<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
------------------------
<TABLE>
<S> <C>
CALIFORNIA 51-0308535
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 727-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock $1 par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the last 90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 29, 1996:
COMMON STOCK, $1.00 PAR VALUE -- $189,747,174
The number of shares outstanding of the issuer's class of common stock as
of February 29, 1996:
COMMON STOCK, $1.00 PAR VALUE -- 24,574,348
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1995 Annual Meeting of
Shareholders to be held April 30, 1996, are incorporated by reference into Part
III.
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<PAGE> 2
WESTCORP AND SUBSIDIARIES
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 42
Item 3. Legal Proceedings.......................................................... 42
Item 4. Submission of Matters to a Vote of Security Holders........................ 43
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 43
Item 6. Selected Financial Data.................................................... 44
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation............................................................. 45
Item 8. Financial Statements and Supplementary Data................................ 52
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure............................................................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 52
Item 11. Executive Compensation..................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 52
Item 13. Certain Relationships and Related Transactions............................. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 53
</TABLE>
2
<PAGE> 3
PART I
ITEM 1 -- BUSINESS
OVERVIEW
Westcorp, a California corporation, is a financial services holding company
which specializes in automobile lending ("consumer") and residential real estate
lending ("mortgage"). Westcorp operates principally through its wholly-owned
subsidiary, Western Financial Savings Bank, F.S.B. (the "Bank") and its
subsidiaries. Westcorp also owns all the capital stock of Westran Services Corp.
("Westran").
The Bank owns 80% of the capital stock of a consumer finance subsidiary,
WFS Financial Inc ("WFS") and WF Mortgage Corporation which in turn owns all the
outstanding capital stock of The Hammond Company ("THC"), a mortgage banking
holding company.
Additionally, the Bank owns all of the outstanding capital stock of Western
Reconveyance Company, Inc. ("Recon"), Westhrift Life Insurance Company
("Westhrift"), Western Consumer Services, Inc. ("WCS") and Westplan Insurance
Agency, Inc. ("Westplan").
WFS owns all of the outstanding stock of Western Financial Auto Loans, Inc.
("WFAL") and Western Financial Auto Loans 2, Inc. ("WFAL2"). THC owns all of the
outstanding stock of The Hammond Company, The Mortgage Bankers ("THCMB") which
in turn owns all the outstanding stock of Sunstate Insurance ("Sunstate") and
Hammond Service Corp ("HSC"). Westplan owns all of the outstanding stock of
Westplan Investments ("WI").
Western Thrift Financial Corporation ("WTFC") was formed in 1974 as the
holding company for Western Thrift & Loan Association ("WTL"), a
California-licensed thrift and loan association founded in 1972. WTFC later
changed its name to Westcorp. In 1982, Westcorp acquired Evergreen Savings and
Loan Association ("Evergreen"), a California-licensed savings and loan
association, which became a wholly-owned subsidiary of Westcorp. Evergreen's
name was ultimately changed to Western Financial Savings Bank. In 1992, Western
Financial Savings Bank converted to a federal charter and added F.S.B. to its
name.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). It is further subject to certain regulations of the Board
of Governors of the Federal Reserve System ("FRB") which governs reserves
required to be maintained against deposits and other matters. The Bank is also a
member of the Federal Home Loan Bank of San Francisco ("FHLB"), one of twelve
regional banks for federally insured savings and loan associations and banks
comprising the Federal Home Loan Bank System ("FHLB System"). The FHLB System is
under the supervision of the Federal Housing Finance Board. WFS is further
regulated by various departments or commissions of the states in which it does
business.
The types of loans which Westcorp may originate are primarily defined by
federal statutes and regulations. Notwithstanding its authority to purchase or
originate a variety of secured and unsecured mortgage, consumer and commercial
loans, Westcorp's strategy to date has been to focus on the basic financing
needs of the consumer-automobile lending and residential real estate lending.
Although the majority of Westcorp's loans are originated in California, over the
past four years Westcorp has expanded into 19 new states and is evaluating
ongoing expansion opportunities in states where it already does business as well
as expansion into other states. Westcorp's business plan is originating or
purchasing loans, selling or securitizing them in the secondary market and
retaining the servicing rights thereon.
3
<PAGE> 4
The following table sets forth the loan origination, purchase and sale
activity of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans originated:
Consumer loans(1).................. $1,533,989 $1,183,188 $ 829,181 $ 673,473 $ 604,069
Mortgage loans:
Existing property............... 507,884 665,480 879,592 570,796 492,341
Construction.................... 5,697 18,853 33,511 27,013 27,965
---------- ---------- ---------- ---------- ----------
Total loans originated............... 2,047,570 1,867,521 1,742,284 1,271,282 1,124,375
Loans purchased:
Mortgage loans:
Existing property............... 252 45,373 210 2,441
---------- ---------- ---------- ----------
Total loans purchased................ 252 45,373 210 2,441
Loans sold or securitized(2):
Consumer loans..................... 1,480,000 842,000 777,500 450,000 725,000
Mortgage loans..................... 304,242 541,923 803,992 386,257 166,898
---------- ---------- ---------- ---------- ----------
Total loans sold or
securitized................... 1,784,242 1,383,923 1,581,492 836,257 891,898
Principal reductions(3).............. 269,483 334,627 529,683 617,017 591,039
---------- ---------- ---------- ---------- ----------
(Decrease) increase in total loans... $ (5,903) $ 194,344 $ (368,681) $ (179,551) $ (358,562)
========== ========== ========== ========== ==========
</TABLE>
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(1) Includes automobile loans purchased from dealers.
(2) Loans sold or securitized in which Westcorp generally retains servicing.
(3) Includes scheduled payments, prepayments and chargeoffs.
Westcorp's owned loan portfolio totalled $1.7 billion at December 31, 1995,
which consisted of 19% retail installment sales contracts secured by automobiles
and other consumer loans and 81% loans secured by real property used primarily
for residential purposes. At December 31, 1995, Westcorp also serviced $1.9
billion of consumer loans and $3.7 billion of mortgage loans for the benefit of
others. Westcorp's revenues are thereby derived principally from interest earned
on loans and servicing income. Interest on deposits and borrowings, provisions
for loan losses, and general and administrative expenses are Westcorp's major
expense items.
4
<PAGE> 5
The following table sets forth the composition of Westcorp's loan portfolio
by type of loan, including loans held for sale, as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer loans:
Automobile.... $ 353,345 20.2% $ 507,772 29.0% $ 251,751 16.2% $ 404,381 21.0% $ 387,667 18.4%
Other......... 20,908 1.2 5,698 0.3 6,572 0.4 10,615 0.6 29,143 1.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
374,253 21.4 513,470 29.3 258,323 16.6 414,996 21.6 416,810 19.8
Less: unearned
discounts..... 38,628 2.2 82,762 4.7 27,972 1.8 60,795 3.2 38,670 1.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total
consumer
loans..... 335,625 19.2 430,708 24.6 230,351 14.8 354,201 18.4 378,140 18.0
Mortgage loans:
Loans on
existing
property.... 1,393,983 79.9 1,298,037 74.1 1,260,670 81.0 1,466,319 76.2 1,592,843 75.7
Home
improvement... 12,184 0.7 10,548 0.6 49,333 3.2 66,356 3.4 88,961 4.2
Construction... 8,469 0.5 19,813 1.1 31,684 2.0 54,648 2.8 76,793 3.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total
mortgage
loans..... 1,414,636 81.1 1,328,398 75.8 1,341,687 86.2 1,587,323 82.4 1,758,597 83.5
Less:
undisbursed
loan
proceeds...... 4,672 0.3 7,614 0.4 14,890 1.0 15,695 0.8 31,357 1.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total
mortgage
loans..... 1,409,964 80.8 1,320,784 75.4 1,326,797 85.2 1,571,628 81.6 1,727,240 82.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total
loans... $1,745,589 100.0% $1,751,492 100.0% $1,557,148 100.0% $1,925,829 100.0% $2,105,380 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans serviced
for the
benefit of
others:
Automobile
loans....... $1,894,944 33.9% $1,210,674 42.2% $1,009,941 46.5% $ 714,665 50.7% $ 658,622 56.2%
Mortgage
loans....... 3,688,730 66.1 1,656,811 57.8 1,160,485 53.5 696,034 49.3 514,322 43.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans
serviced... $5,583,674 100.0% $2,867,485 100.0% $2,170,426 100.0% $1,410,699 100.0% $1,172,944 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
SEGMENT INFORMATION
The automobile lending operations of Westcorp, conducted by WFS, purchases
retail installment sales contracts secured by new and used cars and light trucks
("automobiles") primarily from new and used car dealers and originates direct
consumer loans secured by automobiles. Westcorp conducted its automobile lending
operations in 89 offices serving a total of 16 states at December 31, 1995. In
1996, Westcorp has opened eight additional automobile lending consumer offices
and entered into three additional states. Westcorp originated and purchased
loans secured by residential real estate through 23 mortgage offices in seven
states at December 31, 1995. Westcorp's lending activities are funded primarily
by attracting deposits from the public at 25 retail branch offices in California
and through loan sales and other borrowing sources. A summary of the operations
of each of these business segments is provided in Note 21--Business Segment Data
to the Consolidated Financial Statements.
LENDING -- GENERAL
Westcorp's primary sources of revenue are net interest income and servicing
income. Net interest income is the difference between the income earned on
interest earning assets and the interest paid on interest bearing liabilities.
Servicing income includes contractual servicing fees earned by servicing loans
for the benefit of others, retained residual interest on sold loans, and
additional fees related to servicing, such as late charges and prepayment fees.
5
<PAGE> 6
Net interest income is significantly affected by the difference between
yields earned by Westcorp on its interest earning assets and the rates paid on
its interest bearing liabilities (interest rate spread), and the relative
amounts of Westcorp's interest earning assets and interest bearing liabilities.
The following table presents information relative to the average balances and
interest rates of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ --------------------------------- ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment
securities(1)......... $ 118,926 $ 6,551 5.51% $ 109,547 $ 5,768 5.27% $ 106,705 $ 6,328 5.93%
Other investments....... 99,062 5,662 5.72 90,223 4,343 4.81 81,015 3,190 3.94
Mortgage-backed
securities(1)......... 653,850 47,486 7.26 218,082 13,879 6.36 100,890 5,788 5.74
Total loans:
Consumer loans(2)..... 416,949 60,953 14.62 293,963 38,511 13.10 293,820 39,017 13.28
Mortgage loans........ 1,336,080 101,441 7.59 1,257,434 81,138 6.45 1,436,468 103,623 7.21
---------- -------- ----- ---------- -------- ----- ---------- ------- -----
Total interest earning
assets.................. 2,624,867 222,093 8.46 1,969,249 143,639 7.29 2,018,898 157,946 7.82
Non interest earning
assets:
Premises and equipment
and real estate
owned................. 81,804 102,354 134,601
Other assets............ 171,392 130,866 169,899
Less: allowance for loan
losses................ 40,771 40,328 44,005
---------- ---------- ----------
Total..................... $2,837,292 $2,162,141 $2,279,393
========== ========== ==========
Interest bearing
liabilities:
Savings deposits........ $1,751,539 101,364 5.79 $1,455,058 68,295 4.69 $1,598,585 76,316 4.77
Public debt offerings... 151,446 11,881 7.85 125,969 10,739 8.53 131,009 11,898 9.08
FHLB advances and other
borrowings............ 84,342 7,200 8.54 104,093 7,864 7.55 164,474 12,929 7.86
Repurchase agreements..... 325,926 18,834 5.78 51,402 1,868 3.63 2,146 60 2.80
---------- -------- ----- ---------- -------- ----- ---------- ------- -----
Total interest bearing
liabilities............. 2,313,253 139,279 6.02 1,736,522 88,766 5.11 1,896,214 101,203 5.34
Non interest bearing
liabilities:
Unearned insurance
premiums and
insurance reserves.... 5,227 5,433 5,413
Other liabilities....... 305,501 212,008 194,767
Shareholders' equity...... 213,311 208,178 182,999
---------- -------- ----- ---------- -------- ----- ---------- ------- -----
Total..................... $2,837,292 $2,162,141 $2,279,393
========== ========== ==========
Net interest income and
interest rate spread.... $ 82,814 2.44% $ 54,873 2.18% $ 56,743 2.48%
======== ===== ======== ===== ======= =====
Net yield on average
interest earning
assets.................. 3.16% 2.79% 2.81%
===== ===== =====
</TABLE>
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(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.
6
<PAGE> 7
The following table sets forth the changes in net interest income
attributable to (i) changes in volume (change in average portfolio volume
multiplied by prior period average rate), (ii) changes in rates (change in
weighted average interest rate multiplied by prior period average portfolio
balance), and (iii) the combined effect of changes in rates and volume (change
in weighted average interest rate multiplied by change in average portfolio
balance).
<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
------------------------------------ ----------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------- ------ ------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Investment securities......... $ 494 $ 262 $ 27 $ 783 $ 168 $ (704) $ (24) $ (560)
Other investments............. 425 821 73 1,319 362 704 87 1,153
Mortgage-backed securities.... 27,714 1,962 3,931 33,607 6,726 625 740 8,091
Total loans:
Consumer loans.............. 16,111 4,468 1,863 22,442 18 (528) 4 (506)
Mortgage loans.............. 5,072 14,334 897 20,303 (12,908) (10,917) 1,340 (22,485)
------- ------- ------ ------- -------- -------- ------ --------
Total interest earning assets... $49,816 $21,847 $6,791 78,454 $ (5,634) $(10,820) $ 2,147 (14,307)
======= ======= ====== ======== ======== ======
Interest expense:
Savings deposits.............. $13,904 $16,006 $3,159 33,069 $ (6,846) $ (1,279) $ 104 (8,021)
Public debt offerings......... 2,173 (857) (174) 1,142 377 (250) (10) 117
FHLB advances................. (1,491) 1,031 (204) (664) (6,920) 1,462 (884) (6,342)
Repurchase agreements......... 9,965 1,105 5,896 16,966 1,379 19 411 1,809
------- ------- ------ ------- -------- -------- ------ --------
Total interest bearing
liabilities................... $24,551 $17,285 $8,677 50,513 $(12,010) $ (48) $ (379) (12,437)
======= ======= ====== ======== ======== ======
------- --------
Net change in net interest
income........................ $27,941 $(1,870)
======= ========
</TABLE>
The increase in interest income, interest expense, and net interest income
was the result of the increase in mortgage-backed securities, investment
securities and loans held on-balance sheet as well as generally higher interest
rates. In addition to earning interest income, Westcorp earns servicing income
on loans sold. Westcorp earns servicing income by retaining the loan yield in
excess of the investor's pass-through rate determined by the terms of the sale
and by retaining the servicing rights related to the sold loans.
Westcorp's ability to maintain a positive spread during periods of
fluctuating interest rates is determined principally by the maturities and
repricing mechanisms of its interest earning assets and interest bearing
liabilities. Synchronizing the repricing of an institution's assets and
liabilities to minimize interest rate risk is commonly referred to as gap
management. Negative gap occurs when an institution's liabilities reprice more
rapidly than its assets and positive gap occurs when an institution's assets
reprice more rapidly than its liabilities.
Westcorp's asset/liability management strategy is to match its loan and
investment products with interest bearing liabilities having similar repricing
characteristics and durations. This strategy includes originating adjustable
rate loans, securitizing loans with liabilities that have similar repricing and
maturity characteristics, matching fixed rate loans held in the portfolio with
advances from the FHLB, selling fixed rate loans and utilizing financial
instrument agreements. These agreements are used by Westcorp solely to manage
interest rate risk within its portfolio and include interest rate swaps, caps,
options, floors and forward agreements. See "Management's Discussion and
Analysis -- Asset/Liability Management".
As a result of Westcorp's practice of matching its rate sensitive
liabilities with rate sensitive assets, Westcorp had an overall positive gap of
12%. In addition, Westcorp had a negative gap of 1.5% at December 31, 1995, for
assets and liabilities having an interest rate maturity of one year or less and
a negative gap of 2.2% for assets and liabilities having an interest rate
maturity of three years or less. At December 31, 1995, 77% of Westcorp's
interest earning assets had interest rate maturities of three years or less.
7
<PAGE> 8
Westcorp maintained an overall positive gap by having interest sensitive
assets that adjusted to fluctuations in general interest rates during 1995
almost as frequently as its interest sensitive liabilities adjusted. Westcorp's
ability to maintain a positive gap may be significantly affected by, among other
factors, (i) interest earning assets based on a market lagging index, (ii)
interest earning assets and interest bearing liabilities repricing at different
times, (iii) interest rate caps and floors imposed on its assets, (iv) interest
rates on assets and liabilities responding differently to economic, market and
competitive factors, (v) high interest rate levels adversely affecting lending
markets in general, and (vi) low interest rate levels increasing the difficulty
of originating ARMs and increasing loan prepayments, which prepayments may be
reinvested at lower interest rates.
8
<PAGE> 9
The following table illustrates the projected interest rate maturities,
based upon certain assumptions regarding the major asset and liability
categories of Westcorp at December 31, 1995. Prepayment and decay assumptions
for loans and savings accounts were developed using both Westcorp's own
prepayment experience and industry averages. For Westcorp's mortgage loans, the
prepayment assumptions range from 6% to 20% of loans prepaying per year
depending upon the interest rate, type of loan and contractual repricing terms.
For passbook and money market deposit accounts, Westcorp uses a rate of 20% to
25% decay per year depending upon the characteristics of each type of account.
The interest rate sensitivity of Westcorp's assets and liabilities illustrated
in the following table could vary substantially if different assumptions were
used or actual experience differs from the assumptions set forth. Although
Westcorp's investment securities and mortgage-backed securities are classified
primarily as available for sale, they are presented in the repricing categories
based on their respective stated maturities adjusted for any appropriate
prepayment assumptions. Loans held for sale are presented as repricing within
three months based on management's intent relative to these assets.
<TABLE>
<CAPTION>
AFTER AFTER
THREE AFTER ONE THREE AFTER FIVE
WITHIN MONTHS YEAR YEARS YEARS
THREE THROUGH THROUGH THROUGH THROUGH AFTER TEN
MONTHS ONE YEAR THREE YEARS FIVE YEARS TEN YEARS YEARS TOTAL
---------- ----------- ----------- ----------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities.............. $ 22,405 $ 112,619 $ 135,024
Other investments.................. $ 126,416 500 126,916
Mortgage-backed securities......... 128,590 29,520 164,139 $ 144,570 $ 205,410 $ 180,323 852,552
Total loans:
Consumer(1)...................... 52,602 141,670 109,917 27,591 3,562 283 335,625
Mortgage:
Adjustable rate(2)............. 980,525 225,006 38,731 538 1,244,800
Fixed rate(2).................. 7,133 19,210 47,127 31,074 36,320 20,503 161,367
Construction(2)................ 3,797 3,797
---------- ---------- -------- -------- -------- -------- ----------
Total interest earning assets........ 1,299,063 438,311 472,533 203,773 245,292 201,109 2,860,081
Interest bearing liabilities:
Savings deposits:
Passbook/statement accounts(3)... 3,514 9,447 18,705 12,009 14,429 7,143 65,247
Money market deposit
accounts(3).................... 33 88 172 111 133 65 602
Certificate accounts(4).......... 533,466 745,295 373,199 35,615 5 1,687,580
FHLB advances(4)................... 12,000 135,000 32,000 6,500 6,500 192,000
Other borrowings(4)................ 466,323 15 16 104,360 570,714
---------- ---------- -------- -------- -------- -------- ----------
Total interest bearing liabilities... 1,015,336 889,845 424,092 54,235 125,427 7,208 2,516,143
---------- ---------- -------- -------- -------- -------- ----------
Excess interest bearing assets
(liabilities)...................... 283,727 (451,534) 48,441 149,538 119,865 193,901 343,938
Effect of hedging activities......... 126,000 (70,500) (55,500)
---------- ---------- -------- -------- -------- -------- ----------
Hedged excess........................ $ 409,727 $ (451,534) $ (22,059) $ 149,538 $ 64,365 $ 193,901 $ 343,938
========== ========== ======== ======== ======== ======== ==========
Cumulative excess.................... $ 409,727 $ (41,807) $ (63,866) $ 85,672 $ 150,037 $ 343,938 $ 343,938
========== ========== ======== ======== ======== ======== ==========
Cumulative differences as a
percentage of total assets......... 14.3% (1.5%) (2.2%) 3.0% 5.3% 12.0% 12.0%
</TABLE>
- ---------------
(1) Based on contractual maturities adjusted by Westcorp's historical prepayment
rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the OTS.
(4) Based on contractual maturity.
9
<PAGE> 10
AUTOMOBILE LENDING
Westcorp and its predecessors and affiliates have purchased and originated
automobile loans since 1973. During 1995, Westcorp combined the operations of
the Bank's consumer finance division and the Bank's subsidiaries, Westcorp
Financial Services, Inc., WFAL and WFAL2 to create WFS Financial Inc. Automobile
loans are underwritten and purchased from approved new and used automobile
dealers on a nonrecourse basis ("indirect contract") or are underwritten and
originated directly through a consumer finance office or automobile dealer
center ("direct loan"). Marketing is performed by sales managers through
personal calls to automobile dealers as well as referrals. Westcorp believes
that the creation and maintenance of close personal relationships with
automobile dealers by its branch offices and dealer centers are a major factor
in promoting the growth and sustaining the quality of its automobile loan
portfolio.
Substantially all loans originated or purchased by Westcorp are reviewed to
ensure proper documentation and adherence to underwriting guidelines. Westcorp
does not have minimum or maximum maturity requirements; however, automobile
loans with less than three years' maturity or more than six years' maturity are
seldom purchased due to low customer demand. Each automobile loan is fully
amortizing and provides for level payments over the term of the loan with the
portion of principal and interest of each level payment determined on the basis
of the sum of the digits (also known as the Rule of 78s) or on the simple
interest method. The interest rates charged on automobile loans are primarily
determined by competitive loan rates, which reflect the availability of lendable
funds and the demand for loans.
Westcorp generally lends to the applicant an amount not to exceed the sum
of the dealer's cost, taxes, license fees, and other miscellaneous costs.
Additional advances over the sum of such costs may be made under certain
circumstances based on the creditworthiness of the applicant. For used
automobiles, the amount loaned generally does not exceed the wholesale "blue
book" value for the automobile plus related expenses and any approved additional
advances.
The table presents information relative to originations of indirect
contracts and direct loans as well as new and used vehicles for the following
periods ending:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Indirect contracts............................ $1,454,198 $1,092,300 $740,832
Direct loans.................................. 73,451 84,731 79,386
---------- ---------- --------
Total volume................................ $1,527,649 $1,177,031 $820,218
========== ========== ========
New vehicles.................................. $ 367,638 $ 354,787 $269,467
Used vehicles................................. 1,160,011 822,244 550,751
---------- ---------- --------
Total volume................................ $1,527,649 $1,177,031 $820,218
========== ========== ========
</TABLE>
SERVICING
Westcorp's servicing activities include collecting payments and when
appropriate repossessing the automobile. As part of these activities, Westcorp
also earns late charges and other fees. Payment collection includes pursuing
delinquent accounts, most of which are cured promptly. If not, Westcorp
repossesses and sells the collateral in accordance with the terms of the loan
and statutory guidelines. Deficiency balances are charged off against the
allowance for loan losses. After chargeoff, Westcorp pursues collection of
deficiency balances subject to applicable law.
Each borrower with an automobile loan originated or purchased by Westcorp
is required to maintain insurance covering physical damage to the financed
vehicle, subject to certain limitations. The insurance policy must name Westcorp
as the loss payee under the policy, and must cover loss and damage due to
collision and other risks included in comprehensive coverage. Since borrowers
may choose their own insurers to provide the required coverage, the specific
terms and conditions of their policies vary within limits prescribed under
applicable insurance law and regulation. If a borrower fails to obtain or
maintain the required
10
<PAGE> 11
insurance, Westcorp has the right to obtain such insurance and add the premium
for such insurance to the balance due on the loan. A subsidiary of the Bank,
Westplan, acts as an independent agent for unaffiliated insurers in providing
collateral protection insurance coverage on automobiles securing loans serviced
by Westcorp. See Item 3 -- Legal Proceedings.
ASSET-BACKED MARKET ACTIVITIES
Westcorp regularly sells automobile loans in the asset-backed market while
retaining the servicing rights thereon. Westcorp has securitized its automobile
loans using an off-balance sheet structure which utilizes a separate grantor
trust for each transaction. Automobile loan securitization provides a stable
source of funding, eliminates interest rate risk on the loans sold, enhances
return on assets and improves the capital position of the Bank. The loans are
sold in publicly underwritten securitization transactions in which Westcorp
continues to service such loans. Since 1986, the securities issued have been
rated "AAA" by Standard & Poor's Rating Services, a division of McGraw-Hill,
Inc. ("S&P") and "Aaa" by Moody's Investors Service, Inc. ("Moody's"), their
highest rating categories, either due to the senior/subordinated structure of
the transaction or as a result of third party credit enhancement provided by
Financial Security Assurance, Inc.
These securitizations are structured to be treated as sales without
recourse under generally accepted accounting principles ("GAAP"), thereby
removing the automobile loans sold from Westcorp's balance sheet. Westcorp
retains a residual interest in the excess interest which represents the excess
of the underlying interest rate on the pool of automobile loans sold over the
sum of the pass-through rate on the securities, credit losses, administrative
expenses and contractual servicing fees. The valuation and recognition of the
residual interest is affected by actual credit loss and prepayment history,
discount rate assumptions and other factors.
Westcorp securitized $1.5 billion and $842 million of automobile loans
during 1995 and 1994, respectively. At December 31, 1995 and 1994, $220 million
and $302 million, respectively, of automobile loans were held for sale.
Westcorp anticipates using an owner trust structure in 1996, issuing both
collateralized notes and pass-through certificates. Securitizations using the
owner trust structure will also be treated as a sale without recourse. Westcorp
will retain the servicing of the contracts sold to the owner trust and will
receive excess interest from the contracts sold. The owner trust structure will
enable Westcorp to maximize the return from a securitization transaction by more
closely matching the yield paid to the investor to the yield curve existing at
the time the securitization transaction is consummated.
11
<PAGE> 12
RESIDENTIAL REAL ESTATE LENDING
Westcorp's primary mortgage lending focus is originating single family (1-4
units) mortgage loans to enable borrowers to purchase, refinance or improve
residential property. On a limited basis, it also originates mortgage loans
secured by multifamily residences. Westcorp also holds a small portfolio of
construction and commercial mortgage loans. Westcorp's total mortgage loan
portfolio (including those held for sale) consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994
-------------------- --------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds........................ $ 816,948 57.9% $ 718,924 54.4%
Second trust deeds....................... 116,132 8.3 126,365 9.6
---------- ------ ---------- ------
933,080 66.2 845,289 64.0
Multifamily residential loans.............. 469,951 33.3 459,883 34.8
Construction loans......................... 8,469 0.6 19,813 1.5
Commercial loans........................... 3,136 0.2 3,413 0.3
---------- ------ ---------- ------
1,414,636 1,328,398
Less: undisbursed loan proceeds............ 4,672 0.3 7,614 0.6
---------- ------ ---------- ------
$1,409,964 100.0% $1,320,784 100.0%
========== ====== ========== ======
</TABLE>
Mortgage loan originations are primarily generated by employees through
referrals from real estate brokers. These employees receive commissions based on
the total volume of loans acquired and closed in accordance with Westcorp's
product pricing and underwriting standards. Westcorp has established criteria
for the brokers from whom it will accept loan referrals, and the commissioned
employees endeavor to increase the number of brokers approved by Westcorp.
Westcorp regularly reviews its mortgage loans to ensure compliance with its
underwriting guidelines and with federal and state regulations.
Westcorp's lending strategy includes originating fixed rate loans,
adjustable rate loans ("ARMs") without negative amortization and ARMs with
potential negative amortization. By diversifying its loan portfolio among three
types of loan products, Westcorp reduces its overall risk exposure, increases
its flexibility in asset/liability management, and provides greater loan
origination opportunities. The following table sets forth information on the
amount of fixed rate mortgage loans and ARMs, net of undisbursed loan proceeds,
in Westcorp's portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994
-------------------- --------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family............................ $ 160,699 11.4% $ 103,189 7.8%
Multifamily.............................. 668 0.1 394 0.1
Adjustable rate loans:
Negative amortization.................... 892,295 63.3 916,916 69.3
Without negative amortization............ 356,302 25.2 300,285 22.8
---------- ------ ---------- ------
$1,409,964 100.0% $1,320,784 100.0%
========== ====== ========== ======
</TABLE>
SINGLE FAMILY RESIDENTIAL LOANS
Westcorp originates both ARMs and fixed rate first trust deed loans secured
by single family residences. These loans have original principal amounts up to
$1.0 million, but generally does not exceed $400 thousand in
12
<PAGE> 13
original principal amount. Westcorp has established lending limits based on the
amount of the loan compared to the property's value ("LTV"). Westcorp will
finance loans for the purchase of owner occupied single family residences for up
to 95% of the market value based on the lesser of the purchase price or
appraised value of the property. Mandatory private mortgage insurance, which
ensures the unpaid balance in excess of 75% of the property's value, is required
on loans with a LTV exceeding 80% at origination. The cost of this insurance is
paid by the borrower during the term of the loan. Single family residential
loans are typically made for terms of up to 30 years and are amortized on a
monthly basis with level payments of principal and interest due each month,
subject to periodic adjustment in the case of ARMs.
Interest rates offered by Westcorp are regularly reviewed and adjusted and
generally reflect prevailing competitive terms. Loan demand and availability of
credit affect these market conditions. Loan origination fees are a volatile
source of income varying with the volume and type of loans made and with
competitive conditions in the mortgage markets. The interest rates on adjustable
rate mortgage loans are adjusted monthly, quarterly, semiannually or annually,
at a rate typically equal to 2.25% to 3.0% above a specified index. Westcorp
primarily originates loans using the 11th District Cost of Funds Index ("COFI")
published by the FHLB, but also utilizes Treasury indices, the Federal Cost of
Funds Index, London Interbank Offer Rate ("LIBOR") or other generally recognized
cost of funds indices. Initial interest rates and adjustment periods are set and
reviewed based on prevailing market conditions and, from time to time, have
included initial rates below those which would prevail under the general terms
of the loan. At December 31, 1995, Westcorp held $75.2 million of loans that had
yet to adjust to a fully-indexed rate.
ARM loans are also designed with limits on the amount the interest rate may
change in a given period and with maximum lifetime interest rates, or caps, to
stimulate greater customer acceptance while maintaining the desired interest
rate flexibility. The interest rates on ARMs generally can increase or decrease
no more than 3% to 6% over the life of the loan. All ARMs are assumable by
qualified buyers at the interest rate then in effect on the loan, in some cases
with the payment of an assumption fee, but the maximum upward or downward
interest rate adjustment over the life of the assumed loan is reset at the time
of assumption. On ARMs without negative amortization, the maximum change in
interest rate per period may be limited to 2% or less on certain loan programs.
On ARMs with negative amortization, the amount of any interest due in excess of
the monthly payment is capitalized by adding it to the principal balance of the
loan resulting in negative amortization to principal. The monthly payment on
ARMs with negative amortization is adjusted annually, subject to a 7.5% maximum
increase, to insure that the loan fully amortizes over the remaining term to
maturity. At the end of each five-year interval throughout the life of the loan
(or sooner if the outstanding loan amount reaches a dollar figure specified in
the contract generally no greater than 125% of the original loan amount),
adjustments are made regardless of the 7.5% cap. At December 31, 1995, the total
amount of negative amortization capitalized to principal and outstanding
totalled $2.2 million.
Westcorp offers a secured line of credit typically collateralized by a
second trust deed on a single family residence and bearing an adjustable rate of
interest based on a market index. At December 31, 1995, Westcorp had committed
to lend approximately $93.7 million under this program, of which $60.2 million
was outstanding. The market indices are the 11th District Cost of Funds or the
Prime rate plus a margin between 4.95% to 6.0%. The program will lend up to $300
thousand with a loan to value of 80% or less for a maximum term of 15 years. The
secured line of credit rates are from 6.0% to a maximum of 16%.
The residential mortgage portfolio also includes both fixed and adjustable
rate residential loans secured by second trust deeds ("consumer mortgage
loans"). These loans have original loan amounts up to $300 thousand and
maturities ranging from 5 to 15 years. These loans amortize on a 15 year basis
or less and, depending upon the repayment option selected by the borrower, may
involve a "balloon" payment at the end of the term. As part of the terms of the
loan, Westcorp requires that it be given notice in the event of a default under
the first trust deed to enable it to take appropriate steps to protect its
interest. As of December 31, 1995, Westcorp had $12.2 million outstanding in
consumer mortgage loans.
13
<PAGE> 14
MULTIFAMILY RESIDENTIAL LOANS
On a limited basis, Westcorp originates adjustable rate permanent loans
secured by multifamily residential properties (generally apartment houses) for
up to $5 million in original principal amount and up to 75% LTV. Additionally,
Westcorp originates multifamily residential loans to provide financing on the
disposition of real estate owned. During 1995, Westcorp originated $24.6 million
in multifamily residential loans.
CONSTRUCTION LOANS
On a limited basis, Westcorp originates construction loans primarily for
multifamily and single family owner occupied residences. These include loans for
the acquisition and development of unimproved property to be used for
residential purposes. During 1995, Westcorp originated $5.7 million in
construction loans. At December 31, 1995, Westcorp's construction loans totalled
$8.5 million (of which $4.7 million had not been disbursed). Such loans
represent less than 1% of Westcorp's total assets.
The construction loan portfolio generally consists of loans with terms
ranging from 12 to 18 months with adjustable interest rates equal to 2.0% to
3.0% above an average prime rate of three major banks. Advances are generally
made to cover actual construction costs and include a reserve for paying the
stated interest due on the loan.
SERVICING
Loan servicing includes collecting payments and related servicing income
and on the collateral, when necessary. Additional fees and charges related to
loan servicing include prepayment fees, late charges, assumption fees and other
miscellaneous fees. During 1995, Westcorp purchased rights to service $1.5
billion of single family residential loans for $14.7 million, known as purchased
mortgage servicing rights ("PMSRs") for various loan pools and receives
servicing income related to the servicing of these loans, in addition to the
servicing retained on loans sold from its own portfolio. The purchase price of
PMSRs are capitalized and amortized over the expected life of the underlying
loans. See "Supervision and Regulation -- Regulatory Capital Requirements".
Westcorp requires title insurance, or in some instances lot book insurance,
which insure the priority of its liens on loans made on the security of real
property, and may require additional title endorsements to standard policies as
necessary to protect its security in the property encumbered. Westcorp requires
that fire and extended coverage be maintained in amounts at least equal to the
replacement costs of structures and improvements on all properties serving as
security for its loans. If the borrower fails to obtain or maintain the required
insurance, Westcorp has the right to obtain such insurance and add the premium
for such insurance to the balance due on the loan. Westcorp also requires flood
insurance on properties that are within areas defined as having a special flood
hazard.
Mortgage loan borrowers are provided a 10 to 15 day period after the date
payment is due before a late charge is assessed. Delinquent customers are
promptly contacted by Westcorp. If delinquencies on mortgage loans are not cured
promptly, Westcorp takes those steps required by law to perfect its interest in
the collateral. This process generally includes recording a notice of default
and a trustee's sale of the property. Westcorp disposes of foreclosed property
as expeditiously as possible. Due to legal restrictions and other factors,
Westcorp generally does not pursue a deficiency judgment through a judicial
foreclosure.
SECONDARY MARKET ACTIVITIES
Mortgage loans originated or purchased by Westcorp are either held in its
portfolio or sold in the secondary market. As Westcorp has become more active in
the secondary market, it has sold Federal Housing Administration ("FHA") and
Veteran's Administration ("VA") loans, as well as other conforming and
nonconforming loans to the Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC") and other established conduits.
With the exception of FHA and VA loans which are sold servicing released,
Westcorp generally retains the servicing rights to these loans and earns
14
<PAGE> 15
servicing income therefrom. These sales are generally without recourse, thereby
removing the mortgage loans sold from Westcorp's balance sheet. During 1995,
Westcorp sold $304 million of mortgage loans in the secondary market compared to
$542 million during 1994. Westcorp's portfolio of mortgage loans held for sale,
consisting of single family loans, totalled $149 million at December 31, 1995
and $3.0 million at December 31, 1994.
ASSET QUALITY
Westcorp has established procedures to assist in the effective
identification, measurement and rehabilitation of delinquent and other problem
loans. An integral part of this process is the Internal Asset Review Department
("IAR"). IAR performs an independent review function to measure risk within
Westcorp's asset portfolio. IAR reviews and classifies assets as Pass, Special
Mention, Substandard, Doubtful or Loss. Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that
Westcorp may sustain some loss unless the deficiencies are corrected. Doubtful
assets have a higher possibility of loss than substandard assets. Special
mention assets are assets not falling in the foregoing categories, but which
have weaknesses or potential weaknesses deserving management's close attention.
The Special Asset Department ("SAD") is responsible for the management,
collection and disposition of loans which have certain characteristics that
indicate current or potential credit weaknesses. These characteristics may
include, but are not limited to, delinquency, delinquent taxes, inadequate debt
service ratios and inadequate or deteriorating collateral. SAD prepares action
plans for each of these loans. These plans vary from recommendations to monitor
and review to recommendations to foreclose depending on each loan's particular
situation.
AUTOMOBILE LOAN QUALITY
Westcorp maintains a collection staff to monitor and control delinquencies
within its automobile loan portfolio. During 1995, delinquencies and chargeoffs
increased, as expected, as Westcorp purchased a greater percentage of automobile
loans from the lower end of the prime credit quality spectrum. Automobile loans
are not placed on nonaccrual status since it is Westcorp's policy to charge off
these loans after 120 days past due. Therefore, interest continues to accrue on
automobile loans until the loan is charged off. At the time an automobile loan
is charged off, all accrued but unpaid interest is reversed.
15
<PAGE> 16
The following table sets forth information with respect to the delinquency
of Westcorp's automobile portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------- --------------------- --------------------- --------------------- ---------------------
NUMBER NUMBER NUMBER NUMBER NUMBER
OF OF OF OF OF
AUTOMOBILE AUTOMOBILE AUTOMOBILE AUTOMOBILE AUTOMOBILE
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT(2)
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile
loans
owned... 58,887 $314,717 61,764 $425,010 40,042 $223,792 51,797 $343,602 43,770 $374,607
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Period of
delinquency
for
automobile
loans
owned(1):
31-59
days... 1,332 $ 3,936 688 $ 2,069 490 $ 1,259 653 $ 2,218 815 $ 3,161
60-89
days... 455 1,499 209 567 138 457 276 879 281 1,706
90 days
or more.. 182 473 98 197 83 303 191 747 588 3,531
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Total
automobile
loans delin-
quent... 1,969 $ 5,908 995 $ 2,833 711 $ 2,019 1,120 $ 3,844 1,684 $ 8,398
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Delinquencies
for auto-
mobile loans
as a per-
centage of
number and
amount of
automobile
loans owned... 3.34% 1.88% 1.61% 0.67% 1.78% 0.90% 2.16% 1.12% 3.85% 2.24%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Delinquencies
as a per-
centage
of number
and amount
of auto-
mobile loans
serviced(3)... 1.23% 1.24% 0.80% 0.74% 0.74% 0.65% 1.28% 1.19% 1.95% 1.42%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
</TABLE>
- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) This amount includes unearned add-on interest.
(3) Includes delinquency information for loans sold to grantor trusts but which
were originated and serviced by Westcorp.
16
<PAGE> 17
Even though a loan may have been charged off, collection efforts continue,
including obtaining a deficiency judgment, if necessary. The following table
sets forth information with respect to actual loss experience of Westcorp's
automobile portfolio:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Portfolio
At end of period (net of unearned
add-on interest)............... $314,717 $425,010 $223,792 $343,602 $336,358
======== ======== ======== ======== ========
Average during period (net of
unearned add-on interest)...... $396,683 $285,688 $296,528 $346,448 $591,185
======== ======== ======== ======== ========
Gross chargeoffs of automobile
loans during period............ $ 12,829 $ 10,919 $ 10,529 $ 9,614 $ 12,586
Recoveries of automobile loans
charged off in prior periods... 4,565 6,887 5,223 2,503 1,400
-------- -------- -------- -------- --------
Net chargeoffs.................... $ 8,264 $ 4,032 $ 5,306 $ 7,111 $ 11,186
======== ======== ======== ======== ========
Net chargeoffs as a percent of
average automobile loans owned
during period.................. 2.08% 1.41% 1.79% 2.05% 1.89%
======== ======== ======== ======== ========
Net chargeoffs as a percent of
average automobile loans
serviced during period(1)...... 1.61% 1.09% 1.53% 1.73% 1.40%
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Includes loan loss information for loans sold to grantor trusts that were
originated and serviced by Westcorp.
REAL ESTATE LOAN QUALITY
Westcorp's real estate loan portfolio delinquency has stabilized over the
past several years. From mid 1992 through early 1994, the California economy,
where substantially all of the collateral for Westcorp's real estate loans is
located, experienced severe downturns in the market values of real estate, high
levels of unemployment and a low demand in residential construction and new home
sales. The problems created by this economic slump were especially noticeable in
the multifamily mortgage portfolio. While the economy has not fully recovered,
the downward trends appear to have stabilized.
The following table sets forth the delinquent percentages relative to the
dollar amounts of Westcorp's total mortgage portfolio, including loans held for
sale, for the past five years.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Period of delinquency:
Two payments (31-59 days)............................. 0.57% 0.56% 0.40% 0.72% 0.93%
Three payments (60-89 days)........................... 0.40 0.09 0.42 1.18 0.23
Four or more payments (90 days or more)............... 0.89 1.11 1.31 1.94 1.31
</TABLE>
17
<PAGE> 18
The following table of mortgage delinquencies over 60 days by loan type
demonstates the stabilization of delinquencies over the past three years.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
AMOUNT AMOUNT AMOUNT
PAST PAST PAST
DUE OVER DUE OVER DUE OVER
60 % OF 60 % OF 60 % OF
DAYS CATEGORY DAYS CATEGORY DAYS CATEGORY
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family............................. $ 15,185 1.63% $ 14,152 1.68% $ 19,646 2.39%
Multifamily............................... 2,908 0.62 1,710 0.37 3,384 0.70
Construction.............................. 107 1.56
------- ---- ------- ---- ------- ----
$ 18,200 1.29% $ 15,862 1.20% $ 23,030 1.73%
======= ==== ======= ==== ======= ====
</TABLE>
NONPERFORMING ASSETS
Nonperforming assets ("NPA") consist of nonperforming loans ("NPL") and
real estate acquired through foreclosure ("REO") and real estate acquired for
investment or development ("REI") that is impaired. NPLs are defined as all
loans in which any accrued interest has been reversed, which includes 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. At December 31, 1995, NPAs totalled $29.2 million or 0.90% of total
assets compared to $43.3 million or 1.6% of total asset at December 31, 1994.
NPAs consisted of NPLs of $18.4 million and $10.8 million of REO at December 31,
1995. REOs are recorded at fair value less estimated disposition costs.
As a result of the adoption of SFAS 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 the fair value of the
loan's collateral. Changes in the fair value are recorded through the allowance
for loan losses. At December 31, 1995, $7.5 million of loans were considered
impaired.
When a loan is designated as nonaccrual, all previous accrued interest is
reversed and income is only recognized on a cash basis. Interest income that
would have been recorded in 1995, if these loans had been current in accordance
with their original terms, totalled $0.8 million and $0.9 million for the years
ended December 31, 1995 and 1994, respectively. The following table classifies
NPLs into significant categories:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Loans 90 days or more past due........................................... $10,950 $13,950
Performing, nonaccrual loans............................................. 3,717
Impaired loans........................................................... 7,450
------- -------
Total nonperforming loans...................................... $18,400 $17,667
======= =======
</TABLE>
Single family loans accounted for 59% of total NPAs at December 31, 1995
while multifamily loans accounted for 39%, although no single loan or series of
such loans predominate. The decrease in total NPAs is
18
<PAGE> 19
the result of improving asset quality and stabilization of market values. The
following tables show the rollforward and migration of NPLs and REOs since
December 31, 1993:
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1-4 UNITS 5-36 UNITS 37+ UNITS CONSTRUCTION
-------- --------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NONPERFORMING LOANS
Balance December 31, 1993........ $ 31,966 $ 15,722 $ 2,985 $ 10,134 $ 3,125
New nonperforming loans........ 45,597 21,931 8,186 15,274 206
REO............................ (21,966) (13,044) (5,407) (3,515)
Cures and payoffs.............. (35,003) (8,035) (2,939) (21,834) (2,195)
Chargeoffs..................... (2,927) (2,718) (209)
-------- -------- ------- -------- -------
Balance December 31, 1994........ 17,667 13,856 2,616 59 1,136
New nonperforming loans........ 28,220 15,906 9,876 2,331 107
REO............................ (15,290) (10,850) (3,413) (1,027)
Cures and payoffs.............. (10,454) (7,785) (2,536) (24) (109)
Chargeoffs..................... (1,743) (1,193) (550)
-------- -------- ------- -------- -------
Balance December 31, 1995........ $ 18,400 $ 9,934 $ 5,993 $ 2,366 $ 107
======== ======== ======= ======== =======
REAL ESTATE ACQUIRED THROUGH
FORECLOSURE
Balance December 31, 1993........ $ 17,405 $ 7,469 $ 725 $ 9,211
New REO........................ 49,451 16,077 9,859 $ 23,515
Sales.......................... (29,683) (16,052) (3,221) (4,523) (5,887)
Writedowns..................... (16,436) (2,223) (3,335) (8,493) (2,385)
-------- -------- ------- -------- -------
Balance December 31, 1994........ 20,737 5,271 4,028 10,499 939
New REO........................ 32,200 14,166 11,146 4,361 2,527
Sales.......................... (34,445) (9,962) (9,848) (14,635)
Writedowns..................... (7,661) (2,240) (2,413) (225) (2,783)
-------- -------- ------- -------- -------
Balance December 31, 1995........ $ 10,831 $ 7,235 $ 2,913 $ $ 683
======== ======== ======= ======== =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Westcorp decreased its allowance for loan losses to $39.3 million at
December 31, 1995, compared with $41.3 million at December 31, 1994, primarily
due to the reduced levels of NPAs and the stabilization in the asset quality of
Westcorp's loan portfolio. The allowance for loan losses and related provisions
are determined by considering loan volumes, loan sales, prepayments, loss
trends, levels of NPLs and management's analysis of market conditions and other
relevant factors. The following table sets forth the activity in the allowance
for loan losses.
19
<PAGE> 20
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............................. $ 41,323 $ 39,677 $ 40,656
Chargeoffs:
Mortgage loans........................................... (6,358) (8,268) (21,502)
Consumer loans........................................... (12,829) (10,951) (11,005)
-------- -------- --------
(19,187) (19,219) (32,507)
Recoveries:
Mortgage loans........................................... 189 945 3,706
Consumer loans........................................... 4,565 6,887 5,238
-------- -------- --------
4,754 7,832 8,944
-------- -------- --------
Net chargeoffs............................................. (14,433) (11,387) (23,563)
Transfers from the allowance for real estate losses........ 800
Business acquisition....................................... 100
Provision for loan losses.................................. 11,470 13,033 22,584
-------- -------- --------
Balance at end of period................................... $ 39,260 $ 41,323 $ 39,677
======== ======== ========
Ratio of net chargeoffs during the period to average loans
outstanding during the period............................ 0.82% 0.73% 1.36%
</TABLE>
The allowance for loan loss by loan category was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1995 1994
------------------------- -------------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Consumer....................................... $ 7,795 19.2% $ 9,576 24.6%
Single family residential...................... 8,825 53.6 5,448 48.9
Multifamily residential........................ 22,640 27.2 26,299 26.5
------- ----- ------- -----
$39,260 100.0% $41,323 100.0%
======= ===== ======= =====
</TABLE>
The allowance for real estate losses was established to absorb potential
losses in the REO portfolio. Provisions for real estate losses are charged to
real estate operations. Changes in the allowance for real estate losses were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period................................ $1,684 $ 3,508 $ 20,185
Provision for real estate losses.............................. (100) (2,106) (6,489)
Chargeoffs, net............................................... 282 (10,188)
Transfers to the allowance for loan losses.................... (800)
------ ------- --------
Balance at end of the year.................................... $ 784 $ 1,684 $ 3,508
====== ======= ========
</TABLE>
INVESTMENT SECURITIES
Westcorp's investment securities portfolio consists primarily of United
States Agency and Treasury securities and is classified as available for sale.
Accordingly, the portfolio is reported at fair value with
20
<PAGE> 21
unrealized gains and losses being reflected as a separate component of
shareholders' equity. This portfolio is maintained primarily for liquidity
purposes in accordance with regulatory requirements. The Bank also holds FHLB
stock, which is carried at cost, as required by its affiliation with the FHLB
System. Westcorp also holds minimal amounts of other investments which include
investment securities classified as held to maturity. These securities are
carried at amortized cost. The following table summarizes Westcorp's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest bearing deposits with other
financial institutions............ $ 689 $ 563 $ 796 $ 7,593 $ 500
Other short term investments........ 126,227 145,391 137,162 75,161 65,650
Investment securities:
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations -- AFS............ 130,052 111,677 114,050 114,114 63,891
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations -- HTM............ 1,506
Corporate bonds -- investment
grade.......................... 10
Obligations of states and
political subdivisions......... 3,441 3,062 3,527 998 1,009
Other............................. 25 25 25 25 25
Corporate bonds -- below
investment grade............... 400 803 1,203
FHLB stock........................ 29,624 24,474 17,566 20,674 21,174
-------- -------- -------- -------- --------
$291,564 $285,192 $273,526 $219,368 $153,462
======== ======== ======== ======== ========
</TABLE>
The following table sets forth the stated maturities of Westcorp's
investment securities at December 31, 1995.
<TABLE>
<CAPTION>
FIVE
ONE YEAR YEARS
TO TO TEN NO
UP TO FIVE TEN YEARS STATED
ONE YEAR YEARS YEARS OR MORE MATURITY
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest bearing deposits with other
financial institutions............. $ 689
Other short term investments......... 126,227
Investment securities:
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations.................... 27,121 $107,878
Other.............................. 25
FHLB stock......................... $29,624
-------- -------- -------- -------- -------
$154,037 $107,903 $29,624
======== ======== ======== ======== =======
Weighted average interest rate....... 5.1% 5.1% 6.8%
</TABLE>
MORTGAGE-BACKED SECURITIES
Westcorp invests in mortgage-backed securities ("MBS") to generate net
interest income, to manage its mix of assets and liabilities and to invest in
certain low-income housing programs designed to provide affordable access to the
housing market. Westcorp has designated a specific portion of its MBS portfolio
as held to maturity and accounts for that portion using amortized cost and
designates the rest of the portfolio as available for sale and accounts for that
portion at fair value with unrealized gains or losses being reported as a
21
<PAGE> 22
separate component of shareholders' equity. The following table summarizes
Westcorp's MBS portfolio by issuer.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Held to maturity securities:
GNMA certificates.................................................... $405,582 $208,307
FNMA participation certificates...................................... 97,352 108,033
FHLMC participation certificates..................................... 9,120
Other................................................................ 164 171
-------- --------
$512,218 $316,511
======== ========
Available for sale securities:
GNMA certificates.................................................... $135,901 $ 51,173
FNMA participation certificates...................................... 101,344 77,834
FHLMC participation certificates..................................... 103,089 2,997
Other................................................................ 22,154
-------- --------
$340,334 $154,158
======== ========
</TABLE>
The MBS held to maturity, with a total carrying value of $512 million, had
an estimated market value of $523 million and a weighted average interest rate
of 7.9% at December 31, 1995. The carrying value of the MBS available for sale
is equal to its estimated market value of $340 million and has a weighted
average interest rate of 7.7% at December 31, 1995. Westcorp's MBS portfolio had
maturities of ten years or greater at December 31, 1995, although payments are
generally received monthly throughout the life of these securities.
FUNDING SOURCES
Westcorp employs various sources to fund its operations, including
deposits, commercial paper, advances from the FHLB, repurchase agreements, and
other borrowings. The sources used vary depending on such factors as rates paid,
maturities, and the impact on capital. See "Management's Discussion and
Analysis -- Capital Resources and Liquidity".
DEPOSITS
Westcorp attracts both short term and long term deposits from the general
public and institutions by offering a variety of accounts and rates. Westcorp
offers regular passbook accounts, various money market accounts, fixed interest
rate certificates with varying maturities and individual retirement accounts.
Westcorp's deposits are obtained primarily from the areas surrounding its
branches in California and a limited number were solicited from areas outside
California only by employees at the Bank's headquarters.
The following table sets forth the amount of Westcorp's deposits by type at
the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
No minimum term:
Passbook accounts.................. $ 65,293 $ 104,085 $ 162,185 $ 189,895 $ 187,355
Money market deposit accounts...... 602 801 1,149 1,212 1,604
Certificate accounts:
Certificates (30 days to five
years).......................... 1,462,649 1,335,805 1,026,671 1,313,771 1,494,390
IRA/Keogh.......................... 224,931 192,091 167,053 178,019 131,589
---------- ---------- ---------- ---------- ----------
$1,753,475 $1,632,782 $1,357,058 $1,682,897 $1,814,938
========== ========== ========== ========== ==========
</TABLE>
22
<PAGE> 23
Westcorp has remained competitive due to the variety of savings deposits
offered and its ability to respond with flexibility to changes in customer
demand and competitive pressures. Generally, Westcorp, as other financial
institutions with which Westcorp competes, has become more subject to short term
fluctuations in deposit flows as customers have become more interest rate
conscious. The ability of Westcorp to attract and maintain deposits and control
its cost of funds has been, and will continue to be, significantly affected by
money market conditions. Westcorp's average certificate accounts outstanding are
summarized below.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Average certificate accounts outstanding............ $1,672,920 $1,315,628
Average interest rate paid.......................... 5.9% 4.9%
</TABLE>
Deposit accounts are generally insured by the FDIC up to $100,000.
Westcorp's maturities of certificate accounts greater than or equal to $100,000
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
(DOLLARS IN
THOUSANDS)
Three months or less............................................ $132,549
Over three months through six months............................ 32,590
Over six months through one year................................ 132,158
Over one year through three years............................... 79,513
Over three years................................................ 6,151
--------
$382,961
========
</TABLE>
BORROWINGS AND OTHER SOURCES OF FUNDS
Westcorp's other sources of funds include issuing commercial paper and
obtaining advances from the FHLB, selling securities under agreements to
repurchase and other borrowings as well as loan repayments and cash generated
from operations. Westcorp selects from among these funding alternatives based on
the timing and duration of its cash needs, as well as the costs, maturities and
other requirements of each funding source.
The FHLB System functions in a reserve capacity for savings institutions.
As a member, Westcorp, through the Bank is required to own capital stock in the
FHLB and is authorized to apply for advances from the FHLB on security of such
stock and on certain residential mortgage loans. The Bank has been preapproved
for advances up to 25% of its assets, based on remaining availability under
credit facilities established by the Bank with the FHLB, with 24 hours notice.
Such borrowings may be made pursuant to several different programs offered from
time to time by the FHLB. Additional funds are available subject to additional
collateral and other requirements. Each credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB
prescribes the acceptable uses to which advances pursuant to each program may be
put, as well as limitations on the sizes of advances and repayment provisions.
At December 31, 1995 and 1994, the Bank had $67.9 million and $211 million
of commercial paper outstanding, respectively, with a weighted average interest
rate of 6.0% and 4.7% at December 31, 1995 and 1994, respectively. The maximum
amount of commercial paper outstanding at any month-end was $240 million and
$222 during 1995 and 1994, respectively. The average amount of commercial paper
outstanding during 1995 and 1994 was $124 million and $66.6 million,
respectively.
Savings associations such as the Bank also have authority to borrow from
the FRB "discount window." FRB regulations require these institutions to exhaust
all reasonable alternative sources of funds, including FHLB sources, before
borrowing from the FRB. Federal regulations have been promulgated which connect
Community Reinvestment Act ("CRA") performance with access to long term advances
from FHLB to member institutions. The Bank does not believe that there will be
any adverse effect to it relative to access to this source of funds. The Bank
received a "satisfactory" in its most recent CRA evaluation.
23
<PAGE> 24
SUBORDINATED CAPITAL DEBENTURES
In 1993, Westcorp, through the Bank issued $125 million of 8.5%
Subordinated Capital Debentures due 2003, of which $104 million are currently
outstanding. In addition to being a funding source, the Bank is permitted to
include these Debentures in supplementary capital for purposes of determining
compliance with risk-based capital requirements. See "Supervision and
Regulation -- Regulatory Capital Requirements"
SUBSIDIARIES
WESTERN FINANCIAL SAVINGS BANK, F.S.B.
The Bank is a federally chartered and insured savings bank. The Bank
provides diversified financial services through real estate and related lending
programs, depository accounts and investment services. The Bank has 25 savings
branches and 7 real estate loan centers in Arizona, California, Colorado and
Texas. Substantially all of Westcorp's operations are conducted through the Bank
and its subsidiaries. The Bank's subsidiaries are WFS (which in turn owns all of
the stock of WFAL and WFAL2), Westplan (which in turn owns all of the stock of
WI), Recon, WCS, Westhrift and WFMC (which in turn owns THC). Each of these
entities are described in detail below.
WFS FINANCIAL INC
WFS is in the business of automobile finance and operated through 89
offices in 16 states at December 31, 1995. In 1996, WFS has opened eight
additional offices in three states. Each of its offices are licensed to the
extent required by law to conduct business in each respective state. WFS was
created in 1995 by the combination of the Bank's automobile lending operations
and the Bank's subsidiaries, Westcorp Financial Services Inc, WFAL and WFAL2 and
subsequent sale of stock. The Bank owns an 80% interest in WFS. The remaining
interest is traded on the NASDAQ under the ticker symbol "WFSI". During 1995,
WFS originated $1.5 billion of automobile loans. The loans which WFS originates
are generally sold in securitized offerings by its subsidiaries WFAL and WFAL2.
WESTERN FINANCIAL AUTO LOANS, INC.
WFAL is a wholly-owned, limited purpose subsidiary of WFS. WFAL was
organized primarily for the purpose of purchasing automobile loans from WFS and
securitizing such loans in the secondary market. A total of five securitization
transactions totalling $1.5 billion were completed during 1995.
WESTERN FINANCIAL AUTO LOANS 2, INC.
WFAL2 is a wholly-owned, limited purpose subsidiary of WFS. WFAL2 was
organized primarily for the purpose of purchasing automobile loans from WFS, and
securitizing such loans in the secondary market and engaging in other
asset-backed financing transactions.
WESTPLAN INSURANCE AGENCY, INC.
Westplan is licensed by the California Insurance Commissioner to transact
the business of an insurance agency and other jurisdictions where it conducts
business. It acts as an agent for independent insurers in providing property and
casualty insurance coverage on collateral, primarily automobiles, securing loans
made by Westcorp, protection insurance and other noncredit related life and
disability programs. Westplan's revenues consist of commissions received on
policies sold to customers. In addition, Westplan also holds all outstanding
stock of WI.
WESTPLAN INVESTMENTS
WI began operations in 1994 as a licensed mutual funds broker dealer
selling mutual funds, fixed and variable annuities to the general public and is
not a significant source of revenues or expenses.
24
<PAGE> 25
WESTERN RECONVEYANCE COMPANY, INC.
Recon is a California corporation which acts primarily as the trustee under
trust deed loans made by Westcorp and is not a significant source of revenues or
expenses.
WESTERN CONSUMER SERVICES, INC.
WCS conducts real estate development activities through a California
Limited Liability Company ("LLC"). The purpose of the LLC is to acquire, develop
and ultimately sell single family residences. Westcorp's interest includes a
participating share of the profits realized upon the sale of each unit.
WCS also owns three branch locations of the Bank. One location was
transferred in 1993, and two additional locations were transferred in 1996.
These transfers occurred as a result of a determination that these properties
could not be treated as branch premises for regulatory purposes (based on OTS
guidelines) since the Bank did not occupy 25% of the premises, consistent with
OTS guidelines, and was thus required to divest the property. The Bank is
required to hold risk based capital against its investment in WCS. If and when
the Bank is able to occupy 25% or more of the premises, it may transfer the
property from WCS to the Bank.
WESTHRIFT LIFE INSURANCE COMPANY
Westhrift, an Arizona corporation, is engaged in the business of reinsuring
credit life and credit disability insurance offered to borrowers of Westcorp and
underwritten by an independent insurer. The credit life insurance policies
provide for full payment to Westcorp of the insured's financial obligation in
the event of the insured's death. The credit disability insurance policies
provide for payment to Westcorp of an insured's financial obligation during a
period of disability resulting from illness or physical injury. Westhrift has a
Certificate of Authority from the California Insurance Commissioner authorizing
it to conduct insurance business in California. At December 31, 1995, credit
life and disability insurance in force was $44 million.
For Arizona statutory purposes, Westhrift is required to maintain reserves
for losses on credit life and credit disability policies. Westhrift's aggregate
reserves for credit life and credit disability policies at December 31, 1995
were $1.6 million. The aggregate reserves are computed in accordance with
commonly accepted actuarial standards consistently applied, and are based on
actuarial assumptions which are in accordance with or stronger than those called
for in policy provisions. The policies reinsured are underwritten by the
independent insurer for no more than the amount that the insured owes to the
Bank, not to exceed $25 thousand per loan. Westhrift also maintains a $0.5
million deposit in accordance with California statutory deposit requirements.
Westhrift does not engage in any business except with respect to customers of
the Bank and WFS.
In January 1995, ownership of Westhrift was transferred to the Bank from
WCS after obtaining regulatory approval to do so. The Bank paid WCS $4.8 million
for Westhrift.
WESTRAN SERVICES CORP.
Westran is a California corporation which provides travel related services
for Westcorp and its subsidiaries as well as outside parties through the charter
of its aircraft or through booking flights on commercial airlines and is not a
significant source of revenues or expenses for Westcorp.
WF MORTGAGE CORPORATION
WFMC was created as a part of the process by which the Bank could purchase
an equity interest in The Hammond Company and its subsidiaries. The Bank owns an
80% interest in WFMC. WFMC merged with THC in January 1996.
THE HAMMOND COMPANY
An 80% interest in THC and its subsidiaries was acquired by WFMC on
December 21, 1995. THC and its wholly owned subsidiaries operate through the
principal subsidiary, The Hammond Company, The
25
<PAGE> 26
Mortgage Bankers, as a mortgage banking company. Its principal business is the
origination and sale of residential mortgage loans in the states of Arizona,
California, Hawaii, Nevada and Oregon. The Company has 14 retail loan
origination offices and two wholesale offices. THC is not a significant source
of revenues or expenses.
WESTCORP INVESTMENTS, INC.
WII is a limited-purpose, wholly owned subsidiary of Westcorp, a California
corporation. WII was incorporated in California on February 9, 1996 for the
purpose of purchasing an ownership interest in the Trust and similar trusts. WII
is limited by its Articles of Incorporation from engaging in any business
activities not incidental or necessary to its stated purpose.
COMPETITION
Westcorp faces strong competition in its lending and deposit gathering
activities. Westcorp believes it is competitive because of product pricing and
because it offers a high degree of professionalism and quality in the services
it provides through longstanding relationships with borrowers, real estate
brokers and automobile dealers.
The greatest competition for deposits comes from other savings and loan
associations, money market funds, commercial banks, credit unions, thrift and
loan associations, corporate and government securities and mutual funds. Many of
the nation's largest savings and loan associations and other depository
institutions are headquartered or have branches in the areas where Westcorp
primarily conducts its business. The "Riegle-Neal Interstate Banking and Branch
Efficiency Act of 1994" legislated broader interstate banking authority to
financial institutions. At this time, Westcorp does not know the full extent, if
any, this Act might have on Westcorp or its competitors. Westcorp competes for
deposits primarily on the basis of interest rates paid and quality of service
provided to its customers. Westcorp does not rely on any individual, group or
entity for a material portion of its deposits. Although the majority of its
deposits are placed by depositors in the geographic areas in which Westcorp's
branches are located, some are placed by depositors located in other regions
across the United States.
Westcorp faces strong competition in the purchase of automobile dealer
generated automobile loans from competitors including automobile manufacturer
finance subsidiaries, consumer finance companies, commercial banks, and credit
unions. Westcorp competes for the purchase of such loans on the basis of price
and the level of service provided to the respective dealers, including its
promptness in processing and approving automobile applications submitted by the
dealer.
Competition in originating mortgage loans comes primarily from other
savings and loan associations, commercial banks and mortgage bankers. Westcorp
competes for mortgage loans principally on the basis of the interest rates and
loan fees it charges, the types of loans it originates and the quality of
services it provides borrowers and real estate brokers.
TAXATION
FEDERAL INCOME TAXES
Westcorp and its subsidiaries file a calendar tax year consolidated federal
income tax return.
The Bank is a savings and loan association for federal tax purposes.
Savings and loan associations satisfying certain conditions are permitted under
the Internal Revenue Service Code to establish reserves for bad debts and to
make annual additions to these reserves which qualify as deductions from income.
The Bank is permitted to compute its additions to its bad debt reserve on loans
using one of the following two methods: (i) the percentage of taxable income
method; or (ii) the experience method. The Bank intends, when permitted, to
compute its annual bad debt reserve deduction for loans under the method which
permits the Bank to obtain the maximum allowable deduction.
26
<PAGE> 27
Under the percentage of taxable income method, as revised by the Act, the
Bank may generally deduct an amount equal to 8% of its taxable income, after
deducting certain items . In addition, the bad debt deduction under the
percentage of taxable income method is subject to certain limitations based on
the amount of deposit accounts and outstanding qualifying real property loans.
The allowable deduction under the percentage of taxable income method is
available only if at least 60% of the total dollar amount of the Bank's assets
are qualifying assets. Qualifying assets include, among other things, cash, U.S.
Government obligations, certificates of deposit, loans secured by an interest in
residential real property and loans made for the payment of expenses of a
college or university education. The Bank's qualifying assets exceeded 60% in
1995.
A savings and loan association which utilizes the percentage of taxable
income method is subject to recapture taxes on such reserves if it makes certain
distributions to stockholders. Dividends may be paid without the imposition of
any tax on the Bank to the extent that the amounts paid as dividends do not
exceed the Bank's current or accumulated earnings and profits as calculated for
federal income tax purposes. Dividends paid in excess of current and accumulated
earnings and profits, stock redemptions and other distributions with respect to
stock, are deemed to be made from the bad debt reserve for qualifying real
property loans, to the extent that this reserve exceeds the amount that could
have been accumulated under the experience method. The amount of tax that would
be payable upon any distribution which is treated as having been from the bad
debt reserve for qualifying real property loans is also deemed to have been paid
from the reserve to the extent thereof. Management does not contemplate using
the reserve in a manner that will create taxable income, but assuming a 35% tax
rate, distributions to stockholders which are treated as having been made from
the bad debt reserve for qualifying real property loans could result in a
federal recapture tax which is approximately equal to one-half of the amount of
such distributions, unless offset by net operating losses. In addition, certain
large savings and loan associations (including the Bank) are required to
recapture their existing bad debt reserves in the event that for any taxable
year less than 60% of the association's assets are qualifying assets.
Westcorp will be subject to the alternative minimum tax if such tax is
larger than the regular federal tax otherwise payable. Generally, alternative
minimum taxable income is a taxpayer's regular taxable income, increased by the
taxpayer's tax preference items for the year and adjusted by computing certain
deductions in a special manner which negates the acceleration of such deductions
under the regular federal tax. This amount is then reduced by an exemption
amount and is subject to tax at a 20% rate. Significant alternative minimum tax
items generally applicable to savings and loan associations include (i) 100% of
the excess of a savings and loan association's bad debt deduction over the
amount that would have been allowable under the experience method; and (ii) an
amount equal to 75% of the amount by which a corporation's adjusted current
earnings exceed its alternative minimum taxable income. For alternative minimum
tax purposes, net operating losses can offset no more than 90% of alternative
minimum taxable income. In addition, for taxable years beginning after December
31, 1986, and before January 1, 1996, Westcorp will be subject to an additional
environmental tax of 0.12% of its alternative minimum taxable income with
certain adjustments and exclusions.
At December 31, 1995, Westcorp had no net operating loss carry-forwards.
For net operating losses incurred in taxable years beginning after 1986, there
is a 3-year carry back and a 15-year carry-forward period.
The returns of The Hammond Company and its subsidiaries are being examined
for the year March 31, 1993. No changes are anticipated.
CALIFORNIA FRANCHISE TAX PROVISIONS
The California franchise tax applicable to the Bank is a variable rate tax.
This rate is computed under a formula which is higher than the rate applicable
to nonfinancial corporations because it includes an amount "in lieu" of local
personal property and business license taxes paid by nonfinancial corporations
(but not generally paid by financial institutions such as the Bank). For taxable
year 1995, the total tax rate was set at 11.48%. Under California regulations,
bad debts may be treated by savings and loan associations in either of two ways,
as debts are ascertained to be worthless in whole or in part or by deducting
from income a reasonable reserve addition. The Bank and its subsidiaries file
separate tax returns using the combined reporting method.
27
<PAGE> 28
The returns of Westcorp and its subsidiaries and affiliates were examined
for the years 1988 and 1989. Assessed amounts were paid by the affiliate
company. The returns for the years 1990 through 1993 are currently under
examination.
For additional information regarding the federal and state taxes payable by
Westcorp, see Note 20 -- Income Taxes to the Consolidated Financial Statements.
SUPERVISION AND REGULATION
GENERAL
The adoption of Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") substantially restructured the regulatory framework in which
Westcorp and the Bank operate. In December 1991, The Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") was enacted. FDICIA requires specified
regulatory agencies to adopt regulations having broad application to insured
financial institutions such as the Bank. In 1994 the Riegle Community
Development and Regulatory Improvement Act of 1994 ("RCDA") was adopted, which
modified several of the requirements initiated by FDICIA.
Set forth below is a discussion of the statutory and regulatory framework
for Westcorp as affected by FIRREA, FDICIA and RCDA and the regulations
promulgated thereunder. However, to the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in
applicable law or regulation or in the policies of various regulatory
authorities may have a material effect on the business and prospects of Westcorp
and the Bank.
WESTCORP
The Savings and Loan Holding Company Act
Westcorp, by virtue of its ownership of the Bank, is a savings and loan
holding company within the meaning of the Home Owners' Loan Act ("HOLA"), as
amended by FIRREA. Savings and loan holding companies and their savings
association subsidiaries are extensively regulated under federal laws.
As a savings and loan holding company registered with the OTS, Westcorp is
subject to its regulations, examination and reporting requirements. Westcorp is
a "unitary" savings and loan holding company within the meaning of regulations
promulgated by the OTS, and as a result Westcorp is virtually unrestricted in
the types of business activities in which it may engage, provided the Bank
continues to meet the Qualified Thrift Lender test under HOLA. Although Westcorp
intends to remain a unitary savings and loan holding company, if it acquires one
or more insured institutions and operates them as separate subsidiaries rather
than merging them with the Bank, or if certain other circumstances not currently
applicable to Westcorp arise, Westcorp would be treated as a "multiple" savings
and loan holding company and could cause additional regulatory restrictions to
be imposed on Westcorp. Westcorp does not anticipate that those circumstances
will arise unless such institutions are acquired pursuant to a supervisory
acquisition and the insured subsidiaries meet the Qualified Thrift Lender test.
HOLA prohibits a savings and loan holding company, without prior approval
of the OTS, from controlling any other savings association or savings and loan
holding company.
Additionally, FIRREA empowers the OTS to take substantive action when it
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness, or stability of that holding
company's subsidiary savings association. Thus, FIRREA confers on the OTS
oversight authority for all holding company affiliates, not just the Bank.
Specifically, the OTS may, as necessary: (i) limit the payment of dividends by
the Bank; (ii) limit transactions between the Bank, the holding company and the
subsidiaries or affiliates of either; and (iii) limit any activities of the
holding company that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the Bank. Any such limits
may be issued in the form of regulations, or a directive having the effect of a
cease and desist order.
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Savings association subsidiaries of a savings and loan holding company are
limited by HOLA in the type of activities and investments in which they may
participate if the investment and/or activity involves an affiliate. In general,
savings association subsidiaries of a savings and loan holding company are
subject to Sections 23A and 23B of the Federal Reserve Act ("FRA") in the same
manner and to the same extent as if the savings association were a member bank
of the Federal Reserve System, as well as being subject to similar regulations
adopted by the OTS. Section 23A of the FRA puts certain quantitative limitations
on certain transactions between a bank or its subsidiary and an affiliate,
including transactions involving (i) loans or extensions of credit to the
affiliate; (ii) the purchase of or investment in securities issued by an
affiliate; (iii) purchase of certain assets from an affiliate; (iv) the
acceptance of securities issued by an affiliate as security for a loan or
extension of credit to any person; or (v) the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. Under Section 23B,
transactions between a bank or its subsidiary and an affiliate must meet certain
qualitative limitations. Such transactions must be on terms at least as
favorable to the bank or its subsidiary as transactions with unaffiliated
companies. In addition, Section 11 of the HOLA, as amended by FIRREA, also
specifically prohibits a savings association subsidiary of the savings and loan
holding company from making a loan or extension of credit to an affiliate unless
that affiliate is engaged only in activities permitted to bank holding companies
under Section 4(c) of the Bank Holding Company Act or from purchasing or
investing in the securities of any affiliate (other than a subsidiary of the
savings association). The OTS regulations, consistent with the provisions of
Sections 23A and 23B, exclude transactions between a savings association and its
subsidiaries from the limitations of those sections, but those regulations also
define certain subsidiaries to be affiliates and subject to the requirements of
those sections. At the present time, none of the Bank's subsidiaries are within
the definition of an affiliate for purposes of those regulations.
In addition, amendments made by FIRREA and FDICIA require that savings
associations comply with the requirements of FRA Sections 22(g) and 22(h), and
FRB Regulation O promulgated thereunder, in the same manner as member banks,
with respect to loans to executive officers, directors and principal
shareholders. The RCDA permits loans secured by a first lien on an executive
officer's residence to be made without prior approval of the board of directors
of the financial institution. As a matter of policy, the Bank does not make
loans to executive officers, directors or principal shareholders.
THE BANK
California Savings Association Law
As a federally chartered institution, the Bank's investments and
borrowings, loans, issuance of securities, payments of interest and dividends,
establishment of branch offices and all other aspects of its operations are
subject to the exclusive jurisdiction of the OTS, to the exclusion of the
California Savings Association Law or regulations of the California Savings and
Loan Commissioner. The OTS has adopted a regulation to the effect that State
laws pertaining to the operations of Federal savings associations are preempted.
Federal Home Loan Bank System
The Bank is a member of the FHLB System which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit
facility for member institutions. The Bank, as a member of the FHLB System, is
required to own capital stock in the FHLB in an amount at least equal to the
greater of 1.0% of the aggregate outstanding balance of its loans secured by
residential real property or 5.0% of the sum of advances outstanding plus
committed FHLB commercial paper lines. The Bank is in compliance with this
requirement.
Since the adoption of FIRREA, the dividends which the Bank has received on
its FHLB stock have been significantly reduced as a result of requirements
imposed by FIRREA on the FHLB System. Each FHLB is required to transfer a
certain portion of its reserves and undivided profits to the Resolution Funding
Corporation ("RFC"), the entity established to raise funds to resolve troubled
thrifts, to fund a portion of the interest and the principal on RFC bonds and
other obligations. Also, each FHLB is required to transfer a percentage of its
annual net earnings to the Affordable Housing Program, as defined in FIRREA,
which amount, as of January 1, 1995, increased to a minimum of 10% of the annual
net income of each FHLB.
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Accordingly, it is anticipated that the level of dividends to be received by the
Bank from the FHLB will continue to be less than those received prior to the
adoption of FIRREA.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds for financial
institutions: (i) the Savings Association Insurance Fund ("SAIF"), which insures
the deposits of associations that were insured by the FSLIC prior to the
enactment of FIRREA, and (ii) the Bank Insurance Fund ("BIF"), which insures the
deposits of institutions that were insured by the FDIC prior to FIRREA.
Commencing in 1989 the deposits of the Bank became insured through the SAIF to
the maximum amount permitted by law (currently $100,000).
During 1995 the Bank was required to pay insurance premiums of $4.4
million. FDICIA required the FDIC to implement a risk-based assessment system
under which an institution's premiums are based on the FDIC's determination of
the relative risk the condition of such institution poses to its insurance fund.
In response, the FDIC adopted a final rule, effective January 1, 1994. Under
this rule, each insured institution is classified as "well capitalized,"
"adequately capitalized" or "undercapitalized," using definitions substantially
the same as those adopted with respect to the "prompt corrective action" rules
adopted by the regulatory agencies under FDICIA. See "Prompt Corrective
Regulatory Action." Within each of these classifications, the FDIC has created
three risk categories into which an institution may be placed, based upon the
supervisory evaluations of the institution's primary federal financial
institution regulatory agency and the FDIC. These three categories consist of
those institutions deemed financially sound, those with demonstrated weakness
that could result in significant deterioration of the institution and risk of
loss to the FDIC, and those which pose a substantial probability of loss to the
FDIC. Each of these nine assessment categories for SAIF insured institutions
such as the Bank is assigned an assessment rate ranging from 0.23% to 0.31% of
the institution's deposit assessment base. Under the regulations, an institution
is precluded from disclosing the risk-based assessment category to which it has
been assigned.
Pursuant to the provisions of FIRREA, the FDIC has adopted a significant
reduction in the insurance premiums to be paid by those financial institutions,
primarily commercial banks, whose deposits are insured under the BIF, while the
premiums payable by savings associations insured under the SAIF will remain
unchanged. For BIF insured institutions, the assessment rate will range from
0.0% to 0.27% of the institution's deposit assessment base, with a minimum
premium of $2,000 per year. It is currently uncertain as to the effect of the
premium differential on the ability of the Bank to compete with BIF member
institutions. Legislative efforts are pending in Congress to eliminate the
differential in insurance premiums between SAIF and BIF insured members. Those
efforts contemplate a one time special assessment to be paid by SAIF insured
institutions to recapitalize the SAIF. The special assessment is currently
estimated to be in the range of 79 to 85 basis points. The exact amount of the
special assessment will not be determinable until a bill is adopted which sets
the date as of which the amount of deposits to be assessed is to be measured
(currently contemplated to be March 31, 1995) and the total amount of the
shortfall in the SAIF fund as of that date. The proposals also call for the
eventual merger of the BIF and SAIF funds upon the adoption of future
legislation which will eliminate the federal thrift charter. If the Bank had
been required to pay such a special assessment at December 31, 1995 based upon
its March 31, 1995 deposits, it would have paid between $13.8 million (based
upon 79 basis points) and $14.9 million (based upon 85 basis points).
FIRREA established a five year moratorium on conversions from the SAIF to
the BIF. The Resolution Trust Corporation Completion Act ("RTCCA"), enacted on
December 17, 1993, extended this moratorium until the date on which the SAIF
first meets the reserve ratio designed for it. There are several exceptions to
this moratorium. Most importantly, a SAIF member may convert to bank charter if
the resulting bank remains a SAIF member during the term of the moratorium.
Additionally, conversions to bank charter can take place during the moratorium
if (i) it affects only an "insubstantial" portion of an institution's total
deposits and is approved by the FDIC; (ii) it results from the acquisition of a
troubled institution that is in default or in danger of default and is approved
by the FDIC and the Resolution Trust Corporation (the "RTC"); or (iii) it
results from a merger or consolidation of a bank and a savings association and
is approved by the FDIC or the Office of the Comptroller of the Currency (the
"OCC"), as well as by the FRB.
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The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Liquidity Requirements
Under OTS regulations, the Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances and
specified United States government, state or federal agency obligations and
certain corporate debt obligations and commercial paper) equal to at least 5.0%
of its average daily balance of net withdrawal accounts and borrowings payable
on demand or in one year or less. The Bank must also maintain an average daily
balance of short term liquid assets (generally those having maturities of 12
months or less) equal to at least 1.0% of its average daily balance of net
withdrawable accounts plus short term debt. If at any time the Bank's liquid
assets do not at least equal (on an average daily basis for any month) the
amount required by these regulations, the Bank would be subject to various OTS
enforcement procedures, including monetary penalties. At December 31, 1995, the
Bank's liquidity and short term liquidity percentages as calculated for the
foregoing purposes were 2.75% and 6.88%, respectively. Thus, the Bank was in
compliance with these requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources and
Liquidity."
Brokered Deposits
In June 1992, the FDIC issued regulations under FDICIA that provide for
differential regulation relating to brokered deposits based on capital adequacy.
Institutions are divided into categories of "well capitalized," "adequately
capitalized" and "undercapitalized." Only "well capitalized" institutions may
continue to accept brokered deposits without restriction. The RCDA affirmatively
excludes well capitalized institutions from the definition of deposit brokers,
thereby eliminating the need for well capitalized institutions to register as
deposit brokers.
At December 31, 1995, the Bank met the capital requirements of a well
capitalized association as defined by the regulation. Nonetheless, the Bank does
not currently accept brokered deposits as defined by the regulation.
Regulatory Capital Requirements
The HOLA, as amended by FIRREA, mandates that the OTS promulgate capital
regulations which provide capital standards no less stringent than the capital
standards applicable to national banks.
The HOLA and the OTS regulation require savings associations to maintain
"core capital" in an amount not less than 3.0% of adjusted total assets. Core
capital is defined in the OTS capital regulations as including, among other
things, (i) common stockholders' equity (including retained earnings); (ii) a
certain portion of the association's qualifying supervisory goodwill; (iii)
noncumulative perpetual preferred stock and related surplus; and (iv) purchased
and originated mortgage servicing rights ("MSRs") and purchased credit card
relationships ("PCCRs") meeting certain valuation requirements. The maximum
amount of MSRs and PCCRs which can be included in core capital and tangible
capital may not exceed, in the aggregate, an amount equal to 50% of the
institutions core capital, with PCCRs limited to 25% of core capital. At
December 31, 1995 the Bank had $12.8 million of MSRs, but held no PCCRs. Of the
MSRs held by the Bank, $1.3 million are in excess of the amount which may be
included within the Banks core capital.
The regulations of the OCC, the principal national bank regulator, require
a minimum core capital requirement of 3.0% of adjusted total assets for national
banks with a composite 1 rating (the highest rating
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available) under the CAMEL rating system for national banks and substantially
higher core capital requirements for lower rated national banks. Most national
banks are required to maintain core capital of 4.0% to 5.0% under this
regulation. Because HOLA generally requires that the capital standards
applicable to savings institutions be "no less stringent" than those applicable
to national banks, there is a high likelihood that the OTS will impose
substantially equivalent requirements, and in April 1991, the OTS proposed to
modify the 3.0% of adjusted total assets core capital requirement in the same
manner. Under the OTS proposal, only savings associations rated composite CAMEL
1 will be permitted to operate at the regulatory minimum core capital ratio of
3.0%. For all other savings associations, the minimum core capital ratio will be
3.0% plus at least an additional 100 to 200 basis points, which thus will
increase the core capital ratio requirement to 4.0% to 5.0% (or more) of
adjusted total assets. In determining the amount of additional core capital any
savings institution will be required to maintain, the OTS will assess both the
quality of risk management systems and the level of overall risk in each
individual savings association through the supervisory process on a case-by-case
basis. The OTS has not yet issued a final rule.
The OTS capital regulations already permit the OTS to impose a higher
individual minimum capital requirement on a case-by-case basis. The Bank is not
currently subject to any such requirement. The Bank's core capital ratio at
December 31, 1995 was 8.32%.
A savings association must maintain "tangible capital" in an amount not
less than 1.5% of adjusted total assets. "Tangible capital" means core capital
less any intangible assets (including supervisory goodwill), plus MSRs and PCCRs
to the extent includable in core capital as described above. At December 31,
1995, the Bank's tangible capital was 8.32%.
A savings institution's investments in and extensions of credit to a
subsidiary engaged in any activities not permissible for national banks
("nonincludable subsidiaries") generally are deducted from the institution's
core capital and tangible capital in determining compliance with capital
standards. This deduction is not required for investments in and extensions of
credit to a subsidiary engaged solely in mortgage banking, to certain
subsidiaries which are themselves insured depository institutions or, unless the
FDIC determines otherwise in the interests of safety and soundness, to a
subsidiary which engages in such impermissible activities solely as agent for
its customers. The Bank is required to deduct from its core and tangible capital
its investments in WCS and Westplan (both equity and extensions of credit), as
the former is engaged in residential real estate activities not permitted to
national banks, and the latter is engaged in an insurance agency business not
permitted to national banks. The amount of the deduction related to WCS is to be
phased-in through June 30, 1996, while the amount of the deduction related to
Westplan is not subject to a phase-in period. The OTS has approved the inclusion
in the Bank's core and tangible capital of its investment in WCS at the 60%
level from July 1, 1994 through June 30, 1995, and at the 40% level from July 1,
1995 through June 30, 1996. After July 1, 1996 the Bank will not be permitted to
include any of its remaining investment in WCS in its core or tangible capital.
At December 31, 1995 the amount of its investment in WCS excluded from the
Bank's core and tangible capital was $6.0 million (60% of the investment in that
subsidiary).
As of December 31, 1995, the Bank's core capital was $268 million,
exceeding the Bank's regulatory requirement by $171 million. The Bank's tangible
capital at December 31, 1995 was $268 million, exceeding the applicable
regulatory requirement by $220 million.
The risk-based component of the capital standards requires that an
association have total capital equal to 8.0% of risk-weighted assets. The OTS
risk-based capital regulation provides that for assets sold as to which any
recourse liability is retained (including on-balance sheet assets related to the
assets sold which are at risk) a savings association must hold capital as a part
of its risk-based capital requirement equal to the lesser of (i) the amount of
that recourse liability or (ii) the risk-weighted capital requirement for assets
sold off-balance sheet as though the assets had not been sold. In addition, in
the former instance, when calculating the Bank's risk-based capital ratio (a)
the value of those on-balance sheet assets which are subject to recourse, to the
extent of that recourse liability ("fully-capitalized assets"), is deducted from
the Bank's total capital and (b) neither the risk-weighted value of the asset
sold off-balance sheet nor the amount of the fully capitalized assets is
included in the Bank's total risk-weighted assets. The Bank's risk-based capital
requirement at
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December 31, 1995 included $150 million due to its recourse liability relating
to grantor trust financings, including fully capitalized assets.
The RCDA requires the federal banking agencies, including the OTS, to
review their risk-based capital recourse rules, and to adopt new rules for
assets sold with low levels of recourse to ensure that the risk-based capital
held for such assets does not exceed the contractual maximum recourse liability
retained by the institution upon the sale of those assets. The federal banking
agencies, including the OTS have adopted such regulations. As the existing OTS
low level recourse regulations were already consistent with those called for by
the RCDA, the OTS regulations discussed in the preceding paragraph were not
modified. Accordingly, these regulations will not affect the Bank.
Also in response to the RCDA, the federal banking agencies, including the
OTS have adopted new regulations pertaining to the amount of risk-based capital
which must be held upon the sale, with recourse, of qualifying small business
loans. Under these regulations, a well capitalized institution, such as the
Bank, upon the sale of loans which meet the criteria for loans to small
business, as defined by the Small Business Administration, need maintain capital
only against the amount of recourse retained, provided a reserve is established,
under GAAP, for that recourse liability. In addition, the maximum amount of
recourse retained under this regulation may not exceed 15% of the Bank's total
capital. The effect of this regulation is to substantially reduce the amount of
risk-based capital which must be maintained upon the sale of qualifying loans.
The Bank's total risk-weighted assets are determined by taking the sum of
the products obtained by multiplying each of the Bank's assets and certain
off-balance sheet items by a designated risk-weight. Before an off-balance sheet
item can be assigned a risk-weight, it must be converted to an on-balance sheet
credit equivalent amount.
Four risk-weight categories now exist for on-balance sheet assets. The four
risk-weighted categories are zero percent (generally cash and securities issued
by or backed by the full faith and credit of the United States), twenty percent
(generally US government backed mortgage securities), fifty percent (generally
qualifying mortgage loans and mortgage backed securities not within lower
categories) and one hundred percent (all other assets).
Before a risk-weight category can be applied to a consolidated off-balance
sheet item, such item must be converted into a credit-equivalent amount by
multiplying its face amount by whichever of four conversion factors is
appropriate. There is a one hundred percent conversion of direct credit
substitutes, and net assets sold under an agreement to repurchase; a fifty
percent conversion factor for transaction-related contingencies, and the unused
portions of nonexempt loan commitments; a twenty percent conversion for
trade-related contingencies, such as commercial letters of credit; and a zero
percent conversion factor applies to the unused portion of exempt loan
commitments and unused, unconditionally cancelable retail credit card lines.
Interest-rate contracts have special credit equivalent amounts equal to the sum
of their current credit exposure plus their potential credit exposure. The
risk-weight category to be applied to such amounts in determining the credit
risk component would depend on the obligor, but in no event would be higher than
fifty percent risk-weight. As of December 31, 1995, the Bank's total
risk-weighted assets equaled $3.4 billion.
In addition to regulations pertaining to risk-based capital for interest
rate risk, FDICIA also requires the adoption of risk-based capital regulations
regarding excessive exposure to concentration of credit risk and the risks
associated with nontraditional activities. The OTS individual minimum capital
regulations include these factors as additional grounds upon which the OTS could
impose such requirements. The regulations do not set specific standards, but
leave it to the discretion of the OTS to impose additional capital requirements
on a case by case basis. The RCDA requires the federal banking agencies to add
the size and activities of an institution to that list of factors which may
justify the need for additional risk-based capital. Under the RCDA the federal
banking agencies are not to cause undue reporting burdens in connection with
such regulations. The OTS has not yet proposed new regulations in response to
this law.
Total capital, as defined by OTS regulations, is core capital plus
supplementary capital (supplementary capital cannot exceed 100% of core capital)
less direct equity investments not permissible to national banks
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(subject to a phase-in schedule), reciprocal holdings of depository institution
capital investments, and that portion of land loans and nonresidential
construction loans in excess of 80.0% loan-to-value ratio. Supplementary capital
is comprised of three elements: (i) permanent capital instruments not included
in core capital; (ii) maturing capital instruments; and (iii) general valuation
loan and lease loss allowance.
The Bank currently has $104 million of its 8.5% Debentures outstanding.
Pursuant to the approval from the OTS to treat those debentures as supplementary
capital, subsequent to September 30, 1995 the amount of those debentures which
may be included as supplementary capital may not exceed one-third of the Bank's
total capital. At December 31, 1995, the 8.5% Debentures then outstanding
represented 25.9% of the Bank's total capital. Consistent with the OTS capital
regulations, the amount of the 8.5% Debentures which may be included as
supplementary capital will decrease at the rate of 20% of the amount originally
outstanding per year (net of redemptions), commencing on July 1, 1998. The
Bank's total capital at December 31, 1995 totalled $391 million and its
risk-based capital ratio was 11.42%.
As required by the provisions of FDICIA, the OTS has adopted an interest
rate risk component to its capital rules. The new rule establishes a method for
determining an appropriate level of capital to be held by savings associations
subject to the supervision of the OTS, such as the Bank, against interest rate
risk ("IRR"). The new rule generally provides that if a savings association's
IRR, calculated in accordance with the rule, exceeds a specified percentage, the
savings association must deduct from its total capital an IRR component when
calculating its compliance with the risk-based capital requirement.
Specifically, the rule provides that a savings association's IRR is to be
determined by the decline in that association's Net Portfolio Value ("NPV")
(i.e., the value of the association's assets as determined in accordance with
the provisions of the rule) resulting from a 200 basis point change in market
interest rates (increase or decrease, whichever results in a lower NPV) divided
by the NPV prior to that change. If that result is a decrease of greater than
2%, the association must deduct from its total capital an amount equal to
one-half of the decline in its NPV in excess of 2% of its NPV prior to the
interest rate change (the "IRR component"). The reduction of an association's
total risk-based capital is effective on the first day of the third quarter
following the reporting date of the information used to make the required
calculations. The rule also contains provisions (i) reducing the IRR component
if the association reduces its IRR by the end of the quarter following the
reporting date and (ii) permitting the OTS to waive or defer the IRR component
on a showing that the association has made meaningful steps to reduce or control
its interest rate risk. The OTS has postponed the effective date as of which an
IRR component will be required to be deducted from a savings association's
capital to permit the OTS to review the interest rate risk regulations currently
being promulgated by the other federal banking agencies for their respective
institutions. Even were the rule currently being applied, the Bank would not be
required to reduce its total capital by an IRR component, and does not
anticipate being required to do so during 1996.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. The OTS must prohibit
asset growth by any institution that is in violation of the foregoing minimum
capital requirements, and must require any such institution to comply with a
capital directive issued by the OTS. See "Prompt Corrective Regulatory Action".
In summary, the Bank exceeded the current minimum requirements for core
capital, tangible capital and risk-weighted capital as of December 31, 1995.
However, the required deductions from capital for its investments in WCS are
still being phased-in. The Bank's core, tangible and risk-weighted capital
ratios at December 31, 1995, on a fully phased-in basis, would be 8.21%, 8.21%
and 11.31%, respectively. Accordingly, the Bank meets all of the fully phased-in
capital requirements. Westcorp believes that the Bank will continue to meet all
of the fully phased-in requirements when required. See Note 17 -- Regulatory
Capital to the Consolidated Financial Statements.
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Prompt Corrective Regulatory Action
FDICIA requires each applicable agency and the FDIC to take prompt
corrective action to resolve the problems of insured depository institutions
that fall below certain capital ratios. Such action must be accomplished at the
least possible long-term cost to the appropriate deposit insurance fund.
In connection with such action, each agency must promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the adequacy of its regulatory capital
level: well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. The critically
undercapitalized level cannot be set lower than 2% of total assets or higher
than 65% of the required minimum leverage capital level. In addition to the
various capital levels, FDICIA allows an institution's primary federal
regulatory agency to treat an institution as if it were in the next lower
category if that agency (i) determines (after notice and an opportunity for
hearing) that the institution is in an unsafe or unsound condition or (ii) deems
the institution to be engaged in an unsafe or unsound practice.
At each successive downward level of capital, institutions are subject to
more restrictions and regulators are given less flexibility in deciding how to
deal with the bank or thrift. For example, undercapitalized institutions will be
subject to asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business. For
significantly undercapitalized institutions, the appropriate agency must require
the institution to sell shares in order to raise capital, must restrict interest
rates offered by the institution, and must restrict transactions with affiliates
unless, in each case, the agency determines that such actions would not further
the purposes of the prompt corrective action system. In addition, for critically
undercapitalized institutions, the agency must require prior agency approval for
any transaction outside the ordinary course of business, and the institution
must be placed in receivership or conservatorship unless the appropriate agency
and FDIC make certain affirmative findings regarding the viability of the
institution (which findings must be reviewed every 90 days).
FDICIA prohibits any insured institution (regardless of its capitalization
category) from making capital distributions to anyone or paying management fees
to any persons having control of the institution if after such transaction the
institution would be undercapitalized. Any undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate agency within
45 days of becoming undercapitalized.
A capital restoration plan will be acceptable only if each company having
control over an undercapitalized institution guarantees that the institution
will comply with the capital restoration plan until the institution has been
adequately capitalized on an average during each of four consecutive calendar
quarters and provides adequate assurances of performance. The aggregate
liability of such guarantee is limited to the lesser of (i) an amount equal to
5% of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time the institution fails to comply with its capital
restoration plan.
The OTS, in conjunction with the other federal financial institution
regulatory agencies, adopted regulations defining the five categories of
capitalization and implementing a framework of supervisory actions, including
those described above, applicable to savings institutions in each category. The
regulations provide that a savings association will be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 (i.e., core) risk-based capital ratio of 6% or greater, a leverage ratio
of 5% or greater and is not subject to any OTS order or directive to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater; has a
Tier 1 risk-based capital ratio of 4% or greater and has either (a) a leverage
ratio of 4% or greater or (b) a leverage ratio of 3% or greater and is rated
composite 1 under the CAMEL rating system in the most recent examination of the
institution; (iii) "undercapitalized" if it has a total risk-based capital ratio
that is less than 8%, has a Tier 1 risk-based capital ratio that is less than
4%, has a leverage ratio that is less than 4% or, if rated composite 1 under the
CAMEL rating system in the most recent examination of the institution, has a
leverage ratio that is less than 3%; (iv) "significantly undercapitalized" if it
has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3% or a leverage ratio that is less than 3%; and
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(v) "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%. At December 31, 1995, the Bank met the
capital requirements of a "well capitalized" institution.
Loans to One Borrower
Under the HOLA as amended by FIRREA, the loans-to-one borrower limitations
for national banks apply to all savings associations in the same manner and to
the same extent as they do to national banks. Thus, savings associations
generally are not permitted to make loans to a single borrower in excess of 15%
to 25% of the savings associations' unimpaired capital and unimpaired surplus
(depending upon the type of loan and the collateral provided therefore), except
that a savings association may make loans to one borrower in excess of such
limits under one of the following circumstances: (i) for any purpose, in any
amount not to exceed $500,000; (ii) to develop domestic residential housing
units, in an amount not to exceed the lesser of $30.0 million or 30% of the
savings association's unimpaired capital and unimpaired surplus, provided that
the association receives the written approval of the OTS to do so (which
approval the Bank has not sought) and certain other conditions are satisfied; or
(iii) to finance the sale of real property which it owns as a result of
foreclosure, providing that no new funds are advanced. In addition, further
restrictions on a savings association's loans-to-one borrower authority may be
imposed by the OTS if necessary to protect the safety and soundness of the
savings association. At December 31, 1995, 15.0% of the Bank's unimpaired
capital and unimpaired surplus for loans-to-one borrower purposes was $61.8
million. The largest amount outstanding at December 31, 1995 to one borrower
(and related entities) was $11.9 million.
Equity Risk Investment Limitations
The Bank generally is not authorized to make equity investments other than
investments in subsidiaries. A savings association may not acquire a new
subsidiary or engage in a new activity through an existing subsidiary without
giving 30 days prior notice to the OTS and the FDIC, and must conduct the
activities of the subsidiary in accordance with the regulations and orders of
the OTS. Under certain circumstances, the OTS also may order a savings
association to divest its interest in, terminate the activities of, or take
other corrective measures with respect to, an existing subsidiary.
The Bank's aggregate investment in service corporation subsidiaries was
$2.8 million as of December 31, 1995 and its equity investments in operating
subsidiaries was $120 million as of December 31, 1995.
Qualified Thrift Lender Test
A Qualified Thrift Lender ("QTL") test was enacted as a part of FIRREA, and
was modified by FDICIA. An association that fails to become or remain a QTL must
either (i) convert to a bank subject to the banking regulations or (ii) be
subject to severe restrictions, including being forbidden to invest in or
conduct any activity that is not permissible to both a savings association and a
national bank, and certain other restrictions on branching, advances from its
Federal Home Loan Bank, and dividends. Effective three years after an
association fails to meet its QTL requirements, the association is forbidden
from retaining any investment or continuing any activity not permitted for a
national bank and must repay promptly all FHLB advances. In addition, companies
that control savings associations that fail the QTL test must, within one year
of such failure, become a bank holding company subject to the Bank Holding
Company Act.
Under the existing QTL requirements, a savings association's "qualified
thrift investments" must equal not less than 65% of the association's "portfolio
assets" measured on a monthly basis, in 9 of every 12 consecutive months.
Qualified thrift investments include all loans or mortgage-backed securities
held by an association which are secured or relate to domestic residential or
manufactured housing, as well as FHLB stock and certain obligations of the FDIC
and related entities. Certain other investments are included as qualified thrift
investments, but are limited to 20% of an association's portfolio assets,
including (i) 50% of residential mortgage loans sold by an association within 90
days of their origination, (ii) investments in subsidiaries which derive at
least 80% of their revenue from domestic residential or manufactured housing,
(iii) subject to certain limitations, 200% of investments relating to "starter
homes" or housing and community facilities in "credit-needy areas", (iv)
consumer loans in the aggregate of not more than 10% of portfolio
36
<PAGE> 37
assets, and (v) FHLMC and FNMA stock. Portfolio assets are total assets less
goodwill and other intangible assets, the value of the association's facilities
and the association's liquid assets maintained to meet its liquidity
requirements (but not over 20% of its total assets).
At December 31, 1995 the Bank's percentage of qualified thrift investments
to portfolio assets was 90%. Westcorp anticipates that the Bank will continue to
remain a QTL.
Dividend Regulations
The OTS has adopted regulations limiting the amount of capital
distributions a savings association may make. The regulation divides savings
associations into three tiers; those which meet all of the fully phased-in
capital requirements of the OTS both before and after the proposed distribution
(Tier 1 Associations), those which meet all of the current capital requirements
both before and after the proposed distribution (Tier 2 Associations), and those
which fail to meet one or more of the current capital requirements (Tier 3
Associations). A Tier 1 Association may make capital distributions in an amount
equal to the greater of (i) 100% of its net income for the current calendar year
to the date of capital distribution, plus the amount that would reduce by
one-half its "surplus capital ratio" (the amount by which the association's
total capital-to-risk-weighted assets ratio exceeds its fully phased-in
requirement of 8%) at the beginning of the current calendar year (i.e., at the
end of the immediately prior calendar year), or (ii) 75% of its net income over
the most recent four-quarter period preceding the quarter in which the capital
distribution is to be made. A Tier 2 Association may make capital distributions
of up to 75% of its net income over the past four-quarter period. A Tier 3
Association may not make any capital distribution without the prior
authorization of the OTS. Although Tier 1 and Tier 2 Associations do not need to
obtain prior approval to make a capital distribution which complies with the
requirements of the OTS regulation, the savings association must file a notice
with the OTS at least 30 days in advance of the date on which the distribution
is to be made. The OTS has proposed that savings associations which are not
subsidiaries of holding companies and which are rated CAMEL 1 or CAMEL 2 may
make distributions without advance notice to the OTS. The OTS has the authority,
under the regulation, to preclude a savings association from making capital
distributions, notwithstanding its qualification to do so on the above tests, if
the OTS determines that the savings association is in need of more than normal
supervision, or if the proposed distribution will constitute an unsafe or
unsound practice given the condition of the savings association. In addition, a
Tier 1 Association deemed to be in need of more than normal supervision by the
OTS may be downgraded to a Tier 2 or Tier 3 Association as a result of such
determination. A savings association may also apply to the OTS for approval to
make a capital distribution even though it does not meet the above tests, or for
an amount which exceeds the amount permitted by the express terms of the
regulation.
In addition, another OTS regulation pertaining to holding companies
requires that the OTS be given a 30 day advance notice before a savings
association subsidiary pays a dividend to its holding company. The notice
described above can also constitute the notice for this purpose, if so
designated.
The Bank is a Tier 1 Association. As of the date hereof, under the
limitations of the OTS capital distributions regulation, the Bank may pay
dividends up to the greater of 100% of its net income since January 1, 1996 plus
50% of its surplus capital or 75% of its net income over the four-quarter period
ending December 31, 1995. However, the Bank is also subject to certain
limitations on the payment of dividends by the terms of the indenture for its
8.5% Debentures, which limitations are more severe than the OTS capital
distribution regulations. Under the most restrictive of those limitations, the
greatest capital distribution which the Bank could currently make is $8.3
million. Westcorp received dividends from the Bank during 1995 in the aggregate
amount of $21.5 million. The Bank anticipates making quarterly dividend payments
to Westcorp during 1996.
Community Reinvestment Act
The CRA requires financial institutions regulated by the federal financial
supervisory agencies to ascertain and help meet the credit needs of their
delineated communities, including low- and moderate-income neighborhoods within
those communities, consistent with safe and sound banking practices. The CRA
37
<PAGE> 38
was amended by FIRREA. The FIRREA amendments require that the federal financial
supervisory agencies evaluate an institution's CRA performance based on a four
tiered descriptive rating system, and that these ratings and written evaluations
be made public. The four possible ratings are: (i) Outstanding record of meeting
community credit needs; (ii) Satisfactory record of meeting community credit
needs; (iii) Needs to improve record of meeting community credit needs; and (iv)
Substantial noncompliance in meeting community credit needs.
Many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
The Bank received a CRA audit in 1995, which was made public in 1995. The
Bank's rating was "satisfactory". An institution in this group, has a
satisfactory record of ascertaining and helping to meet the credit needs of its
entire delineated community, including low- and moderate-income neighborhoods,
in a manner consistent with its resources and capabilities.
Each year, the Bank prepares a CRA statement for public viewing. This
document contains the Bank's CRA strategic plan, CRA notice, ascertainment of
community credit needs, marketing and types of credit offered and extended,
community outreach activities, geographical distribution and record of opening
and closing offices, practices intended to discourage discrimination, community
development and a file of public comments.
The OTS, concurrently with the other federal banking regulatory agencies,
revised the CRA regulations in 1995. The procedures contained in the revised
regulations are designed to focus on performance rather than process, to promote
consistency in assessments, to permit more effective enforcement against
institutions with poor performance, and to reduce unnecessary compliance burden
while stimulating improved performance. Specifically, the regulations replace
the current process-based assessment system with a new evaluation system that
will rate institutions based on actual performance in meeting community credit
needs. The new system will evaluate the degree to which an institution is
providing (i) loans, (ii) branches and other services, and (iii) investments to
low- and moderate-income areas. Under the regulations, an association may seek
to be assessed on its CRA performance under a strategic plan prepared by the
association and approved by the OTS. The regulations also emphasize the
importance of an institution's CRA performance in the corporate application
process, and seek to make the regulations more enforceable. The Bank does not
believe that its performance, as might be measured by the regulations as
adopted, will differ materially from its performance under the previously
existing CRA regulations.
Classification of Assets
The OTS has adopted a classification system for problem assets of insured
institutions. Problem assets are classified as "special mention," "substandard,"
"doubtful" or "loss," depending on the presence of certain characteristics. An
asset will be considered "special mention" when assets do not currently expose a
savings association to a sufficient degree of risk to warrant classification but
possess credit deficiencies or potential weaknesses deserving management's close
attention; an asset is "substandard" if it is inadequately protected by the
current capital and paying capacity of the obligor or by the collateral pledged,
if any. Assets classified as "doubtful" have all of the weaknesses inherent in
those classified "substandard," with the added characteristic that the
weaknesses make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Comparison of
Results of Operations -- Provision for Loan and Real Estate Losses."
Insured institutions are required to classify their own assets and to
establish general valuation allowances (reserves) where appropriate. Assets
classified as substandard or doubtful may be reviewed by the OTS examiner and
valuation allowances may be required to be increased subject to review by the
OTS Regional
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<PAGE> 39
Director. For the portion of assets classified as loss, the OTS permits 100% of
the amount classified to be charged off or the establishment of a specific
valuation allowance.
The OTS has proposed that it revise its current asset classification
scheme. The OTS is proposing to remove the specific reference to special mention
assets from its asset classification regulation, and instead issue regulatory
guidance on this topic that will more closely align its treatment of special
mention assets with the Interagency Policy Statement on Credit Availability
issued by the four federal banking regulatory agencies and the OTS. Basically,
the guidance will clarify the supervisory treatment of special mention assets
and emphasize that such assets are not considered adversely classified assets.
In addition, the OTS is considering removing the specific description of assets
classified as "substandard," "doubtful" and "loss" from the regulatory text and
providing such descriptions in guidance, as is the practice of the federal
banking regulatory agencies. Westcorp does not anticipate that these proposals,
when finalized, will result in any increase in its classified assets. Finally,
the OTS has proposed to eliminate the specific requirement of self
classification. As of December 31, 1995 the Bank had established allowances for
loan and real estate losses of $40.0 million.
Insurance Operations
The insurance subsidiaries of the Bank are subject to regulation and
supervision in the jurisdictions in which they do business. The method and
extent of such regulation varies, but the insurance laws of most states
establish agencies with broad regulatory and supervisory powers. These powers
relate primarily to the establishment of solvency standards which must be met
and maintained, the licensing of insurers and their agents, the nature and
amount of investments, approval of policy forms and rates, and the form and
content of required financial statements. The Bank, through its insurance
subsidiaries, is also subject to various state laws and regulations covering
extraordinary dividends, transactions with insurance subsidiaries and other
matters. The Bank is in compliance with these state laws and regulations.
Investment Powers
Pursuant to the Interagency Guidelines for Real Estate Lending Policies,
the Bank is required to have lending policies consistent with the guidelines,
including as to loan portfolio management considerations, underwriting standards
and loan administration. In particular, the regulation establishes supervisory
loan-to-value ("LTV") limits for real property secured loans. Each insured
institution is to set its own policy with respect to LTV, but those LTV limits
are not to exceed the LTV limits of the guidelines, except as specifically
permitted by the guidelines. Generally, the LTV limits are as follows: for raw
land, 65%; for land development, 75%; for construction of 1 to 4 family
residential housing, 85%, and 80% for other construction loans; and for improved
property, 85%. Loans secured by owner occupied 1 to 4 family residences are not
subject to a supervisory LTV limit, except that any such loan with a LTV ratio
of greater than 90% at origination requires either private mortgage insurance or
other readily marketable collateral. The Bank's LTV standards are consistent
with these supervisory limitations. In addition, the OTS and the other federal
banking agencies have adopted uniform real estate appraisal guidelines which
require the board of directors of financial institutions to adopt appraisal and
evaluation programs which will cover the selection of appraisers, monitoring
their activities, require needed independence from the real estate transaction
at issue, establish criteria for reports, formats and the use thereof.
Accounting Requirements
The OTS has a statement of policy which provides guidance regarding the
proper classification of, and accounting for, securities held for investment,
sale and trading. Securities held for investment, sale or trading may be
differentiated based upon an institution's desire to earn an interest yield
(held for investment), to realize a holding gain from assets held for indefinite
periods of time (held for sale), or to earn a dealer's spread between the bid
and asked prices (held for trading). Critical to the proper classification of an
accounting for securities as investments is the intent and ability of an
institution to hold the securities until maturity. A positive intent to hold to
maturity, not just a current lack of intent to dispose, is necessary for
securities acquired to be considered to be held for investment purposes.
Securities held for investment purposes may be accounted for at amortized cost
while securities held for sale are to be accounted for at lower of cost or
market
39
<PAGE> 40
and securities held for trading are to be accounted for at market. The Bank
believes that its investment activities have been and will continue to be
conducted in accordance with the requirements of OTS policies and generally
accepted accounting principles.
The Federal Financial Institutions Examination Council determined in August
of 1993 that all federal financial institution regulatory agencies must adopt
FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," for
fiscal years commencing on or after January 1, 1994. Under FAS 115, savings
associations will be required to recognize unrealized gains and losses on
"available for sale" securities when measuring shareholders' equity. The OTS has
determined that FAS 115 will not be used as a component in core capital or as a
part of supplementary capital. Westcorp recognized an increase in shareholders'
equity of approximately $186 thousand at December 31, 1995 as a result of FAS
115. For additional information see the Consolidated Financial Statements.
Annual Examinations
FDICIA significantly reduces regulatory discretion by mandating the
appropriate federal financial institution regulatory agency to conduct a full
scope, on-site examination of each insured depository institution every twelve
months. The Bank's last annual examination ended on February 16, 1996.
FDIC Back-up Enforcement Authority
The FDIC has the statutory authority under FDICIA to direct an insured
institution's principal regulator to take enforcement action, and to take that
action itself if the principal regulator fails to act timely, or in an emergency
situation.
Financial Reporting
FDICIA requires insured institutions to submit independently audited annual
reports to the FDIC and the appropriate agency. These publicly available reports
must include: (i) annual financial statements prepared in accordance with
generally accepted accounting principles and such other disclosure requirements
as required by the FDIC or the appropriate agency and (ii) a report, signed by
the chief executive officer and the chief financial officer or chief accounting
officer of the institution which contains statements, attested to by independent
auditors, about the adequacy of internal controls and compliance with laws and
regulations. Insured institutions such as the Bank are required to monitor these
activities through an independent audit committee.
FDICIA also directs the FDIC to develop with other appropriate agencies a
method for insured depository institutions to provide supplemental disclosure of
the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution.
Standards for Safety and Soundness
FDICIA, as amended by the RCDA, requires the federal banking regulatory
agencies to prescribe, by regulation or guidelines, standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation fees and benefits. In addition, the federal
banking regulatory agencies are required to prescribe standards relating to
asset quality, earnings and stock valuation as they determine to be appropriate.
The OTS, in conjunction with the federal banking regulatory agencies, has
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness to meet the amended FDICIA requirements. In general, the
guidelines are designed to identify emerging safety and soundness problems and
ensure that such action is taken to address those concerns before they pose a
risk to the deposit insurance fund. The guidelines call for each insured
institution to have policies, procedures and systems as appropriate to its size
and the nature of its assets and liabilities which address the specific criteria
identified in the guidelines for
40
<PAGE> 41
each of the six items identified above. The guidelines do not set any specific
numerical targets or minimum requirements.
In the event the OTS determines that a savings association has failed to
satisfy the safety and soundness standards called for by the guidelines, the OTS
may, upon requisite notice, require such association to submit a compliance plan
that sets forth the steps it will take and the time frame required to correct
the deficiency. If the association fails to comply with the OTS request, the OTS
may then issue a notice of intent to issue an order (or in an appropriate case
an immediate order, subject to appeal by the association) requiring that
association to correct a safety and soundness deficiency or to take or refrain
from other actions.
WFS
WFS is an operating subsidiary of the Bank and a second tier subsidiary of
Westcorp. WFS purchases retail installment sales contracts from new and used
motor vehicle dealers and makes installment loans to individual consumers
secured, in both instances, by automobiles and light duty trucks (collectively,
"contracts"). WFS maintained 89 offices in 16 states at December 31, 1995 and at
the date hereof has 97 offices in 19 states. WFS is licensed in each state in
which it operates as a consumer finance lender by a state licensing agency in
each such state. As such it is subject to audit and examination by the
applicable state agencies for these states, as well as being subject to
examination and supervision by the OTS and the FDIC. WFS engages local counsel
familiar with the applicable consumer finance and auto finance, licensing and
titling laws and regulations of each of the states in which it has offices and
from which it purchases contracts to the extent it purchases contracts out of
states in which it has no office. WFS will continue to do so as to each of the
states into which WFS intends to expand. At December 31, 1995, and as of the
date hereof, WFS is in compliance with the licensing and operation laws and
regulations applicable to each of its offices in these states.
Numerous federal and state consumer protection laws and regulations impose
requirements applicable to the contracts purchased and serviced by WFS. Among
these enactments are the federal Truth-in-Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, The Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
California Rees-Levering Act and similar retail installment sales laws and
similar laws of other states in which WFS originates contract. Most of the
states in which WFS is originating contracts have statutes or regulations
pertaining to the repossession and sale process WFS must follow when seeking to
recover on a defaulted contract. Generally, WFS must follow those requirements
with precision to ensure its ability to maximize its recovery on a defaulted
contract. In addition, some states, such as Texas, have consumer protection laws
which limit the assets WFS may reach in order to recover on any deficiency
following repossession and sale of the vehicle which secures a defaulted
contract.
As an operating subsidiary of the Bank, WFS is precluded by regulations of
the OTS from engaging in any business activity which the Bank could not itself
undertake. All of its current business activities are permitted activities for
the Bank. Also as an operating subsidiary of the Bank, the Bank is required to
retain ownership of at least a majority of the voting stock of WFS. WFS may not
engage in any new business activity nor may it acquire a business from a third
party, even if such business activities are permitted to the Bank and thereby to
WFS, until the Bank has first given notice thereof to the FDIC and given notice
or made application therefore to the OTS, depending upon various ratings
assigned to the Bank by the OTS.
RTC Restructuring Act and RTCCA
The RTC's ability to serve as receiver for insolvent thrifts was extended
from August 9, 1992 to September 30, 1993 by the RTC Restructuring Act. The
RTCCA subsequently extended that period to a date between January 1, 1995 and
July 1, 1995, as determined by the Chairman of the Thrift Depositor Protection
Oversight Board. The Chairman has determined that the final date was July 1,
1995. Furthermore the RTC Restructuring Act and the RTCCA restructure the RTC
and provide additional funding to carry out the purposes of the RTC.
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<PAGE> 42
EMPLOYEES
At December 31, 1995, Westcorp had 1,688 full-time and 22 part-time
employees. None of these employees is represented by a collective bargaining
unit or union and Westcorp and its subsidiaries believe they have good relations
with their respective personnel.
ITEM 2 -- PROPERTIES
At December 31, 1995, Westcorp owned 22 properties in California and leases
additional properties at various locations in other states.
The executive offices are located at 23 Pasteur Road, Irvine, California.
The remaining owned and leased properties are used as branch offices, finance
company offices, dealer centers, and mortgage banking offices. At December 31,
1995, the net book value of property and leasehold improvements was
approximately $56.1 million. Westcorp leases space at three locations from
companies controlled by a major shareholder. For further information see "Item
13 -- Certain Relationships and Related Transactions".
ITEM 3 -- LEGAL PROCEEDINGS
In 1994, WFS, the consumer lending subsidiary of the Bank, was served with
a class action lawsuit entitled Denise Whitehouse et al. v. Westcorp Financial
Services, Inc. Contra Costa Superior Court Case No. C94-01930, filed in May 1994
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. In addition, the Bank was 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 in July 1995. The lawsuit asserts certain allegations relating to the
"forced placement" of collateral protection insurance, similar to the lawsuit
pending against WFS.
A settlement agreement on both class action lawsuits was reached. On
December 22, 1995, the court entered a preliminary approval order that the
settlement is preliminarily approved as fair, reasonable and adequate. The terms
of the settlement include a settlement fund of $3.4 million in cash which has
been accrued. A final hearing will be held on March 29, 1996 to determine
whether the proposed settlement is fair, reasonable and adequate and should be
approved.
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.
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<PAGE> 43
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE BY QUARTER
The common stock of Westcorp has been publicly traded since 1986 and is
currently traded on the New York Stock Exchange ("NYSE"), identified by the
symbol, WES. The following table illustrates the high and low sale prices by
quarter in 1995 and 1994, as reported by NYSE, which prices are believed to
represent actual transactions:
<TABLE>
<CAPTION>
1995 1994
-------------------- -------------------
HIGH LOW HIGH LOW
-------- --------- --------- -------
<S> <C> <C> <C> <C>
First Quarter.................................................. $11 1/2 $ 7 55/64 $ 9 13/32 $8 7/32
Second Quarter................................................. 16 3/8 11 1/8 11 3/4 8 5/8
Third Quarter.................................................. 23 15 1/4 11 1/4 9 5/8
Fourth Quarter................................................. 22 5/8 15 3/8 10 1/8 7 3/4
</TABLE>
There were approximately 1,200 shareholders of Westcorp common stock at
December 31, 1995. The number of shareholders was determined by the number of
record holders, including the number of individual participants, in security
position listings.
DIVIDENDS
Westcorp paid a $0.09 per share quarterly cash dividend and a 5% stock
dividend during 1995. Westcorp paid a $0.071 per share quarterly cash dividend
and a 5% stock dividend during 1994. On February 2, 1996, Westcorp declared a
quarterly cash dividend of $0.10 per share for shareholders of record as of
February 16, 1996, payable March 1, 1996 and a 5% stock dividend for
shareholders of record as of May 20, 1996, payable June 17, 1996.
Westcorp is not restricted by regulation or agreement in its ability to pay
dividends.
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<PAGE> 44
ITEM 6 -- SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Interest income................. $ 222,093 $ 143,639 $ 157,946 $ 212,354 $ 288,305
Interest expense................ 139,279 88,766 101,203 137,955 200,402
----------- ----------- ----------- ----------- -----------
Net interest income........... 82,814 54,873 56,743 74,399 87,903
Provision for loan losses....... 11,470 13,033 22,584 34,270 24,562
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan
losses..................... 71,344 41,840 34,159 40,129 63,341
Other income.................... 105,660 83,190 73,839 32,864 37,645
Other expenses.................. 115,433 92,391 83,625 69,354 65,315
----------- ----------- ----------- ----------- -----------
Income before income taxes.... 61,571 32,639 24,373 3,639 35,671
Income taxes.................... 25,235 13,819 10,386 1,384 14,597
----------- ----------- ----------- ----------- -----------
Income before minority
interest...................... 36,336 18,820 13,987 2,255 21,074
Minority interest in earnings of
subsidiaries.................. 2,908
----------- ----------- ----------- ----------- -----------
Income before extraordinary
item.......................... 33,428 18,820 13,987 2,255 21,074
Extraordinary loss, net of
applicable income tax benefit
of $811(1).................... (1,113)
----------- ----------- ----------- ----------- -----------
Net income...................... $ 33,428 $ 18,820 $ 12,874 $ 2,255 $ 21,074
=========== =========== =========== =========== ===========
Book value per share at December
31(2)......................... $ 12.12 $ 8.74 $ 8.50 $ 8.29 $ 8.36
Weighted average number of
shares and common share
equivalents(2)................ 24,682,873 24,315,412 21,873,041 19,497,108 19,289,751
Income before extraordinary
item.......................... $ 1.35 $ 0.77 $ 0.64 $ 0.12 $ 1.09
Extraordinary loss due to
redemption of subordinated
debentures.................... (0.05)
----------- ----------- ----------- ----------- -----------
Net income per share(2)......... $ 1.35 $ 0.77 $ 0.59 $ 0.12 $ 1.09
=========== =========== =========== =========== ===========
Dividends per share............. $ 0.36 $ 0.29 $ 0.18 $ 0.17 $ 0.12
Dividend Payout Ratio........... 26.7% 37.7% 30.5% 141.7% 11.0%
</TABLE>
- ---------------
(1) During the third quarter of 1993, the Bank redeemed its 11% Subordinated
Capital Debentures due 1999 at a loss.
(2) Gives effect to the issuance of 4.3 million shares of common stock in 1993
and a 5% stock dividends in 1991, 1994 and 1995.
44
<PAGE> 45
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL SUMMARY
Assets:
Loans:
Consumer(1)..................... $ 335,625 $ 430,708 $ 230,351 $ 354,201 $ 378,140
Mortgage(2)..................... 1,409,964 1,320,784 1,326,797 1,571,628 1,727,240
Mortgage-backed securities......... 852,552 470,669 94,567 107,757 189,182
Investments and time deposits...... 291,564 285,192 273,526 219,368 153,462
Cash and other assets.............. 333,093 234,936 247,018 266,541 241,017
-------- -------- -------- -------- --------
Total assets............... $3,222,798 $2,742,289 $2,172,259 $2,519,495 $2,689,041
======== ======== ======== ======== ========
Liabilities:
Deposits........................... $1,753,475 $1,632,782 $1,357,058 $1,682,897 $1,814,938
Public debt offerings.............. 216,690 314,429 271,318 326,763 305,705
FHLB advances and other
borrowings...................... 546,024 335,074 126,000 184,500 263,000
Other liabilities.................. 386,905 247,692 212,768 164,637 145,057
-------- -------- -------- -------- --------
Total liabilities.......... 2,903,094 2,529,977 1,967,144 2,358,797 2,528,700
Minority interest in equity of
subsidiaries.................... 21,965
Shareholders' equity............... 297,739 212,312 205,115 160,698 160,341
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity..... $3,222,798 $2,742,289 $2,172,259 $2,519,495 $2,689,041
======== ======== ======== ======== ========
OTHER SELECTED FINANCIAL DATA
Average assets....................... $2,837,292 $2,162,141 $2,279,393 $2,568,899 $2,843,993
Return on average assets............. 1.18% 0.87% 0.56% 0.09% 0.74%
Average shareholders' equity......... $ 213,311 $ 208,178 $ 182,999 $ 167,494 $ 150,375
Return on average shareholders'
equity............................. 13.51% 9.04% 7.04% 1.35% 14.01%
Equity-to-assets ratio............... 9.24 7.74 9.44 6.38 5.96
Originations:
Consumer loans..................... $1,533,989 $1,183,188 $ 829,181 $ 673,473 $ 604,069
Mortgage loans..................... 513,581 684,333 913,103 597,809 520,306
Interest rate spread................. 2.44% 2.18% 2.48% 2.91% 3.17%
</TABLE>
- ---------------
(1) Net of unearned discount.
(2) Net of undisbursed loan proceeds.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto.
OVERVIEW
Westcorp continued to focus on consumer and mortgage lending during 1995.
Westcorp originated (including loans purchased from dealers) record levels of
consumer loans in 1995 totalling $1.5 billion compared to $1.2 billion in 1994.
The 30% increase in production is due to increased production within existing
offices, expansion into new markets and a strong automobile market in general.
Westcorp continues to expand its consumer operations and at the date hereof
operates in 19 states. Mortgage loan production during 1995 totalled $514
million compared to $684 million during 1994. Decreased mortgage production was
the
45
<PAGE> 46
result of general increases in interest rates and reduced demand in real estate
markets in California, Westcorp's principal mortgage lending market. However, to
offset the decline in real estate originations, Westcorp purchased rights to
service $1.5 billion of single family real estate loans in 1995, thereby
increasing Westcorp's overall servicing portfolio.
During 1995, sales and securitizations of loans in the secondary market
totalled $1.8 billion compared to $1.4 billion in 1994. This included sales or
securitizations of $1.5 billion of automobile loans compared to $842 million in
1994 and sales or securitizations of $304 million of mortgage loans compared to
$542 million in 1994. Loans serviced for the benefit of others increased 95% to
$5.6 billion at December 31, 1995 compared to $2.9 billion at December 31, 1994
and consisted of $1.9 billion of automobile loans and $3.7 billion of mortgage
loans. Secondary market activity is primarily a function of origination levels
and market conditions.
Overall, asset quality improved at Westcorp during 1995 as nonperforming
assets decreased 32%. At December 31, 1995, nonperforming assets totalled $29.2
million or 0.9% of total assets compared to $43.3 million or 1.6% of total
assets at December 31, 1994. The decrease is the result of ongoing dispositions
of nonperforming assets combined with improving asset quality in the remaining
portfolio. At December 31, 1995, loans past due 60 days or more as a percentage
of total loans in Westcorp's consumer and real estate loan portfolios increased
to 0.6% and 1.3%, respectively, compared to 0.2% and 1.2% at December 31, 1994.
Westcorp currently exceeds all regulatory capital requirements. At December
31, 1995, the Bank's regulatory capital ratios for tangible, core, and
risk-based capital were 8.32%, 8.32% and 11.42%, respectively.
RESULTS OF OPERATIONS
GENERAL
The primary sources of income for Westcorp are net interest income and
servicing income which are generated through the management of its interest rate
sensitive assets and liabilities and loan sales. Other significant factors that
affect Westcorp's income are asset quality, automobile lending, mortgage
banking, other miscellaneous income, other expenses and income taxes.
Westcorp's net income was $33.4 million for the year ended December 31,
1995, compared to $18.8 million for the year ended December 31, 1994, and $12.9
million for the year ended December 31, 1993. The increases in net income for
the years ended December 31, 1995 and 1994 compared to 1993 are attributable to
continued sales and securitizations in the secondary market, expanded consumer
lending operations and improved asset quality. These activities have resulted in
increased net interest income, automobile servicing income, and lower provisions
for loan losses, offset in part by lower real estate operations income during
1995 compared to 1994.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of measuring and controlling
interest rate risk through matching the maturity and repricing characteristics
of interest earning assets with those of interest bearing liabilities.
Westcorp's approach to asset/liability management includes originating
adjustable rate loans, securitizing loans with liabilities that have similar
repricing and maturity characteristics, matching fixed rate loans held in the
portfolio with advances from the FHLB and using other financial instrument
agreements. Net interest income in 1995 was $82.8 million compared with $54.9
million in 1994 and $56.7 million in 1993. Net interest income has been affected
by changes in interest rates and changes in average interest earning assets and
interest bearing liabilities.
Interest rates on Westcorp's interest earning assets, particularly its
consumer and mortgage loan portfolios, have increased since 1994 corresponding
with the direction of overall market interest rates. The average yield on
interest earning assets increased to 8.5% for the year ended December 31, 1995,
from 7.3% and 7.8%, for the years ended 1994 and 1993, respectively. Mortgage
loans and mortgage-backed securities comprise the majority of Westcorp's assets
and are principally adjustable rate products. Furthermore, these assets are
primarily indexed to COFI. COFI has increased to 5.1% in December 1995 compared
to 4.6% in December 1994 and 3.9% in December 1993. As COFI increased, the yield
on Westcorp's real estate loan
46
<PAGE> 47
portfolio, which represents the majority of Westcorp's interest earning assets,
also increased to 7.6% for the year ended December 31, 1995, compared to 6.5%
and 7.2% for the years ended December 31, 1994 and 1993, respectively. Consumer
loan rates, which are less sensitive to market conditions, were 14.6% for the
year ended December 31, 1995 compared to 13.1% and 13.3% for the years ended
December 31, 1994 and 1993, respectively. The increase in consumer loan rates is
primarily the result of Westcorp shifting a larger percentage of its product mix
to higher yielding consumer loans.
Interest costs on Westcorp's interest bearing liabilities increased to 6.0%
for the year ended December 31, 1995, compared with 5.1% and 5.3% for the years
ended December 31, 1994 and 1993, respectively. However, the rate of increase
for interest bearing liabilities has been less dramatic than that for interest
earning assets principally due to the lagging of deposit repricing compared to
that of Westcorp's interest earning assets. The cost of savings deposits for the
year ended December 31, 1995, was 5.8% compared to 4.7% and 4.8% for the years
ended December 31, 1994 and 1993, respectively.
During 1995, average interest earning assets were $2.6 billion compared to
$2.0 billion in 1994 and 1993. The increase in average interest earning assets
is primarily attributable to increases in Westcorp's mortgage-backed securities
portfolio. Westcorp invests in mortgage-backed securities to generate additional
net interest income as well as to manage the interest rate risk characteristics
of its balance sheet. The consumer and mortgage loan portfolios increased $123
and $78.6 million for 1995 and 1994, respectively. These increases were
attributable to increased originations of consumer loans and decreased sales of
mortgage loans.
Average interest bearing liabilities totalled $2.3 billion during 1995
compared to $1.7 billion in 1994 and $1.9 billion in 1993. These increases are
due primarily to increasing the deposit base commensurate with the higher asset
base and the effect of the employment of the capital generated by Westcorp's and
WFS' common stock offerings. Average savings deposits, which represent over 75%
of Westcorp's liabilities, have changed to $1.8 billion in 1995, from $1.5
billion in 1994 and $1.6 billion in 1993. Average interest bearing liabilities
as a percentage of average interest earning assets totalled 88.1% in 1995
compared to 88.2% in 1994 and 93.9% in 1993.
On a limited basis, Westcorp also manages interest rate risk through
financial instrument agreements. Westcorp uses interest rate swaps, options,
caps, floors and forward agreements as part of its hedging strategy to reduce
the sensitivity of certain assets to changes in interest rates. These
instruments are carried at, and included as part of, the basis of the underlying
assets.
Westcorp's interest rate swaps consist of agreements to pay fixed-rate
interest and receive floating-rate interest at specified intervals based on an
agreed notional amount, a specified index and settled on a net basis. The cap
agreements have strike rates at 7.0% or 8.0% with expiration dates ranging from
1999 to 2002. The floor agreement has a strike rate of 5.8% expiring in 2000.
The put option on Treasury futures expires in March and June 1996. Westcorp
minimizes the effect of changes in interest rates on loans held for sale by
entering into forward agreements that protect the hedged assets from changes in
interest rates.
The current credit exposure under these forward agreements is limited to
the fair value of the agreements with a positive fair value. Master netting
agreements are arranged or collateral is obtained through physical delivery of,
or rights to, securities to minimize Westcorp's exposure to credit losses in the
event of nonperformance by counter parties to financial instruments. Westcorp
also minimizes its counterpart risk by entering into agreements only with highly
rated counter parties.
The overall interest rate spread for Westcorp was 2.4% during 1995 compared
to 2.2% and 2.5% during 1994 and 1993, respectively. The net yield on average
interest earning assets was 3.2% for the year ended December 31, 1995 and 2.8%
for the years ended December 31, 1994 and 1993. For additional information on
Westcorp's interest sensitive assets, see "Business -- Lending -- General".
ASSET QUALITY
Nonperforming assets and loan delinquency are considered key measures of
asset quality. Asset quality, in turn, affects the determination of the
allowance for loan losses. In addition to nonperforming assets and loan
delinquency levels, valuation allowances for estimated losses on loans and real
estate are
47
<PAGE> 48
determined by taking into consideration general economic conditions in the
markets Westcorp serves, historical loss experience, individual loan reviews and
the level of assets relative to reserves.
Westcorp's portfolio of nonperforming assets has declined to $29.2 million
or 0.9% of total assets at December 31, 1995, which represents a decline of
32.5% over the $43.3 million or 1.6% of total assets reported at December 31,
1994. See "Business -- Nonperforming Assets". This decrease is primarily
attributable to a well defined process of nonperforming asset disposition and
improving overall asset quality. During 1992 and 1993, the national economy was
adversely affected by negative or low rates of economic growth and high
unemployment. The effect in California, Westcorp's predominant real estate
market, was especially severe. During 1995 and 1994, real estate markets have
stabilized, although weaknesses still exist in certain sectors of the market.
While nonperforming assets have declined, delinquency has increased,
indicating a stabilizing market. Mortgage loans past due 60 days or more at
December 31, 1995, totalled $18.2 million or 1.3% of total real estate loans
compared to $15.9 million or 1.2% at December 31, 1994. See "Business -- Real
Estate Loan Quality". Consumer loans past due 60 days or more totalled $2.1
million and $0.8 million at December 31, 1995 and 1994, representing 0.6% and
0.2% of total consumer loans at the respective dates. See "Business -- Consumer
Loan Quality".
The allowance for loan losses decreased to $39.3 million at December 31,
1995 compared to $41.3 million at December 31, 1994 primarily due to the
stabilization in the asset quality of Westcorp's loan portfolio. The allowance
for loan losses is reduced by net chargeoffs and increased by the provision for
loan losses. For the year ended December 31, 1995, the provision for loan losses
totalled $11.5 million compared to $13.0 million and $22.6 million for the years
ended December 31, 1994 and 1993, respectively. Net chargeoffs for the years
ended December 31, 1995, 1994 and 1993 were $14.4 million, $11.4 million and
$23.6 million, respectively. See "Business -- Allowance for Loan Losses". The
decreases in provisions for loan losses for the last two years are the result of
improved asset quality. Westcorp believes that the allowance for loan losses is
currently adequate to absorb potential losses in the portfolio.
48
<PAGE> 49
The allowance for real estate losses totalled $0.8 million at December 31,
1995, compared to $1.7 million at December 31, 1994. The allowance for real
estate losses is charged with writedowns of foreclosed assets for changes in
estimated fair value occurring subsequent to foreclosure. At the time of
foreclosure, individual properties are written down to estimated fair value and
the allowance for loan losses is charged. Management believes that the allowance
for real estate losses is currently adequate to absorb potential losses in the
foreclosed portfolio. The following table presents summarized data relative to
the allowances for loan and real estate losses.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans........................................................... $1,745,589 $1,751,492
Allowance for loan losses............................................. 39,260 41,323
Allowance for real estate losses...................................... 784 1,684
Loans past due 60 days or more........................................ 20,255 16,666
Nonperforming loans................................................... 18,400 17,667
Nonperforming assets(1)............................................... 29,231 43,278
Allowance for loan losses as a percent of:
Total loans(2)...................................................... 2.2% 2.4%
Loans past due 60 days or more...................................... 193.8 247.9
Nonperforming loans................................................. 213.4 233.9
Total allowance as a percent of nonperforming assets.................. 137.0 99.4
Nonperforming loans as a percent of total loans....................... 1.1 1.0
Nonperforming assets as a percent of total assets..................... 0.9 1.6
</TABLE>
- ---------------
(1) Non performing loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
NET INTEREST INCOME
Net interest income is the difference between the rate earned on loans held
on balance sheet and the interest costs associated with Westcorp's borrowings.
Net interest income totalled $82.8 million in 1995 compared to $54.9 million and
$56.7 million in 1994 and 1993, respectively. The increase in net interest
income for the year ended December 31, 1995 compared to 1994 and 1993 is
attributable to the increase in investment and mortgage-backed securities as
well as the increase in loans held on balance sheet and wider interest margins.
As Westcorp sells or securitizes its on-balance sheet loans, revenue
previously recognized as net interest income will, upon sale or securitization,
be recognized as loan servicing income. Servicing income from automobile loans
is recorded as a component of automobile lending income and servicing income
from single family residential loans is recorded as a component of mortgage
banking income.
AUTOMOBILE LENDING
Westcorp originates and sells automobile loans with servicing rights
retained in the asset-backed market. During 1995, Westcorp originated $1.5
billion of automobile loans compared to $1.2 billion in 1994. Income from
automobile lending includes gains from the sale of loans, loan servicing income
net of amortization of capitalized servicing, and other related income such as
late charges. For the year ended December 31, 1995, automobile lending generated
income of $91.4 million compared to $70.2 million and $56.4 million for the
years ended December 31, 1994 and 1993, respectively.
49
<PAGE> 50
Automobile lending is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gains on sale of automobile loans............................. $19,367 $ 1,321 $ 9,685
Loan servicing income......................................... 50,713 55,182 36,778
Other fee income.............................................. 21,354 13,664 9,888
------- ------- -------
$91,434 $70,167 $56,351
======= ======= =======
</TABLE>
Gains on the sale of automobile loans totalled $19.4 million for the year
ended December 31, 1995, compared to $1.3 million and $9.7 million for 1994 and
1993, respectively. Gains on loans sold are primarily a function of loan rates,
market pricing and interest rates. The relatively lower gains on sales during
1994 resulted primarily from narrower interest margins as loan rates decreased
and market interest rates rose during 1994. Automobile loans sold during 1995
totalled $1.5 billion compared to $842 million during 1994. Automobile loans
held for sale at December 31, 1995, totalled $220 million compared to $302
million at December 31, 1994.
Loan servicing income decreased to $50.7 million for the year ended
December 31, 1995, compared to $55.2 million and $36.8 million for 1994 and
1993, respectively. In 1994, Westcorp made an adjustment to servicing income
earned on securitized automobile 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
contracts as income. As a result of subsequent regulatory guidance on this issue
and not because of a change in the underlying assumptions used by Westcorp, an
additional $6.6 million of servicing income was recognized. Absent such
adjustment, servicing income would have been $48.6 million for the year ended
December 31, 1994. In the aggregate, Westcorp serviced automobile loans owned
and those sold and serviced for the benefit of others, of $2.2 billion at
December 31, 1995, $1.6 billion at December 31, 1994, and $1.2 billion at
December 31, 1993.
Other fee income, consisting primarily of documentation fees, late charges
and deferment fees, increased to $21.4 million during 1995 compared to $13.7
million and $9.9 million in 1994 and 1993, respectively, representing increases
of 56% and 38%, respectively. These increases in other fee income are related to
the increase in the number of automobile loans purchased.
MORTGAGE BANKING
Westcorp originates first trust deed loans secured by single family
residences for sale in the secondary market. During 1995, Westcorp originated
$514 million of mortgage loans compared to $684 million in 1994. Loan production
in 1994 was adversely impacted by rising mortgage interest rates and the
lingering effects of a recession after lower interest rates created a heavy
demand for refinancings in 1993. Income from mortgage banking includes gains and
losses on the sale of loans, loan servicing income net of amortization of
capitalized servicing, and other income which primarily consists of late
charges. As shown in the following table, total mortgage banking income was $3.2
million compared to $2.1 million and $13.7 million, for the years ended December
31, 1995, 1994 and 1993, respectively.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net (losses) gains from sale of mortgage loans................ $(2,021) $(2,525) $ 8,960
Loan servicing income......................................... 3,925 3,751 3,059
Other......................................................... 1,255 902 1,668
-------- -------- -------
$ 3,159 $ 2,128 $13,687
======== ======== =======
</TABLE>
50
<PAGE> 51
Losses on sales of mortgage loans for 1995 totalled $2.0 million compared
to $2.5 million and gains of $9.0 million for the years ended December 31, 1994
and 1993, respectively. Gains and losses on mortgage loans are directly related
to the overall interest rate environment. During 1995 and 1994, interest rates
have increased for mortgage loans in contrast to the declining interest rate
environment during 1993. This change in the interest rate environment has
adversely affected the pricing of mortgage loans. Mortgage loans sold during
1995 totalled $304 million compared to $542 million and $804 million for 1994
and 1993, respectively.
Net loan servicing income totalled $3.9 million, $3.8 million and $3.1
million for the years ended December 31, 1995, 1994 and 1993, respectively. The
increasing servicing income is principally the result of a larger servicing
portfolio. At December 31, 1995, Westcorp serviced, including loans owned and
those sold and serviced for the benefit of others, mortgage loans of $5.1
billion compared to $3.0 billion and $2.5 billion at December 31, 1994 and 1993,
respectively.
OTHER INCOME
Other income includes primarily insurance income and real estate
operations. Insurance income, which totalled $8.8 million, $6.2 million and $7.1
million for the years ended December 31, 1995, 1994 and 1993, includes premiums
and commissions earned on insurance and insurance-related products, including
credit life, collateral protection and annuities.
Real estate operations include the costs of managing and disposing of
foreclosed real estate as well as the gains and losses realized upon
disposition. In addition, real estate operations include the gains and losses
relative to the operation of joint ventures. Total real estate operations losses
for 1995 was $266 thousand compared to income of $4.5 million and losses of $5.9
million for 1994 and 1993, respectively. The income generated in 1994 is
primarily the result of sales of foreclosed assets at prices in excess of their
carrying values.
OTHER EXPENSES
Other expenses, which consist of salaries and employee benefits, occupancy,
insurance and other miscellaneous expenses increased to $115 million in 1995
from $92.4 million in 1994 and $83.6 million in 1993. Other miscellaneous
expenses include marketing, telephone, supplies and legal and professional fees.
The increase in expenses is related to increased loan servicing portfolios and
the cost of expansion into other states. The ratio of other expenses to average
serviced assets was 1.8% in 1995 compared to 2.0% in 1994 and 2.1% in 1993.
Although the overall dollar amount increased, the percentage of expenses to
average serviced assets decreased primarily from the purchase of $1.5 billion in
PMSR, thus increasing the total servicing portfolio.
INCOME TAXES
Westcorp's effective tax rate was 41% for the year ended December 31, 1995,
compared to 42% and 43% for the years ended December 31, 1994 and 1993,
respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp and its subsidiaries have diversified sources of funds generated
through its operations. Primary sources of funds include deposits, loan
principal and interest payments received, sales of real estate loans and
automobile loans, sales of and payments on mortgage-backed securities, and the
maturity or sale of investment securities. Prepayments on loans and
mortgage-backed securities and deposit inflows and outflows are affected
significantly by interest rates, real estate sales activity and general economic
conditions.
Other sources of funds include a commercial paper facility totalling $400
million, reverse repurchase agreements and FHLB advances. At December 31, 1995,
Westcorp had $67.9 million of commercial paper outstanding with approximately
$332 million still available from this source. FHLB advances outstanding at
December 31, 1995, totalled $192 million. Westcorp's unused line of credit at
December 31, 1995, totalled approximately $263 million. Dollar reverse
repurchase agreements outstanding at December 31, 1995, totalled $354 million
and currently represent an inexpensive source of short term liquidity.
51
<PAGE> 52
Westcorp uses its funds to meet its business needs, which include funding
maturing certificates of deposit and savings withdrawals, repaying borrowings,
funding loan and investment commitments, meeting operating expenses, and
maintaining minimum regulatory liquidity and capital levels. OTS regulations
require the Bank, as a savings association, to maintain a specified level of
liquid assets such as cash, short term U.S. government and other qualifying
securities. Such liquid assets must not be less than 5.0% of the Bank's average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less, with short term liquid assets (which generally have a term of less
than one year) consisting of not less than 1.0% of that average daily balance
amount. For the years ended December 31, 1995, 1994 and 1993, such ratios were
6.9%, 13.4% and 10.3%, respectively.
EFFECT OF INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of the assets and
liabilities of Westcorp are monetary in nature. As a result, interest rates have
a more significant effect on Westcorp's performance than the general level of
inflation. See "Asset/Liability Management".
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Westcorp's Consolidated Financial Statements begin on page F-3 of this
report.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this report, as
Westcorp will file a definitive proxy statement (the "Proxy Statement") within
120 days after the end of its fiscal year pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for its Annual Meeting of Stockholders to be
held April 30, 1996 and the information included therein is incorporated herein
by reference.
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.
ITEM 11 -- EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Executive Compensation Summary" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management and
Certain Stockholders" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and Westcorp
or its Subsidiaries" in the Proxy Statement and is incorporated herein by
reference.
52
<PAGE> 53
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent auditors of Westcorp and subsidiaries are included in
this Report commencing on page F-2.
Report of Independent Auditors
Consolidated Statements of Financial Condition at December 31,
1995 and 1994.
Consolidated Statements of Income for the year ended December 31,
1995, 1994, and 1993.
Consolidated Statements of Changes in Shareholders' Equity for the
year ended December 31, 1995, 1994, and 1993.
Consolidated Statements of Cash Flows for the year ended
December 31, 1995, 1994, and 1993.
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Schedules to the consolidated financial statements are omitted
because the required information is inapplicable or the
information is presented in Westcorp's consolidated financial
statements or related notes.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Westcorp Incentive Stock Option Plan**
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan*
10.3 Westcorp 1991 Stock Option Plan***
11.1 Statement Re Computation of Earnings Per Share
21.1 Subsidiaries of Westcorp
23.1 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
- ---------------
* Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990, incorporated herein by reference
under Exhibit Number indicated.
** Exhibit previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986, incorporated herein by reference
under Exhibit Number indicated.
*** Exhibit previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991, incorporated herein by
reference under the Exhibit Number indicated.
(B) REPORT ON FORM 8-K
A report on Form 8-K was filed December 29, 1995 announcing that the
Bank completed the acquisition of an 80% interest in The Hammond
Company, a privately held mortgage banking company for $5.4 million.
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTCORP
Dated: March 28, 1996
By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
Senior Executive Vice President and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ----------------
<C> <S> <C>
/s/ ERNEST S. RADY Chairman of the Board, President March 28, 1996
- ------------------------------------------ and Chief Executive Officer
Ernest S. Rady
/s/ ROBERT W. JENKINS Vice Chairman and Director March 28, 1996
- ------------------------------------------
Robert W. Jenkins
/s/ JOY SCHAEFER Senior Executive Vice President March 28, 1996
- ------------------------------------------ and Chief Operating Officer
Joy Schaefer
- ------------------------------------------ Director
Alan L. Milligan
- ------------------------------------------ Director
Stanley E. Foster
/s/ WILLIAM J. CRAWFORD Director March 28, 1996
- ------------------------------------------
William J. Crawford
- ------------------------------------------ Director
Judith M. Bardwick
/s/ HOWARD C. REESE Director March 28, 1996
- ------------------------------------------
Howard C. Reese
/s/ LEE A. WHATCOTT Senior Vice President (Principal March 28, 1996
- ------------------------------------------ Financial and Accounting Officer)
Lee A. Whatcott and Chief Financial Officer
</TABLE>
54
<PAGE> 55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTCORP
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS........................................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at the year ended December 31, 1995 and
1994................................................................................ F-3
Consolidated Statements of Income for the year ended December 31, 1995, 1994 and
1993................................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the year ended December
31, 1995, 1994 and 1993............................................................. F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1995, 1994 and
1993................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westcorp
We have audited the consolidated financial statements of Westcorp and
Subsidiaries listed in the accompanying Index to Consolidated Financial
Statements (Item 14(a)). These financial statements are the responsibility of
Westcorp's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying Index
to Consolidated Financial Statements (Item 14(a)) present fairly, in all
material respects, the consolidated financial position of Westcorp and
Subsidiaries at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
January 16, 1996
F-2
<PAGE> 57
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash.............................................................. $ 35,969 $ 20,339
Interest bearing deposits with other financial institutions....... 689 563
Other short term investments...................................... 126,227 145,391
Investment securities held to maturity (fair value: 1995,
$1,493)......................................................... 1,506
Investment securities available for sale.......................... 133,518 114,764
Mortgage-backed securities held to maturity (fair value: 1995,
$522,529; 1994, $305,466)....................................... 512,218 316,511
Mortgage-backed securities available for sale..................... 340,334 154,158
Loans receivable, net of allowance for loan losses (1995, $39,260;
1994, $41,323).................................................. 1,339,423 1,411,052
Loans held for sale............................................... 368,533 304,506
Premises and equipment, net....................................... 70,052 66,465
Real estate owned, net............................................ 10,044 23,927
Accrued interest receivable....................................... 17,476 13,309
Excess of purchase cost over net assets acquired.................. 1,015 1,099
Federal Home Loan Bank stock...................................... 29,624 24,474
Other assets...................................................... 236,170 145,731
---------- ----------
$3,222,798 $2,742,289
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings deposits.................................................. $1,753,475 $1,632,782
Securities sold under agreements to repurchase.................... 354,024 246,074
Short-term borrowings............................................. 112,330 210,578
Federal Home Loan Bank advances................................... 192,000 89,000
Amounts held on behalf of trustee................................. 341,693 216,204
Unearned insurance premiums and insurance reserves................ 5,102 5,096
Other liabilities................................................. 40,110 26,392
---------- ----------
2,798,734 2,426,126
SUBORDINATED DEBENTURES........................................... 104,360 103,851
MINORITY INTEREST IN EQUITY OF SUBSIDIARIES....................... 21,965
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 45,000,000
shares; issued and outstanding 24,563,419 shares in 1995 and
23,145,640 shares in 1994....................................... 24,563 23,146
Paid-in capital................................................... 167,039 102,376
Retained earnings................................................. 105,951 92,788
Unrealized gains (losses) on securities available for sale, net of
tax............................................................. 186 (5,998)
---------- ----------
297,739 212,312
---------- ----------
$3,222,798 $2,742,289
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 58
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans, including fees........................................... $ 162,394 $ 119,649 $ 142,640
Mortgage-backed securities...................................... 47,486 13,879 5,788
Investment securities........................................... 6,551 5,768 6,328
Other........................................................... 5,662 4,343 3,190
----------- ----------- -----------
TOTAL INTEREST INCOME............................................. 222,093 143,639 157,946
Interest expense:
Savings deposits................................................ 101,364 68,295 76,316
Federal Home Loan Bank advances and other borrowings............ 19,081 18,603 24,827
Securities sold under agreements to repurchase.................. 18,834 1,868 60
----------- ----------- -----------
TOTAL INTEREST EXPENSE............................................ 139,279 88,766 101,203
----------- ----------- -----------
NET INTEREST INCOME............................................... 82,814 54,873 56,743
Provision for loan losses......................................... 11,470 13,033 22,584
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............... 71,344 41,840 34,159
Other income:
Automobile lending.............................................. 91,434 70,167 56,351
Mortgage banking................................................ 3,159 2,128 13,687
Investment and mortgage-backed securities gains................. 1,829 336 2,503
Insurance income................................................ 8,837 6,215 7,062
Real estate operations.......................................... (266) 4,497 (5,881)
Rental operations............................................... (307) (607) (487)
Miscellaneous................................................... 974 454 604
----------- ----------- -----------
TOTAL OTHER INCOME................................................ 105,660 83,190 73,839
Other expenses:
Salaries and employee benefits.................................. 64,844 51,116 44,464
Occupancy....................................................... 10,026 8,527 7,707
Insurance....................................................... 5,766 5,033 7,050
Miscellaneous................................................... 34,797 27,715 24,404
----------- ----------- -----------
TOTAL OTHER EXPENSES.............................................. 115,433 92,391 83,625
----------- ----------- -----------
INCOME BEFORE INCOME TAXES........................................ 61,571 32,639 24,373
Income taxes...................................................... 25,235 13,819 10,386
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST................................... 36,336 18,820 13,987
Minority interest in earnings of subsidiaries..................... 2,908
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM.................................. 33,428 18,820 13,987
Extraordinary loss from the redemption of subordinated debentures,
net of applicable income tax benefit of $811.................... (1,113)
----------- ----------- -----------
NET INCOME........................................................ $ 33,428 $ 18,820 $ 12,874
=========== =========== ===========
Net income per common share and common share equivalents:
Before extraordinary loss....................................... $ 1.35 $ 0.77 $ 0.64
Extraordinary loss due to the redemption of subordinated
debentures.................................................... (0.05)
----------- ----------- -----------
NET INCOME PER COMMON SHARE AND COMMON SHARE EQUIVALENTS.......... $ 1.35 $ 0.77 $ 0.59
=========== =========== ===========
Weighted average number of common shares and common share
equivalents..................................................... 24,682,873 24,315,412 21,873,041
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 59
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
COMMON STOCK SECURITIES
-------------------- AVAILABLE
PAID-IN RETAINED FOR SALE,
SHARES PAR VALUE CAPITAL EARNINGS NET OF TAX TOTAL
---------- --------- -------- --------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1993.......... 17,584,520 $ 17,585 $ 61,212 $ 81,901 $160,698
Stock options exercised........ 26,435 26 180 206
Stock issued................... 4,283,850 4,284 31,001 35,285
Cash dividends................. (3,948) (3,948)
Net income..................... 12,874 12,874
-------- ----- ------ ------ ----- --------
BALANCE DECEMBER 31, 1993........ 21,894,805 21,895 92,393 90,827 205,115
Adjustment to beginning balance
for change in accounting
method, net of tax.......... $ 995 995
Stock options exercised........ 153,292 153 1,066 1,219
Stock dividend................. 1,097,543 1,098 8,917 (10,015)
Cash dividends................. (6,844) (6,844)
Net income..................... 18,820 18,820
Change in unrealized gains
(losses) on securities
available for sale, net of
tax......................... (6,993) (6,993)
-------- ----- ------ ------ ----- --------
BALANCE DECEMBER 31, 1994........ 23,145,640 23,146 102,376 92,788 (5,998) 212,312
Stock options exercised........ 260,485 260 1,906 2,166
Stock dividend................. 1,157,294 1,157 10,416 (11,573)
Cash dividends................. (8,692) (8,692)
Issuance of subsidiary common
stock....................... 52,341 52,341
Net income..................... 33,428 33,428
Change in unrealized gains
(losses) on securities
available for sale, net of
tax......................... 6,184 6,184
-------- ----- ------ ------ ----- --------
BALANCE DECEMBER 31, 1995........ 24,563,419 $ 24,563 $167,039 $ 105,951 $ 186 $297,739
======== ===== ====== ====== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 60
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 33,428 $ 18,820 $ 12,874
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for losses................................................ 11,370 11,327 16,095
Depreciation and amortization....................................... 7,681 7,119 6,974
Amortization of deferred fees....................................... 2,221 688 (2,089)
Amortization of issuance costs...................................... 509 562 378
(Increase) decrease in interest receivable.......................... (4,167) (1,705) 2,306
(Gains) losses on nonoperating activities........................... (23,880) (6,179) 1,005
(Decrease) increase in interest payable............................. (285) 1,004 3,006
Deferred income taxes (benefit) expense............................. (5,225) 7,837 5,791
Extraordinary loss, net of taxes...................................... 1,113
Net change in loans held for sale..................................... (46,680) (4,978) (40,144)
Other, net............................................................ (34,259) 3,708 (13,180)
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES................... (59,287) 38,203 (5,871)
INVESTING ACTIVITIES
Purchases of investment securities available for sale................. (37,271) (24,508) (93,882)
Proceeds from sales of investment securities available for sale....... 65,376
Proceeds from maturities of investment securities available for
sale................................................................ 26,000 20,000 28,906
Purchases of mortgage-backed securities available for sale............ (397,935) (196,485) (7,052)
Proceeds from sale of mortgage-backed securities available for sale... 202,970 119,117 4,662
Purchases of mortgage-backed securities held to maturity.............. (241,518) (203,992)
Payments received on mortgage-backed securities....................... 59,397 9,907 15,470
Net change in loans................................................... 58,128 (289,353) 311,489
Purchases of loans.................................................... (203) (45,373) (210)
Additions to premises and equipment................................... (11,182) (5,984) (4,153)
Dispositions of real estate owned..................................... 17,583 51,694 112,506
Purchases of FHLB stock............................................... (6,842) (9,440) (494)
Proceeds from sales of FHLB stock..................................... 1,692 2,532 3,602
Increase in trust receivable.......................................... (41,604) (17,819) (11,964)
Increase in trustee accounts.......................................... 125,489 33,299 39,456
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES................... (245,296) (556,405) 463,712
FINANCING ACTIVITIES
Increase (decrease) in deposits....................................... 120,693 275,724 (325,839)
Increase in securities sold under agreements to repurchase............ 107,950 246,074
Increase (decrease) in FHLB advances.................................. 103,000 (37,000) (58,500)
(Decrease) increase in short-term borrowings.......................... (98,248) 59,682 (132,156)
Proceeds from issuance of subordinated debentures..................... 120,524
Retirement of subordinated debentures................................. (16,918) (44,858)
Proceeds from sale of common stock.................................... 2,166 1,220 35,490
Minority interest..................................................... 21,965
Issuance of subsidiary common stock................................... 52,341
Cash dividends........................................................ (8,692) (6,844) (3,948)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................... 301,175 521,938 (409,287)
---------- ---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................... (3,408) 3,736 48,554
Cash and equivalents at beginning of period........................... 166,293 162,557 114,003
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 162,885 $ 166,293 $ 162,557
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................................. $ 139,563 $ 87,761 $ 98,196
Income taxes.......................................................... 28,050 10,100 8,814
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Acquisition of real estate acquired through foreclosure............... $ 32,200 $ 39,569 $ 97,965
Securitization of loans............................................... 108,033
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 61
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Westcorp ("Westcorp"), its wholly-owned subsidiaries,
Westran Services Corp. and Western Financial Savings Bank, F.S.B. ("the Bank")
and the Bank's subsidiaries. All significant intercompany accounts and
transactions have been eliminated upon consolidation. Certain prior year amounts
have been reclassified to conform with the current year's presentation.
WFS Financial Inc ("WFS") was created in 1995 by the combination of the
Bank's consumer finance division and the Bank's subsidiaries, Westcorp Financial
Services, Inc., Western Financial Auto Loans, Inc. and Western Financial Auto
Loans 2, Inc. On August 8, 1995, WFS sold to the public 4.6 million shares of
common stock at a price of $16.50 per share raising $70.1 million in additional
capital. The Bank retained an ownership interest in WFS of 80%. The remaining
interest is traded on the National Association of Security Dealers Automated
Quotation System ("NASDAQ") under the ticker symbol "WFSI".
On December 21, 1995, the Bank acquired an 80% ownership interest in WF
Mortgage Corporation ("WFMC") which in turn owns all the outstanding capital
stock of The Hammond Company ("THC"), a privately held mortgage banking company
located in California for $5.4 million. THC's principal business is the
origination and sale of residential mortgage loans in the states of Arizona,
California, Hawaii, Nevada and Oregon. THC has 14 retail loan origination
offices and two wholesale offices.
Nature of Operations: Westcorp is a financial services holding company
which specializes in automobile lending and residential real estate lending. At
December 31, 1995, Westcorp performed this function through 137 offices located
in 17 states.
Cash and Cash Equivalents: Cash and cash equivalents include cash,
interest-bearing deposits with other financial institutions and other short-term
investments which have no material restrictions as to withdrawal or usage.
Investment Securities and Mortgage-Backed Securities Held to
Maturity: Westcorp holds certain investment securities and mortgage-backed
securities which management has both the intent and the ability to hold until
maturity. Accordingly, these securities are carried at their amortized cost.
Unrealized holding gains and losses are not reported in the financial statements
until realized or until a decline in fair value below cost is deemed to be other
than temporary.
Westcorp also enters into various off-balance sheet transactions, primarily
interest rate cap agreements, to manage interest rate risk exposure on its held
to maturity portfolio. These financial instruments are recorded at cost and are
amortized to interest income over the life of the agreement. The interest rate
differential to be received is accrued and included as part of interest income,
thereby adjusting the overall yield on securities for which management is
attempting to reduce its exposure to interest rate risk.
Investment Securities and Mortgage Backed Securities Available for
Sale: Investments and mortgage-backed securities intended to be held for an
indefinite period of time but which may be sold in response to events reasonably
expected in the foreseeable future are classified as available for sale and
carried at fair value. Unrealized holding gains and losses on such investments
are recorded as a separate component of shareholders' equity, net of income
taxes. Any decline in the fair value of the investments which is deemed to be
other than temporary is charged against current earnings.
Westcorp enters into various off-balance sheet transactions, primarily
interest rate swaps, caps, floors and options agreements to manage interest rate
risk exposure on its available for sale portfolios. These financial instruments
are also recorded at fair value and are included in the basis of the designated
available for sale securities. The interest rate differential to be paid or
received is accrued and included as part of interest
F-7
<PAGE> 62
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
income, thereby adjusting the overall yield on securities for which management
is attempting to reduce its exposure to interest rate risk.
Allowance for Loan Losses: The allowance for loan losses is maintained at
a level believed adequate by management to absorb potential losses in the loan
portfolios. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income.
Sales of Receivables: Certain mortgage and automobile loans are originated
and sold to investors with servicing rights retained by Westcorp. Gains and
losses on sales of loans are determined by the difference between sales proceeds
and the cost of the loans, adjusted for the present value of the difference, if
any, between the estimated future servicing revenues and normal servicing
revenues for those loans where servicing is retained by Westcorp. These excess
servicing rights are capitalized and amortized over the expected repayment
patterns of the underlying loans.
Westcorp also purchases mortgage servicing rights, referred to as purchased
mortgage servicing rights ("PMSRs"). PMSRs are amortized using the income
forecast method.
Westcorp periodically evaluates the carrying value of its capitalized
servicing rights in light of the actual experience of the underlying loans and
makes adjustments to reduce the carrying value where appropriate. Servicing
income and amortization of excess servicing rights and PMSRs are included in
automobile lending and mortgage banking income in the Consolidated Statements of
Income.
As a servicer of securitized automobile loans, Westcorp holds and remits
funds collected from the borrowers on behalf of the trustee. These amounts are
reported as amounts held on behalf of trustee.
Nonaccrual Loans: Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest is suspended on all real estate loans when, in
management's judgement, the interest will not be collectible in the normal
course of business or when the loan is 90 days or more past due or full
collection of principal is not assured. When a loan is placed on nonaccrual,
interest accrued is reversed against interest income. Interest income is
suspended on all loans, except consumer loans. On these loans, interest
continues to accrue until the loan is charged off, which occurs automatically
after the loan is past due 120 days.
In January 1995, Westcorp adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," amended
in October 1994 by Statement of Financial Accounting Standards No. 118
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures," hereinafter collectively referred to as SFAS 114. Under SFAS 114 a
loan is considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan. SFAS 114 applies to all loans except large
groups of smaller-balance homogenous loans, which are collectively evaluated,
loans measured at fair value or at the lower of cost or fair value, leases and
debt securities. The statement does not address the overall adequacy of the
allowance for credit losses. When a loan is identified as "impaired," accrual of
interest ceases and any amounts that are recorded as receivable are reversed out
of interest income.
Westcorp's impaired loans include only multifamily mortgage loans
classified as nonperforming loans. Westcorp measures its impaired loans by using
the fair value of the collateral. The difference between the recorded investment
of the impaired loan and the fair value of the loan is defined as the impairment
allowance. The impairment allowance is considered by Westcorp in determining the
overall adequacy of the allowance for credit losses. The adoption of SFAS 114
resulted in no material change in the unallocated portion of the allowance for
credit losses.
F-8
<PAGE> 63
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Loans Held for Sale: Loans held for sale are stated at the lower of
aggregate amortized cost or market. The carrying amount of the specific loan
pools sold is used to compute gains or losses. Market value is based on
prevailing market quotes for real estate loans and discounted cash flow
calculations for consumer loans.
Westcorp enters into forward agreements to hedge the value of its loans
held for sale. Gains or losses on these forward agreements are deferred and
included in the basis of the loans held for sale and realized at the time of
sale.
Premises and Equipment: Premises and equipment are recorded at cost and
depreciated over their estimated useful lives principally using the straight
line method for financial reporting and accelerated methods for tax purposes.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter.
Real Estate Owned: Real estate acquired through foreclosure is recorded at
the lower of cost or fair value less estimated costs to sell. Costs of holding
this real estate, and related gains and losses on disposition, are credited or
charged to real estate operations as incurred. These values are periodically
reviewed and reduced, if appropriate.
Real estate owned is carried net of an allowance for potential losses which
is maintained at a level believed adequate by management to absorb any potential
losses in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the past loss experience, current
economic conditions, selling costs and other relevant factors.
Excess of Purchase Cost over Net Assets Acquired: The excess of amounts
paid over the fair value of assets acquired of a business purchased in 1982 is
being amortized over twenty-five years, using the straight-line method.
Interest Income and Fee Income: Interest income on real estate and some
consumer loans is earned using the effective yield method and classified on the
balance sheet as interest receivable to the extent not collected. Certain retail
installment sales contracts use the sum of the months digits method, which
approximates the interest method.
Westcorp defers loan origination and commitment fees and certain loan
origination costs. The net amount is amortized as an adjustment to the related
loan's yield over the contractual life of the related loans. Commitment fees
based on a percentage of a customer's unused line of credit are recognized over
the commitment period. Fees for other services are recorded as income when
earned.
Insurance Commissions: Commissions on insurance policies sold are
recognized as income over the life of the policies.
Insurance Premiums: Premiums for life and accident/health insurance
policies are recognized as income over the term of the insurance contract.
Income Taxes: Westcorp files consolidated federal and state tax returns
with all its subsidiaries except for Westhrift, which files separate tax
returns.
Net Income Per Common Share: Net income per common share is based on
average shares outstanding during each year plus the net effect of dilutive
stock options.
Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-9
<PAGE> 64
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Current Accounting Pronouncements: Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights", ("SFAS 122") was
issued by the Financial Accounting Standards Board in May 1995 and amended
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities", ("SFAS 65"). SFAS 122 requires capitalization of
the cost of mortgage servicing rights, regardless of whether the underlying
mortgages are purchased or originated and is effective for fiscal years
beginning after December 15, 1995. Adoption of this statement will not have a
material impact on the capitalized mortgage servicing rights of Westcorp.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 permits companies to recognize
compensation expense associated with stock-based compensation plans over the
anticipated service period based on the fair value of the award on the date of
grant. However, SFAS 123 allows companies to continue to measure compensation
costs as prescribed by APB Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25"). Companies electing to continue accounting for stock-based
compensation plans under APB 25 must make pro forma disclosures of net income
and earnings per share, as if SFAS 123 had been adopted. SFAS 123 is effective
for fiscal years beginning after December 15, 1995. The Company anticipates that
it will continue its current policy which is to account for stock-based
compensation plans under APB 25.
NOTE 2 -- INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity consisted of U.S. Treasury
securities and obligations of other U.S. Government agencies and corporations
with amortized costs of $1.5 million, gross unrealized losses of $13.0 thousand
and fair value of $1.5 million with maturities within one to five years.
NOTE 3 -- INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consisted of the following at
December 31:
<TABLE>
<CAPTION>
1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other U.S.
Government agencies and corporations................ $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>
<TABLE>
<CAPTION>
1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other U.S.
Government agencies and corporations................ $119,013 $7,336 $111,677
Obligations of states and political subdivisions...... 3,524 462 3,062
Other................................................. 25 25
-------- -------- ------ --------
$122,562 $7,798 $114,764
======== ======== ====== ========
</TABLE>
F-10
<PAGE> 65
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
At December 31, 1995, the stated maturities of investment securities
available for sale were as follows:
<TABLE>
<CAPTION>
ONE YEAR TO FIVE YEARS TEN YEARS
UP TO ONE YEAR FIVE YEARS TO TEN YEARS OR MORE
------------------- ------------------- ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
other U.S. Government agencies and
corporations.............................. $32,115 $32,191 $98,191 $97,861
Obligations of states and political
subdivisions.............................. $ 1,007 $1,005 $ 2,514 $2,436
Other....................................... 25 25
------- ------- ------- ------- ------ ------ ------ ------
$32,115 $32,191 $98,216 $97,886 $ 1,007 $1,005 $ 2,514 $2,436
======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
NOTE 4 -- MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following at
December 31:
<TABLE>
<CAPTION>
1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR 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>
<TABLE>
<CAPTION>
1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates..................................... $ 208,307 $ 246 $ 6,539 $ 202,014
FNMA participation certificates....................... 108,033 4,752 103,281
Other participation certificates...................... 171 171
-------- ---- ------- --------
$ 316,511 $ 246 $ 11,291 $ 305,466
======== ==== ======= ========
</TABLE>
Westcorp's mortgage-backed securities held to maturity had maturities at
December 31, 1995 of ten years or more, although payments are generally received
monthly throughout the life of these securities.
F-11
<PAGE> 66
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 5 -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale consisted of the following at
December 31:
<TABLE>
<CAPTION>
1995
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR 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>
<TABLE>
<CAPTION>
1994
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates..................................... $ 50,637 $1,572 $1,036 $ 51,173
FNMA participation certificates....................... 80,622 2,788 77,834
FHLMC participation certificates...................... 3,082 85 2,997
Collateralized mortgage obligations................... 22,543 389 22,154
-------- ------ ------ --------
$ 156,884 $1,572 $4,298 $ 154,158
======== ====== ====== ========
</TABLE>
Proceeds from the sale of mortgage-backed securities available for sale
totalled approximately $203 million and $119 million in 1995 and 1994,
respectively. Westcorp had gross gains of $3.1 million and $2.0 million in 1995
and 1994, respectively, and gross losses of $49.0 thousand and $1.7 million in
1995 and 1994, respectively.
Westcorp's mortgage-backed securities available for sale had maturities at
December 31, 1995, of ten years or more, although payments are generally
received monthly throughout the life of these securities.
Westcorp has issued certain mortgage-backed securities that include
recourse provisions. Subject to certain limitations, Westcorp is required, for
the life of the loans, to repurchase the buyer's interest in individual loans on
which foreclosure proceedings have been completed. Securities with recourse
issued by Westcorp had a total outstanding balance of $198 million and $220
million at December 31, 1995 and 1994, respectively.
Westcorp has provided for possible losses that may occur as a result of its
recourse obligations. The maximum remaining exposure under these recourse
provisions at December 31, 1995 and 1994 was $127 and $128 million,
respectively. Westcorp has pledged $32.5 and $30.1 million of securities as
collateral under these recourse provisions at December 31, 1995 and 1994,
respectively.
F-12
<PAGE> 67
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 6 -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Mortgage......................................................... $1,406,167 $1,308,585
Construction..................................................... 8,469 19,813
---------- ----------
1,414,636 1,328,398
Less: Undisbursed loan proceeds.................................... 4,672 7,614
---------- ----------
1,409,964 1,320,784
Consumer:
Sales contracts.................................................. 353,345 507,772
Other............................................................ 20,908 5,698
Less: unearned discounts......................................... 38,628 82,762
---------- ----------
335,625 430,708
---------- ----------
1,745,589 1,751,492
Allowance for loan losses.......................................... (39,260) (41,323)
Net deferred loan costs............................................ 1,627 5,389
---------- ----------
1,707,956 1,715,558
Less: Loans held for sale
Mortgage......................................................... 148,616 2,954
Consumer......................................................... 219,917 301,552
---------- ----------
368,533 304,506
---------- ----------
$1,339,423 $1,411,052
========== ==========
</TABLE>
Loans serviced by Westcorp for the benefit of others totalled approximately
$5.6 billion, $2.9 billion and $2.2 billion at December 31, 1995, 1994, and
1993, respectively. These amounts are not reflected in the accompanying
Consolidated Financial Statements.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year............................... $ 41,323 $ 39,677 $ 40,656
Provision for loan losses.................................. 11,470 13,033 22,584
Chargeoffs................................................. (19,187) (19,219) (32,507)
Recoveries................................................. 4,754 7,832 8,944
Transfers from the allowance for real estate losses........ 800
Business acquisition....................................... 100
-------- -------- --------
Balance at end of year..................................... $ 39,260 $ 41,323 $ 39,677
======== ======== ========
</TABLE>
F-13
<PAGE> 68
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Land............................................................. $20,443 $20,396
Buildings and improvements....................................... 50,354 49,206
Furniture and equipment.......................................... 25,330 19,666
Automobiles and airplane......................................... 1,995 205
------- -------
98,122 89,473
Less: Accumulated depreciation and amortization.................. 28,070 23,008
------- -------
$70,052 $66,465
======= =======
</TABLE>
NOTE 8 -- NONPERFORMING ASSETS
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Loans 90 days or more past due................................... $10,950 $13,950
Performing, nonaccrual loans..................................... 3,717
Impaired loans................................................... 7,450
------- -------
$18,400 $17,667
======= =======
</TABLE>
Interest forgone on nonaccrual loans was $0.8 million, $0.9 million and
$1.2 million for the years ended December 31, 1995, 1994 and 1993, respectively.
The following table presents a breakdown of impaired loans and the
impairment allowance related to impaired loans at December 31:
<TABLE>
<CAPTION>
1995
----------
(DOLLARS
IN
THOUSANDS)
<S> <C>
Recorded investment with allowance...................................... $3,057
Less: Impaired allowance................................................ 1,097
------
1,960
Recorded investment without allowance................................... 5,490
------
$7,450
======
</TABLE>
For the year ended December 31, 1995, the impaired loans average was $5.8
million. For the year ended December 31, 1995, Westcorp recognized $0.8 million
of interest income on impaired loans, all of which was recognized on a cash
basis.
F-14
<PAGE> 69
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Real estate owned consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure......................... $10,828 $25,611
Less: Allowance for losses....................................... 784 1,684
------ ------
$10,044 $23,927
====== ======
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1995 1994 1993
------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.......................... $1,684 $ 3,508 $ 20,185
Provision for real estate losses...................... (100) (2,106) (6,489)
Chargeoffs, net....................................... 282 (10,188)
Transfers to the allowance for loan losses............ (800)
----- ----- ------
Balance at end of year................................ $ 784 $ 1,684 $ 3,508
===== ===== ======
</TABLE>
NOTE 9 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest on loans receivable..................................... $ 9,817 $ 7,633
Interest on securities........................................... 7,604 5,115
Interest on other................................................ 55 561
------ ------
$17,476 $13,309
====== ======
</TABLE>
NOTE 10 -- SAVINGS DEPOSITS
Savings deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE
FOR THE YEAR
ENDED
1995 1995 1994
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts.......................... 3.04% $ 65,293 $ 104,085
Money market deposit accounts.............. 3.11 602 801
Certificate accounts....................... 5.92 1,687,580 1,527,896
---------- ----------
$1,753,475 $1,632,782
========== ==========
</TABLE>
The aggregate amount of certificate accounts in denominations greater than
or equal to $100,000 at December 31, 1995 was $383 million.
F-15
<PAGE> 70
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Scheduled maturities of certificate accounts as of December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AMOUNT
-------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Six months or less........................ 5.79% $ 702,778
More than six months through one year..... 5.81 572,819
More than one year through three years.... 6.63 374,644
More than three years through five
years................................... 6.73 37,339
----------
$1,687,580
==========
</TABLE>
Interest expense on savings deposits consisted of the following for the
year ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts............................................ $ 2,367 $ 3,895 $ 5,125
Money market deposit accounts................................ 20 33 36
Certificate accounts......................................... 98,977 64,367 71,155
-------- ------- -------
$101,364 $68,295 $76,316
======== ======= =======
</TABLE>
The following table summarizes certificate accounts by interest rate within
maturity categories at:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER TOTAL
---------- -------- -------- ------ ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0%-3.99%.................. $ 6,547 $ 36 $ 36 $ 6,619
4.00%-5.99%............... 885,686 72,021 24,053 $1,847 $ 2,834 $ 5 986,446
6.00%-7.99%............... 383,148 241,558 36,757 5,842 26,811 694,116
8.00%-9.99%............... 216 161 22 399
---------- -------- ------- ------- ------- --- ----------
$1,275,597 $313,776 $ 60,868 $7,689 $29,645 $ 5 $1,687,580
========== ======== ======= ======= ======= === ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999 THEREAFTER TOTAL
---------- -------- -------- ------ ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0%-3.99%................. $ 62,718 $ 2,303 $ 232 $ 65,253
4.00%-5.99%.............. 976,405 111,386 10,402 $5,539 $ 3,148 $ 13 1,106,893
6.00%-7.99%.............. 118,884 55,345 171,233 5,503 350,965
8.00%-9.99%.............. 4,420 209 156 4,785
---------- ------- ------- ------ ------ --- ----------
$1,162,427 $169,243 $182,023 $5,539 $ 8,651 $ 13 $1,527,896
========== ======= ======= ====== ====== === ==========
</TABLE>
F-16
<PAGE> 71
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 11 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at end of period, including accrued interest................... $355,188 $247,242
Average amount outstanding during the period........................... 325,926 51,401
Maximum amount outstanding during the period........................... 411,218 266,641
Weighted average interest rate during the period....................... 5.8% 3.6%
Weighted average interest rate at end of period........................ 5.8 4.3
</TABLE>
Mortgage-backed securities available for sale sold under dollar reverse
repurchase agreements were delivered to dealers who arranged the transactions.
The dealers may have sold, loaned, or otherwise disposed of such securities to
other parties in the normal course of their operations, and have agreed to
resell to Westcorp substantially identical securities at the maturities of the
agreements. The agreements at December 31, 1995 and 1994, mature with terms
between 30 to 90 days.
NOTE 12 -- SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1995 and 1994, respectively,
consisted of a commercial paper line with the Federal Home Loan Bank ("FHLB")
and a revolving line of credit with two banks.
The FHLB line totalled $67.9 million and $211 million at December 31, 1995
and 1994, respectively, net of discount (1995, $66.1 thousand; 1994, $0.9
million). The line is collateralized by eligible mortgage loans with an approved
line of up to $400 million in 1995 and 1994, and a weighted average interest
rate of 6.0% at December 31, 1995 and 1994. The maximum amount of commercial
paper outstanding at any month-end during 1995 and 1994 was $240 million and
$222 million, respectively. The average amount of commercial paper outstanding
during 1995 and 1994 was $124 million and $66.6 million, respectively, with a
weighted average interest rate of 6.0% and 4.7% for December 31, 1995 and 1994,
respectively.
Westcorp has a $40.0 million revolving line of credit (warehouse line),
which is the maximum available and outstanding, with two banks under an
agreement to finance certain mortgage loans held for sale. The weighted average
interest rate at December 31, 1995 was 6.6%
NOTE 13 -- FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB are collateralized by the pledge of certain real
estate loans with an uncollected principal balance of approximately $523 million
and $713 million at December 31, 1995 and 1994, respectively.
F-17
<PAGE> 72
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Information as to interest rates and maturities on the advances from the
FHLB as of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Range of interest rates....................................... 5.4%-8.5% 5.6%-8.5%
Weighted average interest rate................................ 6.3 7.4
Year due:
1995........................................................ $ 17,000
1996........................................................ $ 147,000 27,000
1997........................................................ 32,000 32,000
1998........................................................
1999........................................................ 6,500 6,500
Thereafter.................................................... 6,500 6,500
--------- ---------
$ 192,000 $ 89,000
========= =========
</TABLE>
Westcorp had an unused line of credit with the FHLB at December 31, 1995 of
approximately $263 million.
NOTE 14 -- SUBORDINATED DEBENTURES
Subordinated capital debentures of the Bank ("subordinated debentures") at
December 31, 1995 and 1994 totalled $104 million, net of discount (1995, $3.0
million; 1994, $3.5 million). The subordinated debentures are unsecured with an
interest rate of 8.5% due in 2003. They are redeemable, in whole or in part, at
the option of the Bank, on or after July 1, 2000 at 100% of the principal amount
being redeemed plus accrued interest to the date of redemption. For regulatory
purposes, the subordinated debentures, subject to certain limitations, are
included as part of the Bank's supplementary capital.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more were as follows at December 31:
<TABLE>
<CAPTION>
1995
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
1996....................................... $ 3,521
1997....................................... 3,031
1998....................................... 2,692
1999....................................... 1,737
2000....................................... 993
Thereafter................................. 2,229
-------
$14,203
=======
</TABLE>
Rental expense for premises and equipment amounted to $3.2 million, $2.5
million and $2.0 million in 1995, 1994 and 1993, respectively.
F-18
<PAGE> 73
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Westcorp's outstanding loan commitments were as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
-------- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Commitments to fund mortgage loans:
Fixed rate loans............................................... $158,305 $ 513
Variable rate loans............................................ 53,137 7,969
-------- ------
$211,442 $8,482
======== ======
Commitments to sell mortgage loans............................... $158,724 $2,696
======== ======
</TABLE>
Westcorp has pledged certain assets relative to amounts held on behalf of
trustees as follows at December 31:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
FNMA participation certificates................................ $ 85,038 $ 29,901
FHLMC participation certificates............................... 33,510
GNMA certificates.............................................. 73,582
Consumer loans................................................. 133,610
Residential second mortgages................................... 67,644 78,966
Multifamily first mortgages.................................... 83,462 89,937
------- --------
Total collateral pledged............................. $343,236 $332,414
======== ========
</TABLE>
In 1994, WFS, the consumer lending subsidiary of the Bank, was served with
a class action lawsuit entitled Denise Whitehouse et al. v. Westcorp Financial
Services, Inc. Contra Costa Superior Court Case No. C94-01930, filed in May 1994
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. In addition, the Bank was 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 in July 1995. The lawsuit asserts certain allegations relating to the
"forced placement" of collateral protection insurance, similar to the lawsuit
against WFS.
A settlement agreement on both class action lawsuits was reached. On
December 22, 1995, the court entered a preliminary approval order that the
settlement is preliminarily approved as fair, reasonable and adequate. The terms
of the settlement include a settlement fund of $3.4 million in cash, which is
accrued. A final hearing will be held on March 29, 1996 to determine whether the
proposed settlement is fair, reasonable and adequate and should be approved.
Westcorp is also involved as a party to certain immaterial legal
proceedings incidental to its business. Management of Westcorp believes that the
outcome of such proceedings will not have a material effect upon its business or
financial condition.
NOTE 16 -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In 1986, Westcorp reserved 945,000 shares of common stock for future
issuance to certain employees under an incentive stock option plan. Reserved,
unoptioned shares totalled 370,019 and 369,723 shares at December 31, 1995 and
1994, respectively. The options may be exercised, when vested, at $6.91 per
share, in whole or in part, within five years after the date of grant.
F-19
<PAGE> 74
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
In 1991, Westcorp reserved an additional 3,150,000 shares of common stock
for future issuance to certain employees under a stock option plan. Reserved,
unoptioned shares totalled 2,468,630 and 2,469,273 shares at December 31, 1995
and 1994, respectively. The options may be exercised, when vested, at prices
ranging from $7.35 to $13.00 per share, in whole or in part, within five years
after the date of grant.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
PRICE PER
SHARES SHARE
-------- -----------
<S> <C> <C>
Outstanding at December 31, 1992............................ 545,866 $6.16-10.79
Issued.................................................... 429,518 8.39- 9.52
Exercised................................................. (27,757) 6.16- 8.39
Cancelled................................................. (213,685) 6.48-10.79
------- ----------
Outstanding at December 31, 1993............................ 733,942 6.91-10.79
Issued.................................................... 319,632 6.91-10.84
Exercised................................................. (160,957) 6.91- 8.39
Cancelled................................................. (89,581) 6.91- 9.89
------- ----------
Outstanding at December 31, 1994............................ 803,036 6.91-10.84
Issued.................................................... 29,500 6.91-13.00
Exercised................................................. (261,642) 6.91-10.84
Cancelled................................................. (29,153) 6.91-10.84
------- ----------
Outstanding at December 31, 1995............................ 541,741 $6.91-13.00
======= ==========
</TABLE>
At December 31, 1995, there were 17,365 and 201,508 exercisable stock
options under the 1986 and 1991 plans, respectively.
Westcorp has adopted an Employee Stock Appreciation Rights Plan (the "SAR
Plan"), whereby WFS Stock Appreciation Rights ("SARs") may be granted to
officers and other key employees of WFS, as determined by the Board of Directors
of WFS. Under the SAR Plan, optionees are entitled to surrender unexercised SARs
for cash equal to the excess of the fair market value of the surrendered SARs
over the option value of such SARs. Terms of the SARs vary by individual and are
determined by the Board of Directors, but are not in excess of 5 years.
During 1995, 509,336 SARs were granted with the price per share ranging
from $16.50 to $19.50. At December 31, 1995, Westcorp has accrued $1.2 million
of compensation expense for the 380,568 SARs that were vested and exercisable.
NOTE 17 -- REGULATORY CAPITAL
The Bank is subject to three capital standards: (i) a tangible capital
requirement; (ii) a leverage (core) ratio; and (iii) a risk-based capital
requirement. The Bank exceeds all current capital standards.
F-20
<PAGE> 75
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
A reconciliation of the Bank's capital under generally accepted accounting
principles (GAAP) as included in its Consolidated Statements of Financial
Condition and regulatory capital at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Bank shareholder's equity-GAAP basis........ $253,443 $253,443 $253,443
Adjustment: Unrealized gains under SFAS
115....................................... (186) (186) (186)
Less: Non-permissible activities at required
phase-in.................................. (6,044) (6,044) (6,044)
Add: Minority interest in equity of
subsidiaries.............................. 21,965 21,965 21,965
Less: Excess qualifying PMSRs............... (1,284) (1,284) (1,284)
Supplemental capital:
Subordinated debentures(3)................ 106,466
General loan valuation allowance.......... 37,438
Less: Fully capitalized assets............ (14,858)
Equity investments........................ (5,688)
-------- -------- --------
Regulatory capital.......................... 267,894 8.32 %(1) 267,894 8.32 %(1) 391,252 11.42%(2)
Minimum regulatory capital requirement...... 48,290 1.50 96,579 3.00 274,173 8.00
-------- -------- --------
Excess capital.............................. $219,604 $171,315 $117,079
======== ======== ========
</TABLE>
- ---------------
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
(3) Excludes capitalized discounts and issue costs.
NOTE 18 -- DIVIDENDS
Westcorp paid cash dividends of $0.36, $0.29 and $0.18 per share for the
years ended December 31, 1995, 1994 and 1993, respectively. Westcorp declared a
stock dividend of 5% in 1995 and 1994.
NOTE 19 -- PENSION PLAN
Westcorp has an Employee Stock Ownership and Salary Savings Plan ("Plan"),
which covers essentially all full-time employees who have completed one year of
service. Contributions to the Plan are discretionary and determined by the Board
of Directors within limits set forth under ERISA. Contributions to the Plan are
fully expensed in the year to which the contribution applies.
Westcorp's contribution to the Plan amounted to $2.4 million, $1.2 million
and $1.0 million in 1995, 1994 and 1993, respectively.
F-21
<PAGE> 76
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 20 -- INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................................... $23,141 $ 4,271 $2,844
State........................................................ 7,319 1,711 940
------- ------- ------
30,460 5,982 3,784
Deferred:
Federal...................................................... (4,909) 5,994 4,802
State........................................................ (316) 1,843 989
------- ------- ------
(5,225) 7,837 5,791
------- ------- ------
$25,235 $13,819 $9,575
======= ======= ======
</TABLE>
A reconciliation of total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate.......................................... $21,550 $11,423 $8,530
State tax (net of Federal tax benefit)......................... 3,685 2,396 1,688
Tax on extraordinary item...................................... (811)
Other.......................................................... 168
------- ------- ------
$25,235 $13,819 $9,575
======= ======= ======
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
F-22
<PAGE> 77
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Significant components of Westcorp's deferred tax liabilities and assets as
of December 31, 1995 and 1994 are as follows:
DEFERRED TAX POSITION
ASSETS/(LIABILITIES)
<TABLE>
<CAPTION>
1995 1994
------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss reserves...................................................... $ 9,957 $ 16,189
Joint venture losses and write-downs in excess of tax losses............ 1,169 1,407
Grantor trust income recognized for tax purposes........................ 1,679 2,072
Deferred compensation accrual........................................... 2,549 1,946
SFAS 115 deferred taxes................................................. 4,525
Mark to market.......................................................... 510
Other -- net............................................................ 3,602
-------- ---------
Total deferred tax assets................................................. 19,466 26,139
Deferred tax liabilities:
Loan fee income deferred for tax purposes............................... (3,725) (3,335)
FHLB dividends.......................................................... (3,195) (2,648)
Accelerated depreciation for tax purposes............................... (1,256) (1,396)
Loan costs.............................................................. (1,419) (1,810)
SFAS 115 deferred taxes................................................. (140)
Mark to market.......................................................... (3,092)
Other -- net............................................................ (4,559)
-------- ---------
Total deferred tax liabilities............................................ (9,735) (16,840)
-------- ---------
Net deferred tax asset.................................................... $ 9,731 $ 9,299
======== =========
</TABLE>
F-23
<PAGE> 78
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 21 -- BUSINESS SEGMENT DATA
In addition to its principal operations as a savings and loan institution,
Westcorp conducts a significant amount of automobile lending as presented below
at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Automobile lending................................... $ 135,203 $ 108,690 $ 94,297
Savings and loan operations.......................... 191,528 118,138 137,488
Operating profit:
Automobile lending................................... $ 62,645 $ 43,251 $ 41,184
Savings and loan operations.......................... 20,227 9,818 4,019
General corporate expenses........................... (21,301) (20,430) (20,830)
---------- ---------- ----------
Pretax income..................................... $ 61,571 $ 32,639 $ 24,373
========== ========== ==========
Identifiable assets:
Automobile lending................................... $ 583,588 $ 542,962 $ 323,140
Savings and loan operations.......................... 2,614,569 2,164,852 1,811,541
General corporate assets............................. 24,641 34,475 37,578
---------- ---------- ----------
Total assets...................................... $3,222,798 $2,742,289 $2,172,259
========== ========== ==========
</TABLE>
The automobile lending operations involve the purchase, origination, sale
and servicing of automobile loans and contracts. The savings and loan operations
include activities normally associated with a savings and loan including
residential lending, deposit gathering and other ancillary services. The
revenues for each segment are generated through lending and related activities
from unaffiliated customers.
Operating profit is revenues less interest costs, provision for loan losses
and general and administrative costs. Interest expense was allocated based on
the interest earning assets of each segment using Westcorp's weighted average
cost of funds. Operating profit does not include general corporate expense or
income taxes. Identifiable assets are those assets used in the operations of
each segment.
NOTE 22 -- FINANCIAL INSTRUMENT AGREEMENTS
Westcorp uses interest rate swaps, purchased options, floors and caps to
minimize its exposure to interest rate risk. The fair value of these agreements
may vary substantially with changes in interest rates. At December 31, 1995,
Westcorp's portfolio of such agreements consisted of the following:
<TABLE>
<CAPTION>
NOTIONAL CREDIT
AMOUNT EXPOSURE
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Interest rate swaps..................................... $188,500 $ 7,945
Interest rate caps, floors and options.................. 165,000 3,847
-------- -------
$353,500 $ 11,792
======== =======
</TABLE>
Notional amounts do not represent amounts exchanged by parties and, thus,
are not a measure of Westcorp's exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.
F-24
<PAGE> 79
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
Westcorp's interest rate swaps consist of agreements with other parties to
exchange, at specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an agreed notional
amount and a specified index. Westcorp pays a fixed interest rate and receives a
floating interest rate on all of its interest rate swaps. At December 31, 1995,
the terms of Westcorp's interest rate swaps were to pay a weighted average fixed
rate of 6.6% and to receive a weighted average variable rate of 5.9% maturing
between 1998 and 2002 with collateral requirements ranging from 1.0% to 4.0%.
Variable interest rates may change in the future.
Westcorp purchases interest rate caps, floors and options to effectively
remove lifetime interest rate caps on mortgage-backed securities, to hedge
interest rate fluctuations on assets available for sale and to limit the erosion
of net interest income under extreme increases in interest rates. These
agreements reduce Westcorp's exposure to rising interest rates. The interest
rate cap agreements have strike rates from 7.0% to 8.0% with expiration dates
ranging from 1999 to 2002. The option contracts expire in March 1996 and June
1996. Westcorp purchases interest rate floors to limit the erosion of net
interest income under extreme declines in interest rates. The floor agreement
has a strike rate of 5.75% expiring in October 2000.
The current credit exposure under these agreements is limited to the fair
value of the agreements with a positive fair value at the reporting date. Master
netting agreements are arranged or collateral is obtained through physical
delivery of, or rights to, securities to minimize Westcorp's exposure to credit
losses in the event of nonperformance by counter parties to financial
instruments. Westcorp also minimizes its counter party risk by entering into
agreements only with highly rated counter parties.
Due to a lower than investment grade rating on its subordinated debentures,
the Bank has been required to deliver securities with a market value at December
31, 1995, of approximately $8.8 million, as collateral on its interest rate swap
positions.
NOTE 23 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments: Fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value, are reported using quoted market
prices. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and in many cases, could not be realized in immediate settlement of the
instrument. Fair values for certain financial instruments and all non-financial
instruments are not required to be disclosed. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of Westcorp.
The following methods and assumptions were used by Westcorp in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those assets'
fair values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently,
fair values are based on carrying values. The fair values for fixed-rate
mortgage loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. The
F-25
<PAGE> 80
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Interest rate swaps: Interest rate swaps are carried at fair value as
hedges of available for sale securities. The fair value is determined by
obtaining market quotes from brokers.
Interest rate options, floors and caps: The carrying amount comprises
the unamortized premiums paid for the contracts. The fair value is
estimated by obtaining market quotes from brokers.
Forward agreements: The carrying amount comprises the amount of the
gain deferred on expired agreements. The fair value is estimated by
obtaining market quotes from brokers.
Savings deposits: The fair values disclosed for passbook accounts, and
certain types of money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificate accounts to a schedule of aggregated
expected monthly maturities on time deposits.
Securities sold under agreements to repurchase: The fair value is
estimated by using discounted cash flow analyses, based on Westcorp's
current incremental borrowing rates for similar types of borrowing
arrangements.
Federal Home Loan Bank advances: The fair value is estimated by using
discounted cash flow analyses, based on Westcorp's current incremental
borrowing rates for similar types of borrowing arrangements.
Short-term borrowings: The carrying amounts of a commercial paper line
with the FHLB and a bank line of credit approximate their fair values.
Subordinated debentures: The fair values of the subordinated
debentures are estimated using discounted cash flow analyses, based on the
current incremental borrowing rates for similar types of borrowing
arrangements.
F-26
<PAGE> 81
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
The estimated fair values of Westcorp's financial instruments are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents..................... $ 36,658 $ 36,658 $ 20,902 $ 20,902
Other short term investments.................. 126,227 126,227 145,391 145,393
Investment securities and mortgage-backed
securities................................. 978,097 990,519 578,718 567,472
Loans receivable (including held for sale).... 1,747,216 1,732,371 1,756,881 1,758,870
Financial instrument agreements held for
purposes other than trading:
Interest rate swaps........................... 5,633 5,633 3,186 3,186
Interest rate options, floors and caps........ 3,846 1,722 3,529 3,730
Forward agreements............................ (328) 959 1,566
Fixed rate loan commitments................... 158,305 159,777 513 514
Variable rate loan commitments................ 53,137 53,945 7,969 8,067
Financial liabilities:
Savings deposits.............................. $1,753,475 $1,765,657 $1,632,782 $1,616,048
Securities sold under agreements to
repurchase................................. 354,024 354,091 246,074 246,043
Federal Home Loan Bank advances............... 192,000 192,036 89,000 88,800
Short-term borrowings......................... 112,330 112,330 210,578 210,578
Subordinated debentures....................... 104,360 112,479 103,851 92,810
</TABLE>
NOTE 24 -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets
Cash......................................................... $ 41,219 $ 27,778
Investment in subsidiaries................................... 255,372 182,990
Other........................................................ 1,325 1,725
-------- --------
$297,916 $212,493
======== ========
Liabilities and shareholders' equity
Other liabilities............................................ $ 177 $ 181
-------- --------
177 181
Shareholders' equity........................................... 297,739 212,312
-------- --------
$297,916 $212,493
======== ========
</TABLE>
F-27
<PAGE> 82
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income
Interest............................................ $ 9 $ 127 $ 774
Dividends from subsidiaries......................... 21,500 24,600
Other............................................... 1,128 129 1,592
------- ------- -------
22,637 24,856 2,366
Other expenses........................................ 1,016 1,350 2,417
------- ------- -------
Income (loss) before income taxes and equity in net
income of subsidiaries.............................. 21,621 23,506 (51)
Income tax expense (benefit).......................... 49 (351) (7)
------- ------- -------
Income (loss) before equity in net income of
subsidiaries........................................ 21,572 23,857 (44)
Equity in undistributed net income (loss) of
subsidiaries........................................ 11,856 (5,037) 12,918
------- ------- -------
NET INCOME............................................ $33,428 $18,820 $12,874
======= ======= =======
</TABLE>
F-28
<PAGE> 83
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1994 1993
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 33,428 $18,820 $ 12,874
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses..................................... (104) (475) 568
Amortization of investment discount........................... 10
Amortization of goodwill...................................... 84 85 85
Gain on redemption of subordinated debentures................. (279)
Writedown of investments...................................... 400 400
Infusion of capital to subsidiary............................. (2,000)
Equity in undistributed net income of subsidiaries............ (11,856) 5,037 (12,918)
--------- ------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 19,552 23,867 740
INVESTMENT ACTIVITIES
Proceeds from the redemption of subordinated debentures......... 8,509
Contributions to subsidiaries................................... (25,000)
Proceeds from disposition of subsidiary......................... 1,486
Other, net...................................................... 415 393 129
--------- ------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................................... 415 393 (14,876)
FINANCING ACTIVITIES
Decrease in short-term borrowings............................... (11,650)
Dividends paid.................................................. (8,692) (6,844) (3,948)
Proceeds from sale of common stock.............................. 2,166 1,219 35,491
--------- ------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (6,526) (5,625) 19,893
--------- ------- ---------
INCREASE IN CASH.............................................. 13,441 18,635 5,757
Cash at beginning of year....................................... 27,778 9,143 3,386
--------- ------- ---------
CASH AT END OF YEAR............................................. $ 41,219 $27,778 $ 9,143
========= ======= =========
</TABLE>
F-29
<PAGE> 84
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
NOTE 25 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1995 and 1994. Certain quarterly amounts have been
adjusted to conform with the year-end presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Interest income..................................... $49,056 $54,935 $ 58,194 $59,908
Interest expense.................................... 30,832 34,661 36,595 37,191
Net interest income................................. 18,224 20,274 21,599 22,717
Provision for loan losses........................... 638 4,094 3,641 3,097
Investment and mortgage-backed security gains
(losses).......................................... 507 (21) 698 645
Income before income taxes.......................... 11,334 13,679 17,358 19,200
Income taxes........................................ 4,722 5,656 7,125 7,732
Income before minority interest..................... 6,612 8,023 10,233 11,468
Minority interest in earnings of subsidiaries....... 1,160 1,748
Net income.......................................... 6,612 8,023 9,073 9,720
Net income per common share......................... 0.27 0.32 0.37 0.39
1994
Interest income..................................... $34,090 $31,543 $ 36,268 $41,738
Interest expense.................................... 20,679 18,964 21,920 27,203
Net interest income................................. 13,411 12,579 14,348 14,535
Provision for loan losses........................... 4,241 2,512 3,273 3,007
Investment and mortgage-backed security gains
(losses).......................................... 448 313 (425)
Income before income taxes.......................... 7,176 6,791 8,535 10,137
Income taxes........................................ 3,248 2,692 3,552 4,327
Net income.......................................... 3,928 4,099 4,983 5,810
Net income per common share......................... 0.16 0.17 0.20 0.24
</TABLE>
F-30
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------ ------
<C> <S> <C>
3.1 Certificate of Incorporation*.............................................
3.2 Bylaws*...................................................................
10.1 Westcorp Incentive Stock Option Plan**....................................
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan*................
10.3 Westcorp 1991 Stock Option Plan***........................................
11.1 Statement Re Computation of Earnings Per Share............................ F-31
21.1 Subsidiaries of Westcorp.................................................. F-32
23.1 Consent of Independent Auditors........................................... F-33
27 Financial Data Schedule...................................................
</TABLE>
- ---------------
* Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
** Exhibit previously filed with Westcorp Registration Statement in Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated by reference under
Exhibit Number indicated.
*** Exhibit previously filed with Westcorp Registration Statement on Form S-8
(No. 33-43898), filed December 11, 1991 incorporated by reference under the
Exhibit Number indicated.
F-31
<PAGE> 1
EXHIBIT 11.1
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY
Weighted average shares outstanding..................... 24,429,243 24,237,125 21,837,319
Net effect of diluting stock options.................... 253,630 78,287 35,722
----------- ----------- -----------
Total......................................... 24,682,873 24,315,412 21,873,041
=========== =========== ===========
Net income before extraordinary loss.................... $33,427,505 $18,819,507 $13,987,733
Extraordinary loss...................................... (1,113,486)
----------- ----------- -----------
Net Income.............................................. $33,427,505 $18,819,507 $12,874,247
=========== =========== ===========
Net income per share before extraordinary loss.......... $ 1.35 $ 0.77 $ 0.64
Extraordinary loss per share............................ (0.05)
----------- ----------- -----------
Net income per share.................................... $ 1.35 $ 0.77 $ 0.59
=========== =========== ===========
FULLY DILUTED
Weighted average shares outstanding..................... 24,429,243 24,237,125 21,837,319
Net effect of diluting stock options.................... 296,640 78,287 78,462
----------- ----------- -----------
Total......................................... 24,725,883 24,315,412 21,915,781
=========== =========== ===========
Net income before extraordinary loss.................... $33,427,505 $18,819,507 $13,987,733
Extraordinary loss...................................... (1,113,486)
----------- ----------- -----------
Net income.............................................. $33,427,505 $18,819,507 $12,874,247
=========== =========== ===========
Net income per share before extraordinary loss.......... $ 1.35 $ 0.77 $ 0.64
Extraordinary loss per share............................ (0.05)
----------- ----------- -----------
Net income per share.................................... $ 1.35 $ 0.77 $ 0.59
=========== =========== ===========
</TABLE>
F-32
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF WESTCORP
Westran Services Corp., a California corporation
Western Financial Savings Bank, F.S.B., a federal savings bank
WFS Financial Inc, a California corporation
Western Financial Auto Loans, Inc., a California corporation
Western Financial Auto Loans 2, Inc., a California corporation
Westhrift Life Insurance Company, an Arizona corporation
Western Consumer Services, Inc., a California corporation
Westplan Insurance Agency, Inc., a California corporation
Westplan Investments, a California corporation
Western Reconveyance Company, Inc., a California corporation
WF Mortgage Corporation, a California corporation
The Hammond Company, a California corporation
The Hammond Company, The Mortgage Bankers, a California corporation
Sunstate Insurance, a California corporation
Hammond Service Corp., a California corporation
Westcorp Investments, Inc., a California corporation
F-33
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-8405 and No. 33-43898) pertaining to the Incentive Stock
Option Plan of Westcorp and the Westcorp 1991 Stock Option Plan, respectively,
and in the related prospectus of our report dated January 16, 1996, with respect
to the consolidated financial statements of Westcorp included in the Annual
Report (Form 10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
Los Angeles, California
March 26, 1996
F-34
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 162,196
<INT-BEARING-DEPOSITS> 689
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 473,852
<INVESTMENTS-CARRYING> 513,724
<INVESTMENTS-MARKET> 524,022
<LOANS> 1,745,589
<ALLOWANCE> 39,260
<TOTAL-ASSETS> 3,222,798
<DEPOSITS> 1,753,475
<SHORT-TERM> 466,354
<LIABILITIES-OTHER> 408,870
<LONG-TERM> 296,360
0
0
<COMMON> 24,563
<OTHER-SE> 273,176
<TOTAL-LIABILITIES-AND-EQUITY> 3,222,798
<INTEREST-LOAN> 162,394
<INTEREST-INVEST> 54,037
<INTEREST-OTHER> 5,662
<INTEREST-TOTAL> 222,093
<INTEREST-DEPOSIT> 101,364
<INTEREST-EXPENSE> 139,279
<INTEREST-INCOME-NET> 82,814
<LOAN-LOSSES> 11,470
<SECURITIES-GAINS> 1,829
<EXPENSE-OTHER> 115,433
<INCOME-PRETAX> 61,571
<INCOME-PRE-EXTRAORDINARY> 33,428
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,428
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<YIELD-ACTUAL> 3.16
<LOANS-NON> 18,400
<LOANS-PAST> 526
<LOANS-TROUBLED> 23,622
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 41,323
<CHARGE-OFFS> 19,187
<RECOVERIES> 4,754
<ALLOWANCE-CLOSE> 39,260
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
