefit from a
reduction in insurance premiums beginning January 1, 1997. The Federal Deposit
Insurance Corporation is in the process of establishing new premium schedules.
In addition, compensation and benefits increased primarily due to expansion of
operations in both the automobile lending and mortgage banking businesses. The
ratio of annualized operating expense to average serviced loans was 2.62% for
the nine months ended September 30, 1996 compared to 2.14% for the nine months
ended September 30, 1995.
INCOME TAXES
- ------------
The effective tax rates for the nine months ended September 30, 1996 and 1995
were 42.0% and 41.3%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp has diversified sources of funds generated through its operations.
The primary sources include deposits, loan principal and interest payments
received, sale of mortgage loans and consumer loans, and the maturity or sale
of investment securities and MBS. Other sources include commercial paper,
Federal Home Loan Bank advances and repurchase agreements. Prepayments on
loans and mortgage-backed securities and deposit inflows and outflows are
affected significantly by interest rates, real estate sales activity and
general economic conditions.
Westcorp uses these sources to meet its business needs which include funding
maturing certificates of deposits and savings withdrawals, repayment of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses and maintaining minimum regulatory liquidity and
capital levels.
During the first nine months of 1996, Westcorp purchased $300 million of MBS to
more profitably employ
27
<PAGE> 28
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 the securities to
maturity. These purchases included both fixed and adjustable rate MBS.
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 "adequately capitalized", an
institution must have a total risk-based capital ratio of 8% or greater, a Tier
1 (i.e., core) risk-based capital ratio of 4% or greater, a leverage ratio
(i.e., core) of 4% or greater and not be subject to any OTS order or directive
to meet and maintain a specific capital level for any capital measure. At
September 30, 1996 the Bank had a total risk-based capital ratio of 9.27%, a
Tier 1 risk-based capital ratio of 6.55% and a leverage ratio of 8.34%. The
Bank currently meets all the requirements of an "adequately capitalized"
institution. Its regulatory capital position at September 30, 1996 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 $266,187 8.43%(1) $266,187 8.43%(1) $376,794 9.27%(2)
Minimum OTS capital requirement 47,373 1.50 94,747 3.00 325,102 8.00
-------- ---- -------- ---- ------- ----
Excess capital $218,814 6.93% $171,440 5.43% $ 51,692 1.27%
======== ==== ======== ==== ======== ====
</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 1996.
28
<PAGE> 29
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Westcorp or its subsidiaries are involved as parties to certain legal
proceedings incidental to their businesses. Westcorp believes that the
outcome of such proceedings will not have a material effect upon
Westcorp's business or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 11 Computation of Earnings Per Share
(B) REPORTS ON FORM 8-K
None
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTCORP
- -------------------------------------------------------------------------------
(Registrant)
Date: November 1, 1996 By: /s/ JOY SCHAEFER
-----------------------------------
Joy Schaefer
Senior Executive Vice President
and Chief Operating Officer
Date: November 1, 1996 By: /s/ LEE A. WHATCOTT
-----------------------------------
Lee A. Whatcott
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
30
<PAGE> 1
Exhibit 11 Computation of Earnings Per Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1996 1995 1996 1995
------ ---------- ----------- -----------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average and common equivalent shares 26,265,693 26,065,752 26,186,500 25,874,205
---------- ---------- ---------- ----------
Net income $3,479,007 $9,073,040 $24,003,163 $23,707,338
========== ========== =========== ===========
Net income per share $0.13 $0.35 $0.92 $0.92
========== ========== =========== ===========
FULLY DILUTED
Weighted average and common equivalent shares 26,265,693 26,065,752 26,186,500 25,874,205
---------- ---------- ----------- -----------
Net income $3,479,007 $9,073,040 $24,003,163 $23,707,338
========== ========== =========== ===========
Net income per share $0.13 $0.35 $0.92 $0.92
========== ========== =========== ===========
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 70,122
<INT-BEARING-DEPOSITS> 510
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 555,277
<INVESTMENTS-CARRYING> 452,272
<INVESTMENTS-MARKET> 452,496
<LOANS> 1,657,642
<ALLOWANCE> 41,224
<TOTAL-ASSETS> 3,181,347
<DEPOSITS> 1,721,450
<SHORT-TERM> 343,549
<LIABILITIES-OTHER> 445,864
<LONG-TERM> 329,774
0
0
<COMMON> 25,985
<OTHER-SE> 288,319
<TOTAL-LIABILITIES-AND-EQUITY> 3,181,347
<INTEREST-LOAN> 127,437
<INTEREST-INVEST> 47,342
<INTEREST-OTHER> 4,380
<INTEREST-TOTAL> 179,159
<INTEREST-DEPOSIT> 74,143
<INTEREST-EXPENSE> 102,940
<INTEREST-INCOME-NET> 76,219
<LOAN-LOSSES> 10,150
<SECURITIES-GAINS> (2,029)
<EXPENSE-OTHER> 148,164
<INCOME-PRETAX> 51,007
<INCOME-PRE-EXTRAORDINARY> 24,003
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,003
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
<YIELD-ACTUAL> 3.65
<LOANS-NON> 23,931
<LOANS-PAST> 1,124
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,260
<CHARGE-OFFS> 15,646
<RECOVERIES> 5,990
<ALLOWANCE-CLOSE> 41,224
<ALLOWANCE-DOMESTIC> 41,224
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
