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 JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
COMMISSION FILE NUMBER 1-9910
-----------------------------
WESTCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92718-3804
-----------------------------------------
(Address of principal executive offices)
(714) 727-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
As of July 31, 1996, the registrant had 25,978,025 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 29.
2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1996
TABLE OF CONTENTS
-----------------
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
Exhibit 11 Computation of Earnings Per Share 29
Exhibit 27 Financial Data Schedule
2
3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS)
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short-term investments $ 156,809 $ 162,885
Investment securities held to maturity (fair value 1996: $2,227; 1995: $1,493) 2,263 1,506
Investment securities available for sale 142,766 133,518
Mortgage-backed securities held to maturity (fair value 1996: $460,200; 1995:
$522,529) 460,673 512,218
Mortgage-backed securities available for sale 224,978 340,334
Loans receivable, net of allowance for loan losses (1996: $42,066;
1995: $39,260) 1,235,746 1,339,423
Loans held for sale 359,708 368,533
Premises and equipment, net 74,329 70,052
Real estate owned, net 9,959 10,044
Accrued interest receivable 14,996 17,476
Excess of purchase cost over net assets acquired 972 1,015
Federal Home Loan Bank stock 29,024 29,624
Other assets 315,025 236,309
----------- -----------
$ 3,027,248 $ 3,222,937
=========== ===========
LIABILITIES
Deposits $ 1,789,556 $ 1,753,475
Securities sold under agreements to repurchase 145,901 354,024
Short-term borrowings 60,445 112,330
Federal Home Loan Bank advances 176,000 192,000
Amounts held on behalf of trustee 367,068 341,693
Unearned insurance premiums and insurance reserves 1,422 5,102
Other liabilities 44,969 40,249
----------- -----------
2,585,361 2,798,873
SUBORDINATED DEBENTURES 104,632 104,360
MINORITY INTEREST 24,419 21,965
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 25,977,094
shares in 1996 and 24,563,419 shares in 1995 25,977 24,563
Paid-in capital 190,213 167,039
Retained earnings 99,034 105,951
Unrealized gain (loss) on securities available for sale, net of tax (2,388) 186
----------- -----------
312,836 297,739
----------- -----------
$ 3,027,248 $ 3,222,937
=========== ===========
- --------
See accompanying notes to unaudited consolidated financial statements.
3
4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income:
Loans, including fees $ 42,917 $ 40,128 $ 84,576 $ 77,213
Mortgage-backed securities 12,411 11,794 26,606 20,249
Investment securities 1,829 1,644 3,623 3,278
Other 1,690 1,369 3,122 3,251
------------ ------------ ------------ ------------
TOTAL INTEREST INCOME 58,847 54,935 117,927 103,991
Interest expense:
Deposits 24,579 25,737 49,696 48,623
Federal Home Loan Bank advances and other borrowings 5,155 4,423 11,188 9,317
Securities sold under agreements to repurchase 2,900 4,501 7,974 7,553
------------ ------------ ------------ ------------
TOTAL INTEREST EXPENSE 32,634 34,661 68,858 65,493
------------ ------------ ------------ ------------
NET INTEREST INCOME 26,213 20,274 49,069 38,498
Provision for loan losses 1,454 4,094 7,053 4,732
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 24,759 16,180 42,016 33,766
Other income:
Automobile lending 36,140 21,058 72,665 38,192
Mortgage banking 5,427 578 9,741 2,032
Investment and mortgage-backed securities gains
(losses) 90 (21) (1,883) 486
Insurance income 1,336 1,833 5,686 2,409
Real estate operations 209 145 (1,351) 668
Rental operations (174) (100) (84) (158)
Miscellaneous 459 163 997 269
------------ ------------ ------------ ------------
TOTAL OTHER INCOME 43,487 23,656 85,771 43,898
Other expenses:
Salaries and employee benefits 28,084 14,619 51,331 29,326
Occupancy 2,623 1,692 5,217 3,325
Insurance 1,193 1,336 2,399 2,957
Miscellaneous 14,688 8,510 27,539 17,044
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES 46,588 26,157 86,486 52,652
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 21,658 13,679 41,301 25,012
Income taxes 9,090 5,656 17,163 10,378
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 12,568 8,023 24,138 14,634
Minority interest in earnings of subsidiaries 1,894 3,616
------------ ------------ ------------ ------------
NET INCOME $ 10,674 $ 8,023 $ 20,522 $ 14,634
============ ============ ============ ============
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.41 $ 0.31 $ 0.79 $ 0.57
============ ============ ============ ============
CASH DIVIDENDS DECLARED PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.10 $ 0.09 $ 0.20 $ 0.18
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS 26,196,613 25,927,218 26,135,111 25,850,078
============ ============ ============ ============
- --------
See accompanying notes to unaudited consolidated financial statements.
4
5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,522 $ 14,634
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses 7,053 4,732
Depreciation and amortization 4,246 3,654
Amortization of deferred fees 581 1,587
Amortization of bond issuance costs and discount 272 249
Decrease (increase) in accrued interest receivable 2,480 (2,165)
Loss (gain) on sale of investment securities and mortgage-backed securities 1,971 (1,671)
Gain on sale of loans (15,829) (6,016)
Gain on sale of REO loans (1,147) (2,450)
Decrease in interest payable (1,132) (1,133)
Decrease in unearned insurance (3,680) (1,334)
Net change in loans receivable 105,710 (48,580)
Net change in loans held for sale 7,004 77,276
Other, net (31,007) (31,083)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 97,044 7,700
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities held to maturity (757)
Purchase of investment securities available for sale (23,912)
Proceeds from sale of investment securities available for sale 449
Proceeds from maturities of investment securities available for sale 13,000
Purchase of mortgage-backed securities held to maturity (42) (137,321)
Purchase of mortgage-backed securities available for sale (76,145) (167,905)
Proceeds from the sale of mortgage-backed securities available for sale 171,578 98,500
Payments received on mortgage-backed securities 65,208 7,230
Additions to premises and equipment (8,480) (2,604)
Disposition of real estate owned 10,054 17,605
Purchase of FHLB stock (732) (557)
Proceeds from sale of FHLB stock 1,332 1,207
Net increase in trust receivable (38,541) (8,460)
Net increase in trustee accounts 25,375 61,108
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 138,387 (131,197)
- --------
See accompanying notes to unaudited consolidated financial statements.
5
6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
--------- ---------
(DOLLARS IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 36,081 $ 138,163
(Decrease) increase in securities sold under agreements to repurchase (208,123) 63,006
Decrease in FHLB advances, net (16,000) (13,000)
Decrease in short-term borrowings (51,885) (58,814)
Proceeds from issuance of common stock 891 1,496
Minority interest 2,454
Cash dividends (4,925) (4,280)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (241,507) 126,571
--------- ---------
Net (decrease) increase in cash and equivalents (6,076) 3,074
Cash and equivalents at beginning of period 162,885 166,293
--------- ---------
Cash and equivalents at end of period $ 156,809 $ 169,367
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 69,989 $ 66,626
Income taxes 16,713 6,212
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 11,647 $ 13,412
- --------
See accompanying notes to unaudited consolidated financial statements.
6
7
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in Westcorp's annual report on Form 10-K for the year ended December
31, 1995.
Certain amounts from the 1995 consolidated financial statement have been
reclassified to conform to the 1996 presentation.
7
8
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - INVESTMENT SECURITIES HELD TO MATURITY
- -----------------------------------------------
Investment securities held to maturity were as follows:
JUNE 30, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $ 1,506 $ 36 $ 1,470
Other 757 757
-------- ----- -------- --------
$ 2,263 $ 36 $ 2,227
======== ===== ======== ========
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $ 1,506 $ 13 $ 1,493
-------- ----- -------- --------
$ 1,506 $ 13 $ 1,493
======== ===== ======== ========
NOTE C - INVESTMENT SECURITIES AVAILABLE FOR SALE
- -------------------------------------------------
Investment securities available for sale were as follows:
JUNE 30, 1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations $142,004 $ 116 $ 2,277 $139,843
Obligations of states and political
subdivisions 3,029 131 2,898
Other 25 25
-------- ----- -------- --------
$145,058 $ 116 $ 2,408 $142,766
======== ===== ======== ========
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9
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S.Government
agencies and corporations $130,306 $ 265 $ 519 $130,052
Obligations of states and political
subdivisions 3,521 80 3,441
Other 25 25
-------- -------- ------ --------
$133,852 $ 265 $ 599 $133,518
======== ======== ====== ========
NOTE D - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- ----------------------------------------------------
Mortgage-backed securities held to maturity consisted of the following:
JUNE 30, 1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates $363,341 $ 739 $1,790 $362,290
FNMA participation certificates 88,914 445 89,359
FHLMC participation certificates 8,255 133 8,388
Other participation certificates 163 163
-------- -------- ------ --------
$460,673 $ 1,317 $1,790 $460,200
======== ======== ====== ========
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates $405,582 $ 10,943 $2,246 $414,279
FNMA participation certificates 97,352 1,460 98,812
FHLMC participation certificates 9,120 154 9,274
Other participation certificates 164 164
-------- -------- ------ --------
$512,218 $ 12,557 $2,246 $522,529
======== ======== ====== ========
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10
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
- ------------------------------------------------------
Mortgage-backed securities available for sale were as follows:
JUNE 30, 1996
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates $126,703 $ 2,972 $ 3,791 $125,884
FNMA participation certificates 78,956 12 1,303 77,665
FHLMC participation certificates 21,391 122 84 21,429
-------- -------- -------- --------
$227,050 $ 3,106 $ 5,178 $224,978
======== ======== ======== ========
DECEMBER 31, 1995
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates $138,175 $ 2,017 $ 4,291 $135,901
FNMA participation certificates 99,859 1,485 101,344
FHLMC participation certificates 101,639 2,121 671 103,089
-------- -------- -------- --------
$339,673 $ 5,623 $ 4,962 $340,334
======== ======== ======== ========
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11
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - NET LOANS RECEIVABLE
- -----------------------------
Net loans receivable consisted of the following:
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(DOLLARS IN THOUSANDS)
Real estate:
Mortgage $ 1,326,371 $ 1,406,167
Construction 8,875 8,469
----------- -----------
1,335,246 1,414,636
Less: Undisbursed loan proceeds 5,877 4,672
----------- -----------
1,329,369 1,409,964
Consumer:
Sales contracts 315,855 355,058
Other 38,355 19,195
Less: Unearned discounts 47,491 38,628
----------- -----------
306,719 335,625
----------- -----------
1,636,088 1,745,589
Allowance for loan losses (42,066) (39,260)
Net deferred loan costs 1,432 1,627
----------- -----------
1,595,454 1,707,956
Less: Loans held for sale:
Mortgage 126,559 148,616
Consumer 233,149 219,917
----------- -----------
359,708 368,533
----------- -----------
$ 1,235,746 $ 1,339,423
=========== ===========
Loans serviced by Westcorp for the benefit of others totalled approximately $6.7
billion and $5.6 billion at June 30, 1996 and December 31, 1995, respectively.
These amounts are not reflected in the accompanying consolidated financial
statements.
NOTE G - DIVIDENDS
- ------------------
Westcorp paid cash dividends of $0.10 per share on both March 1, 1996 and May
24, 1996. In addition, Westcorp paid a 5% stock dividend on June 17, 1996. The
per share amounts for all periods presented have been restated to reflect the
increased shares outstanding. On July 31, 1996, Westcorp announced a cash
dividend of $0.10 per share for shareholders of record on August 15, 1996,
payable August 29, 1996.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased $196 million or 6.1% to $3.0 billion at June 30, 1996
from $3.2 billion at December 31, 1995. This decrease is primarily the result of
the sale of mortgage-backed securities.
During the second quarter, Westcorp acquired the remaining 20% interest in The
Hammond Company and its subsidiaries ("THC") making it a wholly-owned
subsidiary.
LOANS
Loans (including loans held for sale), net of unearned discounts and undisbursed
loan proceeds, decreased $110 million or 6.27% since December 31, 1995. The
decrease is the result of the differential between loans originated and loans
sold, as well as principal reductions during the six month period ended June 30,
1996. Westcorp 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 $127 million are mortgage loans secured primarily by single family
residences and $233 million which are consumer loans secured by motor vehicles.
Consumer loan originations were 46.1% and 47.9% higher for the three and six
months ended June 30, 1996 compared to the same periods in 1995. This increase
was primarily the result of Westcorp's continued expansion of its dealer center
and branch network and favorable market conditions for automobile sales.
Westcorp currently conducts its consumer finance operations through 103 offices
in 21 states compared to 77 offices in 11 states at June 30, 1995.
Real estate originations increased $183 million and $440 million to $251 million
and $560 million for the three and six months ended June 30, 1996 from $68
million and $120 million for the same periods in 1995. The increase in real
estate originations is the result of a more favorable market environment in
California and the acquisition of THC. The following table sets forth the loan
origination, purchase and sale activity of Westcorp for the periods indicated,
excluding net deferred loan costs:
FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------
1996 1995
---------------------------------------- -----------------------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
Beginning balance $ 1,394,256 $ 336,423 $ 1,339,514 $ 531,440
Originations (1) 251,438 525,596 67,970 359,785
Purchases 59 22
Sales (2) (246,594) (525,000) (15,307) (490,000)
Principal reductions (3) (69,790) (30,300) (39,621) (31,741)
------------------- ------------------- ------------------- -------------------
Ending balance $ 1,329,369 $ 306,719 $ 1,352,578 $ 369,484
=================== =================== =================== ===================
12
13
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------
1996 1995
---------------------------------------- ----------------------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
------------------- ------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
Beginning balance $ 1,409,964 $ 335,625 $ 1,320,784 $ 430,708
Originations (1) 560,237 1,031,332 120,438 697,151
Purchases 139 201
Sales (2) (521,910) (1,010,000) (20,515) (680,000)
Principal reductions (3) (119,061) (50,238) (68,330) (78,375)
------------------- ------------------- ------------------- -------------------
Ending balance $ 1,329,369 $ 306,719 $ 1,352,578 $ 369,484
=================== =================== =================== ===================
- ------------------
(1) Includes sales contracts purchased from automobile dealers.
(2) Loans sold or securitized for which Westcorp generally retains servicing.
(3) Includes scheduled payments, prepayments and chargeoffs.
The real estate loan portfolio (including those classified as held for sale and
excluding net deferred loan costs) consisted of the following:
JUNE 30, 1996 DECEMBER 31, 1995
----------------------------------------- ------------------------------------------
AMOUNT % AMOUNT %
------------------- -------------------- -------------------- -------------------
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds $ 805,199 60.6% $ 816,948 57.9%
Second trust deeds 53,721 4.0 116,132 8.3
------------------- -------------------- -------------------- -------------------
858,920 64.6 933,080 66.2
Multifamily residential loans 464,387 34.9 469,951 33.3
Construction loans 8,875 0.7 8,469 0.6
Commercial loans 3,064 0.2 3,136 0.2
------------------- -------------------- -------------------- -------------------
1,335,246 100.4 1,414,636 100.3
Less: undisbursed loan proceeds (5,877) (0.4) (4,672) (0.3)
------------------- -------------------- -------------------- -------------------
$ 1,329,369 100.0% $ 1,409,964 100.0%
=================== ==================== ===================== ===================
Westcorp's real estate portfolio consisted primarily of adjustable rate mortgage
loans (excluding net deferred loan costs) as shown below:
JUNE 30, 1996 DECEMBER 31, 1995
---------------------------------------- -----------------------------------------
AMOUNT % AMOUNT %
------------------- -------------------- -------------------- ------------------
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Single family $ 159,460 12.0% $ 160,699 11.4%
Multifamily 392 0.1 668 0.1
Adjustable rate loans:
Negative amortization 865,127 65.0 892,295 63.3
Without negative amortization 304,390 22.9 356,302 25.2
------------------- -------------------- -------------------- ------------------
$ 1,329,369 100.0% $ 1,409,964 100.0%
=================== ==================== ==================== ==================
13
14
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
JUNE 30, 1996 DECEMBER 31, 1995
----------------------------------------- ---------------------------------------
AMOUNT % AMOUNT %
------------------- -------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
Sales contracts, net $ 268,364 87.5% $ 316,430 94.3%
Other 38,355 12.5 19,195 5.7
------------------- -------------------- ------------------- -------------------
$ 306,719 100.0% $ 335,625 100.0%
=================== ==================== =================== ===================
MORTGAGE-BACKED SECURITIES
- --------------------------
During the first six months of 1996, Westcorp purchased $76.2 million and sold
$171.6 million of mortgage-backed securities ("MBS"). This is part of Westcorp's
continuing strategy to fully employ capital and enhance net interest income.
ASSET QUALITY
- -------------
DELINQUENCY
The percent of loans 60 days or more delinquent increased to 1.5% at June 30,
1996 compared to 1.2% at December 31, 1995. Delinquent loans by type of loan and
as a percentage of loans by type are summarized as follows at June 30, 1996 and
December 31, 1995:
JUNE 30, 1996
NUMBER OF DAYS DELINQUENT
------------------------------------------------------------------------------
60-89 90 OR MORE TOTAL
------------------------- ------------------------ -------------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Single family residential homes $ 2,895 0.3% $ 15,095 1.8% $ 17,990 2.1%
Multifamily residential homes 1,983 0.4 1,484 0.3 3,467 0.7
Consumer 1,383 0.5 971 0.3 2,354 0.8
----------- ----------- ----------- ----------- ----------- -----------
$ 6,261 0.4% $ 17,550 1.1% $ 23,811 1.5%
=========== =========== =========== =========== =========== ===========
DECEMBER 31, 1995
NUMBER OF DAYS DELINQUENT
----------------------------------------------------------------------------
60-89 90 OR MORE TOTAL
-------------------------- ------------------------ -----------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ----------- ---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Single family residential homes $ 4,416 0.5% $ 10,769 1.2% $ 15,185 1.6%
Multifamily residential homes 1,215 0.3 1,693 0.4 2,908 0.6
Consumer 1,529 0.5 526 0.2 2,055 0.6
Construction 107 1.6 107 1.6
----------- ----------- ---------- ---------- ---------- -----------
$ 7,160 0.4% $ 13,095 0.8% $ 20,255 1.2%
=========== =========== ========== ========== ========== ===========
14
15
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") increased $7.7 million or 26.2% to $36.9
million at June 30, 1996 compared to $29.2 million at December 31, 1995. The
overall increase is primarily attributable to increased delinquency on single
family loans primarily because of property tax payments which were due and not
paid at the end of the fourth quarter of 1995 which caused loans to become 90
days delinquent in the first quarter of 1996. At June 30, 1996, NPAs represented
1.2% of total assets compared to 0.9% at December 31, 1995.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are accounted for at fair value. NPLs are defined as
all loans on nonaccrual, which include mortgage loans 90 days or more past due
or performing loans where full collection of principal and interest is not
reasonably assured. NPLs include loans categorized as impaired. When a loan is
designated as nonaccrual, all previously accrued interest is reversed. Interest
on nonperforming loans excluded from interest income was $1.0 million at both
June 30, 1996 and 1995.
As a result of the adoption of Statement of Financial Accounting Standards
("SFAS") No. 114, a loan is considered impaired when, based on current
information and events, it is probable that Westcorp will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Westcorp measures impairment based on, among other factors, the fair value of
the loan's collateral. Changes in the fair value of loans are recorded through
the allowance for loan losses. At June 30, 1996 and December 31, 1995,
impaired loans were $10.7 million and $7.5 million, respectively.
NONPERFORMING LOANS
Nonperforming loans by loan type consisted of the following:
JUNE 30, DECEMBER 31,
1996 1995
------------------- -------------------
(DOLLARS IN THOUSANDS)
Single family residential $ 14,593 $ 9,934
Multifamily 5-36 units 6,501 5,993
Multifamily 37+ units 5,048 2,366
Other 107
------------------- -------------------
$ 26,142 $ 18,400
=================== ===================
The migration of nonperforming loans and real estate owned from December 31,
1995 to June 30, 1996 is shown below.
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
-------------- ---------------- --------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1995 $ 18,400 $ 9,934 $ 5,993 $ 2,366 $ 107
New nonperforming loans 23,096 13,662 4,926 4,508
REO (8,921) (4,554) (2,697) (1,563) (107)
Cures and payoffs (6,150) (4,166) (1,721) (263)
Chargeoffs (283) (283)
-------------- ---------------- --------------- ---------------- ----------------
Balance, June 30, 1996 $ 26,142 $ 14,593 $ 6,501 $ 5,048 $ 0
============== ================ =============== ================ ================
15
16
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
-------- ----------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1995 $ 10,831 $ 7,235 $ 2,913 $ 683
New REO 11,647 6,270 5,292 85
Sales (9,883) (6,213) (3,670)
Writedowns (1,853) (590) (865) (398)
-------- -------- -------- ---------- --------
Balance, June 30, 1996 $ 10,742 $ 6,702 $ 3,670 $ 370
======== ======== ======== ========== ========
Assets secured by single family residential properties comprised the largest
portion of nonperforming assets. $14.6 million or 56% of NPLs and $6.7 million
or 62% of REOs were secured by single family residential properties.
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp increased its allowance for loan losses to $42.1
million for June 30, 1996 compared to $39.3 million for December 31, 1995. While
Westcorp's nonperforming assets are primarily single family loans, no single
loan, borrower or series of such 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.
16
17
The following table presents summarized data relative to the allowance for loan
losses.
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
Total loans $ 1,636,088 $ 1,745,589
Allowance for loan losses 42,066 39,260
Allowance for real estate losses 784 784
Loans past due 60 days or more 23,811 20,255
Nonperforming loans 26,142 18,400
Nonperforming assets (1) 36,884 29,231
Allowance for loan losses as a percent of:
Total loans (2) 2.6% 2.2%
Loans past due 60 days or more 176.7 193.8
Nonperforming loans 160.9 213.4
Total allowance as a percent of nonperforming assets 116.2 137.0
Nonperforming loans as a percent of total loans 1.6 1.1
Nonperforming assets as a percent of total assets 1.2 0.9
- ------------------
(1) Nonperforming loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
17
18
The table below provides a historical analysis of the allowance for loan losses.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1995 1996 1995
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 41,039 $ 40,670 $ 39,260 $ 41,323
Chargeoffs:
Mortgage loans (1,804) (1,617) (2,436) (2,358)
Consumer loans (3,335) (3,086) (8,029) (5,397)
-------- -------- -------- --------
(5,139) (4,703) (10,465) (7,755)
Recoveries:
Mortgage loans 1,898 59 1,953 127
Consumer loans 1,344 1,136 2,795 2,029
-------- -------- -------- --------
3,242 1,195 4,748 2,156
-------- -------- -------- --------
Net chargeoffs (1,897) (3,508) (5,717) (5,599)
Adjustments 1,470(1) 1,470(1) 800(2)
Provision for loan losses 1,454 4,094 7,053 4,732
-------- -------- -------- --------
Balance at end of period $ 42,066 $ 41,256 $ 42,066 $ 41,256
======== ======== ======== ========
Ratio of net chargeoffs during period to average
loans outstanding during the period (annualized) 0.42% 0.80% 0.64% 0.65%
======== ======== ======== ========
- ------------------
(1) Purchase accounting adjustment related to the acquisition of THC.
(2) Transfer from the allowance for real estate losses as part of implementing
SFAS 114.
Changes in the allowance for real estate losses were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
1996 1995 1996 1995
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 784 $ 784 $ 784 $1,684
Provision for real estate losses (100)
Transfer to the allowance for loan losses (800)
------ ------ ------ ------
Balance at end of period $ 784 $ 784 $ 784 $ 784
====== ====== ====== ======
18
19
RESULTS OF OPERATIONS
SUMMARY
- -------
Westcorp reported net income of $10.7 million and $20.5 million for the three
and six months ended June 30, 1996, compared to $8.0 million and $14.6 million
for the comparable periods of 1995. Return on average assets was 1.43% and 1.25%
for the three and six months ended June 30, 1996, compared to 1.18% and 1.08%
for the same periods of 1995. Return on average equity was 13.9% and 13.5% for
the three and six months ended June 30, 1996, compared to 14.6% and 13.3% for
the comparable periods of 1995. Net income was primarily affected by the
following factors:
- Net interest income increased as Westcorp increased its purchases of
mortgage-backed securities and as originations of loans increased.
- Provision for loan losses decreased as a result of a lower level of loans
receivable held on the balance sheet.
- The automobile lending income increase is primarily due to an increase in
the amounts securitized, wider interest rate spreads and an increase in
the overall servicing portfolio.
- The mortgage banking income increase is the result of the adoption of
SFAS 122 which recognizes the value of originated servicing rights as
well as the initiation of a program to sell certain loans with servicing
rights released.
- Other expenses increased as a result of continued expansion into other
states and expansion of servicing portfolios.
NET INTEREST INCOME
- -------------------
Net interest income for the three and six months ended June 30, 1996 was $26.2
million and $49.1 million, respectively. For the same periods of 1995, net
interest income totalled $20.3 million and $38.5 million.
The total interest rate spread increased 29 basis points for the six months
ended June 30, 1996, compared to the same period of 1995 due to an increase of
22 basis points in the yield on interest earning assets while the cost of funds
decreased by 7 basis points.
The increase in yield on interest earning assets for the six months ended June
30, 1996, compared to the same period of 1995 was affected by a 47 basis point
increase in the yield on the mortgage loan portfolio, which is due to increased
originations of loans with higher yields and a 66 basis point increase in the
yield on consumer loans.
The decrease in the cost of funds was affected by a 47 basis point decrease in
public debt offerings, a 56 basis point decrease in the rate paid on repurchase
agreements and a 121 basis point decrease in the rate paid on FHLB advances and
other borrowings for the six months ended June 30, 1996 compared to the same
period of 1995 due to lower borrowing rates.
19
20
Interest rates for interest earning assets and liabilities for the three and six
months ended June 30, 1996 and 1995 are summarized as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
------ ------ ------ ------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
------ ------ ------ ------
Interest earning assets:
Investment securities (1) 5.44% 5.51% 5.45% 5.52%
Mortgage-backed securities (1) 7.34 7.61 7.17 7.25
Loans:
Consumer 16.01 14.50 15.42 14.76
Mortgage (2) 7.63 7.54 7.70 7.23
Other 5.29 5.48 5.38 5.68
----- ----- ----- -----
Total interest earning assets 8.64 8.50 8.49 8.27
Interest bearing liabilities:
Savings deposits 5.62 5.81 5.69 5.65
Public debt offerings 7.02 7.29 6.84 7.31
Repurchase agreements 4.63 5.85 4.97 5.53
FHLB advances and other borrowings 7.13 7.47 6.25 7.46
----- ----- ----- -----
Total interest bearing liabilities 5.71 6.03 5.79 5.86
Interest rate spread 2.93% 2.47% 2.70% 2.41%
===== ===== ===== =====
Net yield on average interest
earning assets 3.81% 3.25% 3.50% 3.19%
===== ===== ===== =====
- ------------------
(1) Includes both securities available for sale and held to maturity.
(2) For the purposes of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
20
21
ASSET/LIABILITY MANAGEMENT
- --------------------------
The continued profitability of Westcorp is dependent upon, among other factors,
the extent to which the effect of changes in interest rates on its earnings are
minimized. Thus, a major objective of Westcorp's asset/liability management
program has been to control interest rate risk through matching the maturity and
repricing characteristics of its interest-earning assets with those of its
interest-bearing liabilities.
Westcorp originates both adjustable-rate mortgages ("ARM") and fixed-rate
mortgages. To minimize the interest rate risk associated with its real estate
loan portfolio, Westcorp generally retains the ARMs in its own loan portfolio
and sells its fixed-rate loans in the secondary market with servicing rights
retained. During the first six months of 1996, Westcorp purchased rights to
service $1.0 billion of single family residential mortgage loans for $9.7
million. At June 30, 1996, Westcorp serviced $4.3 billion in mortgage real
estate loans for others. ARMs and adjustable-rate mortgage-backed securities
("MBS") amounted to 68% of the total mortgage loans and MBS held by Westcorp at
June 30, 1996. Interest rates generally adjust on a monthly, semiannual or
annual basis with 96% of Westcorp's adjustable mortgage loans adjusting monthly.
Westcorp also originates fixed-rate consumer loans. To minimize interest rate
risk associated with its consumer loan portfolio, Westcorp has sold 98% of its
consumer loan production in securitization transactions in which it has retained
the servicing rights. The interest rate passed through to the purchasers of
those consumer loans is fixed, which provides off balance sheet matched funding
for the majority of Westcorp's consumer loans. At June 30, 1996, Westcorp
serviced $2.6 billion in consumer loans for others.
Approximately 24% of Westcorp's other borrowed funds at June 30, 1996 had fixed
rates and maturities greater than one year of which 89% were subordinated
debentures redeemable in four years and mature in seven years.
Westcorp has entered into or committed to interest rate caps and swaps as hedges
against market value changes in designated portions of its MBS portfolio. At
June 30, 1996, caps with notional amounts totalling $150 million and a swap of
$50 million were outstanding. The cap agreements have strike rates of 8.0% and
7.5% and expire in September, 1999 and 2003, respectively. The swap has a pay
rate of 5.9% and expires in December, 2002. Westcorp uses only counterparties
with high credit ratings and further reduces its risk by avoiding any material
concentration with a single counterparty. Credit exposure is limited to those
agreements with a positive fair value and only to the extent of that fair value.
The sensitivity of earnings to interest rate changes may be measured by the
difference, or gap, between the amount of assets and liabilities scheduled to
reprice, based on certain assumptions, within the same period expressed as a
percentage of interest-earning assets. Conceptually, the lower the amount of
this gap, the less sensitive earnings are to interest rate changes. A positive
gap means an excess of assets over liabilities repricing during the same period.
However, this method of measuring interest rate sensitivity does not take into
account the differing repricing characteristics of various types of assets and
liabilities. Thus, certain assets and liabilities that have similar maturities
or periods to reprice may react differently to changes in market interest rates.
For instance, Westcorp's ARMs are mainly tied to the Eleventh District Cost of
Funds which typically lags the market, and also generally have restrictions on
the maximum amounts of periodic and/or total changes in interest rates and
payments. On the other hand, maturing borrowings have no such restrictions and
may reprice at current market rates.
21
22
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
Westcorp at June 30, 1996. The interest rate sensitivity of Westcorp's assets
and liabilities illustrated in the following table could vary substantially if
different assumptions were used or actual experience differs from the
assumptions set forth.
INTEREST RATE SENSITIVITY ANALYSIS
AT JUNE 30, 1996
WITHIN 3 MONTHS 1 YEAR TO 3 YEARS TO AFTER 5
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment securities $ 19,689 $ 40,826 $ 84,514 $ 145,029
Other investments 145,583 500 146,083
Mortgage-backed securities 201,201 20,211 119,693 $ 106,580 $ 237,966 685,651
Consumer loans (1) 52,414 125,893 96,395 26,913 5,104 306,719
Mortgage loans:
Adjustable rate (2) 915,835 229,122 21,561 1,166,518
Fixed rate (2) 3,350 5,781 39,656 26,125 84,941 159,853
Construction (2) 2,998 2,998
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 1,341,070 422,333 361,819 159,618 328,011 2,612,851
Interest bearing liabilities:
Savings deposits:
Passbook/statement accounts(3) 2,906 7,789 15,416 9,892 17,754 53,757
Money market deposit
accounts (3) 27 72 142 91 161 493
Certificate accounts (4) 506,339 950,650 214,991 33,547 1,705,527
FHLB advances (4) 11,000 152,000 6,500 6,500 176,000
Other borrowings (4) 205,852 490 5 104,631 310,978
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 726,124 1,111,001 237,054 43,530 129,046 2,246,755
----------- ----------- ----------- ----------- ----------- -----------
Excess interest earning assets
(liabilities) 614,946 (688,668) 124,765 116,088 198,965 366,096
Effect of hedging activities 50,000 (50,000)
----------- ----------- ----------- ----------- ----------- -----------
Hedged excess $ 664,946 $ (688,668) $ 124,765 $ 116,088 $ 148,965 $ 366,096
=========== =========== =========== =========== =========== ===========
Cumulative excess $ 664,946 $ (23,722) $ 101,043 $ 217,131 $ 366,096 $ 366,096
=========== =========== =========== =========== =========== ===========
Cumulative excess as a percentage
of total interest earning assets 25.45% (0.91)% 3.87% 8.31% 14.01% 14.01%
- ------------------
(1) Based on contractual maturities adjusted by Westcorp's historical
prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the Office of Thrift Supervision
("OTS").
(4) Based on contractual maturity.
22
23
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the three and six months ended June 30, 1996
was $1.5 million and $7.1 million compared to $4.1 million and $4.7 million
during the comparable periods of 1995. Westcorp recorded a lower provision for
loan losses for the second quarter of 1996 compared to 1995 as a result of a
lower level of loans receivable outstanding.
OTHER INCOME
- ------------
Total other income for the three and six months ended June 30, 1996 was $43.5
million and $85.8 million compared to $23.7 million and $43.9 million during the
comparable periods of 1995. Other income is generated from automobile lending
activities, mortgage banking activities, and other ancillary sources.
AUTOMOBILE LENDING
Westcorp originates and subsequently sells automobile sales contracts in the
secondary market with servicing rights retained. Income from automobile lending
includes gain from the sale of loans, as well as loan servicing income net of
amortization of capitalized servicing and other related income such as document
fees and late charges. For the three and six months ended June 30, 1996,
automobile lending generated income was $36.1 million and $72.7 million compared
to $21.1 million and $38.2 million for the same periods of 1995.
During the three and six months ended June 30, 1996, net gain on automobile loan
sales totalled $9.4 million and $22.3 million compared to $5.4 million and $6.5
million for the same periods of 1995. The increase in the gain on sale reported
in 1996 is primarily the result of increases in both the amounts securitized and
wider interest rate spreads. Contracts sold during the second quarter of 1996
totalled $525 million and $1.0 billion for the three and six months ended June
30, 1996 compared to $490 million and $680 million during the same periods of
1995. Additionally, the owners trust transaction in the second quarter included
an accelerated payment structure to asset backed investors that reduced the
interest cost of the owners trust which is a component in calculating the gain
on sale.
While the assumptions used in determining gain on sale of contracts have not
materially changed during the last three years, the gain on sale of contracts
has fluctuated as a result of changes in the gross interest rate spread of
contracts securitized. The gross interest rate spread is affected by general
market conditions and overall market interest rates. The risks inherent in
interest rate fluctuations are substantially reduced through hedging activities.
Net loan servicing income totalled $19.4 million and $35.9 million for the three
and six months ended June 30, 1996, compared to $10.8 million and $22.0 million
for the comparable periods of 1995. Westcorp serviced $2.6 billion of automobile
loans for others at June 30, 1996 compared to $1.5 billion at June 30, 1995.
23
24
Automobile lending income for the three and six months ended June 30, 1996 and
1995 is summarized as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Gains from sale of sales contracts $ 9,417 $ 5,416 $22,307 $ 6,542
Loan servicing income 19,362 10,771 35,876 21,968
Other fee income 7,361 4,871 14,482 9,682
------- ------- ------- -------
$36,140 $21,058 $72,665 $38,192
======= ======= ======= =======
MORTGAGE BANKING
Westcorp originates mortgage loans for sale in the secondary market. Mortgage
banking operations include gains and losses on the sale of loans, loan servicing
income net of amortization of capitalized servicing and other income which is
primarily late charges. During the three and six months ended June 30, 1996,
mortgage banking generated income of $5.4 million and $9.7 million compared to
$0.6 million and $2.0 million for the comparable periods of 1995.
Gains on sale of mortgage loans for the three and six months ended June 30, 1996
totalled $4.2 million and $6.5 million compared to losses from sale of mortgage
loans of $437 thousand and $526 thousand during the comparable periods of 1995.
The increase in gain on sale of mortgage loans is a result of the adoption of
SFAS 122 which recognizes the value of originated servicing rights as well as
the initiation of a program to sell certain loans with servicing rights
released. Loans sold during the first six months of 1996 totalled $522 million
compared to $20.5 million for the same period of 1995. Mortgage loans held for
sale decreased from $149 million at December 31, 1995 to $127 million at June
30, 1996.
Net loan servicing income was $0.8 million and $2.3 million for the three and
six months ended June 30, 1996 compared to $0.8 million and $2.1 million for the
comparable periods of 1995. At June 30, 1996, Westcorp serviced $4.3 billion of
mortgage loans for others compared to $2.1 billion at June 30, 1995. Net loan
servicing income did not increase proportionately with the servicing portfolio,
due to the amortization of purchased mortgage servicing rights which amounted to
$1.3 million and $2.4 million for the three and six months ended June 30, 1996
compared to $0.8 million and $0.9 million for the comparable periods of 1995.
Mortgage banking income for the three and six months ended June 30, 1996 and
1995 is summarized as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Net gains (losses) from sale of mortgage loans $ 4,243 $ (437) $ 6,478 $ (526)
Loan servicing income 839 781 2,256 2,060
Other 345 234 1,007 498
------- ------- ------- -------
$ 5,427 $ 578 $ 9,741 $ 2,032
======= ======= ======= =======
24
25
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 and six months ended June 30, 1996
totalled $1.3 million and $5.7 million compared to $1.8 million and $2.4 million
for the same periods in 1995.
Real estate operations include the ongoing costs of operation and disposition
associated with Westcorp's REO. Real estate operations earned $0.2 million for
the three months ended June 30, 1996 and a loss of $1.4 million for the six
months ended June 30, 1996 compared to earnings of $0.1 million and $0.7 million
for the same periods in 1995.
OTHER EXPENSES
- --------------
Other expenses consist of compensation and benefits, occupancy expense,
insurance and other operating expenses. Other expenses increased to $46.6
million and $86.5 million for the three and six months ended June 30, 1996
compared to $26.2 million and $52.7 million for the same periods in 1995. The
increase is primarily in compensation and benefits and is a function of
increased loan servicing portfolios and expansion of operations into additional
states. The ratio of annualized operating expense to average serviced loans was
2.45% for the six months ended June 30, 1996 compared to 2.20% for the six
months ended June 30, 1995.
INCOME TAXES
- ------------
The effective tax rates for the six months ended June 30, 1996 and 1995 were
41.6% and 41.5%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp has diversified sources of funds generated through its operations. The
primary sources include deposits, loan principal and interest payments received,
sale of mortgage loans and consumer loans, and the maturity or sale of
investment securities and MBS. Other sources include commercial paper, Federal
Home Loan Bank advances and repurchase agreements. Prepayments on loans and
mortgage-backed securities and deposit inflows and outflows are affected
significantly by interest rates, real estate sales activity and general economic
conditions.
Westcorp uses these sources to meet its business needs which include funding
maturing certificates of deposits and savings withdrawals, repayment of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses and maintaining minimum regulatory liquidity and
capital levels.
During the first six months of 1996, Westcorp purchased $76.2 million of MBS to
more profitably employ its excess capital and enhance interest spreads. These
securities have been segregated, on an individual security basis, into the
available for sale portfolio and the held to maturity portfolio in the financial
statements in accordance with management's intent and ability to hold the
securities to maturity. These purchases included both fixed and adjustable rate
MBS.
25
26
Westcorp's wholly-owned subsidiary, Western Financial Savings Bank, F.S.B. ("the
Bank") is a federally chartered savings bank. As such, it is subject to certain
minimum capital requirements. The Federal Deposit Insurance Corporation
Improvement Act of 1991 separates all financial institutions into one of five
capital categories: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized". In order to be considered "well capitalized", an institution
must have a total risk-based capital ratio of 10% or greater, a Tier 1 (i.e.,
core) risk-based capital ratio of 6% or greater, a leverage ratio (i.e., core)
of 5% or greater, and not be subject to any OTS order or directive to meet and
maintain a specific capital level for any capital measure. The following is a
summary of the Bank's capital ratios as of June 30, 1996:
JUNE 30, 1996
-----------------------
AMOUNT RATIO
---------- -----
RISK-BASED CAPITAL RATIOS (DOLLARS IN THOUSANDS)
Tier 1 Capital $ 269,592 8.73%(1)
Tier 1 Capital minimum requirement 185,370 6.00
---------- -----
Excess $ 84,222 2.73%
========== =====
Total Capital $ 370,845 12.00%(1)
Total Capital minimum requirement 308,950 10.00
---------- -----
Excess $ 61,895 2.00%
========== =====
Risk-adjusted assets, net of excess allowance and
excess deferred tax assets $3,089,499
==========
LEVERAGE RATIOS
Tier 1 Capital $ 269,592 8.90%(2)
Tier 1 Capital minimum requirement 151,375 5.00
---------- -----
Excess $ 118,217 3.90%
========== =====
- ------------------
(1) As a percentage of risk-adjusted assets
(2) As a percentage of total book assets
As a member of the Federal Home Loan Bank System, the Bank is required to
maintain a specified ratio of cash, short-term United States government and
other qualifying securities to net withdrawable accounts and borrowings payable
in a year or less. The required liquidity ratio is currently 5%. The Bank has
maintained liquidity in excess of the required amount in 1996.
26
27
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
Westcorp or its subsidiaries are involved as parties to certain
legal proceedings incidental to their businesses. Westcorp believes
that the outcome of such proceedings will not have a material effect
upon Westcorp's business or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
27
28
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: 8/13/96 By: /s/ JOY SCHAEFER
---------------------------------
Joy Schaefer
Senior Executive Vice
President and
Chief Operating Officer
Date: 8/13/96 By: /s/ LEE A. WHATCOTT
---------------------------------
Lee A. Whatcott
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
28