UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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
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(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) 727-1002
--------------------------------------------
(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 October 31, 2001, the registrant had 35,797,779 outstanding shares of
common stock, $1.00 par value. The shares of common stock represent the only
class of common stock of the registrant.
The total number of sequentially numbered pages is 31.
WESTCORP AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2001
TABLE OF CONTENTS
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Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 2001 and December 31, 2000 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 2001 and 2000 4
Consolidated Statements of Changes in Shareholders' Equity for
the Periods Ended September 30, 2001 and December 31, 2000 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 28
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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------ ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 132,078 $ 128,763
Investment securities available for sale 10,752 10,734
Mortgage-backed securities available for sale 2,220,637 2,230,448
Loans receivable 7,118,697 4,924,053
Allowance for credit losses (148,501) (104,006)
------------ ------------
Loans receivable, net 6,970,196 4,820,047
Amounts due from trusts 168,989 357,051
Retained interest in securitized assets 54,117 111,558
Premises and equipment, net 81,223 83,991
Other assets 264,086 125,318
------------ ------------
TOTAL ASSETS $ 9,902,078 $ 7,867,910
============ ============
LIABILITIES
Deposits $ 2,299,771 $ 2,478,487
Notes payable on automobile secured financing 5,867,653 3,473,377
Securities sold under agreements to repurchase 141,405 178,821
Federal Home Loan Bank advances 390,456 409,570
Amounts held on behalf of trustee 320,000 494,858
Subordinated debentures 147,779 189,962
Notes payable 5,177 27,802
Other liabilities 127,628 71,221
------------ ------------
TOTAL LIABILITIES 9,299,869 7,324,098
Minority interest 75,925 56,644
SHAREHOLDERS' EQUITY
Common stock, (par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 35,796,904
shares in September 2001 and 31,931,826 in December 2000) 35,797 31,932
Paid-in capital 307,000 246,889
Retained earnings 254,927 223,163
Accumulated other comprehensive loss, net of tax (71,440) (14,816)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 526,284 487,168
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,902,078 $ 7,867,910
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Interest income:
Loans, including fees $ 218,910 $ 124,015 $ 590,284 $ 286,696
Other 34,131 40,640 111,024 104,890
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 253,041 164,655 701,308 391,586
Interest expense:
Deposits 26,370 35,604 92,123 95,418
Notes payable on automobile secured financing 90,464 38,698 244,482 63,387
Other 8,564 16,396 34,871 48,287
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 125,398 90,698 371,476 207,092
----------- ----------- ----------- -----------
NET INTEREST INCOME 127,643 73,957 329,832 184,494
Provision for credit losses 60,501 24,906 127,124 52,097
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 67,142 49,051 202,708 132,397
Noninterest income:
Automobile lending 3,948 37,923 54,311 127,484
Other 4,378 3,256 10,956 15,214
----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME 8,326 41,179 65,267 142,698
Noninterest expenses:
Salaries and associate benefits 33,804 32,208 107,412 100,503
Credit and collections 7,468 5,367 20,329 15,628
Data processing 4,176 4,384 13,612 12,426
Other 14,432 12,129 42,809 37,809
----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSES 59,880 54,088 184,162 166,366
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 15,588 36,142 83,813 108,729
Income tax 6,119 14,912 32,967 44,600
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST 9,469 21,230 50,846 64,129
Minority interest in earnings of subsidiaries 1,255 3,081 8,036 8,580
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 8,214 18,149 42,810 55,549
Extraordinary gain from early extinguishment of debt
(net of income taxes of $12, $11, and $169, respectively) 16 16 234
----------- ----------- ----------- -----------
NET INCOME $ 8,214 $ 18,165 $ 42,826 $ 55,783
=========== =========== =========== ===========
Net income per common share -- basic:
Income before extraordinary item $ 0.23 $ 0.57 $ 1.27 $ 1.94
Extraordinary item 0.01
----------- ----------- ----------- -----------
Net income $ 0.23 $ 0.57 $ 1.27 $ 1.95
=========== =========== =========== ===========
Net income per common share -- diluted:
Income before extraordinary item $ 0.23 $ 0.57 $ 1.26 $ 1.94
Extraordinary item 0.01
----------- ----------- ----------- -----------
Net income $ 0.23 $ 0.57 $ 1.26 $ 1.95
=========== =========== =========== ===========
Weighted average number of common shares outstanding:
Basic 35,792,418 31,922,008 33,765,085 28,677,101
Diluted 36,091,155 31,944,528 33,987,939 25,689,820
See accompanying notes to unaudited consolidated financial statements.
4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME (LOSS),
SHARES STOCK CAPITAL EARNINGS NET OF TAX TOTAL
---------- ---------- ---------- ---------- --------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at January 1, 2000 26,597,344 $ 26,597 $ 190,137 $ 157,465 $ (21,481) $ 352,718
Net income 74,743 74,743
Unrealized gains on securities
available for sale and retained
interest in securitized assets,
net of tax (1) 6,665 6,665
----------
Comprehensive income 81,408
Issuance of common stock 5,334,482 5,335 50,349 55,684
Issuance of subsidiary common stock 6,403 6,403
Cash dividends (9,045) (9,045)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 31,931,826 31,932 246,889 223,163 (14,816) 487,168
Net income 42,826 42,826
Unrealized gains on securities
available for sale and retained
interest in securitized assets,
net of tax (1) 20,897 20,897
Unrealized hedge losses on cash flow
hedges, net of tax (2) (89,922) (86,906)
Less: Reclassification adjustment
for losses on securities
available for sale included in
net income (3) 1,187 1,187
Less: Reclassification adjustment
for losses on cash flow hedges
included in income (4) 11,214 8,198
----------
Comprehensive loss (13,798)
Issuance of subsidiary common stock (2,771) (2,771)
Issuance of common stock 3,865,078 3,865 58,204 62,069
Cash dividends (11,062) (11,062)
Other 4,678 4,678
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30, 2001 35,796,904 $ 35,797 $ 307,000 $ 254,927 $ (71,440) $ 526,284
========== ========== ========== ========== ========== ==========
(1) The pre-tax decrease in unrealized losses on securities available for sale
and retained interest in securitized assets was $35.4 million for the nine
months ended September 30, 2001 compared with $11.3 million for the period
ended December 31, 2000.
(2) The pre-tax increase in unrealized losses on cash flow hedges was $152
million for the nine months ended September 30, 2001.
(3) The pre-tax amount of unrealized losses on securities available for sale
reclassified into earnings was $2.0 million for the nine months ended
September 30, 2001.
(4) The pre-tax amount of unrealized loss on derivatives reclassified into
earnings was $19.0 million for the nine months ended September 30, 2001.
See accompanying notes to unaudited consolidated financial statements.
5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 42,826 $ 55,783
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 127,124 52,097
Depreciation and amortization 91,293 74,951
Loans held for sale:
Origination of loans (21,196)
Proceeds from contract securitizations 660,000
Proceeds from sale of loans 2,902 2,198
Loan payments and payoffs 4,441
Increase in other assets (111,641) (47,005)
Increase (decrease) in other liabilities 14,149 (4,848)
Other, net 4,794 24,642
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 171,447 801,063
INVESTING ACTIVITIES
Loans receivable:
Origination of loans (3,977,505) (3,431,167)
Loan payments and payoffs 1,694,704 718,959
Investment securities available for sale:
Purchases (2,568) (1,845)
Payments 2,579 1,081
Mortgage-backed securities:
Purchases (1,004,454) (655,577)
Proceeds from sale 468,600 15
Payments received 628,104 113,112
Increase in retained interest in securitized assets (19,240)
Decrease in amounts due from trusts 188,063 59,789
Purchase of premises and equipment (8,094) (8,976)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,010,571) (3,223,849)
FINANCING ACTIVITIES
(Decrease) increase in deposits (248,301) 376,011
Decrease in securities sold under agreements to repurchase (39,737) (68,824)
Proceeds from notes payable on automobile secured financing 3,563,030 2,869,212
Payments on notes payable on automobile secured financing (1,215,875) (623,072)
(Decrease) increase in borrowings (22,626) 22,267
Decrease in amounts held on behalf of trustee (174,858) (140,920)
Decrease in FHLB advances (19,114) (142,135)
Decrease in subordinated debentures (42,663) (8,642)
Proceeds from issuance of common stock 62,069 55,637
Cash dividends (11,062) (5,852)
Proceeds from issuance of subsidiary common stock 13,623 6,403
Payments on cash flow hedges (22,047)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,842,439 2,340,085
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,315 (82,701)
Cash and cash equivalents at beginning of period 128,763 171,365
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 132,078 $ 88,664
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- 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 nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 2000 included in the Western Financial
Bank Form 10-K/A. Certain amounts from the 2000 consolidated financial
statements have been reclassified to conform to the 2001 presentation.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Accounting for Business Combinations,
also known as SFAS No. 141 and Statement of Financial Accounting Standards No.
142, Accounting for Goodwill and Intangible Assets, also known as SFAS No. 142.
Under SFAS No. 141 and SFAS No. 142, companies may no longer use the
pooling-of-interest accounting method for business combinations or account for
mergers on their financial statements under the traditional purchase method,
which required companies to amortize goodwill assets over a specific time
period. Instead purchased goodwill will remain on the balance sheet as an asset
subject to impairment reviews. SFAS 141 does not have a material impact on our
earnings or financial position, and SFAS No. 142 is not expected to have a
material effect on our earnings or financial position.
NOTE 2 -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale consisted of the following:
SEPTEMBER 30, 2001
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
GNMA certificates $2,150,200 $ 22,060 $ 12,085 $2,160,175
FNMA participation certificates 55,407 844 56,251
FHLMC participation certificates 1,836 33 1,869
Other 2,342 2,342
---------- ---------- ---------- ----------
$2,209,785 $ 22,937 $ 12,085 $2,220,637
========== ========== ========== ==========
7
DECEMBER 31, 2000
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
GNMA certificates $2,181,067 $ 17,533 $ 41,524 $2,157,076
FNMA participation certificates 69,278 3 411 68,870
FHLMC participation certificates 1,948 10 1,938
Other 2,564 2,564
---------- ---------- ---------- ----------
$2,254,857 $ 17,536 $ 41,945 $2,230,448
========== ========== ========== ==========
NOTE 3 -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
Consumer:
Automobile contracts $ 6,601,835 $ 4,307,267
Dealer participation, net of deferred contract fees 123,229 82,717
Other 9,736 13,456
Unearned discounts (108,753) (94,404)
----------- -----------
6,626,047 4,309,036
Real Estate:
Mortgage 388,661 498,963
Construction 15,851 14,784
----------- -----------
404,512 513,747
Undisbursed loan proceeds (5,566) (6,316)
----------- -----------
398,946 507,431
Commercial 93,704 107,586
----------- -----------
7,118,697 4,924,053
Allowance for credit losses (148,501) (104,006)
----------- -----------
$ 6,970,196 $ 4,820,047
=========== ===========
Automobile contracts managed by us totaled $8.0 billion as of September 30,
2001. Of the $8.0 billion, $6.5 billion are owned by us and $1.5 billion are
owned by securitization trusts.
NOTE 4 -- RETAINED INTEREST IN SECURITIZED ASSETS
Retained interest in securitized assets, also known as RISA, is capitalized upon
the sale of automobile contracts to securitization trusts. RISA represents the
present value of the estimated future cash flows to be received by us from the
excess spread created in securitization transactions. Future cash flows are
calculated by taking the coupon rate of the automobile contracts securitized
less the interest rate paid to the investors less contractually specified
servicing fees and guarantor fees, after giving effect to estimated credit
losses and prepayments.
RISA is classified in a manner similar to available for sale securities and as
such is marked to market each quarter. Market value changes are calculated by
discounting the estimated cash flows using a current market
8
discount rate. Any changes in the market value of the RISA are reported as a
separate component of shareholders' equity on our Consolidated Statements of
Financial Condition as accumulated other comprehensive income (loss), net of
applicable taxes. On a quarterly basis, we evaluate the carrying value of the
RISA in light of the actual performance of the underlying automobile contracts
and make adjustments to reduce the carrying value, if appropriate.
The following table presents the activity of the RISA:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------- --------- --------- ---------
2001 2000 2001 2000
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance $ 80,602 $ 140,639 $ 111,558 $ 167,277
Additions 19,240
Amortization (26,881) (17,341) (59,312) (62,669)
Change in unrealized gain/loss on RISA (1) 396 1,378 1,871 828
--------- --------- --------- ---------
Balance at end of period (2) $ 54,117 $ 124,676 $ 54,117 $ 124,676
========= ========= ========= =========
(1) The change in unrealized gain/loss on RISA represents temporary changes in
valuation including changes in the discount rate based on the current
interest rate environment. Such amounts will not be realized unless the RISA
is sold. Changes in prepayment and credit loss assumptions for the RISA are
permanent in nature and impact the value of the RISA. Such permanent
differences are immediately recognized in income as a component of retained
interest income.
(2) There are no restrictions on the RISA.
The following table presents the estimated future undiscounted cash flows to be
received from securitizations treated as sales:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
Estimated net undiscounted RISA earnings $ 114,218 $ 235,270
Off balance sheet allowance for credit losses (56,192) (110,339)
Discount to present value (3,909) (13,373)
----------- -----------
Retained interest in securitized assets $ 54,117 $ 111,558
=========== ===========
Outstanding balance of automobile contracts sold through securitizations $ 1,485,527 $ 2,608,017
Off balance sheet allowance for losses as a percent of
automobile contracts sold through securitizations 3.78% 4.23%
The decline in the off balance sheet allowance for credit losses both on a
dollar and percent basis is the result of our securitization transactions no
longer being treated as sales. Older transactions treated as sales have lower
losses each month after securitization as estimated future credit losses are
realized. We believe that the off balance sheet allowance for credit losses is
adequate to absorb probable losses in the sold portfolio that can be reasonably
estimated.
9
NOTE 5 -- NOTES PAYABLE ON AUTOMOBILE SECURED FINANCING
For the nine months ended September 30, 2001, we issued $3.6 billion of notes
secured by automobile contracts. Interest payments on the notes are due
quarterly, in arrears, based on the respective note's interest rate. There were
$5.9 billion of notes payable on automobile secured financings outstanding at
September 30, 2001 compared with $3.5 billion at December 31, 2000. Interest
expense totaled $90.5 million and $245 million for the three and nine months
ended September 30, 2001, respectively, compared with $38.7 million and $63.4
for the same respective periods in 2000. The increase in interest expense in
2001 is due to treating our recent securitization transactions as secured
financings rather than sales.
The contracts originated and held by us are fixed rate and, accordingly, we have
exposure to changes in interest rates. To protect against potential changes in
interest rates affecting interest payments on future securitization
transactions, we enter into various hedge agreements, which qualify as cash flow
hedges under FAS 133. We settle such financial instruments at the time we close
these securitization transactions and receive or pay cash equal to the gain or
loss on these instruments. Therefore, the total interest payment cash flows on
these notes are adjusted at such time. Unrealized gains or losses on these
agreements are deferred in accumulated other comprehensive income (loss) until
the completion of the securitization transaction. Once the transaction is
complete, this deferred amount is amortized into earnings over the duration of
the secured financing.
Included in notes payable on automobile secured financing are variable rate
notes related to our secured financing transactions. To protect against
potential changes in interest rates affecting future payments on these notes, we
enter into fixed-rate swap agreements. Unrealized gains or losses related to
these agreements are deferred in accumulated other comprehensive income (loss).
Cash received or cash paid related to these agreements are included in interest
expense.
NOTE 6 - DIVIDENDS
On August 24, 2001, we paid an $0.11 per share cash dividend to shareholders of
record as of August 14, 2001. On October 31, 2001, we declared a cash dividend
of $0.11 per share for shareholders of record as of November 7, 2001 with a
payable date of November 27, 2001.
NOTE 7 -- RIGHTS OFFERING
We completed a rights offering in May 2001 in which we raised a total of $61
million through the issuance of 3.7 million additional common shares at a price
of $16.25 per share. With the completion of this offering, our total number of
common shares issued and outstanding increased 12% to 35.7 million shares.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our primary sources of revenue are net interest income and noninterest income.
Net interest income is the difference between the income earned on interest
earning assets and the interest paid on interest bearing liabilities.
Noninterest income is primarily made up of revenues generated from the sale and
servicing of loans. The primary components of noninterest income include
retained interest income on automobile contracts sold, contractually specified
servicing fees for the servicing of loans, late charges, gain on sale of
automobile contracts and mortgage loans, and other miscellaneous servicing fee
income. Other components of noninterest income include gains and losses from the
sale of investments and MBS, insurance income, fees related to the sales of
investment products such as mutual funds and annuities, and fee income from
depository accounts.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is affected by the difference between the rate earned on our
interest earning assets and the rate paid on our interest bearing liabilities
(net interest rate spread) and the relative amounts of our interest earning
assets and interest bearing liabilities. For the three and nine months ended
September 30, 2001, net interest income totaled $128 million and $330 million,
respectively, compared with $74.0 million and $184 million for the same
respective periods in 2000. The increase in net interest income is primarily the
result of us treating our recent securitization transactions as secured
financings as well as widening net interest spreads resulting from a declining
interest rate environment.
11
Interest rates for interest earning assets and interest bearing liabilities for
the three and nine months ended September 30, 2001 and 2000 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------ ------ ------ ------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
------ ------ ------ ------
Interest earning assets:
Total investments:
Mortgage-backed securities 5.67% 7.10% 6.09% 6.87%
Other investments 4.03 6.39 5.02 5.87
------ ------ ------ ------
Total investments 5.54 6.98 6.01 6.74
Total loans:
Consumer loans 13.48 14.54 13.71 14.52
Mortgage loans (1) 7.62 7.92 8.06 7.85
Commercial loans 6.88 9.05 7.79 9.12
------ ------ ------ ------
Total loans 13.01 13.40 13.17 13.04
------ ------ ------ ------
Total interest earning assets 11.00 10.94 11.08 10.45
Interest bearing liabilities:
Deposits 4.62 5.80 5.31 5.49
Notes payable on automobile secured financing 6.40 7.39 6.81 7.56
Securities sold under agreements to repurchase 4.07 6.50 4.86 6.06
FHLB advances and other borrowings 3.92 6.74 5.91 6.30
Subordinated debentures 9.47 8.92 9.29 8.97
------ ------ ------ ------
Total interest bearing liabilities 5.85 6.60 6.34 6.18
------ ------ ------ ------
Interest rate spread 5.15% 4.34% 4.74% 4.27%
====== ====== ====== ======
Net yield on average interest earning assets 5.51% 4.95% 5.20% 4.98%
====== ====== ====== ======
(1) For the purposes of these computations, non-accruing loans are included in
the average loan amounts outstanding.
PROVISION FOR CREDIT LOSSES
We maintain an allowance for credit losses to cover probable losses which can be
reasonably estimated for the loans held on the balance sheet. The allowance for
credit losses is increased by charging the provision for credit losses and
decreased by actual losses on the loans or reversing the allowance for credit
losses through the provision for credit losses when the amount of loans held on
balance sheet is reduced through loan sales. The level of allowance is based
principally on the outstanding balance of loans held on balance sheet and
historical loss trends. We believe that the allowance for credit losses is
currently adequate to absorb probable losses in our owned loan portfolio which
can be reasonably estimated.
For the three and nine months ended September 30, 2001, the provision for credit
losses totaled $60.5 million and $127 million, respectively, compared with $24.9
million and $52.1 million for the same respective periods a year earlier. The
increase in the provision for credit losses was primarily the result of our
loans held on balance sheet increasing by approximately $663 million or 10% from
the previous quarter. Due to this increase, we recorded $27.5 million in
provisions for credit losses in excess of chargeoffs. The increase in provision
for credit losses was also due to higher chargeoffs related to continued slowing
in the economy. The allowance for credit losses as a percentage of owned loans
outstanding was 2.1% at September 30, 2001 and December 31, 2000.
12
NONINTEREST INCOME
Automobile Lending
On a regular basis, we securitize automobile contracts in the asset-backed
securities market and retain the servicing rights. Such transactions are treated
as either sales to a securitization trust or as secured financings for
accounting purposes. For transactions treated as sales to a securitization
trust, we recorded non-cash gain equal to the present value of the estimated
future cash flows from the portfolio of automobile contracts sold less the
write-off of dealer participation balances and the effect of hedging activities.
For these securitizations, net interest earned on the automobile contracts sold
and fees earned for servicing the contract portfolios are recognized over the
life of the securitization transactions as contractual servicing income,
retained interest income and other fee income.
The components of automobile lending income were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Gain on sale of automobile contracts $ 7,719
Retained interest (expense) income $(17,867) $ 12,453 $(14,790) 43,385
Contractual servicing income 5,212 9,986 18,712 33,113
Other fee income 16,603 15,484 50,389 43,267
-------- -------- -------- --------
Total automobile lending income $ 3,948 $ 37,923 $ 54,311 $127,484
======== ======== ======== ========
Contract sales and securitizations totaled $1.2 billion and $3.6 billion for the
three and nine months ended September 30, 2001, respectively, compared with $1.4
billion and $3.6 billion for the same respective periods in the prior year. The
entire $3.6 billion in the current year was treated as a secured financing
compared with $2.9 billion treated as secured financing and $660 million treated
as sales in the prior year. We recognized no gain on sale for the three and nine
months ended September 30, 2001 compared with no gain on sale and a $7.7 million
gain on sale for the same respective periods in the prior year.
Retained interest expense totaled $17.9 million and $14.8 million for the three
and nine months ended September 30, 2001, respectively, compared with retained
interest income of $12.5 million and $43.4 million for the same respective
periods in 2000. For accounting purposes, retained interest income is only
recognized on contracts sold through securitization transactions treated as
sales. Retained interest income on securitization transactions treated as sales
is dependent upon the average excess spread on the contracts sold, credit losses
and the size of the sold portfolio. The retained interest expense recognized in
2001 is the result of higher chargeoffs on our sold portfolio as well as revised
estimates of future chargeoffs due to continued slowing in the economy.
For the three and nine months ended September 30, 2001, contractual servicing
income totaled $5.2 million and $18.7 million, respectively, compared with $10.0
million and $33.1 million for the same respective periods in 2000. For
accounting purposes, contractual servicing income is only recognized on
contracts sold through securitization transactions treated as sales. According
to the terms of each securitization transaction, contractual servicing income is
generally earned at rates ranging from 1.0% to 1.25% per annum on the
outstanding balance of contracts managed.
For the three and nine months ended September 30, 2001, other fee income totaled
$16.6 million and $50.4 million, respectively, compared with $15.5 million and
$43.3 million for the same respective periods in 2000. Other fee income consists
primarily of documentation fees, late charges and deferment fees on our managed
portfolio, including automobile contracts securitized in transactions accounted
for as sales and secured financings and automobile contracts not securitized.
The increase in other fee income is due to the growth in our average managed
automobile contract portfolio to $7.8 billion and $7.4 billion for the three and
nine
13
months ended September 30, 2001, respectively, compared with $6.3 billion and
$5.9 billion for the same respective periods in 2000.
NONINTEREST EXPENSE
For the three and nine months ended September 30, 2001, noninterest expense
totaled $59.9 million and $184 million, respectively, compared with $54.1
million and $166 million for the same respective periods in 2000. Noninterest
expense as a percent of total revenues improved to 44% and 47% for the three and
nine months ended September 30, 2001 compared with 47% and 51% for the same
respective periods in 2000.
INCOME TAXES
We file federal and certain state tax returns on a consolidated basis. Other
state tax returns are filed for each subsidiary separately. Our effective tax
rate was 39% for the three and nine months ended September 30, 2001 compared
with an effective tax rate of 41% for the same respective periods in 2000.
PRO-FORMA STATEMENTS OF INCOME
The following pro-forma portfolio basis statements of income present our results
under the assumption that all our securitization transactions are treated as
secured financings rather than as sales and, therefore, provide a method by
which to gauge our year to year performance. We believe that such a presentation
is an important performance measure of our operations, particularly considering
that our more recent securitization transactions are accounted for as secured
financings. If treated as financings, no gain on sale or subsequent contractual
servicing and retained interest income is recognized. Instead, the earnings of
the automobile contracts in the trusts and the related financing costs are
reflected over the life of the underlying pool of automobile contracts. We refer
to these pro-forma results as "portfolio basis" statements of income since the
automobile contracts would have remained in our on balance sheet contract
portfolio if we accounted for the transactions as financings. We monitor the
periodic portfolio basis earnings of our managed contract portfolio and believe
these portfolio basis statements assist in better understanding our business.
14
The following tables present the portfolio basis statements of income and
reconciliation to net income as reflected in our Consolidated Statements of
Income:
PORTFOLIO BASIS STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $304,087 $266,541 $884,712 $731,508
Interest expense 156,828 147,760 481,794 393,641
-------- -------- -------- --------
Net interest income 147,259 118,781 402,918 337,867
Net chargeoffs (1) 44,995 30,559 114,242 78,625
Provision for growth (2) 5,725 6,122 18,524 18,528
-------- -------- -------- --------
Provision for credit losses 50,720 36,681 132,766 97,153
-------- -------- -------- --------
Net interest income after provision for credit
losses 96,539 82,100 270,152 240,714
Noninterest income 20,981 18,739 61,345 58,481
Noninterest expense 59,902 53,936 184,235 166,867
-------- -------- -------- --------
Income before income tax 57,618 46,903 147,262 132,328
Income tax (3) 22,619 19,351 57,813 54,161
-------- -------- -------- --------
Income before minority interest 34,999 27,552 89,449 78,167
Minority interest in earnings 5,432 3,992 14,541 10,861
-------- -------- -------- --------
Income before extraordinary item 29,567 23,560 74,908 67,306
Extraordinary gain from early extinguishment of debt 16 16 234
-------- -------- -------- --------
Portfolio basis net income $ 29,567 $ 23,576 $ 74,924 $ 67,540
======== ======== ======== ========
Portfolio basis net income per common share -- diluted $ 0.82 $ 0.74 $ 2.20 $ 2.35
======== ======== ======== ========
GAAP basis net income per common share -- diluted $ 0.23 $ 0.57 $ 1.26 $ 1.95
======== ======== ======== ========
(1) Represents actual chargeoffs incurred during the period, net of recoveries.
(2) Represents additional allowance for credit losses we would set aside due to
an increase in the managed contract portfolio.
(3) Such tax effect is based upon our tax rate for the respective period.
15
RECONCILIATION OF GAAP BASIS NET INCOME
TO PORTFOLIO BASIS NET INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
GAAP basis net income $ 8,214 $ 18,165 $ 42,826 $ 55,783
Portfolio basis adjustments:
Gain on sales of automobile contracts (7,719)
Retained interest expense (income) 17,867 (12,453) 14,790 (43,385)
Contractual servicing income (5,212) (9,986) (18,712) (33,113)
Net interest income 19,616 45,021 73,086 153,821
Provision for credit losses 21,752 7,897 31,329 10,155
Net chargeoffs (11,971) (19,672) (36,971) (55,211)
Operating expenses (23) (46) (73) (950)
Minority interest (4,177) (910) (6,505) (2,281)
--------- --------- --------- ---------
Total portfolio basis adjustments 37,852 9,851 56,944 21,317
Net tax effect (1) 16,499 4,440 24,846 9,560
--------- --------- --------- ---------
Portfolio basis net income $ 29,567 $ 23,576 $ 74,924 $ 67,540
========= ========= ========= =========
(1) Such tax is based on our tax rate for the respective period.
FINANCIAL CONDITION
OVERVIEW
Total assets increased $2.0 billion or 26% to $9.9 billion at September 30, 2001
from $7.9 billion at December 31, 2000. This increase is primarily the result of
an increase in automobile contracts held on the balance sheet. At September 30,
2001 automobile contracts totaled $6.6 billion compared with $4.3 billion at
December 31, 2000.
LOAN PORTFOLIO
Commercial Loan Portfolio
For the three and nine months ended September 30, 2001, we originated $85.6
million and $218 million of commercial loans, respectively, compared with $68.6
million and $195 million for the same respective periods in 2000. Though we
continue to focus on expanding our commercial banking operation, it has not been
a significant source of revenue.
16
Mortgage Loan Portfolio
Our total mortgage loan portfolio consisted of the following:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ ------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds $160,659 40.3% $224,798 44.3%
Second trust deeds 5,240 1.3 6,056 1.2
-------- ----- -------- -----
165,899 41.6 230,854 45.5
Multifamily residential loans 194,088 48.7 230,004 45.3
Construction loans 15,850 4.0 14,784 2.9
Other 28,675 7.1 38,105 7.5
-------- ----- -------- -----
404,512 101.4 513,747 101.2
Less: undisbursed loan proceeds 5,566 1.4 6,316 1.2
-------- ----- -------- -----
Total mortgage loans $398,946 100.0% $507,431 100.0%
======== ===== ======== =====
ASSET QUALITY
Overview
Nonperforming assets, repossessions, loan delinquency and credit losses are
considered by us as key measures of asset quality. Asset quality, in turn,
affects our determination of the allowance for credit losses. We also take into
consideration general economic conditions in the markets we serve, individual
loan reviews, and the level of assets relative to reserves in determining the
adequacy of the allowance for credit losses.
Automobile Loan Quality
We provide financing in a market where there is a risk of default by borrowers.
Chargeoffs directly impact our earnings and cash flows. To minimize the amount
of credit losses we incur, we underwrite automobile contracts through a credit
approval process that utilizes proprietary and industry credit scoring models
and have increased the percent of originations with prime borrowers to 75%.
Additionally, we monitor delinquent accounts, promptly repossess and remarket
vehicles, and seek to collect on deficiency balances.
At September 30, 2001, the percentage of accounts delinquent 30 days or greater
was 3.06% compared with 3.18% at December 31, 2000. We calculate delinquency
based on the contractual due date. For the three and nine months ended September
30, 2001, net chargeoffs on average automobile contracts were 2.30% and 2.04%,
respectively, compared with 1.93% and 1.76% for the same respective periods in
2000. The increase in credit loss experience is a result of continued slowing in
the economy.
17
The following table sets forth information with respect to the delinquency of
our portfolio of automobile contracts managed, which includes automobile
contracts that are owned by us and automobile contracts that have been sold
and/or securitized but are managed by us:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------ ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Automobile contracts managed $7,978,837 $6,818,182
========== ==========
Period of delinquency
30-59 days $ 174,734 2.19% $ 157,843 2.32%
60 days or more 69,268 0.87 59,166 0.86
---------- ------- ---------- -------
Total automobile contracts delinquent
and delinquencies as a percentage of
automobile contracts managed $ 244,002 3.06% $ 217,009 3.18%
========== ======= ========== =======
The following table sets forth information with respect to repossessions in our
portfolio of managed automobile contracts:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
-------------------------- --------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Automobile contracts managed 682,071 $7,978,837 616,011 $6,818,182
========== ========== ========== ==========
Repossessed vehicles 867 $ 5,515 946 $ 6,199
========== ========== ========== ==========
Repossessed vehicles as a percentage
of number and amount of automobile
contracts managed 0.13% 0.07% 0.15% 0.09%
The following table sets forth information with respect to actual credit loss
experience on our portfolio of automobile contracts managed:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Average automobile contracts managed during
period $7,801,032 $6,286,588 $7,403,432 $5,869,816
========== ========== ========== ==========
Gross chargeoffs $ 63,810 $ 42,788 $ 162,747 $ 115,487
Recoveries 19,045 12,407 49,375 37,881
---------- ---------- ---------- ----------
Net chargeoffs $ 44,765 $ 30,381 $ 113,372 $ 77,606
========== ========== ========== ==========
Net chargeoffs as a percentage of average
automobile contracts managed during period 2.30% 1.93% 2.04% 1.76%
========== ========== ========== ==========
18
The following table sets forth the cumulative static pool losses by month for
all outstanding securitized pools:
CUMULATIVE STATIC POOL LOSS CURVES (1)
AT SEPTEMBER 30, 2001
PERIOD (2) 1997-C 1997-D 1998-A 1998-B 1998-C 1999-A 1999-B 1999-C 2000-A 2000-B
- -------------------------------------------------------------------------------------------------------------
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.05% 0.05% 0.04% 0.02% 0.04% 0.04% 0.04% 0.02% 0.03% 0.02%
3 0.12% 0.14% 0.11% 0.08% 0.11% 0.11% 0.11% 0.10% 0.10% 0.09%
4 0.29% 0.31% 0.25% 0.18% 0.23% 0.20% 0.26% 0.25% 0.20% 0.24%
5 0.46% 0.56% 0.44% 0.38% 0.39% 0.33% 0.47% 0.40% 0.36% 0.39%
6 0.67% 0.75% 0.66% 0.59% 0.50% 0.46% 0.66% 0.56% 0.55% 0.59%
7 0.93% 0.99% 0.95% 0.83% 0.61% 0.62% 0.87% 0.71% 0.71% 0.78%
8 1.16% 1.24% 1.23% 1.03% 0.75% 0.76% 1.00% 0.86% 0.91% 0.99%
9 1.37% 1.47% 1.50% 1.21% 0.86% 0.92% 1.13% 1.01% 1.10% 1.17%
10 1.66% 1.75% 1.79% 1.40% 1.00% 1.11% 1.24% 1.14% 1.27% 1.33%
11 1.94% 2.06% 2.03% 1.53% 1.17% 1.30% 1.35% 1.34% 1.45% 1.44%
12 2.16% 2.35% 2.21% 1.62% 1.32% 1.47% 1.44% 1.52% 1.58% 1.57%
13 2.40% 2.63% 2.39% 1.74% 1.48% 1.61% 1.58% 1.74% 1.73% 1.72%
14 2.65% 2.86% 2.49% 1.84% 1.66% 1.73% 1.74% 1.94% 1.85% 1.86%
15 2.90% 3.05% 2.60% 1.96% 1.79% 1.81% 1.85% 2.09% 2.00% 2.04%
16 3.15% 3.19% 2.72% 2.10% 1.91% 1.89% 2.03% 2.27% 2.15% 2.24%
17 3.36% 3.32% 2.85% 2.22% 2.01% 2.00% 2.16% 2.39% 2.37% 2.39%
18 3.55% 3.42% 2.98% 2.40% 2.07% 2.10% 2.30% 2.53% 2.52%
19 3.70% 3.50% 3.11% 2.55% 2.11% 2.24% 2.42% 2.67% 2.67%
20 3.81% 3.60% 3.25% 2.69% 2.17% 2.35% 2.50% 2.81%
21 3.91% 3.69% 3.35% 2.79% 2.24% 2.46% 2.58% 2.92%
22 4.00% 3.81% 3.48% 2.85% 2.34% 2.55% 2.67% 3.10%
23 4.11% 3.96% 3.62% 2.89% 2.43% 2.63% 2.77% 3.28%
24 4.21% 4.10% 3.70% 2.92% 2.52% 2.71% 2.87% 3.38%
25 4.30% 4.23% 3.75% 2.97% 2.62% 2.77% 3.01%
26 4.44% 4.34% 3.80% 3.04% 2.71% 2.82% 3.14%
27 4.56% 4.44% 3.87% 3.13% 2.80% 2.89% 3.16%
28 4.66% 4.51% 3.92% 3.18% 2.87% 2.96%
29 4.77% 4.54% 3.98% 3.24% 2.90% 3.02%
30 4.79% 4.56% 4.06% 3.32% 2.95% 3.09%
31 4.83% 4.57% 4.11% 3.38% 3.00% 3.17%
32 4.86% 4.63% 4.17% 3.43% 3.02% 3.20%
33 4.88% 4.67% 4.22% 3.47% 3.08%
34 4.90% 4.71% 4.27% 3.48% 3.14%
35 4.92% 4.76% 4.32% 3.52% 3.15%
36 4.98% 4.80% 4.34% 3.54%
37 5.01% 4.84% 4.35% 3.58%
38 5.06% 4.89% 4.38% 3.63%
39 5.10% 4.92% 4.39% 3.66%
40 5.14% 4.92% 4.43% 3.65%
41 5.17% 4.93% 4.45%
42 5.17% 4.95% 4.50%
43 5.17% 4.97% 4.47%
44 5.17% 5.00%
45 5.19% 5.02%
46 5.20% 4.96%
47 5.22%
48 5.23%
PRIME MIX (3) 53% 49% 57% 67% 70% 70% 70% 67% 69% 69%
19
CUMULATIVE STATIC POOL LOSS CURVES (1)
AT SEPTEMBER 30, 2001
PERIOD (2) 2000-C 2000-D 2001-A 2001-B 2001-C
- --------------------------------------------------------------------------
1 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.04% 0.04% 0.03% 0.03% 0.04%
3 0.13% 0.11% 0.09% 0.10%
4 0.27% 0.24% 0.20% 0.21%
5 0.46% 0.39% 0.33% 0.33%
6 0.65% 0.54% 0.50%
7 0.81% 0.74% 0.70%
8 0.93% 0.93% 0.84%
9 1.07% 1.13%
10 1.24% 1.34%
11 1.41% 1.50%
12 1.62%
13 1.86%
14 2.04%
PRIME MIX (3) 68% 70% 72% 73% 76%
(1) Cumulative static pool losses are equal to the cumulative amount of losses
actually recognized up to and including a given month divided by the
original principal balance of the securitization transaction.
(2) Represents the number of months since the inception of the securitization
transaction.
(3) Represents the original percentage of prime contacts sold within each pool.
20
Real Estate Loan Quality
The following table summarizes mortgage delinquencies over 60 days by loan type:
SEPTEMBER 30, DECEMBER 31,
2001 2000
---------------------- ----------------------
(DOLLARS IN THOUSANDS)
AMOUNT AMOUNT
PAST DUE PAST DUE
OVER 60 % OF OVER 60 % OF
DAYS CATEGORY DAYS CATEGORY
-------- -------- -------- --------
Single family $ 7,219 3.62% $ 7,585 2.78%
Multifamily 386 0.20% 186 0.11%
-------- ------ -------- ------
$ 7,605 1.87% $ 7,771 1.50%
======== ====== ======== ======
Nonperforming Assets
Nonperforming assets, also known as NPAs, consist of nonperforming loans, also
known as NPLs, Chapter 13 bankruptcy accounts greater than 120 days delinquent
and real estate owned, also known as REO. REO is carried at lower of cost or
fair value. NPLs are defined as all nonaccrual loans. This includes mortgage
loans 90 days or more past due and impaired loans where full collection of
principal and interest is not reasonably assured. NPAs increased $10.0 million
to $27.1 million at September 30, 2001 compared with $14.7 million at December
31, 2000. NPAs represented 0.3% of total assets at September 30, 2001 compared
to 0.2% at December 31, 2000. There were no impaired loans at September 30, 2001
and December 31, 2000.
Interest on nonperforming loans excluded from interest income was $0.5 million
at September 30, 2001 and December 31, 2000.
Allowance for Credit Losses
Our allowance for credit losses was $149 million at September 30, 2001 compared
to $104 million at December 31, 2000. The allowance for credit losses and
related provisions are determined by considering loan volumes, loan sales,
prepayments, loss trends, levels of NPLs, management's analysis of market
conditions, individual loan reviews, levels of assets to reserves and other
relevant factors. The allowance for credit losses is reduced by net chargeoffs
and increased by the provision for credit losses. For the three and nine months
ended September 30, 2001, the provision for credit losses was $60.5 million and
$127 million, respectively, compared with $24.9 million and $52.1 million for
the same respective periods in 2000. For the three and nine months ended
September 30, 2001, net chargeoffs totaled $33.0 million and $77.3 million,
respectively, compared with $10.9 million and $23.4 million for the same
respective periods in 2000. The increase in the allowance for credit losses was
the result of a higher level of automobile contracts held on balance sheet as
well as higher chargeoffs related to continued slowing in the economy. The
allowance for credit losses as a percentage of owned loans outstanding was 2.1%
at September 30, 2001 and December 31, 2000.
We believe that the allowance for credit losses is currently adequate to cover
probable losses in our owned portfolio that can be reasonably estimated. No
single loan, borrower or series of such loans comprises a significant portion of
the total portfolio. The provision and allowance for credit losses are
indicative of loan volumes, loss trends and management's analysis of market
conditions.
21
The following table sets forth the activity in the allowance for credit losses:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 122,576 $ 78,880 $ 104,006 $ 64,217
Chargeoffs:
Mortgage loans (224) (199) (881) (809)
Consumer loans (44,987) (14,687) (106,384) (32,462)
--------- --------- --------- ---------
(45,211) (14,886) (107,265) (33,271)
Recoveries:
Mortgage loans 3 49 16 50
Consumer loans 12,184 3,951 29,977 9,807
--------- --------- --------- ---------
12,187 4,000 29,993 9,857
--------- --------- --------- ---------
Net chargeoffs (33,024) (10,886) (77,272) (23,414)
Provision for credit losses 60,501 24,906 127,124 52,097
Write-down of non-performing assets (1,552) (5,357)
--------- --------- --------- ---------
Balance at end of period $ 148,501 $ 92,900 $ 148,501 $ 92,900
========= ========= ========= =========
Ratio of net chargeoffs during the period
(annualized) to average loans outstanding during
the period 1.98% 1.18% 1.72% 1.07%
The following table presents summarized data relative to the allowance for
credit and real estate losses at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
Total loans (1) $ 7,118,697 $ 4,924,053
Allowance for credit losses 148,501 104,006
Allowance for real estate owned losses 250 250
Loans past due 60 days or more 61,802 37,911
Nonperforming loans 11,167 9,132
Nonperforming assets (2) 27,093 14,683
Allowance for credit losses as a percent of:
Total loans (1) 2.1% 2.1%
Loans past due 60 days or more 240.3% 274.3%
Nonperforming loans 1,329.8% 1,138.9%
Total allowance for credit losses and REO losses as a percent
of nonperforming assets 549.0% 710.0%
Nonperforming loans as a percent of total loans 0.2% 0.2%
Nonperforming assets as a percent of total assets 0.3% 0.2%
(1) Loans net of unearned interest and undisbursed loan proceeds.
(2) Nonperforming loans, real estate owned, and repossessed assets.
22
CAPITAL RESOURCES AND LIQUIDITY
Overview
We require substantial capital resources and cash to support our business. Our
ability to maintain positive cash flows for our automobile operations is the
result of our consistent managed growth and efficient operations.
In addition to our indirect statement of cash flows as presented under GAAP, we
also analyze the key cash flows for our automobile operations on a direct basis
excluding certain items such as the purchase or sale of automobile contracts.
The following table shows our operating cash flows:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Cash flows from owned loans $261,909 $135,505
Cash flows from trusts 44,172 106,053
Contractual servicing income 18,712 33,113
Other fee income 50,389 43,267
Less:
Dealer participation 92,960 76,281
Operating costs 155,274 141,135
-------- --------
Operating cash flows $126,948 $100,522
======== ========
Operating cash flows improved for the nine months ended September 30, 2001
compared with the nine months ended September 30, 2000 as a result of improving
net interest margins on our managed portfolio as well as improved operating
efficiency.
PRINCIPAL SOURCES OF CASH
- - Collections of Principal and Interest from Automobile Contracts -- For the
three and nine months ended September 30, 2001, principal and interest
collections totaled $1.1 billion and $3.3 billion, respectively, compared
with $0.9 billion and $2.6 billion for the same respective periods in 2000.
- - Deposits -- Deposits decreased to $2.3 billion at September 30, 2001 from
$2.5 billion at December 31, 2000.
- - Contract Sales and Securitizations -- For the three and nine months ended
September 30, 2001, contract sales and securitizations totaled $1.2 billion
and $3.6 billion, respectively, compared with $1.4 billion and $3.6 billion
for the same respective periods in 2000.
- - Borrowings and Other Sources of Funds -- Borrowings and other sources of
funds, which includes notes payable, securities sold under agreements to
repurchase, and FHLB advances, increased to $6.4 billion at September 30,
2001 from $4.1 billion at December 31, 2000. The increase is primarily due
to securitizations totaling $3.6 billion that were treated as a secured
financing for the nine months ended September 30, 2001.
23
PRINCIPAL USES OF CASH
- - Acquisition of Loans or Investment Securities -- For the three and nine
months ended September 30, 2001, loan originations totaled $1.3 billion and
$3.7 billion, respectively, compared with $1.2 billion and $3.2 billion for
the same respective periods in 2000. We purchased $1.0 billion of MBS and
other investment securities during the nine months ended September 30, 2001
compared with $0.7 billion during the same respective period in 2000.
- - Payments of Principal and Interest on Securitization Transactions -- For
the three and nine months ended September 30, 2001, payments of principal
and interest to noteholders and certificateholders totaled $1.0 billion and
$2.6 billion, respectively, compared with $0.7 billion and $2.5 billion for
same respective periods in 2000.
- - Dealer Participation -- For the three and nine months ended September 30,
2001, participation paid by us to dealers was $31.2 million and $93.0
million, respectively, compared with $27.9 and $76.3 for the same
respective periods in 2000.
- - Advances to Spread Accounts -- The amounts due from trusts at September 30,
2001, including initial advances not yet returned, was $169 million at
September 30, 2001 compared with $357 million at December 31, 2000.
- - Operating Our Business -- For the three and nine months ended September 30,
2001, operating expenses totaled $59.9 million and $184 million,
respectively, compared with $54.1 million and $166 million for the same
respective periods in 2000.
CAPITAL REQUIREMENTS
The Bank is a federally chartered savings bank. As such, it is subject to
certain minimum capital requirements imposed by FIRREA and 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
10.0% or greater, a Tier 1 or core risk-based capital ratio of 6.0% or greater,
a leverage ratio of 5.0% or greater and not be subject to any OTS order. The
Bank currently meets all of the requirements of a "well capitalized"
institution.
24
The following table summarizes the Bank's actual capital and required capital as
of September 30, 2001 and December 31, 2000:
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, 2001
Actual Capital:
Amount $567,347 $567,347 $567,347 $800,836
Capital ratio 7.27% 7.27% 8.48% 11.96%
FIRREA minimum required capital:
Amount $117,065 $234,130 N/A $535,529
Capital ratio 1.50% 3.00% N/A 8.00%
Excess $450,282 $333,217 N/A $265,307
FDICIA well capitalized required capital:
Amount N/A $390,217 $401,647 $669,411
Capital ratio N/A 5.00% 6.00% 10.00%
Excess N/A $177,131 $165,700 $131,425
DECEMBER 31, 2000
Actual Capital:
Amount $533,571 $533,571 $533,571 $780,317
Capital ratio 8.03% 8.03% 8.32% 12.16%
FIRREA minimum required capital:
Amount $ 99,664 $199,327 N/A $513,242
Capital ratio 1.50% 3.00% N/A 8.00%
Excess $433,907 $334,244 N/A $267,075
FDICIA well capitalized required capital:
Amount N/A $332,212 $384,931 $641,552
Capital ratio N/A 5.00% 6.00% 10.00%
Excess N/A $201,359 $148,640 $138,765
The decline in capital ratios from December 31, 2000 to September 30, 2001 is
primarily the result of an increase in the amount of automobile contracts held
by the Bank as we continue to grow our automobile lending operations.
25
The following table reconciles the Bank's capital in accordance with GAAP to the
Bank's tangible, core and risk-based capital:
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(DOLLARS IN THOUSANDS)
Shareholders' equity -- GAAP basis $ 435,824 $ 462,226
Adjustments for tangible and core capital:
Unrealized losses under SFAS 115 and SFAS 133 55,714 14,816
Non-permissible activities (116) (115)
Minority interest in equity of subsidiaries 75,925 56,644
--------- ---------
Total tangible and core capital 567,347 533,571
Adjustments for risk-based capital:
Subordinated debentures (1) 149,534 166,497
General loan valuation allowance (2) 83,955 80,249
--------- ---------
Risk-based capital $ 800,836 $ 780,317
========= =========
(1) Excludes capitalized discounts and issue costs.
(2) Limited to 1.25% of risk-weighted assets.
26
FORWARD-LOOKING STATEMENTS
Included in our Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Form 10-Q are several
"forward-looking statements." Forward-looking statements are those which use
words such as "believe", "expect", "anticipate", "intend", "plan", "may",
"will", "should", "estimate", "continue", or other comparable expressions. These
words indicate future events and trends. Forward-looking statements are our
current views with respect to future events and financial performance. These
forward-looking statements are subject to many risks and uncertainties that
could cause actual results to differ significantly from historical results or
from those anticipated by us. The most significant risks and uncertainties we
face are:
- the level of chargeoffs, as an increase in the level of chargeoffs
will decrease our earnings;
- the ability to originate new automobile contracts in a sufficient
amount to reach our needs, as a decrease in the amount we originate
will reduce our earnings;
- a decrease in the difference between the average interest rate we
receive on the automobile contracts we originate and the rate of
interest we must pay to fund those automobile contracts, as a decrease
will reduce our earnings;
- the continued availability of sources of funding for our operations,
as a reduction in the availability of funding will reduce our ability
to originate automobile contracts;
- the level of notes treated as secured financings, as the level will
impact the timing of revenue recognition;
- the level of operating costs, as an increase in those costs will
reduce our net earnings;
- the effect of new laws, regulations and court decisions; and
- a change in general economic conditions.
You are cautioned not to place undue reliance on our forward-looking statements.
You should carefully review the factors referred to above and other documents we
file from time to time with the Securities and Exchange Commission, including
our quarterly reports on Form 10-Q and our annual reports on Form 10-K.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest rates and early prepayment of loans and MBS are the
primary market risks facing us. The Credit and Pricing Committee is responsible
for setting credit and pricing policies and for monitoring credit quality. Our
Asset/Liability Committee is responsible for the management of interest rate and
prepayment risks. Asset/liability management is the process of measuring and
controlling interest rate risk through matching the maturity and repricing
characteristics of interest earning assets with those of interest bearing
liabilities.
The Asset/Liability Committee closely monitors interest rate and prepayment
risks and recommends policies for managing such risks. The primary measurement
tool for evaluating this risk is the use of interest rate shock analysis. This
analysis simulates the effects of an instantaneous and sustained change in
interest rates (in increments of 100 basis points) on our assets and liabilities
and measures the resulting increase or decrease to our net portfolio value, also
known as NPV. NPV is the discounted value of the future cash flows (or `paths'
of cash flows in the presence of options based on volatility assumptions and an
arbitrage free Monte Carlo simulation method to achieve the current market
price) of all assets minus all liabilities whose value is effected by interest
rates changes plus the book value of non-interest rate sensitive assets minus
the book value of non-interest rate sensitive liabilities. The NPV ratio is the
ratio of the NPV to the market value of our assets as calculated above. In
general, an increase in interest rates would more adversely affect our NPV than
would a decrease in interest rates.
Another important measurement of our interest rate risk is `GAP' analysis. GAP
is defined as the difference between the amount of interest sensitive assets
that reprice versus the amount of interest sensitive liabilities that also
reprice within a defined period of time. We have more interest sensitive
liabilities rather than assets repricing in shorter term maturity buckets and
more interest sensitive assets rather than liabilities repricing in longer term
maturity buckets.
28
The following table summarizes our maturity GAP position:
INTEREST RATE SENSITIVITY ANALYSIS AT SEPTEMBER 30, 2001
------------------------------------------------------------------------------------------
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)
Interest earning assets:
Investment securities $ 9,239 $ 488 $ 1,025 $ 10,752
Other investments 82,917 $ 310 83,227
Mortgage-backed securities 341,835 573,175 683,260 $ 322,728 299,639 2,220,637
----------- ----------- ----------- ----------- ----------- -----------
Total investments 433,991 573,485 683,748 322,728 300,664 2,314,616
Consumer loans (1) 435,621 1,693,046 3,115,464 1,343,037 38,880 6,626,048
Mortgage loans:
Adjustable rate (2) 305,073 59,529 364,602
Fixed rate (2) 747 2,977 5,606 3,580 11,148 24,058
Construction loans (2) 10,285 10,285
Commercial loans (2) 87,683 2,312 1,928 597 1,184 93,704
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 1,273,400 2,331,349 3,806,746 1,669,942 351,876 9,433,313
Interest bearing liabilities:
Deposits:
Passbook accounts (3) 2,164 5,840 3,389 11,393
Demand deposit and money
market accounts (3) 82,005 240,603 466,265 788,873
Certificate accounts (4) 476,126 809,527 125,483 2,190 97 1,413,423
FHLB advances (4) 381,000 6,500 2,956 390,456
Securities sold under
agreements to repurchase (4) 141,405 141,405
Subordinated debentures (4) 147,779 147,779
Notes payable on automobile
secured financing (4) 2,143,174 1,568,496 1,729,530 426,453 5,867,653
Other borrowings (4) 5,177 5,177
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing
liabilities 3,231,051 2,630,966 2,324,667 428,643 150,832 8,766,159
----------- ----------- ----------- ----------- ----------- -----------
Excess interest earning/bearing
assets (liabilities) (1,957,651) (299,617) 1,482,079 1,241,299 201,044 667,154
Effect of hedging activities (5) 3,408,500 (258,600) (1,851,835) (533,565) (764,500)
----------- ----------- ----------- ----------- ----------- -----------
Hedged excess (deficit) $ 1,450,849 $ (558,217) $ (369,756) $ 707,734 $ (563,456) $ 667,154
=========== =========== =========== =========== =========== ===========
Cumulative excess $ 1,450,849 $ 892,632 $ 522,876 $ 1,230,610 $ 667,154 $ 667,154
=========== =========== =========== =========== =========== ===========
Cumulative excess as a percentage
of total interest earning assets 15.38% 9.46% 5.54% 13.05% 7.07% 7.07%
(1) Based on contractual maturities adjusted by our historical prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the OTS.
(4) Based on contractual maturity.
(5) Includes effect of cash flow hedges on our future deposits.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We or our subsidiaries are involved as parties to certain legal
proceedings incidental to our businesses, including consumer
class action lawsuits. We are vigorously defending these actions
and do not believe that the outcome of these proceedings will
have a material effect upon our 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
None
(b) REPORTS ON FORM 8-K
None
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WESTCORP
- --------------------------------------------------------------------------------
(Registrant)
Date: November 14, 2001 By: /s/ JOY SCHAEFER
---------------------- --------------------------------------
Joy Schaefer
President and Chief Operating Officer
Date: November 14, 2001 By: /s/ Lee A. Whatcott
---------------------- --------------------------------------
Lee A. Whatcott
Executive Vice President (Principal
Financial and Accounting Officer) and
Chief Financial Officer
31