<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
COMMISSION FILE NUMBER 1-9910
WESTCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
-----------------------------------------
(Address of principal executive offices)
(714) 727-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No / /
As of March 31, 1997, the registrant had 26,013,956 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 32.
<PAGE> 2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1997
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
Exhibit 11 Computation of Earnings Per Share 32
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,
1997 1996
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short-term investments $ 93,671 $ 138,423
Investment securities held to maturity (fair value 1997: $3,533; 1996: $3,160) 3,550 3,171
Investment securities available for sale 142,710 142,344
Mortgage-backed securities held to maturity (fair value 1997: $423,959;
1996: $442,229) 423,079 438,662
Mortgage-backed securities available for sale 402,915 410,886
Loans receivable, net of allowance for loan losses (1997: $40,273;
1996: $40,211) 1,191,785 1,232,267
Loans held for sale 594,566 458,941
Retained interests in securitized assets 135,113 121,597
Capitalized servicing rights 33,202 28,640
Premises and equipment, net 86,399 82,137
Real estate owned, net 10,642 11,279
Interest receivable 16,195 15,794
Excess of purchase cost over net assets acquired 909 930
Federal Home Loan Bank stock 31,324 31,967
Other assets 239,712 218,007
----------- -----------
$ 3,405,772 $ 3,335,045
=========== ===========
LIABILITIES
Deposits $ 1,908,977 $ 1,873,942
Securities sold under agreements to repurchase 289,529 287,412
Short-term borrowings 28,445 55,945
Federal Home Loan Bank advances 213,998 226,000
Amounts held on behalf of trustee 476,934 393,449
Unearned insurance premiums and insurance reserves 2,318 2,614
Other liabilities 33,168 44,444
----------- -----------
2,953,369 2,883,806
SUBORDINATED DEBENTURES 105,066 104,917
MINORITY INTEREST 27,558 28,392
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized 45,000,000 shares;
issued and outstanding 26,013,956 shares as of
March 31, 1997 and 25,996,618 shares as of December 31, 1996 26,014 25,997
Paid-in capital 183,442 185,742
Retained earnings 110,404 105,108
Unrealized (losses) gains on securities available for sale and retained interests in
securitized assets, net of tax (81) 1,083
----------- -----------
319,779 317,930
----------- -----------
$ 3,405,772 $ 3,335,045
=========== ===========
</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,
------------------------------
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Interest income:
Loans, including fees $ 43,884 $ 41,660
Mortgage-backed securities 15,186 14,196
Investment securities 1,977 1,795
Other 1,483 1,430
------------ ------------
TOTAL INTEREST INCOME 62,530 59,081
Interest expense:
Deposits 25,935 25,117
Federal Home Loan Bank advances and other borrowings 7,043 6,033
Securities sold under agreements to repurchase 3,503 5,074
------------ ------------
TOTAL INTEREST EXPENSE 36,481 36,224
------------ ------------
NET INTEREST INCOME 26,049 22,857
Provision for loan losses 4,371 5,600
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 21,678 17,257
Noninterest income:
Automobile lending 45,634 36,448
Mortgage banking 5,031 4,314
Investment and mortgage-backed securities losses (1,974)
Insurance income 1,265 4,350
Real estate operations (259) (1,560)
Rental operations (258) 90
Miscellaneous 347 616
------------ ------------
TOTAL NONINTEREST INCOME 51,760 42,284
Noninterest expense:
Salaries and employee benefits 33,462 23,247
Occupancy 3,819 2,594
Insurance 160 1,206
Miscellaneous 19,776 12,850
------------ ------------
TOTAL NONINTEREST EXPENSE 57,217 39,897
------------ ------------
INCOME BEFORE INCOME TAXES 16,221 19,644
Income taxes 6,814 8,074
------------ ------------
INCOME BEFORE MINORITY INTEREST 9,407 11,570
Minority interest in earnings of subsidiaries 1,511 1,722
------------ ------------
NET INCOME $ 7,896 $ 9,848
============ ============
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.30 $ 0.38
============ ============
CASH DIVIDENDS DECLARED PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.10 $ 0.10
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS 26,274,339 26,070,903
============ ============
</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,
------------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,896 $ 9,848
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 4,371 5,600
Depreciation and amortization 3,067 2,699
Amortization of retained interests in securitized assets 7,202 16,030
Amortization of capitalized servicing rights 1,896 1,177
(Increase) decrease in interest receivable (401) 2,909
Loss on sale of investment securities and mortgage-backed securities 2,080
Gain on sale of loans (4,239) (10,542)
Gain on sale of real estate owned (560) (530)
Decrease in interest payable (1,079) (1,490)
Decrease in unearned insurance (296) (1,601)
Net change in loans held for sale 139,866 33,582
Other, net (5,400) (13,212)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152,323 46,550
INVESTING ACTIVITIES:
Investment securities held to maturity:
Purchases (450)
Proceeds from maturities 70
Investment securities available for sale:
Purchases (55) (338)
Proceeds from sales 449
Mortgage-backed securities held to maturity:
Purchases (391)
Payments 15,515
Mortgage-backed securities available for sale:
Purchases (1,693) (47,118)
Proceeds from sales 151,601
Payments 7,954 51,283
Net change in loans receivable (240,685) (15,318)
Increase in retained interests in securitized assets (21,784) (23,733)
Increase in capitalized servicing (5,621) (223)
Additions to premises and equipment (7,164) (3,603)
Disposition of real estate owned 6,809 5,638
Purchase of FHLB stock (516)
Proceeds from sale of FHLB stock 1,159
Net increase in trust receivable (25,641) (15,101)
Net increase in trustee accounts 83,485 9,669
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (189,008) 113,206
</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,
------------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 35,035 $ (16,247)
Increase (decrease) in securities sold under agreements to repurchase 2,117 (18,150)
Decrease in FHLB advances, net (12,002) (12,000)
Decrease in short-term borrowings (27,500) (107,158)
(Decrease) increase in minority interest (834) 1,798
Proceeds from issuance of common stock 140 312
Repurchase of subsidiary stock (2,423)
Cash dividends (2,600) (2,457)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (8,067) (153,902)
--------- ---------
(Decrease) increase in cash and cash equivalents (44,752) 5,854
Cash and equivalents at beginning of period 138,423 162,885
--------- ---------
Cash and equivalents at end of period $ 93,671 $ 168,739
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 37,560 $ 37,714
Income taxes 32 108
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 6,000 $ 4,866
</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, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. 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, 1996.
Certain amounts from the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
Effective January 1, 1997, Westcorp (the "Company") adopted Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". See
"Note G - Securitized Assets" in the Company's unaudited Consolidated Financial
Statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which
is required to be adopted on December 31, 1997. Earlier application of SFAS 128
is not permitted. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of SFAS 128 on
the calculation of primary earnings per share and fully diluted earnings per
share is not expected to be material.
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, 1997
----------------------------------------------------
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 $1,503 $ 17 $1,486
Other 2,047 2,047
------ ------ ------ ------
$3,550 $ 17 $3,533
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 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 $1,504 $ 11 $1,493
Other 1,667 1,667
------ ------ ------ ------
$3,171 $ 11 $3,160
====== ====== ====== ======
</TABLE>
NOTE C - INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------------
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 $142,563 $ 1,432 $141,131
Obligations of states and political
subdivisions 1,511 11 1,500
Other 133 54 79
-------- -------- -------- --------
$144,207 $ 1,497 $142,710
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 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 $141,981 $ 1,175 $140,806
Obligations of states and political
subdivisions 1,512 $ 1 1,513
Other 79 54 25
-------- -------- -------- --------
$143,572 $ 1 $ 1,229 $142,344
======== ======== ======== ========
</TABLE>
NOTE D - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $331,946 $ 3,100 $ 2,115 $332,931
FNMA participation certificates 82,615 116 82,499
FHLMC participation certificates 6,956 11 6,967
Other participation certificates 1,562 1,562
-------- -------- -------- --------
$423,079 $ 3,111 $ 2,231 $423,959
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $346,098 $ 5,447 $ 2,497 $349,048
FNMA participation certificates 84,005 394 84,399
FHLMC participation certificates 7,358 223 7,581
Other participation certificates 1,201 1,201
-------- -------- -------- --------
$438,662 $ 6,064 $ 2,497 $442,229
======== ======== ======== ========
</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, 1997
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $314,512 $ 6,452 $ 4,223 $316,741
FNMA participation certificates 71,101 57 787 70,371
FHLMC participation certificates 15,751 163 111 15,803
-------- -------- -------- --------
$401,364 $ 6,672 $ 5,121 $402,915
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $318,505 $ 5,206 $ 1,935 $321,776
FNMA participation certificates 72,214 61 292 71,983
FHLMC participation certificates 17,092 118 83 17,127
-------- -------- -------- --------
$407,811 $ 5,385 $ 2,310 $410,886
======== ======== ======== ========
</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,
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate:
Mortgage $ 1,491,766 $ 1,435,789
Construction 6,804 5,501
----------- -----------
Total real estate loans 1,498,570 1,441,290
Less: Undisbursed loan proceeds 3,710 2,398
----------- -----------
Net real estate loans 1,494,860 1,438,892
Consumer:
Sales contracts 300,316 267,715
Other 55,975 50,911
Less: Unearned discounts (37,429) (33,768)
----------- -----------
Net consumer loans 318,862 284,858
Commercial 13,257 7,867
----------- -----------
Total loans 1,826,979 1,731,617
Allowance for loan losses (40,273) (40,211)
Net deferred loan fees (355) (198)
----------- -----------
Total 1,786,351 1,691,208
Less: Loans held for sale
Mortgage 371,610 272,638
Consumer 222,956 186,303
----------- -----------
Total loans held for sale 594,566 458,941
----------- -----------
Net loans receivable $ 1,191,785 $ 1,232,267
=========== ===========
</TABLE>
Loans serviced by the Company for the benefit of others totalled approximately
$7.5 billion and $7.2 billion at March 31, 1997 and December 31, 1996,
respectively. These amounts are not reflected in the accompanying unaudited
consolidated statements of financial condition.
NOTE G - SECURITIZED ASSETS
SFAS 125 requires that following a transfer of financial assets, an entity must
recognize the assets it controls and the liabilities it has incurred, and
derecognize assets for which control has been surrendered and liabilities that
have been extinguished. SFAS 125 defines two separate financial assets retained
at the time of securitization or sale, retained interests in securitized assets
("RISA"), which represents the excess spread created from securitization or
sale, and capitalized servicing rights ("CSR") which represents the benefit
derived from retaining the rights to service loans securitized or sold. Previous
accounting guidance did not separately distinguish these rights.
11
<PAGE> 12
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RETAINED INTERESTS IN SECURITIZED ASSETS
RISA capitalized upon securitization of automobile loans represents the present
value of the estimated future earnings to be received by the Company from the
excess spread created in securitization transactions. Excess spread is
calculated by taking the difference between the coupon rate of the automobile
loans sold and the certificate rate paid to the investors less contractually
specified servicing and guarantor fees.
Prepayment and credit loss assumptions are utilized to project future earnings
and are based upon historical experience. Credit losses are estimated using a
cumulative loss rate estimated by management to reduce the likelihood of asset
impairment. All assumptions used are evaluated each quarter and adjusted, if
appropriate, to reflect actual performance of the automobile loans.
Future earnings are discounted at a rate management believes to be
representative of market at the time of securitization. The balance of the RISA
is amortized against actual excess spread income earned on a monthly basis over
the expected repayment life of the underlying automobile loans. RISAs are
classified in a manner similar to available for sale securities and as such are
marked to market each quarter. Market value changes are calculated by
discounting the excess spread using a current market discount rate. Any changes
in the market value of the RISA is reported as a separate component of
shareholders' equity as an unrealized gain or loss, net of applicable taxes.
The following table presents the activity of the RISA.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1997
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Beginning balance $ 121,597
Additions 21,784
Amortization (7,202)
Change in unrealized loss on RISA (1,066)
---------
Ending Balance $ 135,113
=========
</TABLE>
When initially valuing the RISA, the Company established an off balance sheet
allowance for expected future credit losses. The allowance is based upon
historical experience and management's estimate of future performance regarding
credit losses and includes an unallocated amount to reduce the likelihood of
impairment of the RISA. The amount is reviewed periodically and adjustments are
made if actual experience or other factors indicate that future performance may
differ from management's prior expectations.
The following table presents the estimated future undiscounted retained interest
earnings to be received from securitizations. Estimated future undiscounted RISA
earnings are calculated by taking the difference between the coupon rate of the
12
<PAGE> 13
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
automobile loans sold and the certificate rate paid to the investors, less the
contractually specified servicing fee of 1.0% and guarantor fees, after giving
effect to estimated prepayments and assuming no losses. To arrive at the RISA,
this amount is reduced by the off balance sheet allowance established for
potential future losses and by discounting to present value. Prior to the
adoption of SFAS 125, the Company reduced excess spread by the actual cost to
service automobile loans instead of the contractually specified servicing fee.
The actual cost to service automobile loans is now included in the computation
of the CSR.
<TABLE>
<CAPTION>
MARCH 31,
1997
----
(DOLLARS IN
THOUSANDS)
<S> <C>
Estimated net undiscounted RISA earnings $ 380,114
Off balance sheet allowance for losses (231,666)
Discount to present value (13,335)
-----------
Retained interest in securitized assets $ 135,113
===========
Outstanding balance of automobile loans sold through securitizations $ 2,952,244
Off balance sheet allowance for losses as a percent of automobile
loans sold through securitizations 7.85%
</TABLE>
The Company believes that the off balance sheet allowance for losses is
currently adequate to absorb potential losses in the sold portfolio. Had SFAS
125 been in effect at December 31, 1996, the off balance sheet allowance for
losses as a percent of automobile loans sold through securitizations would have
been 8.03%.
CAPITALIZED SERVICING RIGHTS
Capitalized servicing rights consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Purchased mortgage servicing rights $ 21,426 $ 20,994
Originated mortgage servicing rights 13,632 9,051
Impairment allowance for mortgage servicing rights (1,856) (1,405)
-------- --------
$ 33,202 $ 28,640
======== ========
</TABLE>
The Company retains the rights to service most loans securitized or sold.
Capitalized CSR assets represent the present value of the estimated future
earnings to be received from servicing securitized or sold loans. These earnings
are calculated by estimating future servicing revenues, including contractually
specified servicing fees, late charges, other ancillary income, and float
benefit and netting them against the actual cost to service loans. During the
three months ended March 31, 1997, Westcorp capitalized $7.2 million compared to
$8.6 million for the comparable period of 1996. The mortgage servicing rights
are included in capitalized servicing and the amortization is a component of
mortgage banking in noninterest income.
13
<PAGE> 14
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value was $44.4 million and $38.3 million at March 31, 1997 and
December 31, 1996, respectively. Fair value was determined based on the present
value of estimated future earnings. Significant assumptions were based upon
prepayment, default, servicing cost and discount rate. For the purpose of
estimated fair value, CSRs are stratified on the basis of loan type, loan coupon
and loan term.
SFAS 125 also requires that all CSRs be evaluated for impairment based on the
excess of the carrying amount of the CSRs over their fair value. For purposes of
measuring impairment, CSRs are stratified on the basis of loan type, loan coupon
and loan term.
Amortization of mortgage servicing rights are reflected as a component of
mortgage banking in noninterest income. Amortization expense of the three months
ended March 31, 1997 was $1.9 million compared to $1.2 million for the
comparable period of 1996.
14
<PAGE> 15
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - DIVIDENDS
The Company paid a cash dividend of $0.10 per share on March 4, 1997 for
shareholders of record as of February 18, 1997. On April 29, 1997, the Company
announced a cash dividend of $0.10 per share for shareholders of record as of
May 14, 1997, payable May 28, 1997.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $70.7 million or 2.1% to $3.41 billion at March 31, 1997
from $3.34 billion at December 31, 1996. This increase is primarily the result
of an increase in loans held for sale.
LOANS
Loans (including loans held for sale), net of unearned discounts and undisbursed
loan proceeds, increased $95 million or 5.6% from December 31, 1996 to March 31,
1997. The increase is the result of the differential between loans originated
and loans sold, as well as principal reductions during the three month period
ended March 31, 1997. The Company has retained the servicing on substantially
all loans sold and receives a servicing fee therefrom. Included in the portfolio
are loans held for sale of which $372 million are mortgage loans secured
primarily by single family residences and $223 million which are consumer loans
secured by automobiles.
Consumer loan originations increased by $48 million to $554 million for the
three months ended March 31, 1997 from $506 million for the same period in 1996,
which represents a 10% increase in production. The Company securitized $500
million of automobile loans for the three months ended March 31, 1997 compared
with $485 million for the same period in 1996. The Company currently conducts
its consumer finance operations through 141 offices in 32 states compared to 136
offices in 31 states at December 31, 1996.
Real estate originations increased $132 million to $441 million for the three
months ended March 31, 1997 from $309 million for the same period in 1996. The
increase in real estate originations is the result of a more favorable market
environment in California and a better utilization of our expanding origination
capacity. The following table sets forth the loan origination, purchase and sale
activity of the Company for the periods indicated, excluding net deferred loan
fees:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
1997 1996
----------------------- -----------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $1,438,892 $284,858 $1,409,964 $335,625
Originations (1) 441,470 554,159 308,799 505,736
Purchases 54 80
Sales (2) 326,026 500,000 275,316 485,000
Principal reductions (3) 59,530 20,155 49,271 19,938
---------- -------- ---------- --------
Ending balance $1,494,860 $318,862 $1,394,256 $336,423
========== ======== ========== ========
</TABLE>
- ------------------------
(1) Includes sales contracts purchased from automobile dealers.
(2) Loans sold or securitized for which the Company generally retains
servicing.
(3) Includes scheduled payments, prepayments and chargeoffs.
16
<PAGE> 17
The real estate loan portfolio (including those classified as held for sale and
excluding net deferred loan costs) consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $ 980,524 65.6% $ 925,353 64.3%
Second trust deeds 54,392 3.6 55,778 3.9
---------- ----- ---------- -----
1,034,916 69.2 981,131 68.2
Multifamily residential loans 449,695 30.0 453,425 31.5
Construction loans 6,804 0.5 5,501 0.4
Nonresidential loans 7,155 0.5 1,233 0.1
---------- ----- ---------- -----
1,498,570 100.2 1,441,290 100.2
Less: Undisbursed loan proceeds 3,710 0.2 2,398 0.2
---------- ----- ---------- -----
$1,494,860 100.0% $1,438,892 100.0%
========== ===== ========== =====
</TABLE>
The Company's real estate portfolio consisted primarily of adjustable rate
mortgage loans (excluding net deferred loan costs) as shown below:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans $ 297,634 19.9% $ 290,814 20.2%
Adjustable rate loans:
Negative amortization 819,280 54.8 831,701 57.8
Without negative amortization 377,946 25.3 316,377 22.0
---------- ----- ---------- -----
$1,494,860 100.0% $1,438,892 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile loans, net $262,887 82.4% $233,947 82.1%
Other 55,975 17.6 50,911 17.9
-------- ----- -------- -----
$318,862 100.0% $284,858 100.0%
======== ===== ======== =====
</TABLE>
MORTGAGE-BACKED SECURITIES
During the first three months of 1997, the Company purchased $2.1 million of
mortgage-backed securities ("MBS"). This is part of the Company's continuing
strategy to increase net interest income.
17
<PAGE> 18
ASSET QUALITY
DELINQUENCY
The percent of loans 60 days or more delinquent remained constant at 1.1%
comparing March 31, 1997 with December 31, 1996. Delinquent loans by type of
loan and as a percentage of loans by type are summarized as follows at March 31,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
MARCH 31, 1997
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 loans $2,282 0.2% $14,243 1.3% $16,525 1.6%
Multifamily residential loans 119 0.0 1,271 0.3 1,390 0.3
Consumer 1,500 0.5 1,235 0.4 2,735 0.9
------ --- ------- --- ------- ---
$3,901 0.2% $16,749 0.9% $20,650 1.1%
====== === ======= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 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 loans $1,738 0.2% $13,528 1.4% $15,266 1.6%
Multifamily residential loans 358 0.1 1,398 0.3 1,756 0.4
Consumer 1,560 0.5 964 0.3 2,524 0.9
------ --- ------- --- ------- ---
$3,656 0.2% $15,890 0.9% $19,546 1.1%
====== === ======= === ======= ===
</TABLE>
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") increased $1.9 million or 5.8% to $34.9
million at March 31, 1997 compared to $33.0 million at December 31, 1996. At
March 31, 1997, NPAs as a percentage of total assets remained constant at 1.0%
compared with December 31, 1996.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are carried at lower of cost or fair value less
estimated disposition cost. NPLs are defined as all loans (other than consumer
loans which are charged off at 120 days) on nonaccrual, which include all
mortgage loans 90 days or more past due or impaired loans. When a loan is
designated as nonaccrual, all previously accrued interest is reversed. Interest
on nonperforming loans excluded from interest income was $1.2 million at March
31, 1997 compared to $1.1 million at March 31, 1996.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. The Company measures impairment
based on, among other factors, the fair value of the loan's collateral. Changes
in the fair value of loans are recorded through the allowance for loan losses.
18
<PAGE> 19
At March 31, 1997 and December 31, 1996, impaired loans were $7.5 million and
$6.9 million, respectively.
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unimpaired loans placed on nonaccrual $16,018 $14,052
Impaired loans 7,466 6,887
------- -------
$23,484 $20,939
======= =======
</TABLE>
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Single family residential loans $15,522 $13,639
Multifamily 5-36 units 2,836 3,327
Multifamily 37+ units 5,126 3,973
------- -------
$23,484 $20,939
======= =======
</TABLE>
The migration of nonperforming loans and real estate owned from December 31,
1996 to March 31, 1997 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, 1996 $ 20,939 $ 13,639 $ 3,327 $ 3,973 $ --
New nonperforming loans 8,823 7,132 511 1,180
REO (4,853) (3,860) (993)
Cures and payoffs (1,338) (1,302) (9) (27)
Chargeoffs (35) (35)
Transfers (52) (52)
-------- -------- ------- ------- ------------
Balance, March 31, 1997 $ 23,484 $ 15,522 $ 2,836 $ 5,126 $ --
======== ======== ======= ======= ============
</TABLE>
19
<PAGE> 20
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, 1996 $ 12,063 $ 9,178 $ 2,515 $ -- $370
New REO 6,000 4,320 1,680
Sales (6,249) (4,579) (1,670)
Writedowns (388) (59) (329)
-------- ------- ------- ----------- ----
Balance, March 31, 1997 $ 11,426 $ 8,860 $ 2,196 $ -- $370
======== ======= ======= =========== ====
</TABLE>
Assets secured by single family residential properties comprised the largest
portion of nonperforming assets. As of March 31, 1997, $15.5 million or 66.1% of
NPLs and $8.9 million or 77.5% of REOs were secured by single family residential
properties.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, the Company increased its allowance for loan losses to $40.3
million for March 31, 1997 compared to $40.2 million for December 31, 1996.
While the Company's portfolio consists primarily of single family loans, no
single loan, borrower or series of loans comprise a significant portion of
the total portfolio. The provision and allowance for loan losses are indicative
of loan volumes, loss trends and management's analysis of market conditions. The
allowance for loan losses is maintained at a level believed by management to be
adequate to absorb potential losses in the loan portfolio.
The following table presents summarized data relative to the allowance for loan
losses:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans $ 1,826,979 $ 1,731,617
Allowance for loan losses 40,273 40,211
Allowance for real estate losses 784 784
Loans past due 60 days or more 20,650 19,546
Nonperforming loans 23,484 20,939
Nonperforming assets (1) 34,910 33,002
Allowance for loan losses as a percent of:
Total loans (2) 2.2% 2.3%
Loans past due 60 days or more 195.0% 205.7%
Nonperforming loans 171.5% 192.0%
Total allowance as a percent of nonperforming assets 117.6% 124.2%
Nonperforming loans as a percent of total loans 1.3% 1.2%
Nonperforming assets as a percent of total assets 1.0% 1.0%
</TABLE>
- ------------------------
(1) Nonperforming loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
20
<PAGE> 21
The table below provides the activity of the allowance for loan losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 40,211 $ 39,260
Chargeoffs:
Mortgage loans (939) (632)
Consumer loans (3,786) (4,694)
-------- --------
(4,725) (5,326)
Recoveries:
Mortgage loans 8 54
Consumer loans 1,094 1,451
-------- --------
1,102 1,505
-------- --------
Net chargeoffs (3,623) (3,821)
Reclassifications (686)
Provision for loan losses 4,371 5,600
-------- --------
Balance at end of period $ 40,273 $ 41,039
======== ========
Ratio of net chargeoffs during period to average
loans outstanding during the period (annualized) 0.77% 0.77%
======== ========
</TABLE>
Changes in the allowance for real estate losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $784 $784
Provision for real estate losses
---- ----
Balance at end of period $784 $784
==== ====
</TABLE>
21
<PAGE> 22
RESULTS OF OPERATIONS
SUMMARY
The Company reported net income of $7.9 million for the three months ended March
31, 1997, compared to $9.8 million for the comparable period of 1996. Return on
average assets was 0.94% for the three months ended March 31, 1997, compared to
1.11% for the same period of 1996. Return on average equity was 9.96% for the
three months ended March 31, 1997, compared to 13.11% for the comparable period
of 1996. Net income was primarily affected by the following factors:
- Net interest income increased primarily due to a larger net interest
rate spread.
- The automobile lending income increase is primarily due to wider
interest rate spreads and an increase in the overall servicing
portfolio which was offset by a decrease in gain on sale of automobile
loans.
- Salaries and employee benefits increased primarily due to the increase
in the number of employees as a result of expansion of operations in
both the automobile lending and mortgage banking businesses.
- Miscellaneous expense increased primarily as a result of expansion of
operations.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1997 was $26.0 million.
For the same period of 1996, net interest income totalled $22.9 million.
The total interest rate spread increased 19 basis points for the three months
ended March 31, 1997, compared to the same period of 1996 due to an increase of
13 basis points in the yield on interest earning assets while the cost of funds
decreased by 6 basis points.
The 13 basis point increase in yield on interest earning assets for the three
months ended March 31, 1997, compared to the same period of 1996 was affected by
a 131 basis point increase in the yield on the consumer loan portfolio, which is
due to a shift in product mix to higher yielding loans.
22
<PAGE> 23
Interest rates for interest earning assets and liabilities for the three months
ended March 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
------ ------
YIELD/ YIELD/
RATE RATE
------ ------
<S> <C> <C>
Interest earning assets:
Investment securities (1) 5.48% 5.46%
Mortgage-backed securities (1) 7.32 7.03
Other investments 5.65 5.23
Loans:
Consumer 16.11 14.80
Mortgage (2) 7.66 7.78
Commercial 8.58
----- -----
Total interest earning assets 8.47 8.34
Interest bearing liabilities:
Deposits 5.58 5.76
Subordinated debt 8.81 8.81
Repurchase agreements 5.46 5.19
FHLB advances and other borrowings 6.55 6.48
----- -----
Total interest bearing liabilities 5.81 5.87
----- -----
Interest rate spread 2.66% 2.47%
===== =====
Net yield on average interest
earning assets 3.47% 3.20%
===== =====
</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.
ASSET/LIABILITY MANAGEMENT
One of the key components to the Company's ongoing profitability is, among other
factors, the extent to which the effect of changes in interest rates on its
earnings are minimized. Thus, a major objective of the Company'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.
23
<PAGE> 24
The Company originates both adjustable-rate mortgages ("ARM") and fixed-rate
mortgages. To minimize the interest rate risk associated with its real estate
loan portfolio, the Company generally retains the ARMs in its own loan portfolio
and sells its fixed-rate loans in the secondary market with servicing rights
retained. At March 31, 1997, the Company serviced $4.6 billion in mortgage real
estate loans for others. ARMs and adjustable-rate mortgage-backed securities
("MBS") amounted to 61% of the total mortgage loans and MBS held by the Company
at March 31, 1997. Interest rates generally adjust on a monthly, semi-annual or
annual basis with 87% of the Company's adjustable mortgage loans adjusting
monthly.
The Company also originates fixed-rate consumer loans. To minimize interest rate
risk associated with its consumer loan portfolio, the Company has sold
substantially all of its consumer loan production in securitization transactions
in which it has retained the servicing rights. The interest rate passed through
to the purchasers of those consumer loans is fixed, which provides off balance
sheet matched funding for the majority of the Company's consumer loans. At March
31, 1997, the Company serviced $3.0 billion in consumer loans for others.
Approximately 30% of the Company's other borrowed funds at March 31, 1997 had
fixed rates and maturities greater than one year. Of that amount, 56% were
subordinated debentures redeemable in four years and mature in seven years.
The Company has entered into or committed to interest rate caps and swaps as
hedges against market value changes in designated portions of its MBS portfolio.
At March 31, 1997, caps with notional amounts totalling $200 million and a swap
of $50 million were outstanding. The cap agreements have strike rates of
8.0%,6.0% and 7.5% and expire in September, 1999, April, 2001 and July, 2003,
respectively. The swap has a pay rate of 5.9% and expires in December, 2002. The
Company uses only counterparties with high credit ratings and further reduces
its risk by avoiding any material concentration with a single counterparty.
Credit exposure is limited to those agreements with a positive fair value and
only to the extent of that fair value.
The sensitivity of earnings to interest rate changes may be measured by the
difference, or gap, between the amount of assets and liabilities scheduled to
reprice, based on certain assumptions, within the same period expressed as a
percentage of interest-earning assets. Conceptually, the lower the amount of
this gap, the less sensitive earnings are to interest rate changes. A positive
gap means an excess of assets over liabilities repricing during the same period.
However, this method of measuring interest rate sensitivity does not take into
account the differing repricing characteristics of various types of assets and
liabilities. Thus, certain assets and liabilities that have similar maturities
or periods to reprice may react differently to changes in market interest rates.
For instance, the Company'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.
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
the Company at March 31, 1997. The interest rate sensitivity of the Company'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.
24
<PAGE> 25
INTEREST RATE SENSITIVITY ANALYSIS
AT MARCH 31, 1997
<TABLE>
<CAPTION>
3 YEARS
WITHIN 3 MONTHS 1 YEAR TO 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 $ 27,687 $ 28,400 $ 90,172 $ 146,259
Other investments 71,751 510 72,261
Mortgage-backed securities 217,066 25,862 146,150 $132,898 $304,018 825,994
Consumer loans (1) 24,242 73,892 136,314 59,123 25,291 318,862
Mortgage loans:
Adjustable rate (2) 887,977 268,135 9,062 8,385 16,863 1,190,422
Fixed rate (2) 3,025 8,549 25,369 15,075 245,616 297,634
Construction (2) 6,804 6,804
Commercial 13,257 13,257
---------- ---------- --------- -------- -------- ----------
Total interest earning assets 1,251,809 405,348 407,067 215,481 591,788 2,871,493
Interest bearing liabilities:
Deposits:
Passbook/statement accounts(3) 2,080 5,586 30,665 38,331
Money market deposit
accounts (3) 1,456 3,955 24,547 29,958
Certificate accounts (4) 308,508 1,148,059 306,783 194 1,763,544
FHLB advances (4) 20,000 110,000 76,500 6,500 998 213,998
Subordinated borrowings 105,066 105,066
Other borrowings (4) 314,529 3,445 317,974
---------- ---------- --------- -------- -------- ----------
Total interest bearing liabilities 646,573 1,271,045 438,495 6,694 106,064 2,468,871
---------- ---------- --------- -------- -------- ----------
Excess interest earning assets
(liabilities) 605,236 (865,697) (31,428) 208,787 485,724 402,622
Effect of hedging activities 50,000 (50,000)
---------- ---------- --------- -------- -------- ----------
Hedged excess $ 655,236 $ (865,697) $ (31,428) $208,787 $435,724 $ 402,622
========== ========== ========= ======== ======== ==========
Cumulative excess $ 655,236 $ (210,461) $(241,889) $(33,102) $402,622 $ 402,622
========== ========== ========= ======== ======== ==========
Cumulative excess as a percentage
of total interest earning assets 22.82% (7.33)% (8.42)% (1.15)% 14.02% 14.02%
</TABLE>
- ------------------------
(1) Based on contractual maturities adjusted by the Company'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.
25
<PAGE> 26
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 1997 was $4.4
million compared to $5.6 million during the comparable period of 1996. The
Company recorded a lower provision for loan losses for the first quarter of 1997
compared to 1996 as a result of improved loan loss experience.
NONINTEREST INCOME
Total noninterest income for the three months ended March 31, 1997 was $51.8
million compared to $42.3 million during the comparable period of 1996.
Noninterest income is generated from automobile lending activities, mortgage
banking activities, and other ancillary sources.
AUTOMOBILE LENDING
The Company originates and subsequently sells automobile loans in the secondary
market with servicing rights retained. Income from automobile lending includes
gain from the sale of loans, as well as loan servicing income net of
amortization of RISA and other related income such as document fees and late
charges. For the three months ended March 31, 1997, automobile lending generated
income of $45.6 million compared to $36.4 million for the same period of 1996.
During the three months ended March 31, 1997, net gain from sale of automobile
loans totalled $7.3 million compared to $12.9 million for the same period of
1996. The decrease in the gain on sale reported in 1997 is primarily the result
of a narrowing interest rate spread for automobile loans sold which was slightly
offset by the increase in the amount of automobile loans sold. Automobile loans
sold totalled $500 million for the three months ended March 31, 1997 compared to
$485 million during the same period of 1996.
Gain on sale of automobile loans has fluctuated as a result of changes in the
gross interest rate spread of automobile loans securitized. The gross interest
rate spread is affected by general market conditions and overall market interest
rates. The risks inherent in interest rate fluctuations are substantially
reduced through hedging activities.
Net loan servicing income totalled $29.4 million for the three months ended
March 31, 1997, compared to $16.4 million for the comparable period of 1996. The
Company serviced $3.0 billion of consumer loans for others at March 31, 1997
compared to $2.1 billion at March 31, 1996.
26
<PAGE> 27
Automobile lending income for the three months ended March 31, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-------------------------
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain on sale of automobile loans $ 7,344 $12,890
Loan servicing income 29,449 16,437
Other fee income 8,841 7,121
------- -------
$45,634 $36,448
======= =======
</TABLE>
MORTGAGE BANKING
The Company 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 rights and other income
(primarily late charges). During the three months ended March 31, 1997, mortgage
banking generated income of $5.0 million compared to $4.3 million for the
comparable period of 1996.
Gains on sale of mortgage loans for the three months ended March 31, 1997
totalled $3.1 million compared to $2.3 million during the comparable period of
1996. The increase in gain on sale of mortgage loans is primarily the result of
loan sales of $326 million for the three months ended March 31, 1997 compared to
$275 million for the same period of 1996. Mortgage loans held for sale increased
from $273 million at December 31, 1996 to $372 million at March 31, 1997.
Net loan servicing income was $1.4 million for the three months ended March 31,
1997, relatively constant with the comparable period of 1996. At March 31, 1997,
the Company serviced $4.6 billion of mortgage loans for others compared to $3.4
billion at March 31, 1996. Net loan servicing income did not increase
proportionately with the servicing portfolio, due to the amortization of
originated and purchased mortgage servicing rights which amounted to $1.8
million for the three months ended March 31, 1997 compared to $1.2 million for
the comparable period of 1996.
Mortgage banking income for the three months ended March 31, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net gain (loss) on sale of mortgage loans $3,105 $2,348
Loan servicing income 1,404 1,417
Other 522 549
------ ------
$5,031 $4,314
====== ======
</TABLE>
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, 1997 totalled
$1.3 million compared to $4.4 million for the same period in 1996.
27
<PAGE> 28
Real estate operations include the ongoing costs of operation and disposition
associated with the Company's REOs. Real estate operations had losses of $0.3
million for the three months ended March 31, 1997 compared to losses of $1.6
million for the same period in 1996.
NONINTEREST EXPENSE
Noninterest expense consists of salaries and employee benefits, occupancy
expense, insurance and other operating expenses. Noninterest expense increased
to $57.2 million for the three months ended March 31, 1997 compared to $39.9
million for the same period in 1996. Compensation and benefits increased
primarily due to expansion of operations in both the automobile lending and
mortgage banking businesses. The ratio of annualized operating expense to
average serviced loans was 2.52% for the three months ended March 31, 1997
compared to 2.28% for the three months ended March 31, 1996.
INCOME TAXES
The effective tax rates for the three months ended March 31, 1997 and 1996 were
42.0% and 41.1%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
The Company has diversified sources of funds generated through its operations.
The primary sources include deposits, loan principal and interest payments
received, sale of mortgage loans and consumer loans, and the maturity or sale of
investment securities and MBS. Other sources include commercial paper, Federal
Home Loan Bank advances and repurchase agreements. Prepayments on loans and
mortgage-backed securities and deposit inflows and outflows are affected
significantly by interest rates, real estate sales activity and general economic
conditions.
The Company 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 1997, the Company purchased $2.1 million of MBS
to increase interest spreads. These securities have been segregated, on an
individual security basis, into the available for sale portfolio and the held to
maturity portfolio in the financial statements in accordance with management's
intent and ability to hold the securities to maturity. These purchases included
both fixed and adjustable rate MBS.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions supervised by the
Office of Thrift Supervision ("OTS"). Westcorp's wholly-owned subsidiary,
Western Financial Bank, F.S.B. ("the Bank") is a federally chartered savings
bank. As such, it must follow specific capital guidelines stipulated by the OTS
which involve quantitative measures of the Bank's assets, liabilities and
certain off balance sheet items as calculated under regulatory accounting
practices. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to a
capital directive and certain restrictions on its operations which could have a
direct material effect on the Company's financial statements.
28
<PAGE> 29
At March 31, 1997 and December 31, 1996 , the Company's most recent notification
from the OTS categorized the Company as "well capitalized" under the prompt
corrective action ("PCA") regulations adopted by the OTS pursuant to the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be
categorized as "well capitalized", the Company must maintain minimum capital
ratios as set forth in the table below. The Bank's capital is subject to review
by federal regulators for the components, amounts, risk weighting
classifications and other factors. There are no conditions or events since March
31, 1997 that management believes have changed the Company's category.
The following table summarizes the Company's actual capital and required capital
as of March 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
MARCH 31, 1997 (DOLLARS IN THOUSANDS)
--------------
<S> <C> <C> <C>
Actual Capital:
Amount $355,608 $355,608 $479,883
Capital ratio 10.36% 10.36% 10.29%
FIRREA minimum required capital:
Amount $ 51,485 $102,971 $373,038
Capital ratio 1.50% 3.00% 8.00%
Excess $304,123 $252,637 $106,845
FDICIA well capitalized required capital:
Amount N/A $172,366 $466,298
Capital ratio N/A 5.00% 10.00%
Excess N/A $183,242 $ 13,585
DECEMBER 31, 1996
-----------------
Actual Capital:
Amount $348,938 $348,938 $467,563
Capital ratio 10.53% 10.53% 10.91%
FIRREA minimum required capital:
Amount $ 49,707 $ 99,414 $342,915
Capital ratio 1.50% 3.00% 8.00%
Excess $299,231 $249,524 $124,648
FDICIA well capitalized required capital:
Amount N/A $166,838 $428,644
Capital ratio N/A 5.00% 10.00%
Excess N/A $182,100 $ 38,919
</TABLE>
29
<PAGE> 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company or its subsidiaries are involved as parties to
certain legal proceedings incidental to their businesses. The
Company believes that the outcome of such proceedings will not
have a material effect upon the Company's financial condition,
results of operations and cash flows.
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
A report on form 8-K was filed May 6, 1997 announcing the
departure of Lee Thyer, Senior Executive Vice President-Branch
Division, and Director of WFS Financial Inc.
30
<PAGE> 31
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 15, 1997 By: /s/ JOY SCHAEFER
----------------------------- ------------------------------------
Joy Schaefer
Senior Executive Vice President
and Chief Operating Officer
Date: May 15, 1997 By: /s/ LEE A. WHATCOTT
----------------------------- ------------------------------------
Lee A. Whatcott
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
<PAGE> 1
Exhibit 11 Computation of Earnings Per Share
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average and common equivalent shares 26,274,339 26,070,903
----------- -----------
Net income $ 7,896,007 $ 9,848,110
=========== ===========
Net income per share $ 0.30 $ 0.38
=========== ===========
FULLY DILUTED:
Weighted average and common equivalent shares 26,274,339 26,070,903
----------- -----------
Net income $ 7,896,007 $ 9,848,110
=========== ===========
Net income per share $ 0.30 $ 0.38
=========== ===========
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 93,161
<INT-BEARING-DEPOSITS> 510
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 545,625
<INVESTMENTS-CARRYING> 426,630
<INVESTMENTS-MARKET> 427,492
<LOANS> 1,826,979
<ALLOWANCE> 40,273
<TOTAL-ASSETS> 3,405,772
<DEPOSITS> 1,908,977
<SHORT-TERM> 317,974
<LIABILITIES-OTHER> 512,420
<LONG-TERM> 319,064
0
0
<COMMON> 26,014
<OTHER-SE> 293,765
<TOTAL-LIABILITIES-AND-EQUITY> 3,405,772
<INTEREST-LOAN> 43,884
<INTEREST-INVEST> 17,163
<INTEREST-OTHER> 1,483
<INTEREST-TOTAL> 62,530
<INTEREST-DEPOSIT> 25,935
<INTEREST-EXPENSE> 36,481
<INTEREST-INCOME-NET> 26,049
<LOAN-LOSSES> 4,371
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 51,760
<INCOME-PRETAX> 16,221
<INCOME-PRE-EXTRAORDINARY> 7,896
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,896
<EPS-PRIMARY> 30
<EPS-DILUTED> 30
<YIELD-ACTUAL> 3.47
<LOANS-NON> 23,484
<LOANS-PAST> 1,235
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 40,211
<CHARGE-OFFS> 4,725
<RECOVERIES> 1,102
<ALLOWANCE-CLOSE> 40,273
<ALLOWANCE-DOMESTIC> 40,273
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
