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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
COMMISSION FILE NUMBER 33-13646
WESTCORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 51-0308535
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(949) 727-1002
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of July 31, 2001, the registrant had 35,792,874 outstanding shares of common
stock, $1.00 par value. The shares of common stock represent the only class of
common stock of the registrant.
The total number of sequentially numbered pages is 32.
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WESTCORP AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 2001
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Changes in Shareholders' Equity
for the Periods Ended June 30, 2001 and December 31, 2000 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosure about Market Risk 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
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3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 40,686 $ 128,763
Investment securities available for sale 9,953 10,734
Mortgage-backed securities available for sale 2,386,345 2,230,448
Loans receivable 6,456,137 4,924,053
Allowance for credit losses (122,576) (104,006)
----------- -----------
Loans receivable, net 6,333,561 4,820,047
Amounts due from trusts 231,426 357,051
Retained interest in securitized assets 80,602 111,558
Premises and equipment, net 83,055 83,991
Other assets 170,364 125,318
----------- -----------
TOTAL ASSETS $ 9,335,992 $ 7,867,910
=========== ===========
LIABILITIES
Deposits $ 2,248,173 $ 2,478,487
Notes payable on automobile secured financing 5,198,550 3,473,377
Securities sold under agreements to repurchase 157,761 178,821
Federal Home Loan Bank advances 391,492 409,570
Amounts held on behalf of trustee 386,558 494,858
Subordinated debentures 188,752 189,962
Notes payable 5,285 27,802
Other liabilities 108,971 71,221
----------- -----------
TOTAL LIABILITIES 8,685,542 7,324,098
Minority interest 81,751 56,644
SHAREHOLDERS' EQUITY
Common stock, (par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 35,777,703
shares in June 2001 and 31,931,826 in December 2000) 35,778 31,932
Paid-in capital 299,683 246,889
Retained earnings 250,652 223,163
Accumulated other comprehensive loss, net of tax (17,414) (14,816)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 568,699 487,168
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,335,992 $ 7,867,910
=========== ===========
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,
------------------------------ ------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Interest income:
Loans, including fees $ 198,731 $ 89,080 $ 371,374 $ 162,681
Other 36,869 36,962 76,893 64,250
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 235,600 126,042 448,267 226,931
Interest expense:
Deposits 32,247 31,000 65,752 59,813
Notes payable on automobile secured financing 81,008 14,886 154,017 24,689
Other 13,395 20,444 26,308 31,892
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 126,650 66,330 246,077 116,394
----------- ----------- ----------- -----------
NET INTEREST INCOME 108,950 59,712 202,190 110,537
Provision for credit losses 39,640 15,246 66,623 27,191
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 69,310 44,466 135,567 83,346
Noninterest income:
Automobile lending 23,428 43,062 50,363 89,561
Other 3,044 2,676 6,579 11,958
----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME 26,472 45,738 56,942 101,519
Noninterest expenses:
Salaries and associate benefits 37,931 34,109 73,608 68,296
Credit and collections 6,443 4,796 12,861 10,261
Data processing 4,947 4,050 9,436 8,042
Other 13,636 13,278 28,377 25,679
----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSES 62,957 56,233 124,282 112,278
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 32,825 33,971 68,227 72,587
Income tax 12,515 13,541 26,848 29,689
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST 20,310 20,430 41,379 42,898
Minority interest in earnings of subsidiaries 3,421 2,873 6,782 5,499
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 16,889 17,557 34,597 37,399
Extraordinary gain from early extinguishment of debt
(net of income taxes of $6, $44, $11, and $158,
respectively) 8 61 16 218
----------- ----------- ----------- -----------
NET INCOME $ 16,897 $ 17,618 $ 34,613 $ 37,617
=========== =========== =========== ===========
Net income per common share - basic
Income before extraordinary item $ 0.50 $ 0.64 $ 1.06 $ 1.38
Extraordinary item 0.00 0.00 0.00 0.01
----------- ----------- ----------- -----------
Net income $ 0.50 $ 0.64 $ 1.06 $ 1.39
=========== =========== =========== ===========
Net income per common share - diluted:
Income before extraordinary item $ 0.50 $ 0.64 $ 1.05 $ 1.38
Extraordinary item 0.00 0.00 0.00 0.01
----------- ----------- ----------- -----------
Net income $ 0.50 $ 0.64 $ 1.05 $ 1.39
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic 33,509,549 27,476,303 32,731,454 27,036,823
Diluted 33,753,794 27,478,055 32,920,043 27,044,660
See accompanying notes to consolidated financial statements.
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5
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME (LOSS),
SHARES STOCK CAPITAL EARNINGS NET OF TAX TOTAL
---------- ------- -------- -------- -------------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance at January 1, 2000 26,597,344 $26,597 $190,137 $157,465 $(21,481) $352,718
Net income 74,743 74,743
Unrealized gains on securities available
for sale and retained interest in
securitized assets, net of tax (1) 6,665 6,665
--------
Comprehensive income 81,408
Issuance of common stock 5,334,482 5,335 50,349 55,684
Issuance of subsidiary common stock 6,403 6,403
Cash dividends (9,045) (9,045)
---------- ------- -------- -------- -------- --------
Balance at December 31, 2000 31,931,826 31,932 246,889 223,163 (14,816) 487,168
Net income 34,613 34,613
Unrealized gains on securities available for
sale and retained interest in securitized
assets, net of tax (1) 5,309 5,309
Unrealized hedge losses on derivatives, net
of tax (2) (15,007) (15,007)
Less: Reclassification adjustment for losses
on securities available for sale included
in net income (3) 625 625
Less: Reclassification adjustment for losses
on derivatives included in income (4) 6,475 6,475
--------
Comprehensive income 32,015
Issuance of subsidiary common stock (2,771) (2,771)
Issuance of common stock 3,845,877 3,846 57,981 61,827
Cash dividends (7,124) (7,124)
Other (2,416) (2,416)
---------- ------- -------- -------- -------- --------
Balance at June 30, 2001 35,777,703 $35,778 $299,683 $250,652 $(17,414) $568,699
========== ======= ======== ======== ======== ========
- --------------
(1) The pre-tax decrease in unrealized losses on securities available for sale
and retained interest in securitized assets was $9.0 million for the six
months ended June 30, 2001 compared with $11.3 million for the period ended
December 31, 2000.
(2) The pre-tax increase in unrealized losses on cash flow hedges was $25.4
million for the six months ended June 30, 2001.
(3) The pre-tax amount of unrealized losses on securities available for sale
reclassified into earnings was $1.1 million for the six months ended June
30, 2001.
(4) The pre-tax amount of unrealized losses on derivatives reclassified into
earnings was $11.0 million for the six months ended June 30, 2001.
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6
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 34,613 $ 37,617
Adjustments to reconcile net income to net cash
provided by operating activities:
Loans held for sale:
Origination of loans (760,973)
Proceeds from contract securitizations 660,000
Proceeds from sale of mortgage loans 1,875 943
Loan payments and payoffs 143,716
Provision for credit losses 66,623 27,191
Depreciation and amortization 52,948 53,474
Increase in other assets (47,020) (29,933)
Increase (decrease) in other liabilities 15,210 (12,608)
Other, net 11,063 (1,562)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 135,312 117,865
INVESTING ACTIVITIES
Loans receivable:
Origination of loans (2,623,238) (1,437,205)
Loan payments and payoffs 1,039,851 271,428
Investment securities available for sale:
Purchases (1,101) (780)
Payments received 896
Mortgage-backed securities:
Purchases (641,956) (554,061)
Proceeds from sale 137,568
Payments received 392,579 69,629
Increase in retained interest in securitized assets (19,239)
Decrease in amounts due from trusts 125,625 35,984
Purchase of premises and equipment (6,378) (5,112)
Other, net 625
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,575,529) (1,639,356)
FINANCING ACTIVITIES
(Decrease) increase in deposits (248,848) 146,892
(Decrease) increase in securities sold under agreements
to repurchase (20,846) 380,716
Proceeds from notes payable on automobile secured financing 2,365,412 1,482,024
Payments on notes payable on automobile secured financing (644,530) (502,704)
Decrease in borrowings (22,517) (2,722)
Decrease in amounts held on behalf of trustee (108,300) (78,447)
Decrease in FHLB advances (18,078) (127,094)
Decrease in subordinated debentures (1,505) (8,426)
Proceeds from issuance of common stock 61,827 55,708
Proceeds from issuance of subsidiary common stock 13,623 23,389
Cash dividends (7,124) (2,660)
Other, net (16,974) 6,403
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,352,140 1,373,079
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (88,077) (148,412)
Cash and cash equivalents at beginning of period 128,763 171,365
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 40,686 $ 22,953
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
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WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes thereto for the year
ended December 31, 2000 included in the Westcorp Form 10-K/A. Certain amounts
from the 2000 consolidated financial statements have been reclassified to
conform to the 2001 presentation.
NOTE 2 - MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale consisted of the following:
JUNE 30, 2001
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
GNMA certificates $2,336,455 $10,213 $ 26,825 $2,319,843
FNMA participation certificates 61,538 11 7 61,542
FHLMC participation certificates 1,869 685 8 2,546
Other 2,414 2,414
---------- ------- ---------- ----------
$2,402,276 $10,909 $ 26,840 $2,386,345
========== ======= ========== ==========
DECEMBER 31, 2000
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
GNMA certificates $2,181,067 $17,533 $ 41,524 $2,157,076
FNMA participation certificates 69,278 3 411 68,870
FHLMC participation certificates 1,948 10 1,938
Other 2,564 2,564
---------- ------- ---------- ----------
$2,254,857 $17,536 $ 41,945 $2,230,448
========== ======= ========== ==========
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NOTE 3 - NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
Consumer:
Automobile contracts $ 5,919,364 $ 4,307,267
Dealer participation, net of deferred
contract fees 112,142 82,717
Other 11,688 13,456
Unearned discounts (106,441) (94,404)
----------- -----------
5,936,753 4,309,036
Real Estate:
Mortgage 420,875 498,963
Construction 19,573 14,784
----------- -----------
440,448 513,747
Undisbursed loan proceeds (7,884) (6,316)
----------- -----------
432,564 507,431
Commercial 86,820 107,586
----------- -----------
6,456,137 4,924,053
Allowance for credit losses (122,576) (104,006)
----------- -----------
$ 6,333,561 $ 4,820,047
=========== ===========
Automobile contracts managed by us for the benefit of others totaled
approximately $1.8 billion and $2.6 billion at June 30, 2001 and December 31,
2000, respectively. The decrease in automobile contracts managed by us for the
benefit of others is the result of our newer securitization transactions being
treated as secured financings rather than sales.
NOTE 4 - RETAINED INTEREST IN SECURITIZED ASSETS
Retained interest in securitized assets, also known as RISA, is capitalized upon
the sale of automobile contracts to securitization trusts. RISA represents the
present value of the estimated future cash flows to be received by us from the
excess spread created in securitization transactions. Future cash flows are
calculated by taking the coupon rate of the automobile contracts securitized
less the interest rate paid to the investors less contractually specified
servicing fees and guarantor fees, after giving effect to estimated credit
losses and prepayments.
RISA is classified in a manner similar to available for sale securities and as
such is marked to market each quarter. Market value changes are calculated by
discounting the estimated cash flows using a current market discount rate. Any
changes in the market value of the RISA are reported as a separate component of
shareholders' equity on our Consolidated Statements of Financial Condition as
accumulated other comprehensive income (loss), net of applicable taxes. On a
quarterly basis, we evaluate the carrying value of the RISA in light of the
actual performance of the underlying automobile contracts and make adjustments
to reduce the carrying value, if appropriate.
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The following table sets forth the components of the RISA:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
2001 2000 2001 2000
-------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Beginning balance $ 98,167 $ 164,640 $ 111,558 $ 167,277
Additions 19,240
Amortization (18,065) (23,092) (32,431) (45,327)
Change in unrealized gain/loss on RISA (1) 500 (909) 1,475 (551)
-------- --------- --------- ---------
Balance at end of period (2) $ 80,602 $ 140,639 $ 80,602 $ 140,639
======== ========= ========= =========
- -------------
(1) The change in unrealized gain/loss on RISA represents temporary changes in
valuation including changes in the discount rate based on the current
interest rate environment. Such amounts will not be realized unless the
RISA is sold. Changes in prepayment and credit loss assumptions for the
RISA are permanent in nature and impact the value of the RISA. Such
permanent differences are immediately recognized in income as a component
of retained interest income.
(2) There are no restrictions on the RISA.
The following table presents the estimated future undiscounted cash flows to be
received from securitizations treated as sales:
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS)
Estimated net undiscounted RISA earnings $ 145,868 $ 235,270
Off balance sheet allowance for credit losses (58,416) (110,339)
Discount to present value (6,850) (13,373)
----------- -----------
Retained interest in securitized assets $ 80,602 $ 111,558
=========== ===========
Outstanding balance of automobile contracts
sold through securitizations $ 1,804,909 $ 2,608,017
Off balance sheet allowance for losses as a
percent of automobile contracts sold through
securitizations 3.24% 4.23%
The decline in the off balance sheet allowance for credit losses both on a
dollar and percent basis is the result of our securitization transactions no
longer being treated as sales. Older transactions treated as sales have lower
losses each month after securitization as estimated future credit losses are
realized. We believe that the off balance sheet allowance for credit losses is
currently adequate to absorb probable losses in the sold portfolio that can be
reasonably estimated.
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NOTE 5 - SECURED FINANCINGS
For the three and six months ended June 30, 2001, we issued $1.4 billion and
$2.4 billion of notes secured by automobile contracts. Interest payments on the
notes are due quarterly, in arrears, based on the respective note's interest
rate. There were $5.2 billion of notes payable on automobile secured financing
outstanding at June 30, 2001 compared with $3.5 billion at December 31, 2000.
For the three and six months ended June 30, 2001, interest expense totaled $81.0
million and $154 million, respectively, compared with $14.9 million and $24.7
for the same respective periods in 2000. The increase in interest expense is due
to treating our recent securitization transactions as secured financings rather
than sales.
The contracts originated and held by us are fixed rate and, accordingly, we have
exposure to changes in interest rates. To protect against potential changes in
interest rates affecting interest payments on future securitization
transactions, we enter into various hedge agreements, which qualify as cash flow
hedges under FAS 133. We settle such financial instruments at the time we close
these securitization transactions and receive or pay cash equal to the gain or
loss on these instruments. Therefore, the total interest payment cash flows on
these notes are adjusted at such time. Unrealized gains or losses on these
agreements are deferred in accumulated other comprehensive income (loss) until
the completion of the securitization transaction. Once the transaction is
complete, this deferred amount is amortized into earnings over the duration of
the secured financing.
Included in notes payable on automobile secured financing are variable rate
notes related to our secured financing transactions. To protect against
potential changes in interest rates affecting future payments on the notes, we
enter into fixed-rate swap agreements. Unrealized gains or losses related to
these agreements are deferred in accumulated other comprehensive income (loss).
Cash received or cash paid related to these agreements are included in interest
expense.
NOTE 6 - DIVIDENDS
On May 3, 2001 we declared a cash dividend of $0.11 per share for shareholders
of record as of June 5, 2001 which was paid on June 15, 2001.
NOTE 7 - RIGHTS OFFERING
We completed a rights offering in May 2001 in which we raised a total of $61
million through the issuance of 3.7 million additional common shares at a price
of $16.25 per share. With the completion of this offering, our total number of
common shares issued and outstanding increased 12% to 35.7 million shares.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our primary sources of revenue are net interest income and noninterest income.
Net interest income is the difference between the income earned on interest
earning assets and the interest paid on interest bearing liabilities.
Noninterest income is primarily made up of revenues generated from the sale and
servicing of loans. The primary components of noninterest income include
retained interest income on automobile contracts sold, contractually specified
servicing fees for the servicing of loans, late charges, gain on sale of
automobile contracts and mortgage loans, and other miscellaneous servicing fee
income. Other components of noninterest income include gains and losses from the
sale of investments and MBS, insurance income, fees related to the sales of
investment products such as mutual funds and annuities, and fee income from
depository accounts.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is affected by the difference between the rate earned on our
interest earning assets and the rate paid on our interest bearing liabilities
(net interest rate spread) and the relative amounts of our interest earning
assets and interest bearing liabilities. For the three and six months ended June
30, 2001, net interest income totaled $109 million and $202 million,
respectively, compared with $59.7 million and $111 million for the same
respective periods in 2000. The increase in net interest income as well as the
improvement in net interest spread is primarily the result of us treating our
recent securitization transactions as secured financings.
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Interest rates for interest earning assets and interest bearing liabilities for
the three and six months ended June 30, 2001 and 2000 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2001 2000 2001 2000
------ ------ ------ ------
YIELD/ YIELD/ YIELD/ YIELD/
RATE RATE RATE RATE
------ ------ ------ ------
Interest earning assets:
Total investments:
Mortgage-backed securities 6.00% 6.85% 6.30% 6.73%
Other investments 5.45 6.43 5.66 5.76
----- ----- ----- -----
Total investments 5.97 6.81 6.26 6.63
Total loans:
Consumer loans 13.76 14.35 13.80 14.50
Mortgage loans (1) 8.06 7.77 8.24 7.67
Commercial loans 7.71 9.13 8.16 9.14
----- ----- ----- -----
Total loans 13.22 12.78 13.22 12.72
----- ----- ----- -----
Total interest earning assets 11.12 10.18 11.11 10.11
Interest bearing liabilities:
Deposits 5.60 5.46 5.65 5.32
Notes payable on automobile secured financing 6.84 6.78 6.97 6.75
Securities sold under agreements to repurchase 4.71 6.05 5.19 5.84
FHLB advances and other borrowings 4.80 7.03 5.30 6.50
Subordinated debentures 8.92 8.99 8.92 8.99
----- ----- ----- -----
Total interest bearing liabilities 6.33 6.08 6.46 5.90
----- ----- ----- -----
Interest rate spread 4.79% 4.10% 4.65% 4.21%
===== ===== ===== =====
Net yield on average interest earning assets 5.21% 4.82% 5.06% 4.95%
===== ===== ===== =====
- -----------------
(1) For the purposes of these computations, non-accruing loans are included in
the average loan amounts outstanding.
PROVISION FOR LOAN LOSSES
We maintain an allowance for credit losses to cover probable losses which can be
reasonably estimated for the loans held on the balance sheet. The allowance for
credit losses is increased by charging the provision for credit losses and
decreased by actual losses on the loans or reversing the allowance for credit
losses through the provision for credit losses when the amount of loans held on
balance sheet is reduced through loan sales. The level of allowance is based
principally on the outstanding balance of loans held on balance sheet and
historical loss trends. We believe that the allowance for credit losses is
currently adequate to absorb probable losses in our owned loan portfolio which
can be reasonably estimated.
For the three and six months ended June 30, 2001, the provision for credit
losses totaled $39.6 million and $66.6 million, respectively, compared with
$15.2 million and $27.2 million for the same respective periods a year earlier.
The increase in the provision for credit losses was the result of a higher level
of automobile contracts held on the balance sheet. The allowance for credit
losses as a percentage of owned loans outstanding was 1.9% and 2.1% at June 30,
2001 and December 31, 2000, respectively.
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NONINTEREST INCOME
Automobile Lending
On a regular basis, we securitize automobile contracts in the asset-backed
securities market and retain the servicing rights. Such transactions are treated
as either sales to a securitization trust or as secured financings for
accounting purposes. For transactions treated as sales to a securitization
trust, we record a non-cash gain equal to the present value of the estimated
future cash flows from the portfolio of automobile contracts sold less the
write-off of dealer participation balances and the effect of hedging activities.
For these securitizations, net interest earned on the automobile contracts sold
and fees earned for servicing the contract portfolios are recognized over the
life of the securitization transactions as contractual servicing income,
retained interest income and other fee income.
The components of automobile lending income were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Gain on sale of automobile contracts $ 7,719
Retained interest income $ 241 $17,616 $ 3,077 30,932
Contractual servicing income 6,135 11,444 13,500 23,127
Other fee income 17,052 14,002 33,786 27,783
------- ------- ------- -------
Total automobile lending income $23,428 $43,062 $50,363 $89,561
======= ======= ======= =======
For the three and six months ended June 30, 2001, we securitized $1.4 billion
and $2.4 billion of automobile receivables in transactions treated as secured
financings. For the three and six months ended June 30, 2000, we securitized
$1.0 billion and $2.2 billion. Of the $2.2 billion, $660 million was treated as
a sale and $1.5 billion were treated as secured financings. No gain on sale was
recognized for the three and six months ended June 30, 2001, compared with no
gain on sale and $7.7 million for the same respective periods in 2000.
For the three and six months ended June 30, 2001, retained interest income
totaled $0.2 million and $3.1 million, respectively, compared with $17.6 million
and $30.9 million for the same respective periods in 2000. For accounting
purposes, retained interest income is only recognized on contracts sold through
securitization transactions treated as sales. Retained interest income on
securitization transactions treated as sales is dependent upon the average
excess spread on the contracts sold, credit losses and the size of the sold
portfolio. Retained interest income is expected to decrease as our recent
securitizations are treated as secured financings.
For the three and six months ended June 30, 2001, contractual servicing income
totaled $6.1 million and $13.5 million, respectively, compared with $11.4
million and $23.1 million for the same respective periods in 2000. For
accounting purposes, contractual servicing income is only recognized on
contracts sold through securitization transactions treated as sales. According
to the terms of each securitization transaction, contractual servicing income is
generally earned at rates ranging from 1.0% to 1.25% per annum on the
outstanding balance of contracts securitized. Contractual servicing income
decreased as our recent securitizations are treated as secured financings.
For the three and six months ended June 30, 2001, other fee income totaled $17.1
million and $33.8 million respectively, compared with $14.0 million and $27.8
million for the same respective periods in 2000. Other fee income consists
primarily of documentation fees, late charges and deferment fees on our managed
portfolio, including automobile contracts securitized in transactions accounted
for as sales and secured financings and automobile contracts not securitized.
The increase in other fee income is due to the growth in our average managed
portfolio to $7.4 billion and $7.2 billion for the three and six months ended
June 30, 2001, respectively, compared with $5.8 billion and $5.7 billion for the
same respective periods in 2000.
13
14
Pro-Forma Statements of Income
The following pro-forma portfolio basis statements of income present our results
under the assumption that all our securitization transactions are treated as
secured financings rather than as sales and, therefore, provide a method by
which to gauge our year to year performance. We believe that such a presentation
is an important performance measure of our operations, particularly considering
that our more recent securitization transactions are accounted for as secured
financings. If treated as financings, no gain on sale or subsequent contractual
servicing and retained interest income is recognized. Instead, the earnings of
the automobile contracts in the trusts and the related financing costs are
reflected over the life of the underlying pool of automobile contracts. We refer
to these pro-forma results as "portfolio basis" statements of income since the
automobile contracts would have remained in our on balance sheet contract
portfolio if we accounted for the transactions as financings. We monitor the
periodic portfolio basis earnings of our managed contract portfolio and believe
these portfolio basis statements assist in better understanding our business.
The following tables present the portfolio basis statements of income and
reconciliation to net income as reflected in our Consolidated Statements of
Income:
PORTFOLIO BASIS STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income $295,845 $244,633 $580,625 $464,967
Interest expense 162,663 132,818 325,966 245,881
-------- -------- -------- --------
Net interest income 133,182 111,815 255,659 219,086
Net chargeoffs (1) 36,580 19,978 69,247 48,066
Provision for growth (2) 7,192 7,595 12,799 12,406
-------- -------- -------- --------
Provision for credit losses 43,772 27,573 82,046 60,472
-------- -------- -------- --------
Net interest income after provision for credit losses 89,410 84,242 173,613 158,614
Noninterest income 20,097 16,678 40,365 39,742
Noninterest expense 62,988 54,305 124,333 112,930
-------- -------- -------- --------
Income before income tax 46,519 46,615 89,645 85,426
Income tax (3) 17,735 18,581 35,195 34,810
-------- -------- -------- --------
Income before minority interest 28,784 28,034 54,450 50,616
Minority interest in earnings 4,942 4,222 9,109 6,907
-------- -------- -------- --------
Income before extraordinary item 23,842 23,812 45,341 43,709
Extraordinary gain from early extinguishment of debt 8 61 16 218
-------- -------- -------- --------
Portfolio basis net income $ 23,850 $ 23,873 $ 45,357 $ 43,927
======== ======== ======== ========
Portfolio basis net income per common share - diluted (4) $ 0.71 $ 0.87 $ 1.38 $ 1.62
======== ======== ======== ========
GAAP basis net income per common share - diluted (4) $ 0.50 $ 0.64 $ 1.05 $ 1.39
======== ======== ======== ========
- ------------
(1) Represents actual chargeoffs incurred during the period, net of recoveries.
(2) Represents additional allowance for credit losses we would set aside due to
an increase in the managed contract portfolio.
(3) Such tax effect is based upon our tax rate for the respective period.
(4) Decline in earnings per share is the result of the rights offering in May
2001, which diluted the number of shares by 12%.
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15
RECONCILIATION OF GAAP BASIS NET INCOME
TO PORTFOLIO BASIS NET INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
GAAP net income $ 16,897 $ 17,618 $ 34,613 $ 37,617
Portfolio basis adjustments:
Gain on sales of automobile contracts (7,719)
Retained interest income (241) (17,616) (13,500) (30,932)
Contractual servicing income (6,135) (11,444) (3,077) (23,127)
Net interest income 24,232 52,307 53,469 108,800
Provision for credit losses 8,097 1,289 9,577 2,255
Net chargeoffs (12,228) (13,618) (25,000) (35,536)
Operating expenses (31) 1,723 (51) (905)
Minority interest (1,521) (1,346) (2,327) (1,405)
-------- -------- -------- ---------
Total portfolio basis adjustments 12,173 11,295 19,091 11,431
Net tax effect (1) 5,220 5,040 8,347 5,121
-------- -------- -------- ---------
Portfolio basis net income $ 23,850 $ 23,873 $ 45,357 $ 43,927
======== ======== ======== =========
- --------------
(1) Such tax is based on our tax rate for the respective period.
NONINTEREST EXPENSE
For the three and six months ended June 30, 2001, noninterest expense totaled
$63.0 million and $124 million, respectively, compared with $56.2 million and
$112 million for the same respective periods in 2000. Noninterest expense as a
percent of total revenues improved to 46% and 48% for the three and six months
ended June 30, 2001 compared with 53% for the same respective periods in 2000.
INCOME TAXES
We file federal and certain state tax returns on a consolidated basis. Other
state tax returns are filed for each subsidiary separately. Our effective tax
rate was 38% and 39% for the three and six months ended June 30, 2001 compared
with an effective tax rate of 40% and 41% for the same respective periods in
2000.
FINANCIAL CONDITION
OVERVIEW
Total assets increased $1.5 billion or 18.7% to $9.3 billion at June 30, 2001
from $7.9 billion at December 31, 2000. This increase is primarily the result of
an increase in automobile contracts held on the balance sheet.
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16
LOAN PORTFOLIO
Consumer Loan Portfolio
Our consumer loan portfolio consisted of the following:
JUNE 30, 2001 DECEMBER 31, 2000
------------------- -------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Automobile contracts $5,925,065 99.8% $4,295,580 99.7%
Other 11,688 0.2 13,456 0.3
---------- ----- ---------- -----
$5,936,753 100.0% $4,309,036 100.0%
========== ===== ========== =====
Commercial Loan Portfolio
For the three and six months ended June 30, 2001, we originated $71.1 million
and $266 million of commercial loans, respectively, compared with $69.0 million
and $127 million for the same respective periods in 2000. Though we continue to
focus on expanding our commercial banking operation, it has not been a
significant source of revenue.
Mortgage Loan Portfolio
Our total mortgage loan portfolio consisted of the following:
JUNE 30, 2001 DECEMBER 31, 2000
------------------ ------------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds $181,778 42.0% $224,798 44.3%
Second trust deeds 5,606 1.3 6,056 1.2
-------- ----- -------- -----
187,384 43.3 230,854 45.5
Multifamily residential loans 204,724 47.3 230,004 45.3
Construction loans 19,573 4.5 14,784 2.9
Other 28,767 6.7 38,105 7.5
-------- ----- -------- -----
440,448 101.8 513,747 101.2
Less: undisbursed loan proceeds 7,884 1.8 6,316 1.2
-------- ----- -------- -----
Total mortgage loans $432,564 100.0% $507,431 100.0%
======== ===== ======== =====
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ASSET QUALITY
Overview
Nonperforming assets, repossessions, loan delinquency and credit losses are
considered by us as key measures of asset quality. Asset quality, in turn,
affects our determination of the allowance for credit losses. We also take into
consideration general economic conditions in the markets we serve, individual
loan reviews, and the level of assets relative to reserves in determining the
adequacy of the allowance for credit losses.
Automobile Loan Quality
We provide financing in a market where there is a risk of default by borrowers.
Chargeoffs directly impact our earnings and cash flows. To minimize the amount
of credit losses we incur, we monitor delinquent accounts, promptly repossess
and remarket vehicles, and seek to collect on deficiency balances.
At June 30, 2001, the percentage of accounts delinquent 30 days or greater was
2.81% compared with 3.18% at December 31, 2000. We calculate delinquency based
on the contractual due date. For the three and six months ended June 30, 2001,
net chargeoffs on average automobile contracts were 1.95% and 1.90%,
respectively, compared with 1.35% and 1.67% for the same respective periods in
2000. The increase in credit loss experience is a result of a slowing economy.
The following table sets forth information with respect to the delinquency of
our portfolio of automobile contracts managed, which includes automobile
contracts that are owned by us and automobile contracts that have been sold
and/or securitized but are managed by us:
JUNE 30, 2001 DECEMBER 31, 2000
------------------------- ----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Automobile contracts managed at end of period $7,617,921 $6,818,182
========== ==========
Period of delinquency
30-59 days $ 152,109 2.00% $ 157,843 2.32%
60 days or more 62,160 0.81 59,166 0.86
---------- ---- ---------- ----
Total automobile contracts delinquent
and delinquencies as a percentage of
automobile contracts managed $ 214,269 2.81% $ 217,009 3.18%
========== ==== ========== ====
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The following table sets forth information with respect to repossessions in our
portfolio of managed automobile contracts:
JUNE 30, 2001 DECEMBER 31, 2000
------------------------ ------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Automobile contracts managed 662,941 $7,617,921 616,011 $6,818,182
======= ========== ======= ==========
Repossessed vehicles 703 $ 4,485 946 $ 6,199
======= ========== ======= ==========
Repossessed vehicles as a percentage
of number and amount of automobile
contracts outstanding 0.11% 0.06% 0.15% 0.09%
The following table sets forth information with respect to actual credit loss
experience on our portfolio of automobile contracts managed:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Automobile contracts managed $7,617,921 $6,071,044 $7,617,921 $6,071,044
========== ========== ========== ==========
Average automobile contracts managed during period
$7,408,488 $5,842,731 $7,203,585 $5,661,430
========== ========== ========== ==========
Gross chargeoffs $ 50,711 $ 31,747 $ 98,937 $ 72,699
Recoveries 14,585 11,987 30,330 25,475
---------- ---------- ---------- ----------
Net chargeoffs $ 36,126 $ 19,760 $ 68,607 $ 47,224
========== ========== ========== ==========
Net chargeoffs as a percentage of average automobile
contracts outstanding during period 1.95% 1.35% 1.90% 1.67%
========== ========== ========== ==========
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19
The following table sets forth the cumulative static pool losses by month for
all outstanding securitized pools:
CUMULATIVE STATIC POOL LOSS CURVES (1)
AT JUNE 30, 2001
PERIOD (2) 1997-C 1997-D 1998-A 1998-B 1998-C 1999-A 1999-B 1999-C 2000-A
- ---------------------------------------------------------------------------------------------------------------------------
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.05% 0.05% 0.04% 0.02% 0.04% 0.04% 0.04% 0.02% 0.03%
3 0.12% 0.14% 0.11% 0.08% 0.11% 0.11% 0.11% 0.10% 0.10%
4 0.29% 0.31% 0.25% 0.18% 0.23% 0.20% 0.26% 0.25% 0.20%
5 0.46% 0.56% 0.44% 0.38% 0.39% 0.33% 0.47% 0.40% 0.36%
6 0.67% 0.75% 0.66% 0.59% 0.50% 0.46% 0.66% 0.56% 0.55%
7 0.93% 0.99% 0.95% 0.83% 0.61% 0.62% 0.87% 0.71% 0.71%
8 1.16% 1.24% 1.23% 1.03% 0.75% 0.76% 1.00% 0.86% 0.91%
9 1.37% 1.47% 1.50% 1.21% 0.86% 0.92% 1.13% 1.01% 1.10%
10 1.66% 1.75% 1.79% 1.40% 1.00% 1.11% 1.24% 1.14% 1.27%
11 1.94% 2.06% 2.03% 1.53% 1.17% 1.30% 1.35% 1.34% 1.45%
12 2.16% 2.35% 2.21% 1.62% 1.32% 1.47% 1.44% 1.52% 1.58%
13 2.40% 2.63% 2.39% 1.74% 1.48% 1.61% 1.58% 1.74% 1.73%
14 2.65% 2.86% 2.49% 1.84% 1.66% 1.73% 1.74% 1.94% 1.85%
15 2.90% 3.05% 2.60% 1.96% 1.79% 1.81% 1.85% 2.09% 2.00%
16 3.15% 3.19% 2.72% 2.10% 1.91% 1.89% 2.03% 2.27% 2.15%
17 3.36% 3.32% 2.85% 2.22% 2.01% 2.00% 2.16% 2.39%
18 3.55% 3.42% 2.98% 2.40% 2.07% 2.10% 2.30% 2.53%
19 3.70% 3.50% 3.11% 2.55% 2.11% 2.24% 2.42% 2.67%
20 3.81% 3.60% 3.25% 2.69% 2.17% 2.35% 2.50% 2.81%
21 3.91% 3.69% 3.35% 2.79% 2.24% 2.46% 2.58% 2.92%
22 4.00% 3.81% 3.48% 2.85% 2.34% 2.55% 2.67%
23 4.11% 3.96% 3.62% 2.89% 2.43% 2.63% 2.77%
24 4.21% 4.10% 3.70% 2.92% 2.52% 2.71% 2.87%
25 4.30% 4.23% 3.75% 2.97% 2.62% 2.77%
26 4.44% 4.34% 3.80% 3.04% 2.71% 2.82%
27 4.56% 4.44% 3.87% 3.13% 2.80% 2.89%
28 4.66% 4.51% 3.92% 3.18% 2.87% 2.96%
29 4.77% 4.54% 3.98% 3.24% 2.90% 3.02%
30 4.79% 4.56% 4.06% 3.32% 2.95%
31 4.83% 4.57% 4.11% 3.38% 2.30%
32 4.86% 4.63% 4.17% 3.43% 2.32%
33 4.88% 4.67% 4.22% 3.47%
34 4.90% 4.71% 4.27% 3.48%
35 4.92% 4.76% 4.32% 3.52%
36 4.98% 4.80% 4.34% 3.54%
37 5.01% 4.84% 4.35% 3.58%
38 5.06% 4.89% 4.38%
39 5.10% 4.92% 4.39%
40 5.14% 4.92% 4.43%
41 5.17% 4.93%
42 5.17% 4.95%
43 5.17% 4.97%
44 5.17%
45 5.19%
46 5.20%
PRIME MIX (3) 53% 49% 57% 67% 70% 70% 70% 67% 69%
19
20
CUMULATIVE STATIC POOL LOSS CURVES (1)
AT JUNE 30, 2001
PERIOD (2) 2000-B 2000-C 2000-D 2001-A 2001-B
- ---------------------------------------------------------------------------------
1 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.02% 0.04% 0.04% 0.03% 0.03%
3 0.09% 0.13% 0.11% 0.09%
4 0.24% 0.27% 0.24% 0.20%
5 0.39% 0.46% 0.39% 0.33%
6 0.59% 0.65% 0.54%
7 0.78% 0.81% 0.74%
8 0.99% 0.93% 0.93%
9 1.17% 1.07%
10 1.33% 1.24%
11 1.44% 1.41%
12 1.57%
13 1.72%
14 1.86%
PRIME MIX (3) 69% 68% 70% 72% 73%
- ------------------
(1) Cumulative static pool losses are equal to the cumulative amount of losses
actually recognized up to and including a given month divided by the
original principal balance of the securitization transaction.
(2) Represents the number of months since the inception of the securitization
transaction.
(3) Represents the original percentage of prime contacts sold within each pool.
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21
Real Estate Loan Quality
The following table summarizes mortgage delinquencies over 60 days by loan type:
JUNE 30, 2001 DECEMBER 31, 2000
-------------------- ---------------------
AMOUNT AMOUNT
PAST DUE PAST DUE
OVER % OF OVER % OF
60 DAYS CATEGORY 60 DAYS CATEGORY
------ -------- -------- --------
(DOLLARS IN THOUSANDS)
Single family $7,402 3.35% $7,585 2.78%
Multifamily 874 0.42% 186 0.11%
------ ---- ------ ----
$8,276 1.88% $7,771 1.50%
====== ==== ====== ====
Nonperforming Assets
NPAs consist of nonperforming loans, also known as NPLs, Chapter 13 bankruptcy
accounts greater than 120 days delinquent and real estate owned, also known as
REO. REO is carried at lower of cost or fair value. NPLs are defined as all
nonaccrual loans. This includes mortgage loans 90 days or more past due and
impaired loans where full collection of principal and interest is not reasonably
assured. NPAs increased $7.7 million to $22.7 million at June 30, 2001 compared
with $14.4 million at December 31, 2000. NPAs represented 0.2% of total assets
at June 30, 2001 and December 31, 2000. There were no impaired loans at June 30,
2001 and December 31, 2000.
At June 30, 2001, interest on nonperforming loans excluded from interest income
was $0.6 million compared to $0.5 million at December 31, 2000.
Allowance for Credit Losses
Our allowance for credit losses was $123 million at June 30, 2001 compared to
$104 million at December 31, 2000. The allowance for credit losses and related
provisions are determined by considering loan volumes, loan sales, prepayments,
loss trends, levels of NPLs, management's analysis of market conditions,
individual loan reviews, levels of assets to reserves and other relevant
factors. The allowance for credit losses is reduced by net chargeoffs and
increased by the provision for credit losses. For the three and six months ended
June 30, 2001, the provision for credit losses was $39.6 million and $66.6
million, respectively, compared with $15.2 million and $27.2 million for the
same respective periods in 2000. For the three and six months ended June 30,
2001, net chargeoffs totaled $24.4 million and $44.2 million, respectively,
compared with $6.4 million and $12.5 million for the same respective periods in
2000. The increase in the allowance for credit losses was the result of a higher
level of automobile contracts held on balance sheet. The allowance for credit
losses as a percentage of owned loans outstanding was 1.9% and 2.1% at June 30,
2001 and December 31, 2000, respectively.
We believe that the allowance for credit losses is currently adequate to cover
probable losses in our owned portfolio that can be reasonably estimated. No
single loan, borrower or series of such loans comprises a significant portion of
the total portfolio. The provision and allowance for credit losses are
indicative of loan volumes, loss trends and management's analysis of market
conditions.
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22
The following table sets forth the activity in the allowance for credit losses:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 110,060 $ 69,994 $ 104,006 $ 64,217
Chargeoffs:
Mortgage loans (496) (139) (657) (610)
Consumer loans (33,094) (9,231) (61,397) (17,775)
--------- -------- --------- --------
(33,590) (9,370) (62,054) (18,385)
Recoveries:
Mortgage loans 12 1 13 2
Consumer loans 9,227 3,009 17,794 5,855
--------- -------- --------- --------
9,239 3,010 17,807 5,857
--------- -------- --------- --------
Net chargeoffs (24,351) (6,360) (44,247) (12,528)
Provision for credit losses 39,640 15,246 66,623 27,191
Write-down of non-performing assets (2,773) (3,806)
--------- -------- --------- --------
Balance at end of period $ 122,576 $ 78,880 $ 122,576 $ 78,880
========= ======== ========= ========
Ratio of net chargeoffs during the period
(annualized) to average loans outstanding
during the period 1.62% 0.92% 1.57% 0.99%
The following table presents summarized data relative to the allowance for
credit and real estate losses at the dates indicated:
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(DOLLARS IN THOUSANDS)
Total loans (1) $ 6,456,137 $ 4,924,053
Allowance for credit losses 122,576 104,006
Allowance for real estate owned losses 250 250
Loans past due 60 days or more 51,897 37,911
Nonperforming loans 7,652 9,132
Nonperforming assets (2) 22,664 14,433
Allowance for credit losses as a percent of:
Total loans (1) 1.9% 2.1%
Loans past due 60 days or more 236.2% 274.3%
Nonperforming loans 1,601.9% 1,138.9%
Total allowance for credit losses and REO losses
as a percent of nonperforming assets 541.9% 698.2%
Nonperforming loans as a percent of total loans 0.1% 0.2%
Nonperforming assets as a percent of total assets 0.2% 0.2%
- --------------
(1) Loans net of unearned interest and undisbursed loan proceeds.
(2) Nonperforming loans, real estate owned, and repossessed assets.
22
23
CAPITAL RESOURCES AND LIQUIDITY
Overview
We require substantial capital resources and cash to support our business. Our
ability to maintain positive cash flows for our automobile operations is the
result of our consistent managed growth and efficient operations.
In addition to our indirect statement of cash flows as presented under GAAP, we
also analyze the key cash flows for our automobile operations on a direct basis
excluding certain items such as the purchase or sale of automobile contracts.
The following table shows our operating cash flows:
SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
-------- -------
(DOLLARS IN THOUSANDS)
Cash flows from owned loans $159,851 $80,947
Cash flows from trusts 35,015 76,258
Contractual servicing income 13,500 23,127
Other fee income 33,786 27,783
Less:
Dealer participation 61,747 48,401
Operating costs 104,342 95,103
-------- -------
Operating cash flows $ 76,063 $64,611
======== =======
Operating cash flows improved for the six months ended June 30, 2001 compared
with the six months ended June 30, 2000 as a result of improving net interest
margins on our managed portfolio as well as improved operating efficiency.
PRINCIPAL SOURCES OF CASH
o Collections of Principal and Interest from Automobile Contracts - For the
three and six months ended June 30, 2001, principal and interest
collections totaled $1.1 billion and $2.1 billion, respectively, compared
with $0.9 billion and $1.7 billion for the same respective periods in 2000.
o Deposits - Deposits decreased to $2.2 billion at June 30, 2001 from $2.5
billion at December 31, 2000.
o Contract Securitizations - For the three and six months ended June 30,
2001, we securitized $1.4 billion and $2.4 billion, respectively, compared
to $1.0 billion and $2.2 billion for the same respective periods in 2000.
o Borrowings and Other Sources of Funds - Borrowings and other sources of
funds, which includes notes payable, securities sold under agreements to
repurchase, and FHLB advances, increased to $5.7 billion at June 30, 2001
from $4.0 billion at December 31, 2000. The increase is primarily due to
$2.4 billion in securitizations that were treated as secured financings for
the six months ended June 30, 2001.
23
24
PRINCIPAL USES OF CASH
o Acquisition of Loans or Investment Securities - For the three and six
months ended June 30, 2001, loan originations totaled $1.4 billion and $2.6
billion, respectively, compared with $1.2 billion and $2.2 billion for the
same respective periods in 2000. We purchased $643 million of MBS and other
investment securities during the six months ended June 30, 2001 compared
with $554 million during the same period in 2000.
o Payments of Principal and Interest on Securitization Transactions - For the
three and six months ended June 30, 2001, payments of principal and
interest to noteholders and certificateholders totaled $0.9 billion and
$1.6 billion, respectively, compared with $0.7 billion and $1.7 billion for
same respective periods in 2000. During the first quarter of the prior
year, we paid off a $500 million conduit facility secured by automobile
contracts in a private placement established in September 1999. This caused
our year-to-date payment of principal and interest to decrease in the
current year compared to the prior year.
o Dealer Participation - For the three and six months ended June 30, 2001,
participation paid by us to dealers totaled $32.5 million and $61.7
million, compared with $25.5 million and $48.4 million for the same
respective periods in 2000.
o Advances to Spread Accounts - The amounts due from trusts at June 30, 2001,
including initial advances not yet returned, was $231 million at June 30,
2001 compared with $357 million at December 31, 2000.
o Operating Our Business - For the three and six months ended June 30, 2001,
operating expenses totaled $63.0 million and $124 million, respectively,
compared to $56.2 million and $112 million for the same respective periods
in 2000.
CAPITAL REQUIREMENTS
The Bank is a federally chartered savings bank. As such, it is subject to
certain minimum capital requirements imposed by FIRREA and FDICIA. FDICIA
separates all financial institutions into one of five capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." In order to be considered
"well capitalized," an institution must have a total risk-based capital ratio of
10.0% or greater, a Tier 1 or core risk-based capital ratio of 6.0% or greater,
a leverage ratio of 5.0% or greater and not be subject to any OTS order. The
Bank currently meets all of the requirements of a "well capitalized"
institution.
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The following table summarizes the Bank's actual capital and required capital as
of June 30, 2001 and December 31, 2000:
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
JUNE 30, 2001
Actual Capital:
Amount $544,940 $544,940 $544,940 $786,653
Capital ratio 7.75% 7.75% 9.00% 13.00%
FIRREA minimum required capital:
Amount $105,494 $210,988 N/A $484,212
Capital ratio 1.50% 3.00% N/A 8.00%
Excess $439,446 $333,952 N/A $302,441
FDICIA well capitalized required capital:
Amount N/A $351,646 $363,159 $605,266
Capital ratio N/A 5.00% 6.00% 10.00%
Excess N/A $193,294 $181,781 $181,387
DECEMBER 31, 2000
Actual Capital:
Amount $533,571 $533,571 $533,571 $780,317
Capital ratio 8.03% 8.03% 8.32% 12.16%
FIRREA minimum required capital:
Amount $ 99,664 $199,327 N/A $513,242
Capital ratio 1.50% 3.00% N/A 8.00%
Excess $433,907 $334,244 N/A $267,075
FDICIA well capitalized required capital:
Amount N/A $332,212 $384,931 $641,552
Capital ratio N/A 5.00% 6.00% 10.00%
Excess N/A $201,359 $148,640 $138,765
The decline in capital ratios from December 31, 2000 to June 30, 2001 is the
result of an increase in the amount of automobile contracts held by us as we
continue to grow our automobile lending operations.
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The following table reconciles the Bank's capital in accordance with GAAP to the
Bank's tangible, core and risk-based capital:
JUNE 30, DECEMBER 31,
2001 2000
--------- -----------
(DOLLARS IN THOUSANDS)
Shareholder's equity -- GAAP basis $ 448,019 $ 462,226
Adjustments for tangible and core capital:
Unrealized losses under SFAS 115 and SFAS 133 15,286 14,816
Non-permissible activities (116) (115)
Minority interest in equity of subsidiaries 81,751 56,644
--------- ---------
Total tangible and core capital 544,940 533,571
Adjustments for risk-based capital:
Subordinated debentures (1) 165,906 166,497
General loan valuation allowance (2) 75,807 80,249
--------- ---------
Risk-based capital $ 786,653 $ 780,317
========= =========
- -------------
(1) Excludes capitalized discounts and issue costs.
(2) Limited to 1.25% of risk-weighted assets.
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FORWARD-LOOKING STATEMENTS
Included in our Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Form 10-Q are several
"forward-looking statements." Forward-looking statements are those which use
words such as "believe", "expect", "anticipate", "intend", "plan", "may",
"will", "should", "estimate", "continue", or other comparable expressions. These
words indicate future events and trends. Forward-looking statements are our
current views with respect to future events and financial performance. These
forward-looking statements are subject to many risks and uncertainties that
could cause actual results to differ significantly from historical results or
from those anticipated by us. The most significant risks and uncertainties we
face are:
o the level of chargeoffs, as an increase in the level of chargeoffs will
decrease our earnings;
o the ability to originate new automobile contracts in a sufficient amount
to reach our needs, as a decrease in the amount we originate will reduce
our earnings;
o a decrease in the difference between the average interest rate we
receive on the automobile contracts we originate and the rate of
interest we must pay to fund those automobile contracts, as a decrease
will reduce our earnings;
o the continued availability of sources of funding for our operations, as
a reduction in the availability of funding will reduce our ability to
originate automobile contracts;
o the level of notes treated as secured financings, as the level will
impact the timing of revenue recognition;
o the level of operating costs, as an increase in those costs will reduce
our net earnings;
o the effect of new laws, regulations and court decisions; and
o a change in general economic conditions.
You are cautioned not to place undue reliance on our forward-looking statements.
You should carefully review the factors referred to above and other documents we
file from time to time with the Securities and Exchange Commission, including
our quarterly reports on Form 10-Q and our annual reports on Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest rates and early prepayment of loans and MBS are the
primary market risks facing us. The Credit and Pricing Committee is responsible
for setting credit and pricing policies and for monitoring credit quality. Our
Asset/Liability Committee is responsible for the management of interest rate and
prepayment risks. Asset/liability management is the process of measuring and
controlling interest rate risk through matching the maturity and repricing
characteristics of interest earning assets with those of interest bearing
liabilities.
The Asset/Liability Committee closely monitors interest rate and prepayment
risks and recommends policies for managing such risks. The primary measurement
tool for evaluating this risk is the use of interest rate shock analysis. This
analysis simulates the effects of an instantaneous and sustained change in
interest rates (in increments of 100 basis points) on our assets and liabilities
and measures the resulting increase or decrease to our net portfolio value, also
known as NPV. NPV is the discounted value of the future cash flows (or `paths'
of cash flows in the presence of options based on volatility assumptions and an
arbitrage free Monte Carlo simulation method to achieve the current market
price) of all assets minus all liabilities whose value is effected by interest
rate changes plus the book value of non-interest rate sensitive assets minus the
book value of non-interest rate sensitive liabilities. The NPV ratio is the
ratio of the NPV to the market value of our assets as calculated above. In
general, an increase in interest rates would more adversely affect our NPV than
would a decrease in interest rates.
Another important measurement of our interest rate risk is `GAP' analysis. GAP
is defined as the difference between the amount of interest sensitive assets
that reprice versus the amount of interest sensitive liabilities that also
reprice within a defined period of time. We have more interest sensitive
liabilities rather than assets repricing in shorter term maturity buckets and
more interest sensitive assets rather than liabilities repricing in longer term
maturity buckets.
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The following table summarizes our maturity GAP position:
INTEREST RATE SENSITIVITY ANALYSIS AT JUNE 30, 2001
-----------------------------------------------------------------------------------
3 Years
Within 3 Months 1 Year to to After 5
3 Months to 1 Year 3 Years 5 Years Years Total
----------- ----------- ----------- ----------- ----------- ----------
(Dollars in thousands)
Interest earning assets:
Investment securities $ 8,440 $ 131 $ 357 $ 1,025 $ 9,953
Other investments 2,595 $ 200 2,795
Mortgage-backed securities 347,939 644,845 734,941 343,823 314,797 2,386,345
----------- ----------- ----------- ----------- ----------- ----------
Total investments 358,974 645,045 735,072 344,180 315,822 2,399,093
Consumer loans (1) 358,073 1,413,212 2,785,428 1,338,043 41,998 5,936,754
Mortgage loans:
Adjustable rate (2) 328,188 65,394 393,582
Fixed rate (2) 852 3,410 6,480 4,131 12,419 27,292
Construction loans (2) 11,689 11,689
Commercial loans (2) 82,398 558 1,781 875 1,208 86,820
----------- ----------- ----------- ----------- ----------- ----------
Total interest earning assets 1,140,174 2,127,619 3,528,761 1,687,229 371,447 8,855,230
Interest bearing liabilities:
Deposits:
Passbook accounts (3) 2,220 6,000 3,492 11,712
Demand deposit and money market
accounts (3) 123,409 191,582 381,029 696,020
Certificate accounts (4) 602,541 790,519 65,499 2,024 92 1,460,675
FHLB advances (4) 382,000 6,500 2,992 391,492
Securities sold under agreements
to repurchase (4) 157,761 157,761
Subordinated debentures (4) 40,544 148,208 188,752
Notes payable on automobile
secured financing (4) 1,644,256 1,293,602 1,773,794 486,898 5,198,550
Other borrowings (4) 5,285 5,285
----------- ----------- ----------- ----------- ----------- ----------
Total interest bearing liabilities 2,958,016 2,288,203 2,223,814 488,922 151,292 8,110,247
----------- ----------- ----------- ----------- ----------- ----------
Excess interest earning/bearing assets
(liabilities) (1,817,842) (160,584) 1,304,947 1,198,307 220,155 744,983
Effect of hedging activities (5) 2,548,500 (189,489) (1,118,048) (626,463) (614,500)
----------- ----------- ----------- ----------- ----------- ----------
Hedged excess (deficit) $ 730,658 $ (350,073) $ 186,899 $ 571,844 $ (394,345) $ 744,983
=========== =========== =========== =========== =========== ==========
Cumulative excess $ 730,658 $ 380,585 $ 567,484 $ 1,139,328 $ 744,983 $ 744,983
=========== =========== =========== =========== =========== ==========
Cumulative excess as a percentage
of total interest earning assets 8.25% 4.30% 6.41% 12.87% 8.41% 8.41%
- --------------
(1) Based on contractual maturities adjusted by our historical prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the OTS.
(4) Based on contractual maturity.
(5) Includes effect of cash flow hedges on our future deposits.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We or our subsidiaries are involved as parties to certain legal
proceedings incidental to our businesses, including consumer class
action lawsuits pertaining to our automobile finance activities. We are
vigorously defending these actions and do not believe that the outcome
of these proceedings will have a material effect upon our financial
condition, results of operations and cash flows.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 2001, we held our annual shareholders' meeting. There were
31,973,160 shares of common stock outstanding entitled to vote, and a
total of 29,611,286 (93%) were represented at the meeting in person or
by proxy. The following summarizes vote results of proposals submitted
to our shareholders:
1. Proposal to elect directors, each for a two-year term
FOR WITHHELD
---------- ---------
Robert T. Barnum 25,822,087 3,789,200
Howard C. Reese 27,585,734 2,025,553
Charles E. Scribner 27,605,263 2,006,024
2. Proposal to ratify the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending December 31, 2001
FOR AGAINST ABSTAIN
---------- ------- -------
29,604,198 5,192 1,896
3. Approval of the adoption of the Westcorp 2001 Stock Option Plan
FOR AGAINST ABSTAIN
---------- --------- -------
23,866,538 4,347,243 6,206
4. Approval of an Amendment to the Articles of Incorporation to increase
the quantity of authorized common stock from 45,000,000 shares to
65,000,000
FOR AGAINST ABSTAIN
---------- ------- -------
28,974,708 627,199 9,378
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
None
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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 13 , 2001 By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
President and Chief Operating
Officer
Date: August 13, 2001 By: /s/ LEE A. WHATCOTT
------------------------------------
Lee A. Whatcott
Executive Vice President
(Principal Financial and
Accounting Officer) and Chief
Financial Officer
32