<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---- ----
COMMISSION FILE NUMBER 1-9910
-----------------------------
WESTCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
-----------------------------------------
(Address of principal executive offices)
(714) 727-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
----- -----
As of April 30, 1996, the registrant had 24,620,619 outstanding shares of common
stock, $1.00 par value. The shares of common stock represent the only class of
common stock of the registrant.
The total number of sequentially numbered pages is 30.
<PAGE> 2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1996
TABLE OF CONTENTS
-------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
Exhibit 11 Computation of Earnings Per Share 30
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short term investments $ 168,739 $ 162,885
Investment securities held to maturity (fair value 1996: $1,831; 1995: $1,493) 1,844 1,506
Investment securities available for sale 132,335 133,518
Mortgage-backed securities held to maturity (fair value 1996: $473,497; 1995:
$522,529) 468,835 512,218
Mortgage-backed securities available for sale 223,876 340,334
Loans receivable, net of allowance for loan losses (1996: $41,039;
1995: $39,260) 1,298,468 1,339,423
Loans held for sale 391,572 368,533
Premises and equipment, net 71,684 70,052
Real estate owned, net 9,644 10,044
Accrued interest receivable 14,567 17,476
Excess of purchase cost over net assets acquired 994 1,015
Federal Home Loan Bank stock 29,624 29,624
Other assets 264,336 236,170
----------- -----------
$ 3,076,518 $ 3,222,798
=========== ===========
LIABILITIES
Savings deposits $ 1,737,228 $ 1,753,475
Securities sold under agreements to repurchase 335,874 354,024
Short-term borrowings 5,172 112,330
Federal Home Loan Bank advances 180,000 192,000
Amounts held on behalf of trustee 351,362 341,693
Unearned insurance premiums and insurance reserves 3,501 5,102
Other liabilities 30,835 40,110
----------- -----------
2,643,972 2,798,734
SUBORDINATED DEBENTURES 104,496 104,360
MINORITY INTEREST 23,763 21,965
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 24,601,960
shares in 1996 and 24,563,419 shares in 1995 24,602 24,563
Paid-in capital 167,312 167,039
Retained earnings 113,342 105,951
Unrealized (loss) gain on securities available for sale, net of tax (969) 186
----------- -----------
304,287 297,739
----------- -----------
$ 3,076,518 $ 3,222,798
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Interest income:
Loans, including fees $ 41,660 $ 37,085
Mortgage-backed securities 14,196 8,454
Investment securities 1,795 1,635
Other 1,430 1,882
------------ ------------
TOTAL INTEREST INCOME 59,081 49,056
Interest expense:
Savings deposits 25,117 22,886
Federal Home Loan Bank advances and other borrowings 6,033 4,894
Securities sold under agreements to repurchase 5,074 3,052
------------ ------------
TOTAL INTEREST EXPENSE 36,224 30,832
------------ ------------
NET INTEREST INCOME 22,857 18,224
Provision for loan losses 5,600 638
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,257 17,586
Other income:
Automobile lending 36,524 17,134
Mortgage banking 4,314 1,454
Investment and mortgage-backed securities (losses) gains (1,974) 507
Insurance income 4,350 575
Real estate operations (1,560) 523
Rental operations 90 (58)
Miscellaneous 540 108
------------ ------------
TOTAL OTHER INCOME 42,284 20,243
Other expenses:
Salaries and employee benefits 23,247 14,708
Occupancy 2,594 2,307
Insurance 1,206 1,622
Miscellaneous 12,850 7,858
------------ ------------
TOTAL OTHER EXPENSES 39,897 26,495
------------ ------------
INCOME BEFORE INCOME TAXES 19,644 11,334
Income taxes 8,074 4,722
------------ ------------
INCOME BEFORE MINORITY INTEREST 11,570 6,612
Minority interest in earnings of subsidiaries 1,722
------------ ------------
NET INCOME $ 9,848 $ 6,612
============ ============
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.40 $ 0.27
============ ============
CASH DIVIDENDS DECLARED PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.10 $ 0.09
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS 24,829,431 24,387,654
============ ============
</TABLE>
- --------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,848 $ 6,612
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for losses 5,600 538
Depreciation and amortization 1,993 1,849
Amortization of deferred fees 570 1,072
Amortization of issuance costs 136 124
Decrease in interest receivable 2,909 301
Gains on nonoperating activities (8,992) (2,747)
Decrease in interest payable (1,490) (3,509)
Decrease in unearned insurance (1,601) (476)
Other, net (19,961) 4,639
Net change in loans available for sale 33,582 (93,284)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 22,594 (84,881)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale (338)
Proceeds from sales of investment securities available for sale 449
Purchase of mortgage-backed securities available for sale (47,118) (59,498)
Purchase of mortgage-backed securities held to maturity (85,628)
Proceeds from the sale of mortgage-backed securities available for sale 151,601 51,806
Payments received on mortgage-backed securities 51,283 2,465
Net change in loans (15,318) (28,771)
Additions to premises and equipment (3,603) (651)
Disposition of real estate owned 5,638 9,611
Purchase of FHLB stock (288)
Proceeds from sales of FHLB stock 688
Net (increase) decrease in trust receivable (15,101) 254
Net increase in trustee accounts 9,669 13,310
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 137,162 (96,702)
</TABLE>
- -------------
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits $ (16,247) $ 124,513
(Decrease) increase in securities sold under agreements to repurchase (18,150) 37,511
Decrease in FHLB advances, net (12,000) (8,000)
(Decrease) increase in borrowings (107,158) 17,943
Proceeds from sale of common stock 312 20
Minority interest 1,798
Cash dividends (2,457) (2,083)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (153,902) 169,904
--------- ---------
Net increase (decrease) in cash and equivalents 5,854 (11,679)
Cash and equivalents at beginning of period 162,885 166,293
--------- ---------
Cash and equivalents at end of period $ 168,739 $ 154,614
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 37,714 $ 34,340
Income taxes 108 17
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 4,866 $ 7,614
</TABLE>
- --------
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. These consolidated financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in
Westcorp's annual report on Form 10-K for the year ended December 31, 1995.
Certain amounts from the 1995 consolidated financial statement amounts have been
reclassified to conform to the 1996 presentation.
7
<PAGE> 8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $1,506 $13 $1,493
Other 338 338
------ ---- --- ------
$1,844 $13 $1,831
====== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $1,506 $13 $1,493
------ ---- --- ------
$1,506 $13 $1,493
====== ==== === ======
</TABLE>
NOTE C - INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $130,698 $151 $1,545 $129,304
Obligations of states and political
subdivisions 3,029 23 3,006
Other 25 25
-------- ---- ------ --------
$133,752 $151 $1,568 $132,335
======== ==== ====== ========
</TABLE>
8
<PAGE> 9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $130,306 $265 $519 $130,052
Obligations of states and political
subdivisions 3,521 80 3,441
Other 25 25
-------- ---- ---- --------
$133,852 $265 $599 $133,518
======== ==== ==== ========
</TABLE>
NOTE D - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $368,385 $6,511 $2,001 $372,895
FNMA participation certificates 91,518 91,518
FHLMC participation certificates 8,769 152 8,921
Other participation certificates 163 163
-------- ------ ------ --------
$468,835 $6,663 $2,001 $473,497
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
(DOLLARS IN THOUSANDS)
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
GNMA certificates $405,582 $10,943 $2,246 $414,279
FNMA participation certificates 97,352 1,460 98,812
FHLMC participation certificates 9,120 154 9,274
Other participation certificates 164 164
-------- ------- ------ --------
$512,218 $12,557 $2,246 $522,529
======== ======= ====== ========
</TABLE>
9
<PAGE> 10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $100,042 $1,660 $2,347 $99,355
FNMA participation certificates 80,650 307 188 80,769
FHLMC participation certificates 43,489 308 45 43,752
-------- ------ ------ --------
$224,181 $2,275 $2,580 $223,876
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $138,175 $2,017 $4,291 $135,901
FNMA participation certificates 99,859 1,485 101,344
FHLMC participation certificates 101,639 2,121 671 103,089
-------- ------ ------ --------
$339,673 $5,623 $4,962 $340,334
======== ====== ====== ========
</TABLE>
10
<PAGE> 11
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate:
Mortgage $ 1,391,984 $ 1,406,167
Construction 6,041 8,469
----------- -----------
1,398,025 1,414,636
Less: Undisbursed loan proceeds 3,769 4,672
----------- -----------
1,394,256 1,409,964
Consumer:
Sales contracts 353,585 355,058
Other 27,661 19,195
Less: Unearned discounts 44,823 38,628
----------- -----------
336,423 335,625
----------- -----------
1,730,679 1,745,589
Allowance for loan losses (41,039) (39,260)
Net deferred loan costs 400 1,627
----------- -----------
1,690,040 1,707,956
Less: Loans held for sale:
Mortgage 158,625 148,616
Consumer 232,947 219,917
----------- -----------
391,572 368,533
----------- -----------
$ 1,298,468 $ 1,339,423
=========== ===========
</TABLE>
Loans serviced by Westcorp for the benefit of others totalled approximately $5.5
billion and $5.6 billion at March 31, 1996 and December 31, 1995, respectively.
These amounts are not reflected in the accompanying consolidated financial
statements.
NOTE G - DIVIDENDS
On March 1, 1996 Westcorp paid a cash dividend of $0.10 per share. On May 1,
1996, Westcorp announced a cash dividend of $0.10 per share for shareholders of
record as of May 15, 1996, payable May 24, 1996. In addition, Westcorp announced
a 5% stock dividend for shareholders of record as of May 20, 1996, payable June
17, 1996. Fractional share interests will be paid in cash. The per share amounts
for all periods presented will be restated to reflect the increased shares
outstanding.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased $146 million or 4.5% to $3.1 billion at March 31, 1996
from $3.2 billion at December 31, 1995. This decrease is primarily the result of
the sale of mortgage-backed securities.
LOANS
Loans (including those held for sale), net of unearned discounts and undisbursed
loan proceeds, decreased $14.9 million or 0.85% since December 31, 1995. The
decrease is the result of the differential between loans originated and sold as
well as principal reductions during the three month period ended March 31, 1996.
Westcorp has retained the servicing on almost all loans sold and receives a
servicing fee therefrom. Included in the portfolio are loans held for sale of
which $159 million are mortgage loans secured primarily by single family
residences and $233 million which are consumer loans secured by motor vehicles.
Consumer loan originations were 50.0% higher for the three months ended March
31, 1996 compared to the same period in 1995. This increase was primarily the
result of Westcorp's continued expansion of its dealer center and branch network
and favorable market conditions for automobile sales. Westcorp currently
conducts its consumer finance operations through 97 offices in California and 17
other states.
Real estate originations increased $256 million during the first three months of
1996 to $309 million compared with $52.5 million the same period a year ago. The
increase in real estate originations is the result of a more favorable market
environment in California and the acquisition of The Hammond Company, a
privately held mortgage banking company. The following table sets forth the loan
origination, purchase and sale activity of Westcorp for the periods indicated.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
1996 1995
---------------------------- ----------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $1,409,964 $335,625 $1,320,784 $430,708
Originations (1) 308,799 505,736 52,468 337,366
Purchases 80 179
Sales (2) 275,316 485,000 5,208 190,000
Principal reductions (3) 49,271 19,938 28,709 46,634
---------- -------- ---------- --------
Ending balance $1,394,256 $336,423 $1,339,514 $531,440
========== ======== ========== ========
</TABLE>
- ------------------------------------
(1) Includes sales contracts purchased from dealers.
(2) Loans sold or securitized in which Westcorp generally retains servicing.
(3) Includes scheduled payments, prepayments and chargeoffs.
12
<PAGE> 13
The real estate loan portfolio (including those classified as held for sale)
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
AMOUNT % AMOUNT %
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 808,067 58.1% $ 816,948 57.9%
Second trust deeds 113,294 8.1 116,132 8.3
---------- ----------- ---------- -----------
921,361 66.2 933,080 66.2
Multifamily residential loans 467,531 33.5 469,951 33.3
Construction loans 6,041 0.4 8,469 0.6
Commercial loans 3,092 0.2 3,136 0.2
---------- ----------- ---------- -----------
1,398,025 1,414,636
Less: undisbursed loan proceeds 3,769 0.3 4,672 0.3
---------- ----------- ---------- -----------
$1,394,256 100.0% $1,409,964 100.0%
========== =========== ========== ===========
</TABLE>
Westcorp's real estate portfolio consisted primarily of adjustable rate mortgage
loans as shown below:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------------------- --------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans:
Single family $ 137,051 9.8% $ 160,699 11.4%
Multifamily 393 0.1 668 0.1
Adjustable rate loans:
Negative amortizing 879,368 63.0 892,295 63.3
Without negative amortizing 377,444 27.1 356,302 25.2
---------- ----- ---------- -----
$1,394,256 100.0% $1,409,964 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales contracts, net $308,762 91.8% $316,430 94.3%
Other 27,661 8.2 19,195 5.7
-------- ----- -------- -----
$336,423 100.0% $335,625 100.0%
======== ===== ======== =====
</TABLE>
13
<PAGE> 14
ASSET QUALITY
General
From mid-1992 through early 1994, the economy in California, where substantially
all of the collateral for Westcorp's real estate loans is located, experienced
severe downturns in the market values of real estate, high levels of
unemployment and a continued slump in residential construction and new home
sales. The problems created by this economic slump have been noticeable in both
the multifamily and single family mortgage portfolios. While the economy has not
fully recovered, the downward spiral appears to have stabilized.
Delinquency
The percent of loans 60 days or more delinquent increased to 1.5% at March 31,
1996 compared to 1.2% at December 31, 1995. Delinquent loans by type of loan and
as a percentage of loans by type are summarized as follows at March 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
MARCH 31, 1996
NUMBER OF DAYS DELINQUENT
------------------------------------------------------------------------------------
60-89 90 OR MORE TOTAL
-------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------- --- ------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family residential homes $2,530 0.3% $15,552 1.7% $18,082 2.0%
Multifamily residential homes 2,987 0.6 3,107 0.7 6,094 1.3
Consumer 1,294 0.4 704 0.2 1,998 0.6
Construction 107 4.1 107 4.1
------ --- ------- --- ------- ---
$6,811 0.4% $19,470 1.1% $26,281 1.5%
====== === ======= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
NUMBER OF DAYS DELINQUENT
------------------------------------------------------------------------------------
60-89 90 OR MORE TOTAL
-------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------- --- ------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family residential homes $4,416 0.5% $10,769 1.2% $15,185 1.6%
Multifamily residential homes 1,215 0.3 1,693 0.4 2,908 0.6
Consumer 1,529 0.5 526 0.2 2,055 0.6
Construction 107 1.6 107 1.6
------ --- ------- --- ------- ---
$7,160 0.4% $13,095 0.8% $20,255 1.2%
====== === ======= === ======= ===
</TABLE>
14
<PAGE> 15
Nonperforming Assets
Total nonperforming assets ("NPA") increased $8.4 million or 28.6% to $37.6
million at March 31, 1996 compared to $29.2 million at December 31, 1995. The
overall increase is primarily attributable to increased delinquency on single
family loans in which property tax payments were due. At March 31, 1996, NPAs
represented 1.2% of total assets compared to 0.9% at December 31, 1995.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are accounted for at fair value. NPLs are defined as
all loans on nonaccrual which include mortgage loans 90 days or more past due or
performing loans where full collection of principal and interest is not
reasonably assured. NPLs include loans categorized as impaired. When a loan is
designated as nonaccrual, all previous accrued interest is reversed. At March
31, 1996, interest on nonperforming loans excluded from interest income was $1.1
million compared to $0.9 million at March 31, 1995.
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 March 31, 1996 and December 31, 1995, impaired loans were $11.6
million and $7.5 million, respectively.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans 90 days or more past due $15,532 $10,950
Impaired loans 11,630 7,450
------- -------
$27,162 $18,400
======= =======
</TABLE>
15
<PAGE> 16
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Single family residential $14,294 $ 9,934
Multifamily 5-36 units 5,899 5,993
Multifamily 37+ units 6,862 2,366
Other 107 107
------- -------
$27,162 $18,400
======= =======
</TABLE>
The migration of nonperforming loans and real estate owned from December 31,
1995 to March 31, 1996 is shown below.
Nonperforming Loans
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
-------- ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 18,400 $ 9,934 $ 5,993 $ 2,366 $107
New nonperforming loans 13,995 7,890 1,597 4,508
REO (3,845) (2,413) (1,432)
Cures and payoffs (1,222) (951) (259) (12)
Chargeoffs (166) (166)
-------- -------- ------- ------- ----
Balance, March 31, 1996 $ 27,162 $ 14,294 $ 5,899 $ 6,862 $107
======== ======== ======= ======= ====
</TABLE>
Real Estate Acquired Through Foreclosure
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
-------- ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 10,831 $ 7,235 $ 2,913 $ 683
New REO 4,866 3,320 1,546
Sales (4,133) (2,495) (1,638)
Writedowns (1,136) (344) (394) (398)
-------- ------- ------- --------- -----
Balance, March 31, 1996 $ 10,428 $ 7,716 $ 2,427 $ 285
======== ======= ======= ========= =====
</TABLE>
For nonperforming assets other than nonperforming loans, assets secured by
single family residential properties was the dominant asset type consisting of
$7.7 million or 74% of these assets.
16
<PAGE> 17
Allowance For Loan And Real Estate Losses
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp increased its allowance for loan losses to $41.0
million for March 31, 1996 compared to $39.3 million for December 31, 1995.
While Westcorp's nonperforming assets are mainly single family loans, no single
loan, borrower or series of such loans predominate. The provision and allowance
for loan losses are indicative of loan volumes, loss trends and management's
analysis of market conditions. The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio.
The following table presents summarized data relative to the allowance for loan
losses.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans $ 1,730,679 $ 1,745,589
Allowance for loan losses 41,039 39,260
Allowance for real estate losses 784 784
Loans past due 60 days or more 26,281 20,255
Nonperforming loans 27,162 18,400
Nonperforming assets (1) 37,590 29,231
Allowance for loan losses as a percent of:
Total loans (2) 2.4% 2.2%
Loans past due 60 days or more 156.2 193.8
Nonperforming loans 151.1 213.4
Total allowance as a percent of nonperforming assets 111.3 137.0
Nonperforming loans as a percent of total loans 1.6 1.1
Nonperforming assets as a percent of total assets 1.2 0.9
</TABLE>
- ------------------------------------
(1) Nonperforming loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
17
<PAGE> 18
The table below provides a historical analysis of the allowance for loan losses.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 39,260 $ 41,323
Chargeoffs:
Mortgage loans (632) (741)
Consumer loans (4,694) (2,311)
-------- --------
(5,326) (3,052)
Recoveries:
Mortgage loans 54 68
Consumer loans 1,451 893
-------- --------
1,505 961
-------- --------
Net chargeoffs (3,821) (2,091)
Transfers from the allowance for real estate losses 800
Provision for loan losses 5,600 638
-------- --------
Balance at end of period $ 41,039 $ 40,670
======== ========
Ratio of net chargeoffs during period to average loans outstanding during
the period (annualized) 0.77% 0.49%
======== ========
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1996 1995
----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 784 $1,684
Provision for real estate losses (100)
Chargeoffs, net
Transfers to the allowance for loan losses (800)
----- ------
Balance at end of period $ 784 $ 784
===== ======
</TABLE>
Westcorp transferred $0.8 million of allowance for real estate losses to
allowance for loan losses at March 31, 1995 as part of implementing SFAS 114.
18
<PAGE> 19
RESULTS OF OPERATIONS
SUMMARY
Westcorp reported net income of $9.8 million for the three months ended March
31, 1996, compared to $6.6 million for the respective period of 1995. Return on
average assets was 1.11% for the three months ended March 31, 1996, compared to
1.00% for the same period of 1995. Return on average equity was 13.1% for the
three months ended March 31, 1996, compared to 12.2% for the respective period
of 1995. Net income was primarily affected by the following factors:
- Net interest income increased as Westcorp increased its purchases of
mortgage-backed securities and as originations of loans increased.
- Provision for loan losses increased due to increased production in the
lower end of the prime credit quality spectrum for auto contracts and
the timing of auto-backed securitizations.
- Automobile lending and Mortgage banking income increased as overall
servicing portfolios increased.
- Other expenses increased as a result of continued expansion into other
states and expansion of servicing portfolios.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1996 was $22.9 million.
For the same period of 1995, net interest income totalled $18.2 million.
Overall interest rate spread increased 10 basis points for the three months
ended March 31, 1996, compared to the same period of 1995 due to an increase of
29 basis points in the yield on interest earning assets while the cost of funds
only increased 19 basis points.
The increase in yield on interest earning assets for the three months ended
March 31, 1996, compared to the same period of 1995 was affected by an 86 basis
point increase in the mortgage loan portfolio, which is due to increased
originations of loans with higher yields. Additionally, the yield on mortgage
loans is offset by decreases in the yield on consumer loans of 25 basis points.
The increase in the cost of funds was affected by a 115 basis point increase in
public debt offerings and a 121 basis point decrease in FHLB advances and other
borrowings for the three months ended March 31, 1996 compared to the same period
of 1995.
19
<PAGE> 20
Interest rates earned and paid for the three months ended March 31, 1996 and
1995 are summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------ ------
YIELD/ YIELD/
RATE RATE
----- -----
<S> <C> <C>
Interest earning assets:
Investment securities (1) 5.46% 5.56%
Mortgage-backed securities (1) 7.03 6.91
Loans:
Consumer (2) 14.80 15.05
Mortgage 7.78 6.92
Other 5.23 5.83
----- -----
Total interest earning assets 8.34 8.05
Interest bearing liabilities:
Savings deposits 5.76 5.48
Public debt offerings 8.49 7.34
Repurchase agreements 5.19 5.11
FHLB advances and other
borrowings 6.24 7.45
----- -----
Total interest bearing liabilities 5.87 5.68
Interest rate spread 2.47% 2.37%
===== =====
Net yield on average interest
earning assets 3.20% 3.15%
===== =====
</TABLE>
- --------
(1) Includes both securities available for sale and held to maturity
(2) For the purposes of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
20
<PAGE> 21
ASSET/LIABILITY MANAGEMENT
The continued profitability of Westcorp is dependent upon, among other factors,
the extent to which the effect of changes in interest rates on its earnings are
minimized. Thus, a major objective of Westcorp's asset/liability management
program has been to control interest rate risk through matching the maturity and
repricing characteristics of its interest-earning assets with those of its
interest-bearing liabilities.
Westcorp originates both adjustable-rate mortgages ("ARM") and fixed-rate
mortgages. To minimize the interest rate risk associated with its real estate
loan portfolio, Westcorp generally retains the ARMs in its own loan portfolio
and sells its fixed-rate loans in the secondary market with servicing rights
retained. Westcorp has also purchased mortgage servicing rights which act as a
potential hedge against rising interest rates. During the first three months of
1996, Westcorp purchased rights to service $508 million of single family
residential mortgage loans for $5.8 million. At March 31, 1996, Westcorp
serviced $3.4 billion in mortgage real estate loans for others. ARMs and
adjustable-rate mortgage-backed securities ("MBS") amounted to 71% of the total
mortgage loans and MBS held by Westcorp at March 31, 1996. Interest rates
generally adjust on a monthly, semiannual or annual basis with 96% of Westcorp's
adjustable products adjusting monthly.
Westcorp also originates fixed-rate consumer loans. To minimize interest rate
risk associated with its consumer loan portfolio, Westcorp has sold 96% of its
consumer loan production in securitization transactions in which it has retained
the servicing rights. The interest rate passed through to the purchasers of
those consumer loans is fixed, which provides off balance sheet match funding
for the majority of Westcorp's consumer loans. At March 31, 1996, Westcorp
serviced $2.1 billion in consumer loans for others.
Approximately 22% of Westcorp's other borrowed funds at March 31, 1996 had fixed
rates and maturities greater than one year. Subordinated debentures, which
represent 76% of this total, are redeemable in four years and mature in seven
years.
Westcorp has entered into or committed to interest rate caps and call options as
hedges against market value changes in designated portions of its MBS portfolio.
At March 31, 1996, caps with a notional amount of $100 million and options
totalling $26.0 million were outstanding. The cap agreement has a strike rate of
8.0% and expires in September, 1999. The call option has a strike price of 116
and expires in June, 1996. Westcorp uses only highly rated counterparties and
further reduces its risk by avoiding any material concentration with a single
counterparty. Credit exposure is limited to those agreements with a positive
fair value and only to the extent of that fair value.
The sensitivity of earnings to interest rate changes may be measured by the
difference, or gap, between the amount of assets and liabilities scheduled to
reprice, based on certain assumptions, within the same period expressed as a
percentage of interest-earning assets. Conceptually, the lower the amount of
this gap, the less sensitive earnings are to interest rate changes. A positive
gap means an excess of assets over liabilities repricing during the same period.
However, this method of measuring interest rate sensitivity does not take into
account the differing repricing characteristics of various types of assets and
liabilities. Thus, certain assets and liabilities that have similar maturities
or periods to reprice may react in different ways to changes in market interest
rates. For instance, Westcorp's ARMs are mainly tied to the Eleventh District
Cost of Funds which typically lags the market, and also generally have
restrictions on the maximum amounts of periodic and/or total changes in
interest rates and payments. On the other hand, maturing borrowings have no
such restrictions and may reprice at current market rates.
21
<PAGE> 22
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at March 31, 1996. The interest rate sensitivity of Westcorp's assets
and liabilities illustrated in the following table could vary substantially if
different assumptions were used or actual experience differs from the
assumptions set forth.
22
<PAGE> 23
INTEREST RATE SENSITIVITY ANALYSIS
AT MARCH 31, 1996
<TABLE>
<CAPTION>
WITHIN 3 MONTHS 1 YEAR TO 3 YEARS TO AFTER 5
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS YEARS TOTAL
---------- ----------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities $ 25,223 $108,956 $ 134,179
Other investments $ 180,201 500 180,701
Mortgage-backed securities 180,699 20,488 124,222 $111,697 $ 255,605 692,711
Consumer loans (1) 11,257 48,375 254,349 20,865 1,577 336,423
Mortgage loans:
Adjustable rate (2) 981,441 229,151 42,169 1,779 1,254,540
Fixed rate (2) 6,054 16,143 38,355 25,492 51,400 137,444
Construction (2) 2,272 2,272
---------- ----------- -------- -------- --------- ----------
Total interest earning assets 1,361,924 339,880 568,051 159,833 308,582 2,738,270
Interest bearing liabilities:
Savings deposits:
Passbook/statement accounts(3) 3,393 9,118 18,046 11,578 20,761 62,896
Money market deposit
accounts (3) 28 75 149 95 170 517
Certificate accounts (4) 208,239 1,171,701 260,660 33,209 6 1,673,815
FHLB advances (4) 4,000 143,000 26,500 6,500 180,000
Other borrowings (4) 340,545 491 10 104,496 445,542
---------- ----------- -------- -------- --------- ----------
Total interest bearing liabilities 556,205 1,324,385 305,365 44,882 131,933 2,362,770
---------- ----------- -------- -------- --------- ----------
Excess interest earning assets
(liabilities) 805,719 (984,505) 262,686 114,951 176,649 375,500
Effect of hedging activities 50,000 (50,000)
---------- ----------- -------- -------- --------- ----------
Hedged excess $ 855,719 $ (984,505) $262,686 $114,951 $ 126,649 $ 375,500
========== =========== ======== ======== ========= ==========
Cumulative excess $ 855,719 $ (128,786) $133,900 $248,851 $ 375,500 $ 375,500
========== =========== ======== ======== ========= ==========
Cumulative excess as a percentage
of total assets 31.25% (4.70)% 4.89% 9.09% 13.71% 13.71%
</TABLE>
- ------------------------------------
(1) Based on contractual maturities adjusted by Westcorp's historical
prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the Office of Thrift Supervision
("OTS").
(4) Based on contractual maturity.
23
<PAGE> 24
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1996 was $5.6
million compared to $0.6 million during the comparable period of 1995. The
increase in the provision for credit losses is attributable to two factors.
Westcorp has expanded aggressively into other states and increased its
production in the lower end of the prime credit quality spectrum resulting in an
increase in chargeoffs for on-balance sheet contracts to 3.63% for the three
months ended March 31, 1996 from 1.56% for the same period in 1995.
Additionally, at the end of the first quarter of 1995, Westcorp had committed to
sell $190 million of contracts. Since the loans had already been committed for
sale, Westcorp did not set aside reserves for this portfolio.
OTHER INCOME
Total other income for the three months ended March 31, 1996 was $42.3 million
compared to $20.2 million during the comparable period of 1995. Other income is
generated from automobile lending activities, mortgage banking activities, and
other ancillary sources.
Automobile Lending
Westcorp originates and sells automobile sales contracts in the secondary market
with servicing rights retained. Income from automobile lending includes gain
from the sale of loans, loan servicing income net of amortization of capitalized
servicing and other related income such as document fees and late charges. For
the three months ended March 31, 1996, automobile lending generated income was
$36.5 million compared to $17.1 million for the same period of 1995.
During the three months ended March 31, 1996, net gain on automobile loan sales
totalled $12.9 million compared to a gain from loan sales of $1.1 million for
the three months ended March 31, 1995. The higher gain on sales during 1996 is a
result of wider locked-in gross interest spread of 946 basis points for the
securitization in the first quarter of 1996 compared to 753 basis points for the
securitization in the first quarter of 1995, as well as a 149% increase in the
amounts of auto contracts securitized. Contracts sold during the first three
months of 1996 totalled $485 million compared to $190 million during the same
period of 1995.
Net loan servicing income totalled $16.5 million for the three months ended
March 31, 1996, compared to $11.2 million for the comparable period of 1995 as
the servicing portfolio increased. Westcorp serviced $2.1 billion of automobile
loans for others at March 31, 1996 compared to $1.2 billion at March 31, 1995.
24
<PAGE> 25
Automobile lending income for the three months ended March 31, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gains from sale of sales contracts $12,890 $ 1,126
Loan servicing income 16,513 11,197
Other fee income 7,121 4,811
------- -------
$36,524 $17,134
======= =======
</TABLE>
Mortgage Banking
Westcorp originates mortgage loans for sale in the secondary market. Mortgage
banking operations include gains and losses on the sale of loans, loan servicing
income net of amortization of capitalized servicing and other income which is
primarily late charges. During the three months ended March 31, 1996, mortgage
banking generated income of $4.3 million compared to $1.5 million for the
comparable period of 1995.
Gains on sale of mortgage loans for the three months ended March 31, 1996
totalled $2.2 million compared to losses from sale of mortgage loans of $0.1
million during the comparable period of 1995. The increase in gain on sale of
mortgage loans is due primarily to the acquisition of The Hammond Company, whose
loans generate greater servicing values and greater loan values from its home
builders retail base. Loans sold during the first three months of 1996 totalled
$275 million compared to $5.2 million for the same period of 1995. Mortgage
loans held for sale increased from $149 million at December 31, 1995 to $159
million at March 31, 1996.
Net loan servicing income was $1.4 million for the three months ended March 31,
1996 compared to $1.3 million for the comparable period of 1995 as a result of a
larger servicing portfolio. At March 31, 1996, Westcorp serviced $3.4 billion of
mortgage loans for others compared to $1.7 billion at March 31, 1995.
Mortgage banking income for the three months ended March 31, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1996 1995
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net gains (losses) from sale of mortgage loans $2,235 $ (90)
Loan servicing income 1,417 1,280
Other 662 264
------ -------
$4,314 $ 1,454
====== =======
</TABLE>
25
<PAGE> 26
Miscellaneous
Other sources of income include insurance income and real estate operations.
Insurance income is generated primarily from commissions earned on the sale of
loan-related insurance products as well as insurance-related investment
products. Insurance income for the three months ended March 31, 1996 totalled
$4.4 million compared to $0.6 million for the same period in 1995. The increase
in insurance income for the period ended March 31, 1996 as compared to March
31, 1995 is the result of the increase in the amount of contracts outstanding,
as a substantial part of such income is with respect to collateral protection
insurance purchased in connection with loans made or purchased by the Company,
and as a result of the settlement of certain litigation (discussed in further
detail below in Part II, Item 1. Legal Proceedings).
Real estate operations include the ongoing costs of operation and disposition
associated with Westcorp's REO. Real estate operations had a loss of $1.6
million in the three months ended March 31, 1996 compared to earnings of $0.5
million for the same period in 1995.
OTHER EXPENSES
Other expenses consist of compensation and benefits, occupancy expense,
insurance and other operating expenses. Other expenses increased to $39.9
million for the three months ended March 31, 1996 compared to $26.5 million for
the same period in 1995. The increase is primarily in compensation and benefits
and is a function of increased loan servicing portfolios and expansion of
operations into additional states. The ratio of annualized operating expense to
average serviced loans was 2.28% for the three months ended March 31, 1996
compared to 2.24% for the three months ended March 31, 1995.
INCOME TAXES
The effective tax rates for the three months ended March 31, 1996 and 1995 were
41.1% and 41.7%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp has diversified sources of funds generated through its operations.
Primary sources include deposits, loan principal and interest payments received,
sale of mortgage loans and consumer loans, sale of MBS and the maturity or sale
of investment securities. Other sources include commercial paper, Federal Home
Loan Bank advances and reverse repurchase agreements. Prepayments on loans and
mortgage-backed securities and deposit inflows and outflows are affected
significantly by interest rates, real estate sales activity and general economic
conditions.
Westcorp uses these sources to meet its business needs which include funding
maturing certificates of deposits and savings withdrawals, repayment of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses and maintaining minimum regulatory liquidity and
capital levels.
During the first three months of 1996, Westcorp purchased $47.1 million of MBS
to more profitably employ its excess capital and enhance interest spreads. These
securities have been segregated, on an individual security basis, into the
available for sale portfolio and the held to maturity portfolio in the financial
statements in accordance with management's intent and ability to hold to
maturity. These purchases included both fixed and adjustable rate MBS.
26
<PAGE> 27
Westcorp's wholly-owned subsidiary, Western Financial Savings Bank, F.S.B. ("the
Bank") is a federally chartered savings bank. As such, it is subject to certain
minimum capital requirements. The Federal Deposit Insurance Corporation
Improvement Act of 1991 separates all financial institutions into one of five
capital categories: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". In order to be considered "well capitalized", an institution
must have a total risk-based capital ratio of 10% or greater, a Tier 1 (i.e.,
core) risk-based capital ratio of 6% or greater, a leverage ratio (i.e., core)
of 5% or greater and not be subject to any OTS order or directive to meet and
maintain a specific capital level for any capital measure. At March 31, 1996 the
Bank had a total risk-based capital ratio of 11.05%, a Tier 1 risk-based capital
ratio of 7.93% and a leverage ratio of 8.31%. The Bank currently meets all the
requirements of a "well capitalized" institution. Its regulatory capital
position at March 31, 1996 was as follows:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $256,853 8.38%(1) $256,853 8.38%(1) $357,996 11.05%(2)
Minimum OTS capital
requirement 45,997 1.50 91,993 3.00 259,169 8.00
-------- ----- -------- ----- -------- -----
Excess capital $210,856 6.88% $164,860 5.38% $ 98,827 3.05%
======== ===== ======== ===== ======== =====
</TABLE>
- ------------------------------------
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
As a member of the Federal Home Loan Bank System, the Bank is required to
maintain a specified ratio of cash, short-term United States government and
other qualifying securities to net withdrawable accounts and borrowings payable
in a year or less. The required liquidity ratio is currently 5%. The Bank has
maintained liquidity in excess of the required amount in 1996.
27
<PAGE> 28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 29, 1996, the court issued its order approving
settlement and its final judgement for the class action lawsuit,
relating to Westcorp's collateral protection insurance program
and the court found that the settlement was fair, reasonable and
adequate. There were no modifications from the preliminary
approval order dated December 22, 1995. The court retains
jurisdiction over the settlement administration.
Westcorp or its subsidiaries are also involved as parties to
certain legal proceedings incidental to their businesses.
Westcorp believes that the outcome of such proceedings will not
have a material effect upon Westcorp's business or financial
condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTCORP
- --------------------------------------------------------------------------------
(Registrant)
Date: May 13, 1996 By:/s/JOY SCHAEFER
--------------- --------------------------------------------
Joy Schaefer
Senior Executive Vice President and
Chief Operating Officer
Date: May 13, 1996 By:/s/LEE A. WHATCOTT
--------------- --------------------------------------------
Lee A. Whatcott
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
29
<PAGE> 1
Exhibit 11 Computation of Earnings Per Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average and common equivalent shares 24,829,431 24,387,654
----------- -----------
Net income $ 9,848,110 $ 6,611,558
=========== ===========
Net income per share $ 0.40 $ 0.27
=========== ===========
FULLY DILUTED
Weighted average and common equivalent shares 24,829,431 24,387,654
----------- -----------
Net income $ 9,848,110 $ 6,611,558
=========== ===========
Net income per share $ 0.40 $ 0.27
=========== ===========
</TABLE>
30
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 168,039
<INT-BEARING-DEPOSITS> 701
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 356,211
<INVESTMENTS-CARRYING> 470,679
<INVESTMENTS-MARKET> 475,328
<LOANS> 1,730,679
<ALLOWANCE> 41,039
<TOTAL-ASSETS> 3,076,518
<DEPOSITS> 1,737,228
<SHORT-TERM> 341,046
<LIABILITIES-OTHER> 385,698
<LONG-TERM> 284,496
0
0
<COMMON> 24,602
<OTHER-SE> 279,685
<TOTAL-LIABILITIES-AND-EQUITY> 3,076,518
<INTEREST-LOAN> 41,660
<INTEREST-INVEST> 15,991
<INTEREST-OTHER> 1,430
<INTEREST-TOTAL> 59,081
<INTEREST-DEPOSIT> 25,117
<INTEREST-EXPENSE> 36,224
<INTEREST-INCOME-NET> 22,857
<LOAN-LOSSES> 5,600
<SECURITIES-GAINS> (1,974)
<EXPENSE-OTHER> 39,897
<INCOME-PRETAX> 19,644
<INCOME-PRE-EXTRAORDINARY> 9,848
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,848
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 3.20
<LOANS-NON> 27,162
<LOANS-PAST> 704
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,260
<CHARGE-OFFS> 5,326
<RECOVERIES> 1,505
<ALLOWANCE-CLOSE> 41,039
<ALLOWANCE-DOMESTIC> 41,039
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
