<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
COMMISSION FILE NUMBER 33-13646
-------------------------------
WESTCORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(949) 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, 1998, the registrant had 26,321,654 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, 1998
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, 1998 and December 31, 1997 3
Consolidated Statements of Income (loss) and Comprehensive Income
(loss) for the Three Months Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
</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,
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash $ 69,421 $ 73,783
Interest-bearing deposits with other financial institutions 510 15,510
Other short-term investments 28,667 84,136
Investment securities available for sale 123,827 123,409
Mortgage-backed securities available for sale 1,015,087 941,448
Loans receivable, net of allowance for loan losses (1998: $36,245;
1997: $33,834) 1,014,647 1,126,322
Loans held for sale 872,021 712,554
Amounts due from trusts 331,344 295,123
Retained interests in securitized assets 177,307 181,177
Capitalized servicing rights 41,325 37,417
Premises and equipment, net 87,664 89,791
Real estate owned, net 6,302 6,336
Federal Home Loan Bank stock 29,926 25,762
Other assets 14,758 16,097
---------- ----------
$3,812,806 $3,728,865
========== ==========
LIABILITIES
Deposits $2,159,776 $2,000,896
Securities sold under agreements to repurchase 330,093 287,071
Short-term borrowings 56,799 191,880
Federal Home Loan Bank advances 84,941 84,971
Amounts held on behalf of trustee 518,226 488,653
Other liabilities 63,418 57,910
---------- ----------
3,213,253 3,111,381
SUBORDINATED DEBENTURES 239,445 239,195
MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 27,344 29,538
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 45,000,000 shares; 26,301 26,279
issued and outstanding 26,301,428 shares as of March 31, 1998 and
26,278,593 shares as of December 31, 1997
Additional paid-in capital 185,345 185,187
Retained earnings 116,596 131,427
Unrealized gains on securities available for sale and retained interests
in securitized assets, net of income taxes 4,522 5,858
---------- ----------
332,764 348,751
---------- ----------
$3,812,806 $3,728,865
========== ==========
</TABLE>
- -------------
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Interest income:
Loans, including fees $ 44,977 $ 43,884
Mortgage-backed securities 16,095 15,186
Investment securities 1,710 1,977
Other 2,264 1,483
------------ ------------
TOTAL INTEREST INCOME 65,046 62,530
Interest expense:
Deposits 27,132 25,935
Federal Home Loan Bank advances and other borrowings 8,697 7,043
Securities sold under agreements to repurchase 4,326 3,503
------------ ------------
TOTAL INTEREST EXPENSE 40,155 36,481
------------ ------------
NET INTEREST INCOME 24,891 26,049
Provision for loan losses 6,388 4,371
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,503 21,678
------------ ------------
Noninterest income:
Automobile lending 25,292 45,634
Mortgage banking (587) 5,034
Investment and mortgage-backed securities gains 2,544
Insurance income 1,495 1,265
Real estate operations (845) (259)
Rental operations (181) (258)
Miscellaneous 498 344
------------ ------------
TOTAL NONINTEREST INCOME 28,216 51,760
------------ ------------
Noninterest expense:
Salaries and employee benefits 38,109 33,462
Occupancy 3,516 3,819
Insurance 447 160
Restructuring charge 10,500
Miscellaneous 18,904 19,776
------------ ------------
TOTAL NONINTEREST EXPENSE 71,476 57,217
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (24,757) 16,221
Income taxes (10,392) 6,814
------------ ------------
INCOME (LOSS) BEFORE MINORITY INTEREST (14,365) 9,407
Minority interest in earnings (losses) of subsidiaries (2,162) 1,511
------------ ------------
NET INCOME (LOSS) (12,203) 7,896
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) NET OF INCOME TAXES:
Decrease in unrealized gains on securities available for sale and
retained interests in securitized assets (1,336) (1,164)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (13,539) $ 6,732
============ ============
NET INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS - BASIC $ (0.46) $ 0.30
============ ============
NET INCOME (LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS - DILUTED $ (0.46) $ 0.30
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS - BASIC 26,288,431 26,012,643
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS - DILUTED 26,288,431 26,274,339
============ ============
</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,
-------------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (12,203) $ 7,896
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan losses 6,388 4,371
Depreciation and amortization 3,996 3,067
Gain on sale of investment securities and mortgage-backed securities (2,544)
Gain on sale of loans (10,230) (4,239)
Gain on disposition of real estate owned (296) (560)
Net change in loans held for sale (149,237) 139,866
Net change in retained interests in securitized assets 3,807 (14,582)
Net change in capitalized servicing rights (3,908) (3,725)
Other, net 7,854 (7,176)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (156,373) 124,918
INVESTING ACTIVITIES:
Investment securities held to maturity:
Purchases (450)
Proceeds from maturities 70
Investment securities available for sale:
Purchases (71) (55)
Proceeds from maturities 33
Mortgage-backed securities held to maturity:
Purchases (391)
Payments 15,515
Mortgage-backed securities available for sale:
Purchases (226,075) (1,693)
Proceeds from sale 121,304
Payments 30,537 7,954
Net change in loans receivable 102,378 (239,325)
Additions to premises and equipment (1,157) (7,164)
Disposition of real estate owned 3,256 5,449
Purchases of FHLB stock (4,164) (516)
Proceeds from sale of FHLB stock 1,159
Increase in amounts due from trusts (36,221) (25,641)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (10,180) (245,088)
FINANCING ACTIVITIES:
Increase in deposits 158,880 35,035
Increase in securities sold under agreements to repurchase 43,022 2,117
Decrease in FHLB advances, net (30) (12,002)
Decrease in short-term borrowings (135,081) (27,500)
Increase in amounts held on behalf of trustee 29,573 83,485
Decrease in minority interest (2,194) (834)
Proceeds from issuance of common stock 180 140
Issuance of subsidiary common stock (2,423)
Cash dividends (2,628) (2,600)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 91,722 75,418
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (74,831) (44,752)
Cash and cash equivalents at beginning of period 173,429 138,423
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 98,598 $ 93,671
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 44,715 $ 37,560
Income taxes 1,451 32
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Acquisition of real estate acquired through foreclosure $ 2,859 $ 6,000
Loans to facilitate the sale of real estate owned 67 1,360
Decrease in unrealized gains on securities available for sale and retained
interests in securitized assets, net of income taxes 1,336 1,164
</TABLE>
- --------------
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
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 (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. 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, 1997.
Certain amounts from the 1997 Consolidated Financial Statements have been
reclassified to conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 131 "Disclosures about Segments of an
Enterprise and Related Information". This Statement provides guidance for the
way public enterprises report information about operating segments in annual
financial statements and requires selected information about operating segments
in annual financial statements and in interim financial reports. It also
requires certain related disclosures about products and services, geographic
areas and major customers. The segment and other information disclosure are
required for the year ended December 31, 1998. In the initial year of
application, comparative information for earlier years is to be restated.
6
<PAGE> 7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - INVESTMENT SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------
Investment securities available for sale were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------------
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 $121,701 $ 527 $ 149 $122,079
Obligations of states and political
subdivisions 1,511 35 1,546
Other 202 202
-------- -------- -------- --------
$123,414 $ 562 $ 149 $123,827
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 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 $121,716 $ 418 $ 420 $121,714
Obligations of states and political
subdivisions 1,511 21 1,532
Other 163 163
-------- -------- -------- --------
$123,390 $ 439 $ 420 $123,409
======== ======== ======== ========
</TABLE>
NOTE C - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------------
Mortgage-backed securities available for sale were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $ 860,692 $ 10,480 $ 5,303 $ 865,869
FNMA participation certificates 137,022 1,673 26 138,669
FHLMC participation certificates 7,713 37 123 7,627
Other 2,861 71 10 2,922
---------- ---------- ---------- ----------
$1,008,288 $ 12,261 $ 5,462 $1,015,087
========== ========== ========== ==========
</TABLE>
7
<PAGE> 8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates $778,302 $ 12,710 $ 4,070 $786,942
FNMA participation certificates 142,572 972 93 143,451
FHLMC participation certificates 8,188 42 105 8,125
Other 2,912 54 36 2,930
-------- -------- -------- --------
$931,974 $ 13,778 $ 4,304 $941,448
======== ======== ======== ========
</TABLE>
NOTE D - NET LOANS RECEIVABLE
- ------------------------------
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Mortgage $ 1,535,305 $ 1,529,764
Construction 9,810 15,835
----------- -----------
1,545,115 1,545,599
Undisbursed loan proceeds (4,394) (6,711)
----------- -----------
1,540,721 1,538,888
----------- -----------
Consumer:
Automobile loans 313,455 253,455
Other 44,732 57,758
Unearned discounts (25,876) (22,225)
----------- -----------
332,311 288,988
----------- -----------
Commercial 45,101 41,668
----------- -----------
1,918,133 1,869,544
Allowance for loan losses (36,245) (33,834)
Net deferred loan costs 4,780 3,166
----------- -----------
1,886,668 1,838,876
----------- -----------
Less: Loans held for sale
Mortgage 600,242 529,026
Consumer 271,779 183,528
----------- -----------
872,021 712,554
----------- -----------
$ 1,014,647 $ 1,126,322
=========== ===========
</TABLE>
Loans serviced by Westcorp ("the Company") for the benefit of others totalled
approximately $8.6 billion and $8.4 billion at March 31, 1998 and December 31,
1997, respectively. These amounts are not reflected in the accompanying
Unaudited Consolidated Statements of Financial Condition.
8
<PAGE> 9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - SECURITIZED ASSETS AND CAPITALIZED SERVICING RIGHTS
- ------------------------------------------------------------
SFAS 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" 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. The Company did not recognize any CSR as of March 31, 1998
or December 31, 1997 with respect to securitized automobile loans. Previous
accounting guidance did not separately distinguish these rights.
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 the
difference between the coupon rate of the automobile loans sold and the interest
rate paid to the investors less contractually specified servicing and guarantor
fees.
Prepayment and credit loss assumptions are utilized to project future excess
spread 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. Similar to
available for sale securities, RISAs 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 income taxes.
The following table presents the activity of the RISA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $ 181,177 $ 121,597
Additions 23,388 21,784
Amortization (27,195) (7,201)
Change in unrealized gains on RISA (63) (1,067)
--------- ---------
Ending balance $ 177,307 $ 135,113
========= =========
</TABLE>
9
<PAGE> 10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
When initially valuing the RISA, the Company establishes 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
automobile loans sold and the certificate rate paid to the investors, less the
contractually specified servicing fee 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.
The following table sets forth the components of the RISA:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 441,073 $ 438,190
Off-balance sheet allowance for losses (243,405) (236,796)
Discount to present value (20,361) (20,217)
----------- -----------
Retained interests in securitized assets $ 177,307 $ 181,177
=========== ===========
Outstanding balance of automobile loans sold through securitizations $ 3,536,624 $ 3,449,590
Off-balance sheet allowance for losses as a percent of automobile
loans sold through securitizations 6.88% 6.86%
</TABLE>
The Company believes that the off-balance sheet allowance for losses is
currently adequate to absorb potential losses in the sold portfolio.
10
<PAGE> 11
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CAPITALIZED SERVICING RIGHTS
Capitalized servicing rights consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Purchased mortgage servicing rights $ 13,723 $ 14,695
Originated mortgage servicing rights 33,212 26,161
Impairment allowance for mortgage servicing rights (5,610) (3,439)
-------- --------
$ 41,325 $ 37,417
======== ========
</TABLE>
The Company retains the rights to service most loans securitized or sold. CSR
assets represent an allocation of the cost basis of loans sold between the CSR
and the loans based upon their relative fair value at the date the loans are
originated or purchased. The fair value of CSR is calculated by estimating
future servicing revenues, including servicing fees, late charges, other
ancillary income, and float benefit, less the cost to service loans.
During the three months ended March 31, 1998, the Company capitalized servicing
rights totalling $8.8 million compared to $3.2 million for the comparable period
in 1997. The mortgage servicing rights are included in capitalized servicing
rights and the amortization is a component of mortgage banking income in
noninterest income.
The fair value of the CSR was $44.0 million and $42.8 million at March 31, 1998
and December 31, 1997, 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, CSR are stratified on the basis of loan type, loan coupon
and loan term.
CSR are evaluated for impairment based on the excess of the carrying amount of
the CSR over their fair value.
Amortization of capitalized servicing rights is reflected as a component of
mortgage banking income in noninterest income. Amortization expense for the
three months ended March 31, 1998 was $4.9 million compared to $1.9 million for
the comparable period of 1997.
NOTE F - DIVIDENDS
- ------------------
On January 29, 1998, the Company declared a cash dividend of $0.10 per share
which was paid on February 23, 1998. On April 30, 1998, the Company declared a
cash dividend of $0.05 per share for shareholders of record as of May 14, 1998
payable May 22, 1998.
11
<PAGE> 12
NOTE G - EARNINGS PER SHARE
- ---------------------------
SFAS 128, "Earnings Per Share" was issued by the FASB in February, 1997 and
adopted on December 31, 1997. Under the provisions of SFAS 128, primary and
fully diluted earnings per share were replaced with basic and diluted earnings
per share in an effort to simplify the computation of these measures and align
them more closely with the methodology used internationally. Basic earnings per
share is calculated by dividing net income available to common stockholders by
the weighted average number of common share outstanding and does not include the
impact of any potentially dilutive common stock equivalents. The diluted
earnings per share calculation method is similar to the previously required
fully diluted earnings per share method and is arrived at by dividing the
weighted average number of shares outstanding, adjusted for the dilutive effect
of outstanding stock options. For purposes of comparability, all prior period
earnings per share data has been restated.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
BASIC
Net income (loss) $ (12,203) $ 7,896
========== ===========
Average common shares outstanding 26,288,431 26,012,643
========== ===========
Net income (loss) per common share - basic $ (0.46) $ 0.30
========== ===========
DILUTED
Net income (loss) $ (12,203) $ 7,896
========== ===========
Average common shares outstanding 26,288,431 26,012,643
Stock option adjustment 261,696
---------- -----------
Average common shares outstanding 26,288,431 26,274,339
========== ===========
Net income (loss) per common share - diluted $ (0.46) $ 0.30
========== ===========
</TABLE>
Options to purchase 868,455 and 2,000 shares of common stock at March 31, 1998
and 1997, respectively, were not included in the computation of diluted earnings
per share because the Company had a loss or the exercise prices of the options
were greater than the average market price of the common share, and therefore,
the effect would be antidilutive. The weighted average exercise price at March
31, 1998 and 1997 was $14.91 and $22.75, respectively, for the options
outstanding.
NOTE H - REPORTING COMPREHENSIVE INCOME
- ---------------------------------------
As of January 1, 1998 the Company adopted SFAS 130, "Reporting Comprehensive
Income". SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or shareholders' equity. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
During the quarter ended March 31,1998, the Company had a pre-tax decrease in
unrealized gains on securities available for sale and retained interests in
securitized assets of $2.3 million and $2.0 million, respectively.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Total assets increased $83.9 million or 2.3% to $3.8 billion at March 31, 1998
from $3.7 billion at December 31, 1997. This increase is primarily the result of
an increase in mortgage-backed securities available for sale and loans held for
sale.
LOANS
- -----
Loans (including loans held for sale), net of unearned discounts and undisbursed
loan proceeds, increased $47.8 million or 2.6% from $1.8 billion at December 31,
1997 to $1.9 billion at March 31, 1998. The increase is due to an increase in
the volume of origination. 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 $600 million are mortgage loans
secured primarily by single family residences and $272 million which are
consumer loans secured by automobiles.
Consumer loan originations increased by $54.4 million to $609 million for the
three months ended March 31, 1998 from $554 million for the same period in 1997,
which represents a 9.8% increase in production. The Company securitized $525
million of automobile loans for the three months ended March 31, 1998 compared
with $500 million for the same period in 1997.
Real estate originations increased $506 million to $947 million for the three
months ended March 31, 1998 from $441 million for the same period in 1997, which
represents a 114% increase in production. However, due to rapid prepayments
caused by the lower interest rate environment, the Company's portfolio of
serviced mortgage loans (which include both owned loans and those serviced for
others) grew at a slower pace, from $6.4 billion at December 31, 1997 to $6.6
billion at March 31, 1998. The Company sold $820 million of mortgage loans for
the three months ended March 31, 1998 compared with $326 million for the same
period in 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------
1998 1997
-------------------------- --------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $1,538,888 $ 288,988 $1,438,892 $ 284,858
Originations (1) 947,055 608,544 441,524 554,159
Sales (2) 819,731 525,000 326,026 500,000
Principal reductions (3) 125,491 40,221 59,530 20,155
---------- ---------- ---------- ----------
Ending balance $1,540,721 $ 332,311 $1,494,860 $ 318,862
========== ========== ========== ==========
</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.
13
<PAGE> 14
The Company's real estate loan portfolio (including those held for sale and
excluding net deferred loan costs) consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
---------------------- -------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds $1,091,385 70.8% $1,062,208 69.0%
Second trust deeds 45,924 3.0 48,393 3.1
---------- ----- ---------- -----
1,137,309 73.8 1,110,601 72.1
Multifamily residential loans 393,512 25.5 410,139 26.7
Construction loans 5,416 0.4 15,835 1.0
Other 8,878 0.6 9,024 0.6
---------- ----- ---------- -----
1,545,115 100.3 1,545,599 100.4
Undisbursed loan proceeds (4,394) (0.3) (6,711) (0.4)
---------- ----- ---------- -----
$1,540,721 100.0% $1,538,888 100.0%
========== ===== ========== =====
</TABLE>
The following table sets forth information on the amount of fixed rate mortgage
loans and adjustable rate mortgage loans, (excluding undisbursed loan proceeds
and net deferred loan costs), in the Company's portfolio.
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans $ 573,455 37.2% $ 417,991 27.2%
Adjustable rate loans:
Negative amortization 655,230 42.5 707,431 46.0
Without negative amortization 312,036 20.3 413,466 26.8
---------- ----- ---------- -----
$1,540,721 100.0% $1,538,888 100.0%
========== ===== ========== =====
</TABLE>
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile loans, net $287,579 86.5% $231,230 80.0%
Other 44,732 13.5 57,758 20.0
-------- ----- -------- -----
$332,311 100.0% $288,988 100.0%
======== ===== ======== =====
</TABLE>
The Company had outstanding commercial loans of $45.1 million at March 31, 1998
compared to $41.7 million at December 31, 1997. The Company originated $19.1
million of commercial loans for the quarter ended March 31, 1998 compared to
$7.7 million for the comparable period in 1997. Though the Company continues to
focus on expanding its commercial banking operations, it is not a significant
source of revenue for the Company for the quarter ended March 31, 1998.
14
<PAGE> 15
MORTGAGE-BACKED SECURITIES
- --------------------------
During the first three months of 1998, the Company purchased $226 million and
sold $121 million of mortgage-backed securities ("MBS"). This is part of the
Company's continuing strategy to increase net interest income.
ASSET QUALITY
- -------------
DELINQUENCY
The percent of loans 60 days or more delinquent remained unchanged at 0.9% at
March 31, 1998 compared to December 31, 1997. Delinquent loans by type of loan
and as a percentage of loans by type are summarized as follows at March 31, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1998
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 $ 1,755 0.2% $ 8,847 0.8% $10,602 0.9%
Multifamily residential loans 556 0.1 1,075 0.3 1,631 0.4
Consumer 2,478 0.8 1,512 0.5 3,990 1.2
Construction 564 17.8 564 17.8
------- ---- ------- ---- ------- ---
$ 4,789 0.3% $11,998 0.6% $16,787 0.9%
======= ==== ======= ==== ======= ===
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 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 $ 1,161 0.1% $11,832 1.1% $12,993 1.2%
Multifamily residential loans 350 0.1 588 0.1 938 0.2
Consumer 2,093 0.7 1,067 0.4 3,160 1.1
Construction 221 2.8 221 2.8
------- --- ------- --- ------- ---
$ 3,604 0.2% $13,708 0.7% $17,312 0.9%
======= === ======= === ======= ===
</TABLE>
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") decreased $5.1 million or 18.9% to $21.8
million at March 31, 1998 compared to $26.9 million at December 31, 1997. At
March 31, 1998, NPAs as a percentage of total assets decreased to 0.6% compared
to 0.7% at December 31, 1997.
15
<PAGE> 16
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 costs. NPLs are defined as all loans (other than consumer
loans which are charged off at 120 days) on nonaccrual, which include all
mortgage and commercial loans 90 days or more past due or impaired loans. When a
loan is designated as nonaccrual, all previously accrued but unpaid interest is
reversed. Interest on nonperforming loans excluded from interest income
decreased to $0.6 million at March 31, 1998 from $1.2 million at March 31, 1997.
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. At March
31, 1998, impaired loans decreased to $4.7 million from $4.8 million at December
31, 1997.
NONPERFORMING LOANS
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unimpaired loans placed on nonaccrual $10,074 $14,979
Impaired loans 4,659 4,806
------- -------
$14,733 $19,785
======= =======
</TABLE>
Nonperforming loans by loan type consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Single family residential loans $ 8,867 $13,309
Multifamily 5-36 units 1,295 2,251
Multifamily 37+ units 3,840 3,866
Other 731 359
------- -------
$14,733 $19,785
======= =======
</TABLE>
16
<PAGE> 17
The migration of nonperforming loans and real estate owned from December 31,
1997 to March 31, 1998 is shown below:
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1-4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
-------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 19,785 $ 13,309 $ 2,251 $ 3,866 $ 359
New nonperforming loans 4,343 3,020 779 544
REO (2,977) (2,803) (174)
Cures and payoffs (6,203) (4,591) (1,561) (26) (25)
Chargeoffs (215) (68) (147)
-------- -------- -------- -------- --------
Balance, March 31, 1998 $ 14,733 $ 8,867 $ 1,295 $ 3,840 $ 731
======== ======== ======== ======== ========
</TABLE>
REAL ESTATE OWNED
<TABLE>
<CAPTION>
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1-4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
------- --------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 7,120 $ 5,148 $ 1,693 $ 279
New REO 3,426 3,253 173
Sales (3,027) (2,882) (145)
Writedowns (433) (146) (112) (175)
------- ------- ------- ------- -------
Balance, March 31, 1998 $ 7,086 $ 5,373 $ 1,609 $ -- $ 104
======= ======= ======= ======= =======
</TABLE>
Assets secured by single family residential properties comprised the largest
portion of nonperforming assets although no single loan or series of such loans
predominate. As of March 31, 1998, $8.9 million or 60% of NPLs and $5.4 million
or 76% of REOs were secured by single family residential properties. The Company
had allowance for real estate losses of $784 thousand at March 31, 1998 and
December 31, 1997.
17
<PAGE> 18
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 $36.2
million at March 31, 1998 compared to $33.8 million at December 31, 1997 as a
result of higher losses on automobile loans. 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,
1998 1997
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans (1) $ 1,918,133 $ 1,869,544
Allowance for loan losses 36,245 33,834
Allowance for real estate losses 784 784
Loans past due 60 days or more 16,787 17,312
Nonperforming loans 14,733 19,785
Nonperforming assets (2) 21,819 26,905
Allowance for loan losses as a percent of:
Total loans (1) 1.9% 1.8%
Loans past due 60 days or more 215.9 195.4
Nonperforming loans 245.3 171.0
Total allowance for loan losses and real estate losses as a percent
of nonperforming assets 169.7 128.7
Nonperforming loans as a percent of total loans 0.8 1.1
Nonperforming assets as a percent of total assets 0.6 0.7
</TABLE>
- --------------
(1) Loans, net of unearned discounts and undisbursed loan proceeds.
(2) Nonperforming loans and real estate owned.
18
<PAGE> 19
The following table sets forth the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 33,834 $ 40,211
Chargeoffs:
Mortgage loans (1,251) (939)
Consumer loans (3,381) (3,786)
-------- --------
(4,632) (4,725)
Recoveries:
Mortgage loans 15 8
Consumer loans 640 1,094
-------- --------
655 1,102
-------- --------
Net chargeoffs (3,977) (3,623)
Reclassification (686)
Provision for loan losses 6,388 4,371
-------- --------
Balance at end of period $ 36,245 $ 40,273
======== ========
Ratio of net chargeoffs during period to average
loans outstanding during the period (annualized) 0.82% 0.77%
======== ========
</TABLE>
The allowance for real estate losses of $784 thousand remained unchanged at
March 31, 1998 and December 31, 1997.
19
<PAGE> 20
RESULTS OF OPERATIONS
SUMMARY
- -------
The Company reported a net loss of $12.2 million or $0.46 per diluted share for
the three months ended March 31, 1998, compared to net income of $7.9 million or
$0.30 per diluted share for the comparable period of 1997. Return on average
assets was (1.31%) for the three months ended March 31, 1998, compared to 0.94%
for the same period of 1997. Return on average equity was (14.26%) for the three
months ended March 31, 1998, compared to 9.96% for the comparable period of
1997. Net loss was primarily affected by the following factors:
. Net interest income decreased due to a decline in the yield on
mortgage-backed securities and consumer loans.
. Noninterest income decreased primarily due to lower retained interest
income and higher amortization of Retained Interests in Securitized
Assets as a result of higher automobile losses.
. Provisions for loan losses were increased as a result of higher losses
on automobile loans.
. Noninterest expense increased primarily as a result of restructuring
related costs in the automobile lending operations.
NET INTEREST INCOME
- -------------------
Net interest income for the three months ended March 31, 1998 was $24.9 million.
For the same period of 1997, net interest income totalled $26.0 million.
The total interest rate spread decreased 33 basis points for the three months
ended March 31, 1998, compared to the same period of 1997 due to a decrease of
29 basis points in the yield on interest earning assets while the cost of funds
increased by 4 basis points.
The decrease in income on interest earning assets for the three months ended
March 31, 1998, compared to the same period of 1997 was affected by a 50 basis
point decrease in the yield on the consumer loan portfolio as the Company
increased its mix of prime automobile loans and a 38 basis point decrease in the
yield on mortgage-backed securities.
20
<PAGE> 21
Interest rates for interest earning assets and liabilities for the three months
ended March 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------ ------
YIELD/ YIELD/
RATE RATE
----- -----
<S> <C> <C>
Interest earning assets:
Investment securities (1) 5.48% 5.48%
Mortgage-backed securities(1) 6.94 7.32
Other investments 5.58 5.65
Loans:
Consumer 15.61 16.11
Mortgage (2) 7.51 7.66
Commercial 8.72 8.58
----- -----
Total interest earning assets 8.18 8.47
Interest bearing liabilities:
Deposits 5.35 5.58
Subordinated debentures 8.95 8.81
Securities sold under agreements to repurchase 5.99 5.46
FHLB advances and other borrowings 7.12 6.45
----- -----
Total interest bearing liabilities 5.85 5.81
----- -----
Interest rate spread 2.33% 2.66%
===== =====
Net yield on average interest earning assets 3.07% 3.47%
===== =====
</TABLE>
- ------------
(1) 1997 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.
ASSET/LIABILITY MANAGEMENT
- --------------------------
Asset/liability management is the process of measuring and controlling interest
rate risk through matching the maturity and repricing characteristics of
interest earnings assets with those of interest bearing liabilities.
The Company's approach to asset/liability management includes originating
adjustable rate loans, securitizing loans with liabilities that have similar
repricing and maturity characteristics, matching fixed rate loans held in the
portfolio with advances from the FHLB, selling fixed rate loans and using other
financial instrument agreements.
21
<PAGE> 22
The Company also originates fixed-rate automobile loans. To minimize interest
rate risk associated with its automobile loan portfolio, the Company has sold
substantially all of its automobile loan production in securitization
transactions in which it has retained the servicing rights. The interest rate
passed through to the purchasers of those automobile loans is fixed, which
provides off-balance sheet matched funding for the majority of the Company's
automobile loans. At March 31, 1998, the Company serviced $3.5 billion in
automobile loans for others.
Approximately 35% of the Company's other borrowed funds at March 31, 1998 had
fixed rates and maturities greater than one year. Of that amount, 97% were
subordinated debentures redeemable in three and seven years and maturing in six
and ten years.
The Company uses interest rate swaps, options, caps, floors and forward
agreements as part of its hedging strategy to reduce the sensitivity of its
assets to adverse changes in interest rates. These instruments are carried at,
and included as part of, the basis of the underlying assets. The Company's
interest rate swaps consist of agreements to pay fixed-rate interest and receive
floating-rate interest at specified intervals based on an agreed notional
amount, a specified index and settlement on a net basis. The Company minimizes
the effect of changes in interest rate on loans held for sale by entering into
forward agreements that protect the hedged assets from changes in interest
rates. Master netting agreements are arranged or collateral is obtained through
physical delivery of, or rights to, securities to minimize the Company's
exposure to credit losses in the event of nonperformance by counterparties to
financial instruments.
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. At March
31, 1998, caps with notional amounts totalling $540 million and a swap of $50
million were outstanding. The cap agreements have strike rates that range from
6.0% to 8.0% and expire between September, 1999 and March, 2008. 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 Company's hedging strategy for its loan production includes the use of
forward agreements. The Company enters into these agreements in numbers and
amounts which generally correspond to the principal amount of the sale and/or
securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying loans. Because
of this inverse relationship, the Company can effectively lock in its gain
and/or gross interest rate spread at the time of the hedge transaction. Gains
and losses relative to these agreements are deferred and recognized in full at
the time of loan sale and/or securitization as an adjustment to the gain or loss
on the sale of loans. The Company 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. At March 31, 1998, the
Company held forward agreements with a notional amount outstanding of $140
million.
The Company's ability to maintain a positive spread during periods of
fluctuating interest rates is determined principally by the maturities and
repricing mechanisms of its interest earning assets and interest bearing
liabilities. Synchronizing the repricing of an institution's assets and
liabilities to minimize interest rate risk is commonly referred to as gap
management. Negative gap occurs when an institution's liabilities reprice more
rapidly than its assets and positive gap occurs when an institution's assets
reprice more rapidly than its liabilities.
22
<PAGE> 23
The Company's asset/liability management strategy is to match its loan and
investment products with interest bearing liabilities having similar repricing
characteristics and durations. This strategy includes originating adjustable
rate loans, matching loans with liabilities that have similar repricing and
maturity characteristics, matching fixed rate loans held in the portfolio with
advances from the FHLB, selling fixed rate loans and utilizing financial
instrument agreements. These agreements are used by the Company solely to manage
interest rate risk within its portfolio and include interest rate swaps, caps,
options, floors and forward agreements.
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, 1998. 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.
INTEREST RATE SENSITIVITY ANALYSIS
AT MARCH 31, 1998
<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 $ 5,007 $ 76,623 $ 30,677 $ 10,013 $ 1,507 $ 123,827
Other investments 28,667 510 29,177
Mortgage-backed securities 53,696 153,642 299,240 198,031 310,478 1,015,087
Consumer loans (1) 36,310 85,270 140,929 63,492 6,310 332,311
Mortgage loans:
Adjustable rate (2) 752,032 209,818 961,850
Fixed rate (2) 21,072 81,294 141,162 104,107 225,820 573,455
Construction (2) 5,416 5,416
Commercial 42,683 1,984 134 300 45,101
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 944,883 609,141 612,142 375,943 544,115 3,086,224
Interest bearing liabilities:
Deposits:
Savings accounts (3) 3,887 7,503 7,593 18,983
Money market deposit
accounts (3) 2,151 15,354 156,296 173,801
Certificate of deposit accounts (4) 595,439 1,049,494 152,368 39,560 59 1,836,920
Securities sold under agreements
to repurchase 330,093 330,093
FHLB advances (4) 8 76,540 114 6,630 1,649 84,941
Subordinated debentures 239,445 239,445
Other borrowings (4) 51,834 4,965 56,799
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 983,412 1,148,891 321,336 46,190 241,153 2,740,982
----------- ----------- ----------- ----------- ----------- -----------
Excess interest earning assets
(liabilities) (38,529) (539,750) 290,806 329,753 302,962 345,242
Effect of hedging activities 590,000 (100,000) (215,000) (275,000)
----------- ----------- ----------- ----------- ----------- -----------
Hedged excess (deficit) $ 551,471 $ (539,750) $ 190,806 $ 114,753 $ 27,962 $ 345,242
=========== =========== =========== =========== =========== ===========
Cumulative excess $ 551,471 $ 11,721 $ 202,527 $ 317,280 $ 345,242 $ 345,242
=========== =========== =========== =========== =========== ===========
Cumulative excess as a
percentage of total interest
earning assets 17.87% 0.38% 6.56% 10.28% 11.19% 11.19%
</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.
23
<PAGE> 24
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the three months ended March 31, 1998 was $6.4
compared to $4.4 million during the comparable period of 1997. The increase for
the first quarter of 1998 compared to 1997 is the result of an increase in
automobile loan loss experience due to disruptions in the automobile collections
area during the restructuring. The allowance for loan losses as percent of total
on balance sheet automobile loans increased to 3.4% from 3.1% a year earlier.
NONINTEREST INCOME
- ------------------
Total noninterest income for the three months ended March 31, 1998 was $28.2
million compared to $51.8 million during the comparable period of 1997.
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 and other related
income such as document fees and late charges. Servicing income represents
excess spread earned on securitized automobile loans less any losses not
absorbed by the off-balance sheet allowance for losses. For the three months
ended March 31, 1998, automobile lending generated income of $25.3 million
compared to $45.6 million for the same period of 1997.
During the three months ended March 31, 1998, net gain from sale of automobile
loans totalled $8.3 million compared to $7.3 million for the same period of
1997. The increase in the gain on sale reported for the three months ended March
31, 1998 is primarily the result of wider interest rate spreads and an increase
in the amount of automobile loans sold. Automobile loans sold totalled $525
million for the three months ended March 31, 1998 compared to $500 million
during the same period of 1997. 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 $7.8 million for the three months ended March
31, 1998, compared to $29.4 million for the comparable period of 1997 due to
lower retained interest income and higher amortization of retained interests in
securitized assets as a result of higher loan losses. Despite the increased
losses, no single RISA has been impaired. The Company serviced $3.5 billion of
consumer loans for others at March 31, 1998 compared to $3.0 billion at March
31, 1997.
24
<PAGE> 25
Automobile lending income for the three months ended March 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain on sale of automobile loans $ 8,270 $ 7,344
Loan servicing income 7,839 29,449
Other fee income 9,183 8,841
------- -------
$25,292 $45,634
======= =======
</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, 1998, mortgage
banking generated a loss of $0.6 million compared to income of $5.0 million for
the comparable period of 1997. The Company's mortgage banking results were
directly impacted by the volatile interest rate environment that has caused
rapid prepayments and accelerated the amortization of the Company's capitalized
servicing assets. Gains on sale of mortgage loans for the three months ended
March 31, 1998 totalled $2.0 million compared to $3.1 million during the
comparable periods of 1997. Net loan servicing loss was $3.2 million for the
three months ended March 31, 1998 compared to net loan servicing income of $1.4
million for the comparable period of 1997.
Mortgage banking income for the three months ended March 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain on sale of mortgage loans $ 1,960 $ 3,108
Loan servicing income (loss) (3,229) 1,404
Other fee income 682 522
------- -------
$ (587) $ 5,034
======= =======
</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, 1998 totalled
$1.5 million compared to $1.3 million for the same period in 1997.
Real estate operations include the ongoing costs of operation and disposition
associated with the Company's REOs. Real estate operations had losses of $0.8
million for the three months ended March 31, 1998 compared to $0.3 million for
the same periods in 1997.
NONINTEREST EXPENSE
- -------------------
Noninterest expense consists of salaries and employee benefits, occupancy, data
processing expense, insurance, restructuring charge and other miscellaneous
expenses. Noninterest expense increased to $71.5 million for the three months
ended March 31, 1998 compared to $57.2 million for the same period in 1997 due
to a $10.5 million restructuring charge related to the automobile lending
business and an increase of $1.2 million in salaries and employee benefits
discussed in the restructuring paragraph below. The ratio of noninterest
expenses to average serviced assets was 2.4% for the three months ended March
31, 1998 compared to 2.5% for the comparable period in 1997.
RESTRUCTURING
- -------------
During the first quarter of 1998, the Company's automobile lending business
incurred $17.4 million of pre-tax restructuring costs as part of the
consolidation of the Company's western region Dealer Center and Branch Divisions
into a single automobile lending operation and the elimination of 150 redundant
positions. Restructuring related costs included $1.2 million of salaries and
employee benefits for retention arrangements for selected employees, $3.0
million in increased provisions as a result of disruptions in the collections
area during the consolidation and $2.7 million in reduced automobile loan
servicing income. Restructuring related costs include a pre-tax restructuring
charge of $10.5 million of which $0.6 million was for employee severance and
$9.9 million was for lease termination fees and writeoff or disposition of
assets in closed offices. The restructuring program is designed to reduce
operating costs by approximately $1.0 million each month thereafter.
INCOME TAXES
- ------------
The effective tax rate for the three months ended March 31, 1998 and 1997 was
42.0%.
CAPITAL RESOURCES AND LIQUIDITY
The Company has multiple sources of funds generated through its operations.
Primary sources of funds include deposits, loan principal and interest payments
received, sales of mortgage loans and consumer loans, sales of or payments on
mortgage-backed securities and the maturity or sale of investment securities.
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.
Although the Company does not have publicly rated debt, the Company's
wholly-owned subsidiary, Western Financial Bank ("the Bank") receives senior
and subordinated debt ratings. In April 1998, Standard & Poor's and Fitch IBCA
lowered the outstanding ratings of the Bank's senior and subordinated debt.
Although these downgrades did not have a material impact on current funding
sources, results of operations or liquidity, future downgrades could materially
affect the Company's future financing costs.
The Company uses its funds to meet its business needs which include funding new
and maturing certificates of deposit, savings, money market and demand deposit
withdrawals, repaying borrowings, funding loan and investment commitments,
meeting operating expenses and maintaining minimum
26
<PAGE> 27
regulatory liquidity and capital levels. Office of Thrift Supervision ("OTS")
regulations require the Company, as a savings association, to maintain a
specified level of liquid assets such as cash and short-term U.S. government and
other qualifying securities. Such liquid assets must not be less than 4.0% for
March 1998 and December 1997 of the Company's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. At
March 31, 1998 and December 31, 1997, such ratios were 8.0% and 9.1%,
respectively.
For the quarter ended March 31, 1998, net cash used in operating activities was
$156 million compared to net cash provided by operating activities of $125
million for the quarter ended March 31, 1997. The major component of cash flows
related to operating activities was cash inflows or outflows due to net change
in loans held for sale. There was a net outflow of $149 million for the quarter
ended March 31, 1998 compared to a net inflow of $140 million for the quarter
ended March 31, 1997.
Net cash used in investing activities for the quarter ended March 31, 1998 was
$10.2 million compared to $245 million for the quarter ended March 31, 1997. The
major components that affected the net cash used in investing activities was due
to purchases of MBS available for sale of $226 million for the quarter ended
March 31, 1998 compared to $1.7 million for the quarter ended March 31, 1997,
proceeds from sale of MBS available for sale of $121 million for the quarter
ended March 31, 1998 and a decrease in loans receivable of $102 million for the
quarter ended March 31, 1998 compared to an increase in loans receivable of $239
million for the quarter ended March 31, 1997.
The Company's net cash provided by financing activities during the quarter ended
March 31, 1998, was $91.7 million compared to $75.4 million for the quarter
ended March 31, 1997. Increase in deposits provided the primary source of cash
for the Company.
The Bank, a federally chartered savings bank, is subject to certain minimum
capital requirements imposed by the Financial Institution Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA 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 of 5%
or greater and not be subject to any OTS order. The Bank currently meets all of
the requirements of a "well capitalized" institution. Its regulatory capital
position at March 31, 1998 for this purpose, was as follows:
27
<PAGE> 28
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- -------- --------
MARCH 31, 1998 (DOLLARS IN THOUSANDS)
- --------------
<S> <C> <C> <C> <C>
Actual Capital:
Amount $337,105 $337,105 $332,829 $614,011
Capital ratio 8.81% 8.81% 6.33% 11.68%
FIRREA minimum required capital:
Amount $ 57,419 $114,839 N/A $421,483
Capital ratio 1.50% 3.00% N/A 8.00%
Excess $279,686 $222,266 N/A $192,528
FDICIA well capitalized required capital:
Amount N/A $192,445 $316,113 $526,854
Capital ratio N/A 5.00% 6.00% 10.00%
Excess N/A $144,660 $ 16,716 $ 87,157
DECEMBER 31, 1997
- -----------------
Actual Capital:
Amount $355,650 $355,650 $352,123 $639,937
Capital ratio 9.48% 9.48% 6.74% 12.24%
FIRREA minimum required capital:
Amount $ 56,249 $112,498 N/A $418,115
Capital ratio 1.50% 3.00% N/A 8.00%
Excess $299,401 $243,152 N/A $221,822
FDICIA well capitalized required capital:
Amount N/A $188,574 $313,587 $522,644
Capital ratio N/A 5.00% 6.00% 10.00%
Excess N/A $167,076 $ 38,536 $117,293
</TABLE>
28
<PAGE> 29
The following table reconciles the Bank's capital in accordance with generally
accepted accounting principles ("GAAP") to the Bank's tangible, core and
risk-based capital as of March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank shareholder's equity-GAAP basis $ 328,160 $ 345,426
Adjustments for tangible and core capital:
Unrealized gains under SFAS 115 (4,522) (5,858)
Non-permissible activities (1) (9,744) (10,222)
Disallowed capitalized servicing rights (4,133) (3,234)
Minority interest in equity of subsidiaries 27,344 29,538
--------- ---------
Total tangible and core capital 337,105 355,650
Adjustments for risk-based capital:
Subordinated debentures (2) 247,315 256,311
General loan valuation allowance (3) 33,867 31,503
Equity investments and other assets required to
be deducted (4) (4,276) (3,527)
--------- ---------
Risk-based capital $ 614,011 $ 639,937
========= =========
</TABLE>
- ----------
(1) Does not include minority interest in joint venture subsidiaries.
(2) Maximum includable is 40% of risk-based capital and excludes issue
costs.
(3) Limited to 1.25% of risk-weighted assets.
(4) Amount is deducted from core capital to arrive at Tier 1 risk-based
capital.
YEAR 2000
- ---------
The Company continues to assess its exposure related to the impact of the Year
2000 data issue which is attributable to the fact that many computer programs
use only two digits to identify a year in a date field. Based on the information
obtained to date, management does not expect that the cost of conversion will
have a material adverse impact on the Company's financial position, results of
operations or cash flows. There has been no material change in the expected
level of preparedness by the Company since December 31, 1997.
FORWARD-LOOKING STATEMENTS
The preceding Management Discussion and Analysis of Financial Condition and
Results of Operations section contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a new "safe harbor" for certain forward-looking statements. This Form
10-Q contains forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The forward-looking
terminology such as "believe", "expect", "design", "anticipate", "intend",
"may", "will", "should", "estimate", "continue" and/or the negative thereof or
other comparable expressions thereof or other comparable expressions which
indicate future events and trends identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak
29
<PAGE> 30
only as of their dates. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following factors could cause
actual results to differ materially from historical results or those
anticipated: (1) the level of demand for consumer, mortgage and commercial
loans, which is affected by such external factors as the level of interest
rates, the strength of the various segments of the economy, debt burden held by
the consumer and demographics of the Company's lending markets; (2) the
direction of interest rates; (3) fluctuations between interest rates and the
cost of funds; (4) federal and state regulation on the Company's operations; (5)
competition within the financial services industry; (6) the availability and
cost of securitization transactions (7) continued dealer and broker
relationships and (8) the impact of the automobile lending operations
restructure.
30
<PAGE> 31
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 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
A report on Form 8-K was filed on March 25, 1998 by the Company to
announce that Ernest Rady, the Chairman of the Board, President and
Chief Executive Officer of the Company and Chairman of the Board of the
Bank will assume the added duties and titles of President and Chief
Executive Officer of the Bank.
31
<PAGE> 32
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)
<TABLE>
<S> <C>
Date: May 12, 1998 By:/s/ JOY SCHAEFER
---------------------------------- ------------------------------------------------
Joy Schaefer
Senior Executive Vice President and
Chief Operating Officer
Date: May 12, 1998 By:/s/ LEE A. WHATCOTT
---------------------------------- ------------------------------------------------
Lee A. Whatcott
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 98,088
<INT-BEARING-DEPOSITS> 510
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,138,914
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,886,668
<ALLOWANCE> 36,245
<TOTAL-ASSETS> 3,812,806
<DEPOSITS> 2,159,776
<SHORT-TERM> 386,892
<LIABILITIES-OTHER> 608,988
<LONG-TERM> 324,386
0
0
<COMMON> 26,301
<OTHER-SE> 306,463
<TOTAL-LIABILITIES-AND-EQUITY> 3,812,806
<INTEREST-LOAN> 44,977
<INTEREST-INVEST> 17,805
<INTEREST-OTHER> 2,264
<INTEREST-TOTAL> 65,046
<INTEREST-DEPOSIT> 27,132
<INTEREST-EXPENSE> 40,155
<INTEREST-INCOME-NET> 24,891
<LOAN-LOSSES> 6,388
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 28,216
<INCOME-PRETAX> (24,757)
<INCOME-PRE-EXTRAORDINARY> (24,757)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,203)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
<YIELD-ACTUAL> 3.07
<LOANS-NON> 14,733
<LOANS-PAST> 16,787
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 33,834
<CHARGE-OFFS> 4,632
<RECOVERIES> 655
<ALLOWANCE-CLOSE> 36,245
<ALLOWANCE-DOMESTIC> 36,245
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
