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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 1-9910
WESTCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
-----------------------------------------
(Address of principal executive offices)
(714) 727-1000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
As of June 30, 1997, the registrant had 26,195,099 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 36.
2
WESTCORP AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
--------------
Page No.
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
Exhibit 11 Computation of Earnings Per Share 35
2
3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash, interest-bearing deposits with other financial institutions and
other short-term investments $ 76,060 $ 138,423
Investment securities held to maturity (fair value 1997: $4,124; 1996: $3,160) 4,139 3,171
Investment securities available for sale 125,934 142,344
Mortgage-backed securities held to maturity (fair value 1997: $414,003;
1996: $442,229) 409,330 438,662
Mortgage-backed securities available for sale 600,085 410,886
Loans receivable, net of allowance for loan losses (1997: $36,616;
1996: $40,211) 1,219,542 1,232,235
Loans held for sale 620,959 458,973
Amounts due from trusts 255,125 191,469
Retained interests in securitized assets 159,487 121,597
Capitalized servicing rights 31,933 28,640
Premises and equipment, net 88,239 82,137
Real estate owned, net 7,680 11,279
Interest receivable 18,818 15,794
Excess of purchase cost over net assets acquired 888 930
Federal Home Loan Bank stock 34,174 31,967
Other assets 25,800 26,538
---------- ----------
$3,678,193 $3,335,045
========== ==========
LIABILITIES
Deposits $1,997,051 $1,873,942
Securities sold under agreements to repurchase 370,424 287,412
Short-term borrowings 43,406 55,945
Federal Home Loan Bank advances 282,995 226,000
Amounts held on behalf of trustee 471,030 393,449
Other liabilities 45,796 47,058
---------- ----------
3,210,702 2,883,806
SUBORDINATED DEBENTURES 105,214 104,917
MINORITY INTEREST 29,408 28,392
SHAREHOLDERS' EQUITY:
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 26,195,099 shares as of
June 30, 1997 and 25,996,618 shares as of December 31, 1996 26,195 25,997
Paid-in capital 186,152 185,742
Retained earnings 117,670 105,108
Unrealized gains on securities available for sale and retained interests in
securitized assets, net of tax 2,852 1,083
---------- ----------
332,869 317,930
---------- ----------
$3,678,193 $3,335,045
========== ==========
- ----------
See accompanying notes to unaudited consolidated financial statements.
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4
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest income:
Loans, including fees $47,142 $42,917 $91,026 $84,576
Mortgage-backed securities 17,897 12,411 33,083 26,606
Investment securities 1,878 1,829 3,855 3,623
Other 1,641 1,690 3,124 3,122
------- ------- ------- -------
TOTAL INTEREST INCOME 68,558 58,847 131,088 117,927
Interest expense:
Deposits 26,480 24,579 52,415 49,696
Federal Home Loan Bank advances and
other borrowings 8,699 5,155 15,742 11,188
Securities sold under agreements to repurchase 4,854 2,900 8,357 7,974
------- ------- ------- -------
TOTAL INTEREST EXPENSE 40,033 32,634 76,514 68,858
------- ------- ------- -------
NET INTEREST INCOME 28,525 26,213 54,574 49,069
Provision for loan losses 2,602 1,454 6,973 7,053
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 25,923 24,759 47,601 42,016
Noninterest income:
Automobile lending 48,713 36,073 94,347 72,521
Mortgage banking 7,125 5,427 12,156 9,741
Investment and mortgage-backed securities gains
(losses) 837 90 837 (1,883)
Insurance income 1,315 1,336 2,580 5,686
Real estate operations (367) 209 (626) (1,351)
Rental operations (355) (174) (613) (84)
Miscellaneous (358) 526 705 1,141
------- ------- ------- -------
TOTAL NONINTEREST INCOME 57,626 43,487 109,386 85,771
Noninterest expense:
Salaries and employee benefits 36,855 28,084 70,317 51,331
Occupancy 3,850 2,483 7,669 4,954
Insurance 589 1,193 749 2,399
Miscellaneous 22,050 14,828 41,826 27,802
------- ------- ------- -------
TOTAL NONINTEREST EXPENSE 63,344 46,588 120,561 86,486
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 20,205 21,658 36,426 41,301
Income taxes 8,573 9,090 15,387 17,163
------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST 11,632 12,568 21,039 24,138
Minority interest in earnings of subsidiaries 1,747 1,894 3,258 3,616
------- ------- ------- -------
NET INCOME $ 9,885 $10,674 $17,781 $20,522
======= ======= ======= =======
NET INCOME PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.38 $ 0.41 $ 0.68 $ 0.79
======= ======= ======= =======
CASH DIVIDENDS DECLARED PER COMMON
SHARE AND COMMON SHARE EQUIVALENTS $ 0.10 $ 0.10 $ 0.20 $ 0.20
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE EQUIVALENTS 26,283,343 26,196,613 26,273,447 26,135,111
========== ========== ========== ==========
- ----------
See accompanying notes to unaudited consolidated financial statements.
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WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 17,781 $ 20,522
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for loan losses 6,973 7,053
Depreciation and amortization 6,962 5,099
Amortization of retained interests in securitized assets 13,431 32,274
Amortization of capitalized servicing rights 3,589 2,576
(Increase) decrease in interest receivable (3,024) 2,480
(Gain) loss on sale of investment securities and
mortgage-backed securities (477) 1,971
Gain on sale of loans (21,792) (28,785)
Gain on sale of real estate owned (1,220) (1,147)
Increase (decrease) in interest payable 550 (1,132)
Net change in loans receivable 3,062 105,710
Net change in loans held for sale (140,194) 19,960
Other, net 497 (11,781)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (113,862) 154,800
INVESTING ACTIVITIES:
Investment securities held to maturity:
Purchases (1,040) (757)
Proceeds from maturities 70
Investment securities available for sale:
Purchases (10,015) (23,912)
Proceeds from sales 449
Proceeds from maturities 28,000 13,000
Mortgage-backed securities held to maturity:
Purchases (934) (42)
Payments 29,372 50,360
Mortgage-backed securities available for sale:
Purchases (259,447) (76,145)
Proceeds from sales 56,789 171,578
Payments 15,977 14,848
Increase in retained interests in securitized assets (51,382) (47,994)
Increase in capitalized servicing (6,882) (9,762)
Additions to premises and equipment (12,461) (8,480)
Disposition of real estate owned 7,645 10,054
Purchase of FHLB stock (11,261) (732)
Proceeds from sale of FHLB stock 9,054 1,332
Increase in trust receivable (63,656) (38,541)
Increase in amounts held on behalf of trustee 77,581 25,375
--------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (192,590) 80,631
- ----------
See accompanying notes to unaudited consolidated financial statements.
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6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
--------- ---------
(DOLLARS IN THOUSANDS)
FINANCING ACTIVITIES:
Increase in deposits $ 123,109 $ 36,081
Increase (decrease) in securities sold under agreements to repurchase 83,012 (208,123)
Decrease in short-term borrowings (12,539) (51,885)
Increase (decrease) in FHLB advances, net 56,995 (16,000)
Increase in minority interest 886 2,454
Proceeds from issuance of common stock 307 891
Repurchase of subsidiary stock (2,462)
Cash dividends (5,219) (4,925)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 244,089 (241,507)
--------- ---------
Decrease in cash and cash equivalents (62,363) (6,076)
Cash and cash equivalents at beginning of period 138,423 162,885
--------- ---------
Cash and cash equivalents at end of period $ 76,060 $ 156,809
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 75,964 $ 69,989
Income taxes 5,034 12,293
Supplemental disclosures of noncash transactions:
Acquisition of real estate acquired through foreclosure $ 5,959 $ 11,647
Unrealized gains (losses) on securities available for sale and retained interests
in securitized assets, net of tax 1,769 (2,575)
Change in subsidiary's equity due to unrealized gains on retained interests
in securitized assets 522
- ----------
See accompanying notes to unaudited consolidated financial statements.
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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, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in Westcorp's annual report on Form 10-K for the year ended December
31, 1996.
Certain amounts from the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
Effective January 1, 1997, Westcorp (the "Company") adopted Statement of
Financial Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities". See
"Note G - Securitized Assets" in the Company's unaudited Consolidated Financial
Statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share",
which is required to be adopted on December 31, 1997. Earlier application of
SFAS 128 is not permitted. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact
of SFAS 128 on the calculation of primary earnings per share and fully diluted
earnings per share is not expected to be material.
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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, 1997
--------------------------------------------
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 $1,503 $ 15 $1,488
Other 2,636 2,636
------ ------- ------ ------
$4,139 $ 15 $4,124
====== ======= ====== ======
DECEMBER 31, 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 $1,504 $ 11 $1,493
Other 1,667 1,667
------ ------- ------ ------
$3,171 $ 11 $3,160
====== ======= ====== ======
NOTE C - INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale were as follows:
JUNE 30, 1997
-------------------------------------------------
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 $125,014 $ 653 $124,361
Obligations of states and political
subdivisions 1,511 19 1,492
Other 134 53 81
-------- ------- -------- --------
$126,659 $ 725 $125,934
======== ======= ======== ========
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WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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 $141,981 $1,175 $140,806
Obligations of states and
political subdivisions 1,512 $ 1 1,513
Other 79 54 25
-------- -------- ------ --------
$143,572 $ 1 $1,229 $142,344
======== ======== ====== ========
NOTE D - MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following:
JUNE 30, 1997
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------ ------- ------ ------
(DOLLARS IN THOUSANDS)
GNMA certificates $319,312 $5,754 $1,535 $323,531
FNMA participation certificates 81,359 200 81,559
FHLMC participation certificates 6,661 254 6,915
Other participation certificates 1,998 1,998
-------- ------ ------ --------
$409,330 $6,208 $1,535 $414,003
======== ====== ====== ========
DECEMBER 31, 1996
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------ ------- ------ ------
(DOLLARS IN THOUSANDS)
GNMA certificates $346,098 $5,447 $2,497 $349,048
FNMA participation certificates 84,005 394 84,399
FHLMC participation certificates 7,358 223 7,581
Other participation certificates 1,201 1,201
-------- ------ ------ --------
$438,662 $6,064 $2,497 $442,229
======== ====== ====== ========
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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, 1997
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates $516,806 $9,163 $2,949 $523,020
FNMA participation certificates 69,471 28 458 69,041
FHLMC participation certificates 8,072 17 65 8,024
-------- ------ ------ --------
$594,349 $9,208 $3,472 $600,085
======== ====== ====== ========
DECEMBER 31, 1996
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates $318,505 $5,206 $1,935 $321,776
FNMA participation certificates 72,214 61 292 71,983
FHLMC participation certificates 17,092 118 83 17,127
-------- ------ ------ --------
$407,811 $5,385 $2,310 $410,886
======== ====== ====== ========
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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,
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
Real estate:
Mortgage $ 1,529,186 $ 1,435,789
Construction 7,901 5,501
----------- -----------
Total real estate loans 1,537,087 1,441,290
Less: Undisbursed loan proceeds 3,814 2,398
----------- -----------
Net real estate loans 1,533,273 1,438,892
Consumer:
Sales contracts 295,893 267,715
Other 59,675 50,911
Less: Unearned discounts (34,674) (33,768)
----------- -----------
Total consumer loans 320,894 284,858
Commercial 17,983 7,867
----------- -----------
Total loans 1,872,150 1,731,617
Allowance for loan losses (36,616) (40,211)
Net deferred loan costs (fees) 4,967 (198)
----------- -----------
Total 1,840,501 1,691,208
Less: Loans held for sale
Mortgage 390,940 272,670
Consumer 230,019 186,303
----------- -----------
Total loans held for sale 620,959 458,973
----------- -----------
Net loans receivable $ 1,219,542 $ 1,232,235
=========== ===========
Loans serviced by the Company for the benefit of others totalled approximately
$8.0 billion and $7.2 billion at June 30, 1997 and December 31, 1996,
respectively. These amounts are not reflected in the accompanying unaudited
consolidated statements of financial condition.
NOTE G - SECURITIZED ASSETS
SFAS 125 requires that following a transfer of financial assets, an entity must
recognize the assets it controls and the liabilities it has incurred, and
derecognize assets for which control has been surrendered and liabilities that
have been extinguished. SFAS 125 defines two separate financial assets
retained at the time of securitization or sale, retained interests in
securitized assets ("RISA"), which represents the excess spread created from
securitization or sale, and capitalized servicing rights ("CSR") which
represents the benefit derived from retaining the rights to service loans
securitized or sold. Previous accounting guidance did not separately
distinguish these rights.
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WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RETAINED INTERESTS IN SECURITIZED ASSETS
RISA capitalized upon securitization of automobile loans represents the present
value of the estimated future earnings to be received by the Company from the
excess spread created in securitization transactions. Excess spread is
calculated by taking the difference between the coupon rate of the automobile
loans sold and the certificate rate paid to the investors less contractually
specified servicing and guarantor fees.
Prepayment and credit loss assumptions are utilized to project future earnings
and are based upon historical experience. Credit losses are estimated using a
cumulative loss rate estimated by management to reduce the likelihood of asset
impairment. All assumptions used are evaluated each quarter and adjusted, if
appropriate, to reflect actual performance of the automobile loans.
Future earnings are discounted at a rate management believes to be
representative of market at the time of securitization. The balance of the
RISA is amortized against actual excess spread income earned on a monthly basis
over the expected repayment life of the underlying automobile loans. RISAs are
classified in a manner similar to available for sale securities and as such are
marked to market each quarter. Market value changes are calculated by
discounting the excess spread using a current market discount rate. Any
changes in the market value of the RISA is reported as a separate component of
shareholders' equity as an unrealized gain or loss, net of applicable taxes.
The following table presents the activity of the RISA.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
--------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance $ 135,113 $ 121,597
Additions 29,597 51,382
Amortization (6,229) (13,431)
Change in unrealized gains (losses) on RISA 1,006 (61)
--------- ---------
Ending balance $ 159,487 $ 159,487
========= =========
When initially valuing the RISA, the Company established an off balance sheet
allowance for expected future credit losses. The allowance is based upon
historical experience and management's estimate of future performance regarding
credit losses and includes an unallocated amount to reduce the likelihood of
impairment of the RISA. The amount is reviewed periodically and adjustments
are made if actual experience or other factors indicate that future performance
may differ from management's prior expectations.
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations. Estimated future
undiscounted RISA earnings are calculated by taking the difference
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WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
between the coupon rate of the automobile loans sold and the certificate rate
paid to the investors, less the contractually specified servicing fee of 1.0%
and guarantor fees, after giving effect to estimated prepayments and assuming
no losses. To arrive at the RISA, this amount is reduced by the off balance
sheet allowance established for potential future losses and by discounting to
present value. Prior to the adoption of SFAS 125, the Company reduced excess
spread by the actual cost to service automobile loans instead of the
contractually specified servicing fee. The actual cost to service automobile
loans is now included in the computation of the CSR.
JUNE 30,
1997
-----------
(DOLLARS IN
THOUSANDS)
Estimated net undiscounted RISA earnings $ 407,953
Off balance sheet allowance for losses (231,845)
Discount to present value (16,621)
-----------
Retained interests in securitized assets $ 159,487
===========
Outstanding balance of automobile loans sold
through securitizations $ 3,160,005
Off balance sheet allowance for losses as a percent of
automobile loans sold through securitizations 7.34%
The Company believes that the off balance sheet allowance for losses is
currently adequate to absorb potential losses in the sold portfolio. Had SFAS
125 been in effect at December 31, 1996, the off balance sheet allowance for
losses as a percent of automobile loans sold through securitizations would have
been 8.03%.
CAPITALIZED SERVICING RIGHTS
Capitalized servicing rights consisted of the following:
JUNE 30, DECEMBER 31,
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
Purchased mortgage servicing rights $19,255 $20,994
Originated mortgage servicing rights 14,595 9,051
Impairment allowance for mortgage servicing rights (1,917) (1,405)
------- -------
$31,933 $28,640
======= =======
The Company retains the rights to service most loans securitized or sold. CSR
assets represent the present value of the estimated future earnings to be
received from servicing securitized or sold loans. These earnings are
calculated by estimating future servicing revenues, including servicing fees,
late charges, other ancillary income, and float benefit and netting them against
the actual cost to service loans.
13
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WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the three and six months ended June 30, 1997, Westcorp capitalized $4.5
million and $6.9 million, respectively, compared to $9.5 million and $9.8
million for the comparable periods of 1996. The mortgage servicing rights are
included in capitalized servicing and the amortization is a component of
mortgage banking in noninterest income.
The fair value was $45.3 million and $38.3 million at June 30, 1997 and
December 31, 1996, respectively. Fair value was determined based on the
present value of estimated future earnings. Significant assumptions were based
upon prepayment, default, servicing cost and discount rate. For the purpose of
estimated fair value, CSRs are stratified on the basis of loan type, loan
coupon and loan term.
SFAS 125 also requires that all CSRs be evaluated for impairment based on the
excess of the carrying amount of the CSRs over their fair value. For the
purpose of estimating fair value, CSRs are stratified on the basis of loan
type, loan coupon and loan term.
Amortization of mortgage servicing rights are reflected as a component of
mortgage banking in noninterest income. Amortization expense for the three and
six months ended June 30, 1997 was $1.7 million and $3.6 million, respectively,
compared to $1.4 million and $2.6 million for the comparable periods of 1996.
14
15
WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H - DIVIDENDS
The Company paid a cash dividend of $0.10 per share on March 4, 1997 and May
28, 1997. On August 7, 1997, the Company announced a cash dividend of $0.10
per share for shareholders of record as of August 18, 1997, payable August 27,
1997.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Western Financial Bank, a wholly-owned subsidiary of the Company issued $150
million of 8.875% subordinated capital debentures due 2007 on July 25, 1997.
Proceeds will be used to (1) fund the operations of WFS Financial Inc, a
consumer lending subsidiary, (2) pay a dividend to the Company and (3) use the
balance for general corporate purposes.
Total assets increased $343 million or 10.3% to $3.68 billion at June 30, 1997
from $3.34 billion at December 31, 1996. This increase is primarily the result
of an increase in mortgage-backed securities available for sale and loans held
for sale.
LOANS
Loans (including loans held for sale), net of unearned discounts and
undisbursed loan proceeds, increased $149 million or 8.8% from December 31,
1996 to June 30, 1997. The increase 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, 1997. The Company has retained the servicing on
substantially all loans sold and receives a servicing fee therefrom. Included
in the portfolio are loans held for sale of which $391 million are mortgage
loans secured primarily by single family residences and $230 million which are
consumer loans secured by automobiles.
Consumer loan originations increased $90.7 million and $139 million to $616
million and $1.2 billion for the three and six months ended June 30, 1997 from
$526 million and $1.0 billion for the same periods in 1996, which represent
17.3% and 13.5% increases in production. The Company securitized $590 million
and $1.1 billion of automobile loans for the three and six months ended June
30, 1997 compared with $525 million and $1.0 billion for the same periods in
1996. The Company currently conducts its consumer finance operations through
143 offices in 35 states compared to 103 offices in 21 states at June 30, 1996.
Real estate originations increased $292 million and $424 million to $543
million and $985 million for the three and six months ended June 30, 1997 from
$251 million and $560 million for the same periods in 1996, which represent
116% and 76% increases in production. The increase in real estate originations
is the result of a more favorable market environment in California and a better
utilization of the Company's expanding origination capacity. The following
table sets forth the loan origination, purchase and sale activity of the
Company for the periods indicated, excluding net deferred loan fees:
16
17
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Beginning balance $ 1,494,860 $ 318,862 $ 1,394,256 $ 336,423
Originations (1) 543,105 616,299 251,438 525,596
Purchases 212 59
Sales (2) (450,037) (590,000) (246,594) (525,000)
Principal reductions (3) (54,867) (24,267) (69,790) (30,300)
----------- ----------- ----------- -----------
Ending balance $ 1,533,273 $ 320,894 $ 1,329,369 $ 306,719
=========== =========== =========== ===========
FOR THE SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
MORTGAGE CONSUMER MORTGAGE CONSUMER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Beginning balance $ 1,438,892 $ 284,858 $ 1,409,964 $ 335,625
Originations (1) 984,574 1,170,459 560,237 1,031,332
Purchases 266 139
Sales (2) (776,063) (1,090,000) (521,910) (1,010,000)
Principal reductions (3) (114,396) (44,423) (119,061) (50,238)
----------- ----------- ----------- -----------
Ending balance $ 1,533,273 $ 320,894 $ 1,329,369 $ 306,719
=========== =========== =========== ===========
(1) Includes sales contracts purchased from automobile dealers.
(2) Loans sold or securitized for which the Company generally retains
servicing.
(3) Includes scheduled payments, prepayments and chargeoffs.
The real estate loan portfolio (including those classified as held for sale and
excluding net deferred loan costs) consisted of the following:
JUNE 30, 1997 DECEMBER 31, 1996
---------------------- ----------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds $ 998,321 65.1% $ 925,353 64.3%
Second trust deeds 77,086 5.0 55,778 3.9
---------- ----- ---------- -----
1,075,407 70.1 981,131 68.2
Multifamily residential loans 446,654 29.1 453,425 31.5
Construction loans 7,901 0.5 5,501 0.4
Nonresidential loans 7,125 0.5 1,233 0.1
---------- ----- ---------- -----
1,537,087 100.2 1,441,290 100.2
Less: Undisbursed loan proceeds 3,814 0.2 2,398 0.2
---------- ----- ---------- -----
$1,533,273 100.0% $1,438,892 100.0%
========== ===== ========== =====
17
18
The Company's real estate portfolio consisted primarily of adjustable rate
mortgage loans (excluding net deferred loan costs) as shown below:
JUNE 30, 1997 DECEMBER 31, 1996
---------------------- ----------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Fixed rate loans $ 324,371 21.2% $ 290,814 20.2%
Adjustable rate loans:
Negative amortization 800,700 52.2 831,701 57.8
Without negative amortization 408,202 26.6 316,377 22.0
---------- ----- ---------- -----
$1,533,273 100.0% $1,438,892 100.0%
========== ===== ========== =====
The composition of the consumer loan portfolio, all of which is fixed rate, was
as follows:
JUNE 30, 1997 DECEMBER 31, 1996
-------------------- --------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Automobile loans, net $261,219 81.4% $233,947 82.1%
Other 59,675 18.6 50,911 17.9
-------- ----- -------- -----
$320,894 100.0% $284,858 100.0%
======== ===== ======== =====
MORTGAGE-BACKED SECURITIES
During the first six months of 1997, the Company purchased $260 million and
sold $56.8 million of mortgage-backed securities ("MBS"). This is part of the
Company's continuing strategy to increase net interest income.
ASSET QUALITY
DELINQUENCY
The percent of loans 60 days or more delinquent decreased to 1.0% of total
loans at June 30, 1997 down from 1.1% at December 31, 1996. Delinquent loans
by type of loan and as a percentage of loans by type are summarized as follows
at June 30, 1997 and December 31, 1996:
JUNE 30, 1997
NUMBER OF DAYS DELINQUENT
-----------------------------------------------------------------
60-89 90 OR MORE TOTAL
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
(DOLLARS IN THOUSANDS)
Single family residential loans $ 3,532 0.3% $ 9,872 0.9% $13,404 1.2%
Multifamily residential loans 330 0.1 1,453 0.3 1,783 0.4
Consumer 1,351 0.4 849 0.3 2,200 0.7
Construction 41 0.8 366 7.4 407 8.2
------- --- ------- --- ------- ---
$ 5,254 0.3% $12,540 0.7% $17,794 1.0%
======= === ======= === ======= ===
18
19
DECEMBER 31, 1996
NUMBER OF DAYS DELINQUENT
-----------------------------------------------------------------
60-89 90 OR MORE TOTAL
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
(DOLLARS IN THOUSANDS)
Single family residential loans $ 1,738 0.2% $13,528 1.4% $15,266 1.6%
Multifamily residential loans 358 0.1 1,398 0.3 1,756 0.4
Consumer 1,560 0.5 964 0.3 2,524 0.8
------- --- ------- --- ------- ---
$ 3,656 0.2% $15,890 0.9% $19,546 1.1%
======= === ======= === ======= ===
NONPERFORMING ASSETS
Total nonperforming assets ("NPA") decreased $4.9 million or 15.0% to $28.1
million at June 30, 1997 compared to $33.0 million at December 31, 1996. At
June 30, 1997, NPAs as a percentage of total assets decreased to 0.8% compared
to 1.0% at December 31, 1996.
NPAs consist of nonperforming loans ("NPL") and real estate acquired through
foreclosure ("REO"). REOs are carried at lower of cost or fair value less
estimated disposition costs. NPLs are defined as all loans (other than
consumer loans which are charged off at 120 days) on nonaccrual, which include
all mortgage loans 90 days or more past due or impaired loans. When a loan is
designated as nonaccrual, all previously accrued interest is reversed.
Interest on nonperforming loans excluded from interest income decreased to
$0.7 million at June 30, 1997 from $1.0 million at June 30, 1996.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The Company measures
impairment based on, among other factors, the fair value of the loan's
collateral. Changes in the fair value of loans are recorded through the
allowance for loan losses. At June 30, 1997 and December 31, 1996, impaired
loans decreased to $6.4 million from $6.9 million, respectively.
NONPERFORMING LOANS
Nonperforming loans consisted of the following:
JUNE 30, DECEMBER 31,
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
Unimpaired loans placed on nonaccrual $13,238 $14,052
Impaired loans 6,356 6,887
------- -------
$19,594 $20,939
======= =======
19
20
Nonperforming loans by loan type consisted of the following:
JUNE 30, DECEMBER 31,
1997 1996
------- -------
(DOLLARS IN THOUSANDS)
Single family residential loans $12,126 $13,639
Multifamily 5-36 units 3,550 3,327
Multifamily 37+ units 3,918 3,973
------- -------
$19,594 $20,939
======= =======
The migration of nonperforming loans and real estate owned from December 31,
1996 to June 30, 1997 is shown below:
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1 - 4 UNITS 5 - 36 UNITS 37+ UNITS CONSTRUCTION
----- ----------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1996 $ 20,939 $ 13,639 $ 3,327 $ 3,973 $ --
New nonperforming loans 12,273 10,390 703 1,180
REO (8,835) (6,321) (1,333) (1,181)
Cures and payoffs (3,793) (3,699) (40) (54)
Chargeoffs (938) (938)
Transfers (52) (945) 893
-------- -------- -------- -------- --------
Balance, June 30, 1997 $ 19,594 $ 12,126 $ 3,550 $ 3,918 $ --
======== ======== ======== ======== ========
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, 1996 $ 12,063 $ 9,178 $2,515 $ -- $ 370
New REO 5,956 3,387 2,569
Sales (6,424) (3,779) (2,645)
Writedowns (3,131) (1,722) (1,409)
-------- -------- ------ ----- --------
Balance, June 30, 1997 $ 8,464 $ 7,064 $1,030 $ -- $ 370
======== ======== ====== ===== ========
Assets secured by single family residential properties comprised the largest
portion of nonperforming assets. As of June 30, 1997, $12.1 million or 61.9%
of NPLs and $7.1 million or 83.5% of REOs were secured by single family
residential properties.
20
21
ALLOWANCE FOR LOAN AND REAL ESTATE LOSSES
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, the Company decreased its allowance for loan losses to $36.6
million for June 30, 1997 compared to $40.2 million for December 31, 1996.
While the Company's portfolio consists primarily of single family loans, no
single loan, borrower or series of loans comprise a significant portion of the
total portfolio. The provision and allowance for loan losses are indicative of
loan volumes, loss trends and management's analysis of market conditions. The
allowance for loan losses is maintained at a level believed by management to be
adequate to absorb potential losses in the loan portfolio.
The following table presents summarized data relative to the allowance for loan
losses:
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(DOLLARS IN THOUSANDS)
Total loans(2) $1,872,150 $ 1,731,617
Allowance for loan losses 36,616 40,211
Allowance for real estate losses 784 784
Loans past due 60 days or more 17,794 19,546
Nonperforming loans 19,594 20,939
Nonperforming assets (1) 28,058 33,002
Allowance for loan losses as a percent of:
Total loans (2) 2.0% 2.4%
Loans past due 60 days or more 205.8% 205.7%
Nonperforming loans 186.9% 192.0%
Total allowance for loan losses and real estate losses as a percent of
nonperforming assets 133.3% 124.2%
Nonperforming loans as a percent of total loans 1.0% 1.2%
Nonperforming assets as a percent of total assets 0.8% 1.0%
- ----------
(1) Nonperforming loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
21
22
The table below provides the activity of the allowance for loan losses:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 40,273 $ 41,039 $ 40,211 $ 39,260
Chargeoffs:
Mortgage loans (4,300) (1,804) (5,239) (2,436)
Consumer loans (3,023) (3,335) (6,809) (8,029)
-------- -------- -------- --------
(7,323) (5,139) (12,048) (10,465)
Recoveries:
Mortgage loans 6 1,898 15 1,953
Consumer loans 1,042 1,344 2,136 2,795
-------- -------- -------- --------
1,048 3,242 2,151 4,748
-------- -------- -------- --------
Net chargeoffs (6,275) (1,897) (9,897) (5,717)
Adjustments 16 1,470(1) (671) 1,470(1)
Provision for loan losses 2,602 1,454 6,973 7,053
-------- -------- -------- --------
Balance at end of period $ 36,616 $ 42,066 $ 36,616 $ 42,066
======== ======== ======== ========
Ratio of net chargeoffs during period to average
loans outstanding during the period (annualized) 1.27% 0.42% 1.03% 0.64%
======== ======== ======== ========
- ----------
(1) Reclassification adjustments related to the acquisition of The Hammond
Company and its subsidiaries.
Allowance for real estate losses of $784 thousand remained constant at June 30,
1997 and December 31, 1996.
22
23
RESULTS OF OPERATIONS
SUMMARY
The Company reported net income of $9.9 million and $17.8 million for the three
and six months ended June 30, 1997, compared to $10.7 million and $20.5 million
for the comparable periods of 1996. Return on average assets was 1.07% and
1.01% for the three and six months ended June 30, 1997, compared to 1.43% and
1.25% for the same periods of 1996. Return on average equity was 12.19% and
11.09% for the three and six months ended June 30, 1997, compared to 13.90% and
13.51% for the comparable periods of 1996. Net income was primarily affected
by the following factors:
- Net interest income increased primarily due to an increase in the
average MBS.
- The automobile lending income increase is primarily due to an increase
in the overall servicing portfolio which was offset by a decrease in
gain on sale of automobile loans.
- Salaries and employee benefits increased primarily due to the increase
in the number of employees as a result of expansion of operations in
both the automobile lending and mortgage and commercial banking
businesses.
- Miscellaneous expense increased primarily as a result of expansion of
operations.
NET INTEREST INCOME
Net interest income for the three and six months ended June 30, 1997 was $28.5
million and $54.6 million. For the same periods of 1996, net interest income
totalled $26.2 million and $49.1 million.
The total interest rate spread has remained relatively constant at 2.71% for
the six months ended June 30, 1997, compared to 2.70% for the same period of
1996. Yield on interest earning assets was 8.50% for the six months ended June
30, 1997 compared to 8.49% for the same period of 1996 and cost of funds was at
5.79% for the six months ended June 30, 1997 and 1996.
23
24
Interest rates for interest earning assets and liabilities for the three and
six months ended June 30, 1997 and 1996 are summarized as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
------ ------ ------ ------
Interest earning assets:
Investment securities (1) 5.50% 5.44% 5.49% 5.45%
Mortgage-backed securities (1) 7.34 7.34 7.33 7.17
Other investments 5.43 5.29 5.53 5.38
Loans:
Consumer 15.91 16.01 16.00 15.42
Mortgage (2) 7.73 7.63 7.70 7.70
Commercial 8.50 8.61
----- ----- ----- -----
Total interest earning assets 8.54 8.64 8.50 8.49
Interest bearing liabilities:
Deposits 5.52 5.62 5.55 5.69
Subordinated debt 8.80 8.80 8.81 8.81
Repurchase agreements 5.46 4.63 5.46 4.97
FHLB advances and other
borrowings 6.48 6.09 6.50 6.35
----- ----- ----- -----
Total interest bearing liabilities 5.78 5.71 5.79 5.79
----- ----- ----- -----
Interest rate spread 2.76% 2.93% 2.71% 2.70%
===== ===== ===== =====
Net yield on average interest
earning assets 3.50% 3.81% 3.48% 3.50%
===== ===== ===== =====
- ----------
(1) Includes both securities available for sale and held to maturity.
(2) For the purposes of these computations, nonaccruing loans are included
in the average loan amounts outstanding.
ASSET/LIABILITY MANAGEMENT
One of the key components to the Company's ongoing profitability is, among
other factors, the extent to which the effect of changes in interest rates on
its earnings are minimized. Thus, a major objective of the Company's
asset/liability management program has been to control interest rate risk
through matching the maturity and repricing characteristics of its
interest-earning assets with those of its interest-bearing liabilities.
The Company's approach to asset/liability management includes originating
adjustable rate loans, securitizing loans with liabilities that have similar
repricing and maturity characteristics, matching fixed rate loans held in the
portfolio with advances from the FHLB, selling fixed rate loans and using other
financial instrument agreements.
24
25
The Company also originates fixed-rate consumer loans. To minimize interest
rate risk associated with its consumer loan portfolio, the Company has sold
substantially all of its consumer loan production in securitization
transactions in which it has retained the servicing rights. The interest rate
passed through to the purchasers of those consumer loans is fixed, which
provides off balance sheet matched funding for the majority of the Company's
consumer loans. At June 30, 1997, the Company serviced $3.2 billion in
consumer loans for others.
Approximately 24% of the Company's other borrowed funds at June 30, 1997 had
fixed rates and maturities greater than one year. Of that amount, 56% were
subordinated debentures redeemable in three years and maturing in six years.
The Company has entered into or committed to interest rate caps, swaps and
two-year Treasury securities forward agreements as hedges against market value
changes in designated portions of its MBS and consumer loan portfolios. At
June 30, 1997, caps with notional amounts totalling $315 million, a swap of $50
million and forward agreements totalling $180 million were outstanding. The
cap agreements have strike rates that range from 6.0% to 8.0% and expire
between September, 1999 and September, 2003. The swap has a pay rate of 5.9%
and expires in December, 2002. The Company uses only counterparties with high
credit ratings and further reduces its risk by avoiding any material
concentration with a single counterparty. Credit exposure is limited to those
agreements with a positive fair value and only to the extent of that fair
value.
The sensitivity of earnings to interest rate changes may be measured by the
difference, or gap, between the amount of assets and liabilities scheduled to
reprice, based on certain assumptions, within the same period expressed as a
percentage of interest-earning assets. Conceptually, the lower the amount of
this gap, the less sensitive earnings are to interest rate changes. A positive
gap means an excess of assets over liabilities repricing during the same
period. However, this method of measuring interest rate sensitivity does not
take into account the differing repricing characteristics of various types of
assets and liabilities. Thus, certain assets and liabilities that have similar
maturities or periods to reprice may react differently to changes in market
interest rates. For instance, the Company's ARMs are mainly tied to the
Eleventh District Cost of Funds which typically lags the market, and also
generally have restrictions on the maximum amounts of periodic and/or total
changes in interest rates and payments. On the other hand, maturing borrowings
have no such restrictions and may reprice at current market rates.
The following table illustrates the projected interest rate maturities, based
upon certain assumptions, regarding the major asset and liability categories of
the Company at June 30, 1997. The interest rate sensitivity of the Company's
assets and liabilities illustrated in the following table could vary
substantially if different assumptions were used or actual experience differs
from the assumptions set forth.
25
26
INTEREST RATE SENSITIVITY ANALYSIS
AT JUNE 30, 1997
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 $ 19,888 $ 9,940 $ 90,300 $ 9,945 $ 130,073
Other investments 55,860 55,860
Mortgage-backed securities 194,743 31,898 189,516 176,536 $ 416,722 1,009,415
Consumer loans (1) 24,309 71,912 135,034 64,000 25,639 320,894
Mortgage loans:
Adjustable rate (2) 809,762 395,053 1,204,815
Fixed rate (2) 14,528 24,130 58,953 51,128 175,632 324,371
Construction (2) 4,087 4,087
Commercial 17,983 17,983
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 1,141,160 532,933 473,803 301,609 617,993 3,067,498
Interest bearing liabilities:
Savings deposits:
Passbook/statement
accounts (3) 2,159 5,618 23,331 31,108
Money market deposit
accounts (3) 1,602 4,361 27,748 33,711
Certificate accounts (4) 265,939 1,112,336 479,060 4,309 10 1,861,654
FHLB advances (4) 149,000 50,000 76,500 6,500 995 282,995
Subordinated debentures 105,214 105,214
Other borrowings (4) 410,391 3,439 413,830
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 829,091 1,175,754 606,639 10,809 106,219 2,728,512
Excess interest earning assets
(liabilities) 312,069 (642,821) (132,836) 290,800 511,774 338,986
Effect of hedging activities 365,000 (100,000) (165,000) (100,000)
----------- ----------- ----------- ----------- ----------- -----------
Hedged excess (deficit) $ 677,069 $ (642,821) $ (232,836) $ 125,800 $ 411,774 $ 338,986
=========== =========== =========== =========== =========== ===========
Cumulative excess (deficit) $ 677,069 $ 34,248 $ (198,588) $ (72,788) $ 338,986 $ 338,986
=========== =========== =========== =========== =========== ===========
Cumulative excess (deficit) as a
percentage of total interest
earning assets 22.07% 1.12% (6.47)% (2.37)% 11.05% 11.05%
- ----------
(1) Based on contractual maturities adjusted by the Company's historical
prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the Office of Thrift Supervision
("OTS").
(4) Based on contractual maturity.
26
27
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and six months ended June 30, 1997
was $2.6 million and $7.0 million compared to $1.5 million and $7.1 million
during the comparable periods of 1996. The Company recorded a higher
provision for loan losses for the second quarter of 1997 compared to 1996 even
though provision has remained relatively flat on a year to date basis as a
result of a change in product mix. The Company added AMPs ("Alternative
Mortgage Products") which targets the top tier of the sub-prime market.
NONINTEREST INCOME
Total noninterest income for the three and six months ended June 30, 1997 was
$57.6 million and $109 million compared to $43.5 million and $85.8 million
during the comparable periods of 1996. Noninterest income is generated from
automobile lending activities, mortgage banking activities, and other
ancillary sources.
AUTOMOBILE LENDING
The Company originates and subsequently sells automobile loans in the secondary
market with servicing rights retained. Income from automobile lending
includes gain from the sale of loans, as well as loan servicing income net of
amortization of RISA and other related income such as document fees and late
charges. For the three and six months ended June 30, 1997, automobile lending
generated income of $48.7 million and $94.3 million compared to $36.1 million
and $72.5 million for the same periods of 1996.
During the three and six months ended June 30, 1997, net gain from sale of
automobile loans totalled $6.5 million and $13.8 million compared to $9.4
million and $22.3 million for the same periods of 1996. The decrease in the
gain on sale reported in 1997 is primarily the result of a narrowing interest
rate spread for automobile loans sold which was slightly offset by the increase
in the amount of automobile loans sold. Automobile loans sold totalled $590
million and $1.1 billion for the three and six months ended June 30, 1997
compared to $525 million and $1.0 billion during the same periods of 1996.
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 $33.4 million and $62.8 million for the
three and six months ended June 30, 1997, compared to $19.3 million and $35.7
million for the comparable periods of 1996. The Company serviced $3.2 billion
of consumer loans for others at June 30, 1997 compared to $2.6 billion at June
30, 1996.
27
28
Automobile lending income for the three and six months ended June 30, 1997 and
1996 is summarized as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Gain on sale of automobile loans $ 6,491 $ 9,417 $13,835 $22,307
Loan servicing income 33,396 19,295 62,845 35,732
Other fee income 8,826 7,361 17,667 14,482
------- ------- ------- -------
$48,713 $36,073 $94,347 $72,521
======= ======= ======= =======
MORTGAGE BANKING
The Company originates mortgage loans for sale in the secondary market.
Mortgage banking operations include gains and losses on the sale of loans, loan
servicing income net of amortization of capitalized servicing rights and other
income (primarily late charges). During the three and six months ended June
30, 1997, mortgage banking generated income of $7.1 million and $12.2 million
compared to $5.4 million and $9.7 million for the comparable periods of 1996.
Gains on sale of mortgage loans for the three and six months ended June 30,
1997 totalled $4.9 million and $8.0 million compared to $4.1 million and $6.5
million during the comparable periods of 1996. The increase in gain on sale of
mortgage loans is primarily the result of an increase in the volume of loan
sales which rose to $450 million and $776 million for the three and six months
ended June 30, 1997 compared to $247 million and $522 million for the same
periods of 1996. Mortgage loans held for sale increased from $273 million at
December 31, 1996 to $391 million at June 30, 1997.
Net loan servicing income was $1.7 million and $3.1 million for the three and
six months ended June 30, 1997 compared to $0.8 million and $2.3 million for
the comparable periods of 1996. At June 30, 1997, the Company serviced $4.8
billion of mortgage loans for others compared to $4.3 billion at June 30, 1996.
Mortgage banking income for the three and six months ended June 30, 1997 and
1996 is summarized as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ----------------------
1997 1996 1997 1996
------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Net gain on sale of mortgage loans $ 4,852 $ 4,130 $ 7,957 $ 6,478
Loan servicing income 1,719 839 3,123 2,256
Other fee income 554 458 1,076 1,007
------- ------- ------- -------
$ 7,125 $ 5,427 $12,156 $ 9,741
======= ======= ======= =======
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, 1997
totalled $1.3 million and $2.6 million compared to $1.3 million and $5.7
million for the same periods in 1996.
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Real estate operations include the ongoing costs of operation and disposition
associated with the Company's REOs. Real estate operations had losses of $0.4
million and $0.6 million for the three and six months ended June 30, 1997
compared to earnings of $0.2 million and losses of $1.4 million for the same
periods in 1996.
NONINTEREST EXPENSE
Noninterest expense consists of salaries and employee benefits, occupancy
expense, insurance and other operating expenses. Noninterest expense increased
to $63.3 million and $121 million for the three and six months ended June 30,
1997 compared to $46.6 million and $86.5 million for the same periods in 1996.
Compensation and benefits increased primarily due to expansion of operations in
both the automobile lending and mortgage banking businesses (which were
substantially completed in 1996). The ratio of annualized operating expense to
average serviced loans was 2.6% for the three and six months ended June 30,
1997 compared to 2.6% and 2.5% for the comparable periods in 1996.
INCOME TAXES
The effective tax rates for the six months ended June 30, 1997 and 1996 were
42.2% and 41.6%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
The Company has diversified sources of funds generated through its operations.
The primary sources include deposits, loan principal and interest payments
received, sale of mortgage loans and consumer loans, and the maturity or sale
of investment securities and MBS. Other sources include commercial paper,
Federal Home Loan Bank advances and repurchase agreements. Prepayments on
loans and mortgage-backed securities and deposit inflows and outflows are
affected significantly by interest rates, real estate sales activity and
general economic conditions.
The Company uses these sources to meet its business needs which include funding
maturing certificates of deposits and savings withdrawals, repayment of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses and maintaining minimum regulatory liquidity and
capital levels.
During the first six months of 1997, the Company purchased $260 million of MBS
to increase interest spreads. These securities have been segregated, on an
individual security basis, into the available for sale portfolio and the held
to maturity portfolio in the financial statements in accordance with
management's intent and ability to hold the securities to maturity. These
purchases included both fixed and adjustable rate MBS.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions supervised by the
Office of Thrift Supervision ("OTS"). The Company's wholly-owned subsidiary,
Western Financial Bank, ("the Bank") is a federally chartered savings bank. As
such, it must follow specific capital guidelines stipulated by the OTS which
involve quantitative measures of the Bank's assets, liabilities and
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certain off balance sheet items as calculated under regulatory accounting
practices. An institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can be subject to a
capital directive and certain restrictions on its operations which could have a
direct material effect on the Company's financial statements.
At June 30, 1997 and December 31, 1996, according to the OTS, the Bank is
categorized as "well capitalized" under the prompt corrective action ("PCA")
regulations adopted by the OTS pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). To be categorized as "well
capitalized", the Bank must maintain minimum capital ratios as set forth in the
table below. The Bank's capital is subject to review by federal regulators for
the components, amounts, risk weighting classifications and other factors.
There are no conditions or events since June 30, 1997 that management believes
have changed the Bank's category.
The following table summarizes the Bank's actual capital and required capital
as of June 30, 1997 and December 31, 1996:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
------- ------- -------
JUNE 30, 1997 (DOLLARS IN THOUSANDS)
-------------
Actual Capital:
Amount $383,596 $383,596 $521,962
Capital ratio 10.43% 10.43% 10.65%
FIRREA minimum required capital:
Amount $55,148 $110,296 $392,041
Capital ratio 1.50% 3.00% 8.00%
Excess $328,448 $273,300 $129,921
FDICIA well capitalized required capital:
Amount N/A $184,853 $490,051
Capital ratio N/A 5.00% 10.00%
Excess N/A $198,743 $31,911
DECEMBER 31, 1996
-----------------
Actual Capital:
Amount $348,938 $348,938 $467,563
Capital ratio 10.53% 10.53% 10.91%
FIRREA minimum required capital:
Amount $49,707 $99,414 $342,915
Capital ratio 1.50% 3.00% 8.00%
Excess $299,231 $249,524 $124,648
FDICIA well capitalized required capital:
Amount N/A $166,838 $428,644
Capital ratio N/A 5.00% 10.00%
Excess N/A $182,100 $38,919
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The following table reconciles the Bank's capital in accordance with generally
accepted accounting principles ("GAAP") to the Bank's tangible, core and
risk-based capital as of June 30, 1997 and December 31, 1996.
JUNE 30, DECEMBER 31,
1997 1996
--------- -----------
(DOLLARS IN THOUSANDS)
Bank shareholder's equity-GAAP basis $ 370,835 $ 337,958
Adjustment: Unrealized gains under SFAS 115, net of tax (2,852) (1,083)
Less: Non-permissible activities at required phase-in (10,286) (13,135)
Add: Minority interest in equity of subsidiaries 29,092 28,061
Less: Excess qualifying PMSRs (3,193) (2,863)
--------- ---------
Total tangible and core capital 383,596 348,938
Adjustments for risk-based capital:
Subordinated Debentures(1) 106,624 106,559
General loan valuation allowance (2) 34,119 36,298
Less: Fully capitalized assets (2,377) (24,232)
--------- ---------
Risk-based capital $ 521,962 $ 467,563
========= =========
- ----------
(1) Excludes capitalized discounts and issue costs.
(2) Limited to 1.25% of risk-weighted assets.
FORWARD-LOOKING STATEMENTS
The preceding Management Discussion and Analysis of Financial Condition and
Results of Operations section contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995
which provides a new "safe harbor" for certain forward- looking statements.
The 10Q contains forward-looking statements which reflect the Company's current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The forward-looking
terminology such as "believe", "expect", "anticipate", "intend", "may", "will",
"should", "estimate", "continue" and/or the negative or other comparable
expressions thereof which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following factors could cause actual results to
differ materially from historical results or those anticipated: (1) the level
of demand for consumer, mortgage and commercial loans, which is affected by
such external factors as the level of interest rates, the strength of the
various segments of the economy, debt burden held by the consumer and
demographics of the Company's lending markets; (2) the direction of interest
rates; (3) fluctuations between interest rates and the cost of funds; (4) the
effect of federal and state regulation on the Company's operations; (5)
competition within the financial services industry; (6) the availability and
cost of securitization transactions and (7) continued dealer and broker
relationships.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company or its subsidiaries are involved as parties to certain
legal proceedings incidental to their businesses. The Company believes
that the outcome of such proceedings will not have a material effect
upon the Company's financial condition, results of operations and cash
flows.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
A report on form 8-K was filed July 15, 1997 announcing the results for
its second quarter and six months ended June 30, 1997, and reported
that Western Financial Bank had filed a registration statement with the
Office of Thrift Supervision with the intent of issuing $150 million of
subordinated debentures.
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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: August 11, 1997 By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
Senior Executive Vice President and
Chief Operating Officer
Date: August 11, 1997 By: /s/ LEE WHATCOTT
------------------------------------
Lee A. Whatcott
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
SEQUENTIALLY
Exhibit NUMBERED
No. Description PAGES
------- ----------- ------------
11 Computation of Earnings Per Share 35
27 Financial Data Schedule 36
34