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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM:
COMMISSION FILE NUMBER: 33-13646
WESTCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 51-0308535
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 PASTEUR ROAD
IRVINE, CALIFORNIA 92718
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 727-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock $1 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 last 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 1994:
COMMON STOCK, $1.00 PAR VALUE -- $77,535,084
The number of shares outstanding of the issuer's classes of common stock as
of March 1, 1994:
COMMON STOCK, $1.00 PAR VALUE -- 21,908,163
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1994 Annual Meeting of
Shareholders to be held May 26, 1994 are incorporated by reference into Part
III.
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PART I
ITEM 1 -- BUSINESS
GENERAL
Westcorp, a California corporation, is a financial services holding company
which operates principally through its wholly-owned subsidiary, Western
Financial Savings Bank, F.S.B. (the "Bank"). The Bank owns all of the
outstanding capital stock of Westcorp Financial Services, Inc. ("Westcorp
Financial"), Western Financial Auto Loans, Inc. ("WFAL"), Western Financial Auto
Loans 2, Inc. ("WFAL2"), Western Reconveyance Company, Inc., ("Recon"), Westplan
Insurance Agency, Inc. ("Westplan"), and Western Consumer Services, Inc.
("WCS"). Westplan owns all the outstanding stock of Westplan Investments ("WI").
WCS owns all the outstanding stock of Westhrift Life Insurance Company
("Westhrift"). Unless otherwise expressly indicated, a reference herein to
Westcorp or the Bank shall also be deemed to include a reference to their
respective subsidiaries.
Westcorp was formed in 1974 as Western Thrift Financial Corporation, the
holding company for Western Thrift & Loan Association ("Western Thrift"), a
California-licensed thrift and loan association founded in 1972. In 1977,
Western Thrift Financial Corporation acquired Amfac Thrift & Loan Association
and caused it to be merged with Western Thrift. In March 1986 Western Thrift
Financial Corporation changed its name to Westcorp. In May 1986, Westcorp
completed its first public offering of 4.5 million shares of common stock. In
April 1988, it reincorporated in Delaware as Westcorp, Inc. In September 1990,
it reincorporated in California. During 1993, Westcorp completed a common stock
offering of 4.3 million shares.
In November 1982, Westcorp acquired Evergreen Savings and Loan Association
("Evergreen"), a California-licensed savings and loan association, which became
a wholly-owned subsidiary of Westcorp. Evergreen's name was ultimately changed
to Western Financial Savings Bank. In June 1992, Western Financial Savings Bank
converted to a federal charter and added F.S.B. to its name.
Westcorp's business consists primarily of attracting deposits from the
public and using such deposits, together with borrowings and other funds, to
purchase retail installment sales contracts secured by motor vehicles primarily
from new and used car dealers and to originate and purchase loans secured by
residential real estate. Westcorp operates 26 retail banking offices, 8
automobile dealer centers, 32 consumer finance offices specializing in motor
vehicle finance and 13 mortgage banking offices located throughout California.
Westcorp also has 7 consumer finance offices located in Oregon, Nevada and
Arizona. Generally, the dealer centers and mortgage banking offices are located
in or near the Bank's branch offices.
Westcorp's lending activities are conducted primarily in the California
marketplace. As of December 31, 1993, Westcorp's loan portfolio totalled
approximately $1.6 billion of which approximately 14.8% consisted of outstanding
retail installment sales contracts secured by motor vehicles and other consumer
loans, and approximately 85.2% consisted of loans secured by real property used
primarily for residential purposes. At December 31, 1993, Westcorp also serviced
for the benefit of others $1.0 billion of consumer loans and $1.2 billion of
real estate loans. Westcorp's revenues are derived principally from interest
charged on its loan portfolio, servicing income, and, to a lesser extent, loan
fees, insurance revenues and income on other investments. Interest on deposits
and borrowings and general and administrative costs are Westcorp's major expense
items.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). It is also a member of the Federal Home Loan Bank of San
Francisco ("FHLB"), which is currently one of twelve regional banks for
federally insured savings and loan associations and savings banks comprising the
Federal Home Loan Bank System ("FHLB System"). The FHLB System is under the
supervision of the Federal Housing Finance Board which was created by the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA").
The Bank is further subject to certain regulations of the Board of Governors of
the Federal Reserve System ("FRB") governing reserves required to be maintained
against deposits and other matters. Westcorp Financial is further regulated by
the California Department of Corporations, the Oregon Department of Insurance
and Finance and the Arizona Corporation Commission.
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LENDING ACTIVITIES
General
Westcorp's loan portfolio (including loans classified as available for
sale) totalled $1.6 billion at December 31, 1993, representing 72% of Westcorp's
assets at that date. The loan portfolio consists principally of loans secured by
motor vehicles, loans secured by single family or multifamily dwellings
("residential loans") and residential construction loans. Westcorp's strategy is
to focus on and expand its well-defined niches in the motor vehicle finance and
single family residential real estate lending markets, the two main lines of
business that Westcorp has successfully developed in the financial services
industry.
Westcorp has adopted various measures to protect its loan portfolio from
interest rate fluctuations. Such measures include (i) emphasizing short term
consumer loans, (ii) originating adjustable-rate mortgages ("ARMs") for
residential properties, (iii) originating fixed rate and ARMS residential loans
documented for sale in the secondary mortgage market, (iv) funding loans with
advances of like maturities from the FHLB, and (v) pooling and selling motor
vehicle loans through securitized public offerings.
The types of loans which Westcorp may originate are limited by federal
statutes and regulations promulgated by the OTS. Westcorp may originate or
purchase whole loans or loan participations secured by real estate located
throughout the United States. Notwithstanding this nationwide lending authority,
over 99% of Westcorp's real estate loan portfolio is secured by real estate
located in California. As a federally chartered savings institution, the Bank
has authority to make various kinds of secured and unsecured consumer and
commercial loans. It has not, however, expanded its lending activities to
include credit card accounts or significant amounts of commercial loans and has
no plans to do so in the foreseeable future.
The following table sets forth selected data relating to the composition of
Westcorp's loan portfolio by type of loan, including loans classified as
available for sale, as of the dates indicated.
DECEMBER 31,
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1993 1992 1991 1990 1989
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AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
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Consumer loans:
Motor vehicle
loans...... $ 251,751 16.2% $ 404,381 21.0% $ 387,667 18.4% $ 944,515 38.3% $1,111,105 48.0%
Deposit
account
loans...... 2,787 0.2 5,302 0.3 5,927 0.3 7,351 0.3 5,899 0.2
Other........ 3,785 0.2 5,313 0.3 23,216 1.1 20,805 0.8 40,515 1.8
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
258,323 16.6 414,996 21.6 416,810 19.8 972,671 39.4 1,157,519 50.0
Less unearned
discounts... 27,972 1.8 60,795 3.2 38,670 1.8 154,026 6.2 201,348 8.7
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
consumer
loans.... 230,351 14.8 354,201 18.4 378,140 18.0 818,645 33.2 956,171 41.3
Real estate
loans:
Loans on
existing
property... 1,260,670 81.0 1,466,319 76.2 1,592,843 75.7 1,518,626 61.6 1,248,691 53.9
Home
improvement
loans...... 49,333 3.2 66,356 3.4 88,961 4.2 83,866 3.4 87,297 3.8
Construction
loans...... 31,684 2.0 54,648 2.8 76,793 3.6 75,830 3.1 60,724 2.6
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1,341,687 86.2 1,587,323 82.4 1,758,597 83.5 1,678,322 68.1 1,396,712 60.3
Less
undisbursed
loan
proceeds..... 14,890 1.0 15,695 0.8 31,357 1.5 33,025 1.3 37,623 1.6
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Total real
estate
loans.... 1,326,797 85.2 1,571,628 81.6 1,727,240 82.0 1,645,297 66.8 1,359,089 58.7
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Total
loans... $1,557,148 100.0% $1,925,829 100.0% $2,105,380 100.0% $2,463,942 100.0% $2,315,260 100.0%
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Motor Vehicle Loans
The Bank and its predecessors and affiliates have underwritten and
purchased motor vehicle loans from dealers and made direct motor vehicle loans
(i.e., loans on applications submitted by consumers directly to offices of the
Bank or Westcorp Financial) since 1973. Motor vehicle loans are currently
underwritten through
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the Bank's motor vehicle dealer centers ("Dealer Centers") or through a Westcorp
Financial branch office. Neither the Bank nor Westcorp Financial has minimum or
maximum maturity requirements; however, motor vehicle loans of less than three
years' maturity or more than six years are seldom purchased due to low customer
demand. Each motor vehicle loan is fully amortizing and provides for level
payments over the term of the loan with the portion of principal and interest of
each level payment determined on the basis of the sum of the digits (also known
as the Rule of 78s) or on the simple interest method.
At December 31, 1993, approximately 39% of the aggregate outstanding
principal amount of motor vehicle loans were advanced by the Bank to finance
purchases of new vehicles and approximately 61% were advanced to finance
purchases of used vehicles. At December 31, 1992, approximately 43% of the
aggregate outstanding principal amount of motor vehicle loans were advanced to
finance purchases of new vehicles and approximately 57%, were advanced to
finance purchases of used vehicles.
Loans originated by Westcorp Financial on average have a higher interest
rate than those originated by the Bank since Westcorp Financial's underwriting
criteria are not as strict as the Bank's. Therefore, Westcorp Financial's loans
generally have a higher percentage of delinquencies. Accordingly, the Bank and
Westcorp Financial generally service a different customer base.
The Credit Officers at the Dealer Centers purchase motor vehicle loans
through franchised new car dealers and selected used car dealers. The Westcorp
Financial Branch Manager is responsible for purchasing motor vehicle loans
through franchised new car dealers and from used car dealers. The marketing is
accomplished by sales managers through personal calls to auto dealerships as
well as referrals.
Substantially all loans purchased by the Bank are reviewed by Bank
employees to insure proper documentation and adherence to underwriting
guidelines, and all loans purchased by Westcorp Financial are similarly reviewed
by Westcorp Financial employees. Substantially all motor vehicle loans are
nonrecourse to the originating dealer. In the case of new car loans, the Bank
generally lends to the applicant an amount not to exceed the sum of the dealer's
cost, taxes, license fees, service warranty cost and, if applicable, premium for
credit life or credit disability insurance, and in some cases, miscellaneous
costs. Additional advances over the sum of such costs may be made under certain
circumstances based on the creditworthiness of the applicant. For used cars, the
amount loaned does not exceed the wholesale "blue book" value for the car plus
related expenses and any additional approved advances. For loans made or
purchased by Westcorp Financial, dealers are offered a flexible program as to
the amount of additional advances on both new and used vehicles, based on the
creditworthiness of the applicant, at a higher rate of interest.
The Bank regularly sells the motor vehicle loans originated by it and
Westcorp Financial in the secondary market and retains the servicing thereon. At
December 31, 1993 and 1992, $102 million and $180 million respectively of motor
vehicle loans were classified as held for sale. See "Loan Sales and
Securitizations".
Real Estate Loans
GENERAL
Westcorp offers three categories of real estate loans on existing improved
properties: fixed rate mortgage loans, ARMs with potential negative amortization
and ARMs with no negative amortization. Westcorp currently offers fixed rate
mortgage loans and ARMs on single family residential properties secured by a
first lien with maturities of up to 30 years. Interest rates are adjusted
monthly, quarterly, semiannually or annually, at a rate typically equal to 2.25
to 3.0 percentage points above the Cost of Funds Index ("COFI") published by the
FHLB, Treasury, the Federal Cost of Funds Index, LIBOR or other generally
recognized cost of funds indices, with certain rate caps designed to stimulate
greater customer acceptance while maintaining the desired interest rate
flexibility. Interest rates and loan fees are determined primarily by
competitive conditions and profitability requirements. In 1993, Westcorp
generally did not offer ARMs with initial rates below those which would prevail
under the foregoing general terms to remain competitive with other lenders in
its market area.
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The interest rates on ARMs may increase or decrease no more than 3.0% to
6.0% over the life of the loans. All ARMs are assumable by qualified buyers at
the interest rate then in effect on the loan, but the maximum upward or downward
interest rate adjustment over the life of the assumed loan may be changed from
3.0% to 6.0% greater or less than the interest rate at the time of assumption.
On ARMs with no negative amortization, the maximum change in interest rate per
period may be limited to 2 percentage points or less per annum on some loan
programs. On ARMs with negative amortization, the amount of any interest due in
excess of the monthly payment is capitalized by adding it to the principal
balance of the loan, to be repaid through future monthly payments, resulting in
negative amortization of principal. So that the loan amortizes fully over the
remaining term to maturity, payments may be adjusted by more than 7.5% at the
end of each five-year interval throughout the life of the loan or sooner, if the
outstanding loan amount reaches a dollar figure specified in the contract
(generally no greater than 125% of the original loan amount). As of December 31,
1993 and 1992, the total amount of negative amortization capitalized to
principal totalled $0.2 million and $1.8 million, respectively, which represents
less than 1% of the total real estate loan portfolio.
At December 31, 1993, Westcorp's real estate loan portfolio, based on
dollar value, consisted of 14.1% fixed rate loans, 30.8% ARMs with no negative
amortization and 55.1% of ARMs with negative amortization. The total of all
fixed rate loans and ARMs having a contractual maturity after 1994 is $152
million and $1.0 billion, respectively. Westcorp believes that its lending
strategy of diversification in its loan portfolio among its three types of loans
reduces the overall risk exposure to the institution. The following table sets
forth information on the amount of fixed rate mortgage loans and ARMs, net of
undisbursed loan proceeds, in Westcorp's portfolio at the dates indicated:
DECEMBER 31,
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1993 1992
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AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Single family loans.......................... $ 184,075 13.9% $ 205,416 13.1%
Multifamily loans............................ 2,181 0.2 2,411 0.2
Adjustable rate loans:
Negative amortizing loans.................... 730,840 55.1 884,454 56.2
No negative amortizing loans................. 409,701 30.8 479,347 30.5
---------- ----- ---------- -----
$1,326,797 100.0% $1,571,628 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
COMPOSITION OF REAL ESTATE PORTFOLIO
Westcorp's primary real estate lending activity is the origination of
mortgage loans to enable borrowers to purchase, refinance or improve residential
property. Increasingly, loans originated are in turn sold to others through
secondary market activities. Westcorp's total real estate loan portfolio
(including those classified as held for sale) consisted of the following:
DECEMBER 31,
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1993 1992
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AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds............................ $ 673,322 50.7% $ 783,215 49.8%
Second trust deeds........................... 152,160 11.5 242,731 15.5
---------- ----- ---------- -----
825,482 62.2 1,025,946 65.3
Multifamily residential loans.................. 480,692 36.2 502,091 31.9
Construction loans............................. 31,684 2.4 54,648 3.5
Commercial loans............................... 3,828 0.3 4,638 0.3
---------- ----- ---------- -----
1,341,686 1,587,323
Less undisbursed loan proceeds................. 14,889 1.1 15,695 1.0
---------- ----- ---------- -----
$1,326,797 100.0% $1,571,628 100.0%
---------- ----- ---------- -----
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Westcorp's portfolio of real estate loans classified as available for sale
consists primarily of single family loans totalling $199 million at December 31,
1993 and $62.4 million at December 31, 1992.
Single Family Residential Loans. Single family residential loans made by
Westcorp are generally under $400,000 in original principal amount but Westcorp
may consider making single family residential loans up to $650,000 in original
principal amount. Westcorp's single family residential loans consist of 77.7%
ARMs and 22.3% fixed rate loans at December 31, 1993. At December 31, 1993, of
the total $825 million single family residential loan portfolio, $184 million
were fixed rate loans with a weighted average interest rate of 7.8%. Westcorp
sells most of the loans originated by it in the secondary market as whole loan
transactions through FNMA, FHLMC and other private institutional purchasers, and
generally retains the servicing thereon.
Westcorp also offers 15 year and 30 year fixed rate conventional loans and
loans insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Veterans Administration ("VA"), secured by first liens on
single family residences. The general terms of these loans conform to the
guidelines established by purchasers of loans in the secondary market.
Generally, Westcorp will not advance more than 80.0% of the property's
value unless the borrower has private mortgage insurance. On loans for the
purchase of owner occupied single family residences, Westcorp may finance up to
95.0% of the market value based on the lesser of the purchase price or appraised
value of the property with mandatory private mortgage insurance on loans with
loan-to-value ratios that exceed 80.0% at origination insuring the unpaid
balance that exceeds 75.0% of the property's value. The cost of this insurance
is paid by the borrower during the term of the loan. Residential loans have
typically been made for terms of up to 30 years and are amortized on a monthly
basis with level payment of principal and interest due each month, subject to
periodic adjustment in the case of ARMs. Westcorp regularly reviews its loan
policy in light of market conditions and may change its policy in the future.
As part of Westcorp's single family residential lending strategy, Westcorp
originates both fixed and adjustable rate residential loans secured by second
trust deeds. Westcorp offers a second trust deed loan of up to $300,000 with a
term from 5 to 15 years at both fixed and adjustable interest rates. These loans
amortize on a 15 or 30 year basis and, depending upon the repayment option
selected by the borrower, may involve a "balloon" payment at the end of the
term. When making such loans, Westcorp requires that it be given notice in the
event of a default under the first trust deed to enable it to take appropriate
steps to protect its interest.
Westcorp offers a loan referred to as the "Western Revolver," which is a
secured line of credit typically collateralized by a second trust deed on a
single family residence and bearing an adjustable rate of interest based on a
market index. At December 31, 1993 the Bank had committed to lend approximately
$111 million of such loans, of which $70 million was outstanding.
Multifamily Residential Loans. Westcorp is not currently making new
multifamily residential loans with the exception of loans to refinance or
restructure loans currently in the portfolio or loans to facilitate the
disposition of real estate owned. Westcorp may become a more active multifamily
lender if and when economic conditions warrant such increased activity.
Multifamily lending in the past has consisted of permanent loans secured by
multifamily residential properties (generally apartment houses) and were
originated by Westcorp both for its own portfolio and for sale to others.
Multifamily residential loans made by Westcorp were generally adjustable rate
loans under $5.0 million in original principal amount. Westcorp generally has
not extended credit above 80.0% of the appraised value of multifamily
residences. At December 31, 1993, no multifamily loan exceeded $10 million or
.8% of the total real estate loan portfolio.
Construction Loans. In the past, Westcorp provided construction loans
primarily for multifamily and single family owner occupied residences but
currently provides such loans only on single family owner occupied residences.
These included (or include with respect to such single family residences) loans
for the acquisition and development of unimproved property to be used for
residential purposes. At December 31, 1993, Westcorp's construction loans
totaled $31.7 million (of which $14.9 million had not been disbursed as of
December 31, 1993) or 1.5% of assets.
Construction loans generally have adjustable interest rates equal to 2.0 to
3.5 percentage points above a market index, currently the average prime rate of
three major banks. Construction loans generally have terms
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ranging from 12 to 18 months and advances are generally made to cover actual
construction costs and include a reserve for paying the stated interest due on
the loan.
Construction financing is generally considered to involve a higher degree
of risk than long term financing secured by improved owner occupied real estate.
Accordingly, these loans generally have fees and rates substantially higher than
the fees and rates charged for other types of secured real estate loans made by
Westcorp. Westcorp's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction or development, the estimated construction costs (including
interest during construction) and the ability of the borrower to manage the
project.
At December 31, 1993, Westcorp had no acquisition, development or
construction loans on its books.
LOAN ORIGINATIONS, SALES AND SECURITIZATIONS
Westcorp's origination activity has continued to increase even as
on-balance sheet loans have decreased as a result of greater emphasis on loan
sales in the secondary market.
The following table sets forth the loan origination, purchase and sale
activity of Westcorp for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loans originated:
Consumer loans(1).................. $ 829,181 $ 673,473 $ 604,069 $ 544,975 $ 546,644
Real estate loans:
Existing property............... 879,592 570,796 492,341 495,562 525,211
Construction loans.............. 33,511 27,013 27,965 49,286 88,769
---------- ---------- ---------- ---------- ----------
Total loans originated..... $1,742,284 $1,271,282 $1,124,375 $1,089,823 $1,160,624
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Loans purchased:
Real estate loans:
Existing property............... $ 210 $ 2,441
---------- ----------
Total loans purchased...... $ 210 $ 2,441
---------- ----------
---------- ----------
Loans sold or securitized:
Consumer loans(2).................. $ 777,500 $ 450,000 $ 725,000 $ 313,492 $ 196,554
Real estate loans.................. 803,992 386,257 166,898 76,710 317,179
---------- ---------- ---------- ---------- ----------
Total loans sold or
securitized.............. 1,581,492 836,257 891,898 390,202 513,733
Principal reductions(3).............. 529,683 617,017 591,039 550,939 451,454
---------- ---------- ---------- ---------- ----------
Increase (decrease) in total loans... $ (368,681) $ (179,551) $ (358,562) $ 148,682 $ 195,437
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
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(1) Includes motor vehicle loans purchased from motor vehicle dealers.
(2) Motor vehicle loans sold to WFAL2 or a grantor trust.
(3) Includes scheduled payments, prepayments and charge-offs.
Loan originations come from a number of sources, which include the Bank and
Westcorp Financial's network of offices. This network consists of the Dealer
Centers, the Westcorp Financial Branch offices, the mortgage banking offices,
and a network of automobile dealers and mortgage brokers. The Bank regards all
of its branches as loan solicitation facilities as well as sources of deposits.
Motor vehicle loans held by the Bank and Westcorp Financial have been
purchased from approved motor vehicle dealers on a nonrecourse basis or have
been originated directly by the Bank and Westcorp Financial. The Bank and
Westcorp Financial believe that the creation and maintenance of close personal
relationships at the Dealer Center and motor vehicle dealer-branch office level
are major factors in promoting the growth and sustaining the quality of its
motor vehicle loan portfolio.
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Most real estate loans are referred from real estate brokers and mortgage
brokers. Westcorp hires commissioned loan agents at its mortgage banking offices
to originate single family residential loans. The loan agents, whose commissions
are based on closed loans, assist walk-in customers as well as serving real
estate brokers in the area of each respective branch office. Westcorp is
represented in its wholesale real estate lending by salaried employees located
at its mortgage banking offices. These employees receive commissions based on
the total volume of loans acquired through mortgage brokers. Westcorp has
established criteria for the brokers (from whom it will accept loan referrals),
and the loan agents endeavor to increase the number of brokers approved by
Westcorp for this purpose.
Westcorp periodically audits its motor vehicle loans and real estate loans
to ensure compliance with its underwriting guidelines. In addition, branch
manager bonuses are calculated by a formula of production and branch
profitability which takes into consideration delinquencies and loan losses.
Bonuses are therefore not only determined by the amount of loans but also by
their quality.
Between January 1, 1986 and December 31, 1993, Westcorp securitized or
sold, in 22 transactions, approximately $3.3 billion of its motor vehicle loans
in publicly underwritten securitization transactions in which Westcorp continues
to service such loans. All 22 issues were rated "AAA" by S&P and "Aaa" by
Moody's, their highest rating categories, as a result of a third party credit
enhancement provided by Financial Security Assurance, Inc. ("FSA") or due to the
structure of the transaction. On March 11, 1994, Westcorp sold an additional
$200 million through a similar transaction.
Beginning in 1990, Westcorp began to securitize its motor vehicle loans
using an off-balance sheet structure which utilizes a separate grantor trust for
each transaction. These securitizations are structured to be treated as sales
without recourse, thereby removing the motor vehicle loans sold from Westcorp's
balance sheet. Westcorp retains a residual interest in the excess interest
(which is recorded as servicing fee income) which represents the excess of the
underlying interest rate on the pool of motor vehicle loans sold over the sum of
the pass-through rate on the grantor trust securities, credit losses,
administrative expenses and contractual servicing fees. Westcorp securitized
$777.5 million and $450.0 million of motor vehicle loans using this structure
during 1993 and 1992, respectively.
Westcorp derives multiple benefits from the grantor trust form of motor
vehicle loan securitization, including a stable source of low cost funding,
elimination of interest rate risk, enhanced return on assets and improved
capital position.
In the past, most of the real estate loans originated or purchased by
Westcorp have been maintained in its portfolio except for fixed rate
conventional, FHA and VA loans, which have historically been originated for sale
in the secondary market. In 1993, Westcorp increasingly sold fixed rate loans in
the secondary market. In years prior to 1992, Westcorp's real estate loan sales
activities were part of its general real estate loan investment strategy. During
1992, these sales activities were segregated into a separate portfolio of real
estate loans held for sale and accounted for as a discrete operating activity in
accordance with GAAP. Westcorp sold $596.9 million of whole fixed rate
conventional loans and $14.4 million of whole FHA and VA fixed rate loans in
1993 compared to $340.8 million and $6.8 million in 1992. Westcorp also sold
$192.8 million of ARMs in 1993 compared to $37.2 million in 1992.
Prior to 1989, Westcorp purchased ARMs and construction loans in the
secondary market. Westcorp anticipates that future growth of its real estate
loan portfolio will be accomplished primarily by its origination activities
rather than by purchases in the secondary market.
INTEREST RATES AND LOAN FEES
Interest rates charged on motor vehicle and real estate loans are primarily
determined by competitive loan rates offered in the lending area. These rates
reflect prevailing levels of interest rates, the availability of lendable funds
and the demand for loans.
In addition to interest earned on motor vehicle and real estate loans,
Westcorp receives loan origination fees for originating real estate loans. Loan
origination fees in an amount equal to a percentage of the principal amount of
the loans are charged to the borrower for the origination of the loan.
Currently, Westcorp receives
7
9
fees of up to 3.63% on its loans. Westcorp generally does not charge a loan fee
for the origination or purchase of motor vehicle loans. Loan origination fees
are a volatile source of income varying with the volume and type of loans made
and with competitive conditions in the mortgage markets. Loan demand and
availability of credit affect these market conditions.
SERVICING OF LOANS
Additional fees and charges which relate to the servicing of existing motor
vehicle and real estate loans include prepayment fees, late charges and fees
collected in connection with an assumption of the loan by a different borrower
or other loan modifications. As a result of substantial loan sales during the
last three years, loan servicing fee income, which included contractual
servicing fees and Westcorp's retained residual interest, substantially
increased. This increase in servicing fee income represents a partial offset to
the decrease in net interest income. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Comparison of Results of
Operations -- Net Interest Income."
LOAN INSURANCE
Each borrower obtaining a motor vehicle loan from the Bank or Westcorp
Financial is required to maintain insurance covering physical damage to the
financed vehicle. The insurance policy must name the Bank or Westcorp Financial,
as applicable, as a loss payee under the policy, and must cover loss and damage
due to collision and other risks included in comprehensive coverage. Since
borrowers may choose their own insurers to provide the required coverage, the
specific terms and conditions of their policies vary within limits prescribed
under applicable insurance law and regulations. If a borrower fails to obtain or
maintain the required insurance, the Bank or Westcorp Financial, as applicable
has the right to obtain such insurance and add the premium for such insurance to
the balance due on the loan. A subsidiary of the Bank, Westplan, acts as an
independent agent for unaffiliated insurers in providing material damage
insurance coverage on motor vehicles securing loans owned by either the Bank or
Westcorp Financial.
Westcorp requires title insurance, or in some instances lot book insurance,
insuring the priority of its liens on loans secured by real property, and may
require additional title endorsements to standard policies as necessary to
protect its security in the property encumbered. Westcorp requires that fire and
extended coverage be maintained in amounts at least equal to the replacement
costs of structures and improvements on all properties serving as security for
its loans. If the borrower fails to obtain or maintain the required insurance,
Westcorp has the right to obtain such insurance and add the premium for such
insurance to the balance due on the loan. Westcorp also requires flood insurance
on properties that are within areas defined as having a special flood hazard.
Private mortgage insurance may be required by regulation, secondary mortgage
market saleability or increased risk exposure. In addition, Westcorp offers
credit life and credit disability and mortgage life and disability insurance to
its loan customers through an independent insurer.
Westhrift, an indirect subsidiary of the Bank, is engaged in the business
of reinsuring policies for credit life and credit disability coverage
underwritten by an independent insurer. As of December 31, 1993 the credit life
insurance in force was $47.8 million.
ASSET QUALITY
Westcorp has established procedures to assist in the effective
identification, measurement and rehabilitation of delinquent and other problem
loans. An integral part of this process is the Internal Asset Review Department
("IAR"). The IAR is an independent review function established to measure risk
within Westcorp's asset portfolio. The IAR reviews and classifies assets as
Pass, Special Mention, Substandard, Doubtful or Loss. Substandard assets have
one or more defined weaknesses and are characterized by the distinct possibility
that Westcorp may sustain some loss unless the deficiencies are corrected.
Doubtful assets have a higher possibility of loss than substandard assets.
Special mention assets are assets not falling in the foregoing categories, but
which have weaknesses or potential weaknesses deserving management's close
attention.
8
10
Consumer Loan Quality
Westcorp's consumer loan servicing activities are conducted through the
Bank and Westcorp Financial. The Bank's consumer loan servicing activities are
conducted through its Dealer Centers. Westcorp Financial's servicing activities
are conducted by the Westcorp Financial branch that generated the loan.
In most cases, delinquencies are cured promptly, but if not, Westcorp
reposses and sells the vehicle collateralizing the loan in accordance with the
terms of the loan and statutory guidelines. Deficiency balances are charged off
against the allowance for loan losses. After charge off, Westcorp pursues
collection of deficiency balances subject to applicable law.
Total delinquencies and losses increased from 1989 to 1991, which trend was
attributable to several factors. The first factor relates to Westcorp's move to
new headquarters which was completed in 1990. This resulted in a large turnover
in collection personnel in anticipation of the move and the relocation of
Westcorp's Southern California servicing activities to Irvine. As a result,
prompt follow ups on delinquent loans by personnel were temporarily interrupted.
This was followed by conversion onto a new computer system that occurred in the
latter part of 1990, creating a need for training on the new system. Total
delinquencies and losses decreased during 1993 and 1992 as compared to 1991.
Total delinquencies and losses compared to the total amounts of motor vehicle
loans outstanding were .90% and 1.79%, 1.12% and 2.05%, and 2.24% and 1.89%, in
1993, 1992 and 1991, respectively.
Management attributes such improvement to the completion of its relocation,
the substantial conversion to the new computer system (which has resulted in
increased employee attention and follow-up on delinquencies) and a change in the
charge-off policy requiring the charge-off of loans delinquent 120 days or more
rather than 150 days or more. This change may have resulted in slightly lower
delinquency figures in 1993 and 1992, in that certain loans not in the process
of collection that were delinquent 120 days or more were charged off as compared
to prior periods where loans were allowed to go 150 days or more past due prior
to charge off. These charged off loans were therefore being carried on the books
of Westcorp as delinquent loans for periods of 30 and sometimes 60 days less
than in prior reporting periods. This policy was implemented in response to
regulatory requirements and was not instituted for the purpose of reducing
delinquency.
9
11
Loss experience was higher in the initial months after the change of policy
but there has not been a significant overall change in loss experience over the
most recent reporting period as a result of the change.
The following tables set forth the delinquency and loss experience of
Westcorp related to motor vehicle loans, at the dates indicated.
DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990 1989
-------------------- -------------------- -------------------- -------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
MOTOR MOTOR MOTOR MOTOR MOTOR
VEHICLE VEHICLE VEHICLE AMOUNT VEHICLE AMOUNT VEHICLE AMOUNT
LOANS AMOUNT LOANS AMOUNT LOANS (2) LOANS (2) LOANS (2)
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
Motor vehicle
loans
owned...... 40,042 $223,792 51,797 $343,602 43,770 $374,607 104,772 $886,139 112,640 $1,076,622
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----------
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----------
Period of
delinquency
for motor
vehicle
loans
owned(1):
31-59
days..... 490 $ 1,259 653 $ 2,218 815 $ 3,161 1,456 $ 11,452 1,055 $ 8,961
60-89
days..... 138 457 276 879 281 1,706 298 2,428 283 2,683
90 days or
more..... 83 303 191 747 588 3,531 358 2,613 867 5,784
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----------
Total motor
vehicle
loans
delinquent... 711 $ 2,019 1,120 $ 3,844 1,684 $ 8,398 2,112 $ 16,493 2,205 $ 17,428
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----------
--------- -------- --------- -------- --------- -------- --------- -------- --------- ----------
Delinquencies
for motor
vehicle loans
as a
percentage of
number and
amount of
motor vehicle
loans
owned........ 1.78% 0.90% 2.16% 1.12% 3.85% 2.24% 2.02% 1.86% 1.96% 1.62%
--- --- --- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- --- --- ---
Delinquencies
as a
percentage of
number and
amount of
motor vehicle
loans
serviced(3)... 0.74% 0.65% 1.28% 1.19% 1.95% 1.42% 1.81% 1.66%
--- --- --- --- --- --- --- ---
--- --- --- --- --- --- --- ---
- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) This amount includes unearned add-on interest.
(3) Includes delinquency information for loans sold to grantor trusts but which
were originated and are still serviced by Westcorp.
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Portfolio
At end of period (net of unearned add-on interest)....... $223,792 $343,602 $336,358 $744,125 $875,662
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Average during period (net of unearned add-on
interest)............................................. $296,528 $346,448 $591,185 $885,620 $822,595
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Gross charge-offs of motor vehicle loans during period... $ 10,529 $ 9,614 $ 12,586 $ 11,856 $ 7,555
Recoveries of motor vehicle loans charged-off in prior
periods............................................... 5,223 2,503 1,400 850 335
-------- -------- -------- -------- --------
Net charge-offs.......................................... $ 5,306 $ 7,111 $ 11,186 $ 11,006 $ 7,220
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net charge-offs as a percent of average motor vehicle
loans owned during period............................. 1.79% 2.05% 1.89% 1.24% 0.88%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net charge-offs as a percent of average motor vehicle
loans serviced during period(1)....................... 1.53% 1.73% 1.40% 1.20%
-------- -------- -------- --------
-------- -------- -------- --------
- ---------------
(1) Includes loan loss information for loans sold to grantor trusts that were
originated and are still serviced by Westcorp.
10
12
Motor vehicle loans are not placed in nonaccrual status since it is
Westcorp's policy to charge-off these loans after 120 days past due unless
Westcorp can demonstrate that repayment would occur regardless of delinquency
status, (i.e., the loan is well secured by collateral and is in the process of
collection). Interest continues to accrue on motor vehicle loans until the loan
is charged off. At the time a motor vehicle loan is charged off, all accrued but
unpaid interest is reversed.
Real Estate Loan Quality
Real estate loan borrowers are provided a 10 to 15 day period after the
date payment is due before a late charge is assessed. Customers receive computer
generated notices of delinquencies on the fifteenth and thirtieth day of
delinquency as well as telephone calls from employees of Westcorp. If
delinquencies on real estate loans are not cured promptly, Westcorp normally
records a notice of default in the appropriate county recorder's office. If the
default is not cured within three months after a notice of default has been
recorded, Westcorp proceeds to sell the property at a trustee's sale after
appropriate publication. California law does not generally permit a deficiency
judgment against the borrower following a trustee's sale. California law does
permit a deficiency judgment in some instances following a judicial foreclosure.
Due to the time and expense required for a judicial foreclosure, however, such
actions are rarely initiated by lenders in California. If Westcorp acquires
title to a security property at a trustee's sale, the property so acquired is
thereafter sold and, if deemed necessary, may be financed by a loan on terms
more favorable to the borrower than normally offered by Westcorp. At December
31, 1993, Westcorp had $19.2 million of these financing arrangements outstanding
compared to $8.3 million at December 31, 1992.
The following table sets forth the percentages of the dollar amounts of
Westcorp's total real estate portfolio, including loans available for sale,
represented by delinquent real estate loans for the past five years.
DECEMBER 31,
----------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Period of delinquency:
Two payments (31-59 days)............... 0.40% 0.72% 0.93% 0.13% 0.10%
Three payments (60-89 days)............. 0.42 1.18 0.23 0.12 0.01
Four or more payments (90 days or
more)................................. 1.31 1.94 1.31 1.03 0.23
The decrease in real estate delinquencies over 60 days is shown by loan
type in the table below:
DECEMBER 31,
-------------------------------------------------
1993 1992
---------------------- ----------------------
AMOUNT AMOUNT
PAST PAST
DUE OVER DUE OVER
60 DAYS 60 DAYS
(DOLLARS IN % OF (DOLLARS IN % OF
THOUSANDS) CATEGORY THOUSANDS) CATEGORY
----------- -------- ----------- --------
Single family......................... $19,646 2.39% $25,724 2.49%
Multifamily........................... 3,384 0.70 11,429 2.28
Construction.......................... 11,884 25.47
Other................................. 398 8.58
----------- -----------
Total delinquent loans...... $23,030 1.73% $49,435 3.12%
----------- -----------
----------- -----------
Total real estate delinquencies over 60 days at December 31, 1993 were
$23.0 million compared to $49.4 million at December 31, 1992 after increases in
each year from 1989 to 1992. California, where substantially all of the
collateral for Westcorp's real estate loans is located, has experienced
significant downturns in the market values of real estate. Although the region
is continuing to experience high levels of unemployment and a continued slump in
residential construction and new home sales, Westcorp was able to reduce
delinquencies during 1993. Westcorp does not believe that its real estate
portfolio was adversely affected by the January 17, 1994 Northridge earthquake
in any material respects.
11
13
The Special Asset Department ("SAD")is responsible for the management,
collection and disposition of all loans, including delinquent or nonperforming
loans, which have certain characteristics that indicate current or potential
credit weaknesses. SAD has prepared action plans with respect to each of these
loans. Action plans vary from recommendations to monitor and review for
performing loans that are classified only by virtue of delinquent taxes or
inadequate debt service ratios to recommendations to foreclose on loans with
chronic or acute problems with no other apparent remedy.
Westcorp services a pool of multifamily residential loans previously sold
by it with an original principal balance of $159.6 million and a current balance
at December 31, 1993 of $100.6 million in which the purchaser has recourse
against Westcorp up to an amount equal to 20.0% of the total original pool
amount. Management has provided an allowance for loan losses which it believes
is sufficient to absorb any losses under the recourse provision of this pool.
Nonperforming Assets
Nonperforming assets (NPA) include (i) loans in Westcorp's portfolio that
are contractually past due 90 days or more or performing nonaccrual loans with
identified credit deficiencies ("nonperforming loans"), (ii) insubstance
foreclosures, (iii) real estate acquired through foreclosure, and (iv) real
estate acquired for investment or development that would otherwise be considered
insubstance foreclosure. Collectively, nonperforming assets of $75.0 million
represented 3.5% of total assets at December 31, 1993 compared to $102.5 million
and 4.1%, respectively, at December 31, 1992. Westcorp's nonperforming assets at
December 31, 1993 consisted primarily of multifamily and construction loans.
In general, the accrual of interest on real estate loans is discontinued
when in management's judgment the interest will not be collectible in the normal
course of business or when the loan is 90 days or more past due. When a loan is
placed on nonaccrual status, interest accrued to date but not collected is
reversed. Accordingly, Westcorp does not accrue or recognize interest income on
nonperforming loans.
Nonperforming loans consisted of the following as of December 31:
1993 1992
----------- -----------
Loans 90 days or more past due...................... $17,651,418 $33,842,738
Performing, nonaccrual loans........................ 14,314,820 23,976,390
----------- -----------
Total nonaccrual loans.................... $31,966,238 $57,819,128
----------- -----------
----------- -----------
Nonperforming assets decreased during 1993 to $75.0 million compared to
$102.5 at December 31, 1992. At December 31, 1993, NPA included $32.0 million of
nonaccrual loans, $20.8 million of insubstance foreclosures, $17.4 million of
real estate acquired through foreclosure, and $4.8 million of nonperforming real
estate held for development. Assets secured by single family 1-4 unit residences
accounted for 37.3% of the total NPA portfolio. The decrease in total NPA is a
result of dispositions without corresponding new additions to the NPA portfolio.
12
14
The migration of nonperforming loans, insubstance foreclosures ("ISF") and
real estate owned is shown below.
SINGLE MULTI-
FAMILY MULTIFAMILY FAMILY
TOTAL 1-4 UNITS 5-36 UNITS 37+ UNITS CONSTRUCTION
------------ ------------ ------------ ------------ ------------
Nonperforming Loans
Balance December 31,
1992..................... $ 57,819,128 $ 20,299,765 $ 5,672,687 $ 20,401,716 $ 11,444,960
New nonperforming
loans................. 69,090,231 35,981,786 14,587,543 9,734,791 8,786,111
REO/ISF.................. (75,657,187) (25,343,330) (14,748,115) (19,397,027) (16,168,715)
Cures and payoffs........ (15,095,632) (11,396,786) (2,346,448) (604,957) (747,441)
Chargeoffs............... (4,190,302) (3,819,623) (180,561) (190,118)
------------ ------------ ------------ ------------ ------------
Balance December 31,
1993.................. $ 31,966,238 $ 15,721,812 $ 2,985,106 $ 10,134,523 $ 3,124,797
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Insubstance Foreclosures
Balance December 31,
1992..................... $ 22,554,947 $ 16,222,405 $ 6,332,542
New ISF.................. 53,181,119 $ 6,051,864 36,929,255 10,200,000
Transfer to REO.......... (40,615,811) (3,900,544) (26,244,143) (10,471,124)
Cures.................... (5,060,000) (5,060,000)
Writedowns............... (9,234,722) (909,320) (6,988,984) (1,336,418)
------------ ------------ ------------ ------------ ------------
Balance December 31,
1993.................. $ 20,825,533 $ 1,242,000 $ 14,858,533 $ 4,725,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Real Estate Acquired
Through Foreclosure
Balance December 31,
1992..................... $ 22,091,491 $ 7,563,528 $ 1,532,372 $ 7,892,879 $ 5,102,712
New REO.................. 85,400,134 25,972,245 10,932,717 31,811,990 16,683,182
Sales.................... (63,864,715) (21,594,547) (9,150,198) (29,275,629) (3,844,341)
Writedowns............... (26,221,946) (4,472,842) (2,589,794) (10,429,240) (8,730,070)
------------ ------------ ------------ ------------ ------------
Balance December 31,
1993.................. $ 17,404,964 $ 7,468,384 $ 725,097 $ $ 9,211,483
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Allowance for Loan Losses
Consistent with loan volume, loan sales, losses, nonaccrual loans and other
relevant factors, Westcorp maintained its allowance for loan losses at $39.7
million at December 31, 1993 compared with $40.7 million at December 31, 1992.
While Westcorp's nonperforming assets are mainly multifamily and construction
loans, no single loan or series of such loans predominate. 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 adequate by management to absorb potential losses
in the loan portfolio. The table below presents summarized data relative to the
allowance for loan losses at December 31:
1993 1992
----------- ------------
Total loans (in thousands)............................... $ 1,557,148 $ 1,925,829
Allowance for loan losses................................ 39,676,719 40,655,934
Allowance for real estate losses......................... 3,508,123 20,185,024
Loans past due 60 days or more........................... 23,885,549 51,867,273
Nonperforming loans...................................... 31,966,238 57,819,128
Nonperforming assets..................................... 74,972,203 102,465,566
Allowance for loan losses as a percent of:
Total loans............................................ 2.55% 2.11%
Loans past due 60 days or more......................... 166.11 78.38
Nonperforming loans.................................... 124.12 70.32
Total allowance as a percent of nonperforming assets..... 57.60 59.38
Nonperforming loans as a percent of total loans.......... 2.05 3.00
Nonperforming assets as a percent of total assets........ 3.45 4.06
13
15
The following table sets forth the activity in the allowance for loan
losses.
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1992 1991
------------ ------------ ------------
Balance at beginning of period........... $ 40,655,934 $ 33,932,677 $ 22,839,480
Charge-offs:
Real estate mortgage loans............. (21,501,674) (19,426,181) (1,781,319)
Consumer loans......................... (11,005,288) (10,970,817) (13,395,700)
------------ ------------ ------------
(32,506,962) (30,396,998) (15,177,019)
Recoveries:
Real estate mortgage loans............. 3,705,661 62,458 24,642
Consumer loans......................... 5,238,430 2,787,099 1,684,005
------------ ------------ ------------
8,944,091 2,849,557 1,708,647
Net charge-offs.......................... (23,562,871) (27,547,441) (13,468,372)
Provision for loan losses................ 22,583,656 34,270,698 24,561,569
------------ ------------ ------------
Balance at end of period................. $ 39,676,719 $ 40,655,934 $ 33,932,677
------------ ------------ ------------
------------ ------------ ------------
Ratio of net charge-offs during the
period to average loans outstanding
during the period...................... 1.36% 1.35% 0.58%
Westcorp established an allowance for real estate losses separate from the
allowance for loan losses during 1992. The allowance for real estate losses was
established to absorb potential losses in the REO portfolio in accordance with
generally accepted accounting principles.
Changes in the allowance for real estate losses at December 31 were as
follows:
1993 1992
------------ -----------
Balance at beginning of period................... $ 20,185,024
Provision for real estate losses................. (6,488,540) $22,015,872
Charge-offs...................................... (10,188,361) (1,830,848)
------------ -----------
Balance at end of period......................... $ 3,508,123 $20,185,024
------------ -----------
------------ -----------
Prior to 1992, there was no separate allowance for real estate losses as
Westcorp had not prior to that time experienced significant REO activity.
Westcorp was of the view that the allowance for loan losses was adequate to also
cover the few REO properties and limited number of foreclosures Westcorp had
theretofore experienced. In 1992, an allowance for real estate losses was
created as Westcorp had a sufficient amount of REO activity to require a
separate allowance for real estate losses. The allowance for real estate losses
was created by charging real estate operations. The allowance for real estate
losses was reduced at December 31, 1993 from the level at December 31, 1992, due
primarily to charge-offs taken in the first quarter of 1993 related to certain
properties for which specific reserves were provided in the fourth quarter of
1992.
INVESTMENT AND MORTGAGE BACKED SECURITIES ACTIVITIES
Westcorp's investments consist primarily of investment securities and
mortgage-backed securities. Both of these portfolios are classified as available
for sale and are therefore accounted for at the lower of cost or market.
Westcorp, through the Bank's subsidiary, WCS, has also entered into joint
ventures for the development and sale to individual buyers of single family
residences and the construction or rehabilitation of apartment projects. As a
result of the passage of FIRREA and the capital standards therein, management
anticipates that WCS's joint venture activities will continue to be reduced. See
"Business -- Subsidiaries -- Western Consumer Services, Inc."
14
16
INVESTMENT SECURITIES ACTIVITIES
Westcorp's investment securities portfolio consists primarily of United
States Agency and Treasury Securities. This portfolio is maintained primarily
for liquidity in accordance with regulatory requirements. The Bank also holds
FHLB stock as required by its affiliation with the FHLB System, corporate bonds,
and minimal amounts of other investments.
The following table sets forth Westcorp's investments at the dates
indicated.
DECEMBER 31,
----------------------------------------------------
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest bearing deposits with other
financial institutions.................... $ 796 $ 7,593 $ 500 $ 500 $ 7,926
Other short term investments................ 137,162 75,161 65,650 7,500
Investment securities:
U.S. Treasury securities and obligations of
other U.S. Government agencies and
corporations.............................. 114,050 114,114 63,891 82,189 60,420
Corporate bonds -- investment grade......... 10 15,999 22,935
Obligations of states and political
subdivisions.............................. 3,527 998 1,009 2,204 2,257
Common stock(1)............................. 27 791
Other....................................... 25 25 25 2,020 25
Corporate bonds -- below investment grade... 400 803 1,203 4,388 55,442
FHLB stock.................................. 17,566 20,674 21,174 24,314 22,524
-------- -------- -------- -------- --------
$273,526 $219,368 $153,462 $131,641 $179,820
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ---------------
(1) Excludes investment in common stock of subsidiaries.
The following table sets forth the stated maturities of Westcorp's
investments at December 31, 1993.
ONE YEAR FIVE YEARS
UP TO TO TO TEN YEARS NO STATED
ONE YEAR FIVE YEARS TEN YEARS OR MORE MATURITY
--------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest bearing deposits with other
financial institutions.................... $ 796
Other short term investments................ 137,162
Investment securities:
U.S. Treasury securities and obligations
of other U.S. Government agencies and
corporations........................... 19,907 $94,143
Obligations of states and political
subdivisions........................... $ 1,680 $1,847
Other..................................... 25
Corporate bonds -- below investment
grade.................................. 400
FHLB stock.................................. $ 17,566
--------- ----------- ----------- ---------- ----------
$ 157,865 $94,168 $ 1,680 $2,247 $ 17,566
--------- ----------- ----------- ---------- ----------
--------- ----------- ----------- ---------- ----------
Estimated market value...................... $ 157,926 $94,579 $ 1,672 $2,230 $ 17,566
Weighted average interest rate.............. 3.81% 5.31% 5.01% 4.58% 3.77%
15
17
Mortgage Backed Securities Activities
At December 31, 1993 the mortgage backed securities portfolio consisted of
various issues as follows:
DECEMBER 31, 1993
------------------
GNMA certificates................... $ 2,019,992
FNMA participation certificates..... 88,782,456
FHLMC participation certificates.... 3,591,647
Other participation certificates.... 172,503
------------------
$ 94,566,598
------------------
------------------
Other participation certificates were issued to fund certain low-income
housing programs designed to provide affordable access to the housing market.
Westcorp's mortgage-backed securities had maturities at December 31, 1993
of ten years or more, although payments are generally received monthly
throughout the life of these securities. These securities had at that date a
weighted average interest rate of 5.57%, and had an estimated market value of
$95.8 million, as compared to their book value of $94.6 million.
FUNDING SOURCES
Westcorp employs various sources to fund its operations, including
deposits, commercial paper, advances from the FHLB, repurchase agreements, and
other borrowings. The sources used vary depending on such factors as rates paid,
maturities, and the impact on capital. See "Asset Liability Management" in
Management's Discussion and Analysis.
DEPOSITS
Westcorp attracts both short term and long term deposits from the general
public and institutions by offering a variety of accounts and rates. Westcorp
offers regular passbook accounts, various money market accounts, fixed interest
rate certificates with varying maturities, and individual retirement accounts.
Although Westcorp is authorized to offer negotiable order of withdrawal ("NOW")
accounts, it has elected not to do so in the belief that its depositors prefer
the higher interest rates it can offer on other money market accounts which do
not entail the high transaction costs it believes are associated with NOW
accounts. Westcorp's deposits are obtained primarily from the areas surrounding
its branches in California and a small amount are solicited from areas outside
California by employees only at the Bank's headquarters.
From time to time in the past, Westcorp obtained brokered deposits when
such deposits were an inexpensive source of funds which generally provided a
means of matching Westcorp's ARMs to certain of its liabilities. The Board of
Directors of Westcorp has authorized Westcorp to hold up to $100.0 million of
brokered deposits if such deposits would be an inexpensive source of funds
relative to its other sources of funds and are permitted to be held by Westcorp.
As of December 31, 1993, Westcorp had no brokered deposits. See further
discussion in the section captioned "Supervision and Regulation -- The
Bank -- Brokered Deposits."
16
18
The following table sets forth the amount of Westcorp's deposits by type
for the dates indicated.
DECEMBER 31,
------------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
No minimum term:
Passbook accounts.............. $ 162,185 $ 189,895 $ 187,355 $ 89,867 $ 78,758
Money market deposit
accounts.................... 1,149 1,212 1,604 2,528 4,045
Certificate accounts:
Certificates (30 days to five
years)...................... 928,620 1,189,520 1,489,309 1,487,714 994,307
Jumbo accounts................. 98,051 124,251 5,081 87,857 287,867
IRA/Keogh...................... 167,053 178,019 131,589 88,814 46,014
---------- ---------- ---------- ---------- ----------
Total.................. $1,357,058 $1,682,897 $1,814,938 $1,756,780 $1,410,991
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The variety of savings deposits offered by Westcorp has allowed it to
remain competitive in obtaining funds and to respond with flexibility to, but
without eliminating the threat of, disintermediation (the flow of funds away
from depository institutions such as savings and loan associations into direct
investment vehicles such as government and corporate securities). In addition,
Westcorp, as well as financial institutions generally, has become much more
subject to short term fluctuations in deposit flows, as customers have become
more interest rate conscious. The ability of Westcorp to attract and maintain
deposits and control its cost of funds has been, and will continue to be,
significantly affected by money market conditions. Westcorp's average
certificate deposits outstanding are summarized below.
1993 1992
---------- ----------
Average certificate deposits outstanding (in
thousands)........................................ $1,426,614 $1,574,212
Average interest rate paid.......................... 4.99% 5.78%
Westcorp's maturities of certificate accounts greater than or equal to
$100,000 are as follows at December 31, 1993:
Three months or less........................... $106,365,491
Over three months through six months........... 46,993,029
Over six months through one year............... 76,444,627
One year through three years................... 94,645,381
Over three years............................... 1,402,674
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$325,851,202
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BORROWINGS AND OTHER SOURCES OF FUNDS
Westcorp's other sources of funds include issuances of commercial paper,
securities sold under agreements to repurchase, advances from the FHLB and other
borrowings as well as loan repayments and cash generated from operations. The
FHLB System functions in a reserve capacity for savings institutions. As a
member, the Bank is required to own capital stock in the FHLB and is authorized
to apply for advances from the FHLB on security of such stock and on certain
residential mortgage loans and other assets. The Bank has been preapproved for
advances up to 25% of its assets, based on remaining availability under credit
facilities established by the Bank with the FHLB, with 24 hours notice. Such
borrowings may be made pursuant to several different programs offered from time
to time by the FHLB. Additional funds are available subject to additional
collateral and other requirements. Each credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLB
prescribes the acceptable uses to which advances pursuant to each program may be
put, as well as limitations on the sizes of advances and repayment provisions.
The Bank also has utilized the FHLB for long term borrowings to fund its lending
activities and had borrowed $126 million as of December 31, 1993. At December
31, 1993 the Bank had a total unused line of credit with the FHLB of
approximately $203 million. The weighted average interest rate as of December
31, 1993 was 7.58%. The maximum amount of advances outstanding at any month-end
was $174 million and $279 million during
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1993 and 1992, respectively. The Bank also has a commercial paper facility with
a credit line up to $200 million with the FHLB.
Savings associations such as the Bank also have authority to borrow from
the Federal Reserve Bank (the "FRB") "discount window." FRB regulations require
these institutions to exhaust all reasonable alternative sources of funds,
including FHLB sources, before borrowing from the FRB.
Federal regulations have been promulgated which connect Community
Reinvestment Act (the "CRA") performance with access to long term advances from
FHLB to member institutions. The Bank does not believe that there will be any
adverse effect to it relative to access to this source of funds. The Bank
received an "outstanding" in its most recent CRA evaluation, the highest rating
available.
SUBORDINATED CAPITAL DEBENTURES
The Bank issued $125,000,000 of 8.5% Subordinated Capital Debentures due
2003 on June 17, 1993. The Bank subsequently received permission from the OTS to
include these debentures in supplementary capital for purposes of determining
compliance with risk-based capital requirements. See "Regulatory Capital
Requirements" in Supervision and Regulation. As a result, the Bank redeemed its
$52 million of outstanding 11% Subordinated Capital Debentures due 1999 on
September 10, 1993. This early extinguishment of debt resulted in an
extraordinary loss of $1.1 million net of related taxes of $0.8 million. See
"Extraordinary Item" in Management's Discussion and Analysis.
SUBSIDIARIES
General
The Bank's subsidiaries are Westcorp Financial, WFAL, WFAL2, Westplan
(which in turn owns all of the stock of Westplan Investments), Western
Reconveyance and WCS, (which in turn owns all of the stock of Westhrift). Each
of such subsidiaries are described in detail below. The operations of a former
subsidiary, Westamerica Computer Services, Inc., were merged into the Bank
effective September 1, 1993.
Westcorp Financial Services, Inc.
Westcorp Financial is in the business of consumer finance. Each of its
offices are licensed to the extent required by law to conduct business in each
respective state. Westcorp Financial initiated operations to serve markets not
covered by the Bank. During 1993, Westcorp Financial originated $198.5 million
of motor vehicle loans. The loans which Westcorp Financial originates are
generally sold to the Bank and are serviced by Westcorp Financial under its
license, whether such loans are held by the Bank or sold in securitized
offerings. In 1994 Westcorp Financial plans to expand into other states,
including Texas.
Western Financial Auto Loans, Inc.
WFAL is a wholly-owned, limited purpose finance subsidiary of the Bank.
WFAL was organized primarily for the purpose of purchasing motor vehicle loans
from the Bank and issuing obligations collateralized by such loans and engaging
in other asset-backed financing transactions. A total of three such transactions
totaling $527.5 million were completed during 1993. On March 11, 1994, an
additional $200 million of loans were sold in a similar transaction.
Western Financial Auto Loans 2, Inc.
WFAL2 is a wholly-owned, limited purpose finance subsidiary of the Bank.
WFAL2 was organized primarily for the purpose of purchasing motor vehicle loans
from the Bank originated by the Bank and Westcorp Financial, and issuing
obligations collateralized by the motor vehicle loans and engaging in other
asset-backed financing transactions. Since December 1986, the Bank sold motor
vehicle loans with a principal amount of approximately $2.9 billion to WFAL2 in
exchange for the net proceeds of ten bond issues totaling $1.2 billion and nine
sales to grantor trusts established by WFAL2 in the amount of $1.6 billion. Each
bond issuance to date has been paid off in full at or before its respective
maturity date.
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Westplan Insurance Agency, Inc.
Westplan was incorporated in California in 1980 and is licensed by the
California Insurance Commissioner to transact the business of an insurance
agency. It acts as an agent for independent insurers in providing property and
casualty insurance coverage on collateral, primarily motor vehicles, securing
loans made by the Bank and Westcorp Financial, protection insurance and other
noncredit related life and disability programs. In addition, Westplan offers
annuities through the branch offices. Westplan's revenues consist of commissions
received on policies sold to customers of the Bank and Westcorp Financial. See
"Business -- Loan Insurance." Westplan was transferred from Westcorp to the Bank
effective March 31, 1993 in compliance with OTS regulations pertaining to
insurance agencies. The Bank paid $1.5 million to Westcorp for all the stock of
Westplan.
In addition, Westplan also holds all outstanding stock of Westplan
Investments.
Westplan Investments
Westplan Investments was incorporated in 1993 as a licensed mutual funds
broker dealer in contemplation of selling mutual funds to the general public.
Westcorp anticipates that such operations will commence at some time during 1994
although no assurance can be given in this regard.
Western Reconveyance Company, Inc.
Western Reconveyance is a California corporation which was incorporated in
1979. It acts primarily as the trustee under trust deed loans made by the Bank
and Westcorp Financial and is not a significant source of income. Western
Reconveyance Company Inc. was transferred from Westcorp to the Bank in 1992.
Westcorp received $10,000 from the Bank for the stock of that company.
Western Consumer Services, Inc.
WCS is a company which conducts real estate development activities
primarily in the form of joint ventures. The joint ventures are engaged in
construction of residential units for sale, construction of rental units and
rehabilitation of rental housing, the latter primarily in low and moderate
income neighborhoods. WCS's interest in these projects ranges from 51% to 100%
and, in some cases, includes a participating share of the profits realized upon
sale. Its asset level at December 31, 1993, was approximately $9.2 million.
WCS's investment in real estate totaled $0.5 million at December 31, 1993.
Westcorp believes that the joint venture operations were affected by the
combination of overall recessionary pressures and slower sales activities
beginning in August 1990. Westcorp is continuing its efforts to dispose of
assets in this real estate investment category to third parties (other than the
Laguna Hills property described below).
The Bank transferred its ownership of Laguna Hills Country Plaza, which is
the location of its Laguna Hills branch office, to WCS in 1992 which resulted in
an increase of $7.8 million of real estate being carried on the books of WCS.
This transfer occurred as a result of a determination that this property could
not be treated as branch premises for regulatory purposes (based on OTS
guidelines) since the Bank did not occupy 25.0% of the premises, consistent with
OTS guidelines, and was thus required to divest the property. The Bank is
required to hold risk based capital against this asset as it does against other
assets which are held in its real estate investment subsidiary. If and when the
Bank is able to occupy 25% or more of the premises, it may transfer the property
from WCS to the Bank.
As a result of the passage of FIRREA, certain of the Bank's investments in
and extension of credit to any subsidiary engaged in activities not permissible
for a national bank must be deducted from the Bank's capital for purposes of
determining compliance with the capital standards pursuant to a phase-in
schedule. See "Supervision and Regulation -- Regulatory Capital Requirements."
In 1992 an amendment to FIRREA provided for an extension of the phase-in period
from July 1, 1994 to June 30, 1996 for investments in or extensions of credit to
real estate subsidiaries of the Bank subject to the approval of an application
submitted to the OTS. The Bank received approval of its application and its real
estate subsidiary investment is now subject to a capital phase-in period that
expires on July 1, 1996.
In addition, WCS also holds all outstanding stock of Westhrift.
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Westhrift Life Insurance Company
Westhrift, an Arizona corporation, is engaged in the business of reinsuring
credit life and credit disability insurance offered to borrowers of the Bank and
Westcorp Financial and underwritten by an independent insurer. The credit life
insurance policies provide for full payment to the Bank of the insured's
financial obligation in the event of the insured's death. The credit disability
insurance policies provide for payment to the Bank of an insured's financial
obligation during a period of disability resulting from illness or physical
injury. In 1987 Westhrift received a Certificate of Authority from the
California Insurance Commissioner to conduct insurance business in California.
For Arizona statutory purposes, Westhrift's aggregate reserves for credit life
and credit disability policies as of December 31, 1993 were $3.7 million, and
Westhrift's provision for loss on such policies for the year ended December 31,
1993 was $0.3 million. The aggregate reserves are computed in accordance with
commonly accepted actuarial standards consistently applied, and are based on
actuarial assumptions which are in accordance with or stronger than those called
for in policy provisions. The policies reinsured are underwritten by the
independent insurer for no more than the amount that the insured owes to the
Bank. Westhrift does not engage in any business except with respect to customers
of the Bank and Westcorp Financial. See "Business -- Loan Insurance."
COMPETITION
Westcorp faces strong competition in its lending activities and, with
respect to the Bank, in attracting savings deposits. Westcorp believes it is
competitive because it offers a high degree of professionalism and quality in
the services it provides through longstanding relationships with borrowers, real
estate brokers and motor vehicle dealers.
The greatest competition for deposits comes from other savings and loan
associations, money market funds, commercial banks, credit unions, thrift and
loan associations, corporate and government securities and mutual funds. Many of
the nation's largest savings and loan associations and other depository
institutions are headquartered or have branches in the areas where Westcorp
primarily conducts its business. Westcorp competes for deposits primarily on the
basis of interest rates paid and quality of service to its customers. Westcorp
does not rely on any individual, group or entity for a material portion of
deposits. Although the majority of its deposits are placed by depositors in the
geographic areas in which Westcorp's branches are located, some are placed by
depositors located in other regions across the United States.
Competition in originating real estate loans comes primarily from other
savings and loan associations, commercial banks and mortgage bankers. Westcorp
competes for mortgage loans principally on the basis of the interest rates and
loan fees it charges, the types of loans it originates and the quality of
services it provides borrowers. Westcorp believes it offers a high degree of
professionalism and quality in the services it provides borrowers and real
estate brokers.
Westcorp faces strong competition in the purchase of motor vehicle dealer
generated motor vehicle loans from commercial banks, motor vehicle manufacturer
finance subsidiaries, consumer finance companies and credit unions. Westcorp
competes for the purchase of such loans on the basis of price and the level of
service provided to the respective dealers. Westcorp also depends for its share
of a particular dealer's motor vehicle loans on the promptness with which it can
process and approve a motor vehicle loan application submitted by the dealer.
Westcorp must also compete with dealer rebate and interest rate subsidy programs
offered by motor vehicle manufacturer's finance subsidiaries.
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SUPERVISION AND REGULATION
GENERAL
The adoption of FIRREA in 1989 substantially restructured the regulatory
framework in which Westcorp and the Bank operate. In December 1991, The Federal
Deposit Insurance Corporation Improvement Act ("FDICIA") was enacted. FDICIA
requires specified regulatory agencies to adopt regulations having broad
application to insured financial institutions such as the Bank.
Set forth below is a discussion of the statutory and regulatory framework
for Westcorp as affected by FIRREA and FDICIA and the regulations promulgated
thereunder. However, to the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
law or regulation or in the policies of various regulatory authorities may have
a material effect on the business and prospects of Westcorp and the Bank.
WESTCORP
The Savings and Loan Holding Company Act
Westcorp, by virtue of its ownership of the Bank, is a savings and loan
holding company within the meaning of the Home Owners' Loan Act, as amended by
FIRREA ("HOLA"). FIRREA transferred, with few changes, the provisions of the
Savings and Loan Holding Company Act from the National Housing Act to HOLA.
Savings and loan holding companies and their savings association subsidiaries
are extensively regulated under federal laws.
As a savings and loan holding company registered with the OTS, Westcorp is
subject to its regulations, examination and reporting requirements. Westcorp is
a "unitary" savings and loan holding company within the meaning of regulations
promulgated by the OTS, and as a result Westcorp is virtually unrestricted in
the types of business activities in which it may engage, provided the Bank
continues to meet the Qualified Thrift Lender test under HOLA. Although Westcorp
intends to remain a unitary savings and loan holding company, if it acquires one
or more insured institutions and operates them as separate subsidiaries rather
than merging them into the Bank, or if certain other circumstances not currently
applicable to Westcorp arise, Westcorp would be treated as a "multiple" savings
and loan holding company and could cause additional regulatory restrictions to
be imposed on Westcorp. Westcorp does not anticipate that those circumstances
will arise unless such institutions are acquired pursuant to a supervisory
acquisition and the insured subsidiaries meet the Qualified Thrift Lender test.
HOLA prohibits a savings and loan holding company, without prior approval
of the OTS, from controlling any other savings association or savings and loan
holding company.
Additionally, FIRREA empowers the OTS to take substantive action when it
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness, or stability of such holding
company's subsidiary savings association. Thus, FIRREA confers on the OTS
oversight authority for all holding company affiliates, not just the Bank.
Specifically, the OTS may, as necessary: (i) limit the payment of dividends by
the Bank; (ii) limit transactions between the Bank, the holding company and the
subsidiaries or affiliates of either; and (iii) limit any activities of the
holding company that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the Bank. Any such limits
may be issued in the form of regulations, or a directive having the effect of a
cease and desist order.
Savings association subsidiaries of a savings and loan holding company are
limited by HOLA in the type of activities and investments in which they may
participate if the investment and/or activity involves an affiliate. In general,
savings association subsidiaries of a savings and loan holding company are
subject to Sections 23A and 23B of the Federal Reserve Act ("FRA") in the same
manner and to the same extent as if the savings association were a member bank
of the Federal Reserve System. Section 23A of the FRA puts certain quantitative
limitations on certain transactions between a bank or its subsidiary and an
affiliate, including transactions involving (i) loans or extensions of credit to
the affiliate; (ii) the purchase of or
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investment in securities issued by an affiliate; (iii) purchase of certain
assets from an affiliate; (iv) the acceptance of securities issued by an
affiliate as security for a loan or extension of credit to any person; or (v)
the issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. Under Section 23B, transactions between a bank or its subsidiary and
an affiliate must meet certain qualitative limitations. Such transactions must
be on terms at least as favorable to the bank or its subsidiary as transactions
with unaffiliated companies. In addition, Section 11 of the HOLA, as amended by
FIRREA, also specifically prohibits a savings association subsidiary of the
savings and loan holding company from making a loan or extension of credit to an
affiliate unless that affiliate is engaged only in activities permitted to bank
holding companies under Section 4(c) of the Bank Holding Company Act or from
purchasing or investing in the securities of any affiliate (other than a
subsidiary of the savings association). The OTS may issue additional
restrictions if necessary to protect the safety and soundness of any savings
association. The OTS has issued regulations, consistent with the provisions of
Sections 23A and 23B, which exclude transactions between a savings association
and its subsidiaries from the limitations of those sections, but those
regulations also define certain subsidiaries to be affiliates and subject to the
requirements of those sections. At the present time, none of the Bank's
subsidiaries are within the definition of an affiliate for purposes of those
regulations.
In addition, amendments made by FIRREA and FDICIA require that savings
associations comply with the requirements of FRA Sections 22(g) and 22(h), and
Federal Reserve Board ("FRB") Regulation O promulgated thereunder, in the same
manner as member banks, with respect to loans to executive officers, directors
and principal shareholders. As a matter of policy, the Bank does not make loans
to executive officers, directors or principal shareholders.
THE BANK
California Savings Association Law
As a federally chartered institution, the Bank's investments and
borrowings, loans, issuance of securities, payments of interest and dividends,
establishment of branch offices and all other aspects of its operations are
subject to the exclusive jurisdiction of the OTS, to the exclusion of the
California Savings Association Law or regulations of the California Savings and
Loan Commissioner.
Federal Home Loan Bank System
The Bank is a member of the FHLB System which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Banks provide a central credit
facility for member institutions. The Bank, as a member of the FHLB System, is
required to own capital stock in the FHLB in an amount at least equal to the
greater of 1.0% of the aggregate outstanding balance of its loans secured by
residential real property or 5.0% of the sum of advances outstanding plus
committed FHLB commercial paper lines. The Bank is in compliance with this
requirement.
Since the adoption of FIRREA, the dividends which the Bank has received on
its FHLB stock have been significantly reduced as a result of requirements
imposed by FIRREA on the FHLB System. Each FHLB is required to transfer a
certain portion of its reserves and undivided profits to the Resolution Funding
Corporation ("RFC"), the entity established to raise funds to resolve troubled
thrifts, to fund a portion of the interest and the principal on RFC bonds and
other obligations. Also, each FHLB is required to transfer a percentage of its
annual net earnings to the Affordable Housing Program, as defined in FIRREA,
which amount is to increase from 6% of the annual net income of each FHLB in
1994 to at least 10% in 1995 and thereafter. Accordingly, it is anticipated that
the level of dividends to be received by the Bank from the FHLB will continue to
be less than those received prior to the adoption of FIRREA.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds for financial
institutions: (i) the Savings Association Insurance Fund ("SAIF"), which insures
the deposits of associations that were insured by the FSLIC prior to the
enactment of FIRREA, and (ii) the Bank Insurance Fund ("BIF"), which insures the
deposits of institutions that were insured by the FDIC prior to FIRREA. Thus,
commencing in 1989 the
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deposits of the Bank became insured through the SAIF to the maximum amount
permitted by law (currently $100,000).
During 1993 the Bank was required to pay insurance premiums of $5.0
million. FDICIA requires the FDIC to implement, by January 1, 1994, a risk-based
assessment system under which an institution's premiums are based on the FDIC's
determination of the relative risk the condition of such institution poses to
its insurance fund. In response, the FDIC adopted a transitional rule, effective
January 1, 1993, and a final rule, effective January 1, 1994. Under these rules,
each insured institution is classified as "well capitalized," "adequately
capitalized" or "undercapitalized," using definitions substantially the same as
those adopted with respect to the "prompt corrective action" rules adopted by
the regulatory agencies under FDICIA. See "Prompt Corrective Regulatory Action."
Within each of these classifications, the FDIC has created three risk categories
into which an institution may be placed, based upon the supervisory evaluations
of the institution's primary federal financial institution regulatory agency and
the FDIC. These three categories consist of those institutions deemed
financially sound, those with demonstrated weakness that could result in
significant deterioration of the institution and risk of loss to the FDIC, and
those which pose a substantial probability of loss to the FDIC. Each of these
nine assessment categories is assigned an assessment rate ranging from 0.23% to
0.31% of the institutions deposit assessment base. Under these regulations, an
institution is precluded from disclosing the risk-based assessment category to
which it has been assigned.
FIRREA established a five year moratorium on conversions from the SAIF to
the BIF. The Resolution Trust Corporation Completion Act ("RTCCA"), enacted on
December 17, 1993, extended this moratorium until the date on which the SAIF
first meets the reserve ratio designed for it. There are several exceptions to
this moratorium. Most importantly, a SAIF member may convert to bank charter if
the resulting bank remains a SAIF member during the term of the moratorium.
Additionally, conversions to bank charter can take place during the moratorium
if (i) it affects only an "insubstantial" portion of an institution's total
deposits and is approved by the FDIC; (ii) it results from the acquisition of a
troubled institution that is in default or in danger of default and is approved
by the FDIC and the Resolution Trust Corporation (the "RTC"); or (iii) it
results from a merger or consolidation of a bank and a savings association and
is approved by the FDIC or the Office of the Comptroller of the Currency (the
"OCC"), as well as by the FRB.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Liquidity Requirements
Under OTS regulations, the Bank is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances and
specified United States government, state or federal agency obligations and
certain corporate debt obligations and commercial paper) equal to at least 5.0%
of its average daily balance of net withdrawal accounts and borrowings payable
on demand or in one year or less. If at any time the Bank's liquid assets do not
at least equal (on an average daily basis for any month) the amount required by
these regulations (which requirement may not be set at less than 4.0% nor more
than 10.0% of the Bank's net withdrawable accounts plus short term borrowings),
the Bank would be subject to various OTS enforcement procedures, including
monetary penalties. The Bank must also maintain an average daily balance of
short term liquid assets (generally those having maturities of 12 months or
less) equal to at least 1.0% of its average daily balance of net withdrawable
accounts plus short term debt. At December 31, 1993, the Bank's liquidity and
short term liquidity percentages as calculated for the foregoing purposes were
10.3% and 4.7%, respectively. Thus, the Bank was in compliance with these
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources and Liquidity."
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Brokered Deposits
In June 1992, the FDIC issued regulations under FDICIA that provide for
differential regulation relating to brokered deposits based on capital adequacy.
Institutions are divided into categories of "well capitalized," "adequately
capitalized" and "undercapitalized." Only "well capitalized" institutions may
continue to accept brokered deposits without restriction.
"Adequately capitalized" institutions may accept brokered deposits only if
(i) they first obtain a waiver from the FDIC and (ii) the rate of interest paid
on such brokered deposits, at the time such funds are accepted, does not
"significantly" exceed (defined as more than 75 basis points) (a) the rate paid
on deposits of similar maturity in such institution's normal market area for
deposits accepted in the institution's normal market area or (b) the "national
rate" paid on deposits of comparable maturity for deposits accepted outside the
institution's normal market area. For purposes of these regulations, "national
rate" means 120% of the current yield on similar maturity U.S. Treasury
obligations or, in the case of a deposit at least half of which is uninsured
(institutional or wholesale deposits), 130% of such applicable yield.
Furthermore, because the term "deposit broker" is defined to include an
"adequately capitalized" association which itself solicits deposits by offering
rates of interest that are "significantly" higher (defined as more than 75 basis
points) than the prevailing rates offered by other insured associations in the
offering association's market area, the interest rate limitations applicable to
deposits obtained through third party intermediaries will also apply to deposits
obtained by the offering association.
"Undercapitalized" institutions are prohibited from (i) accepting brokered
deposits or (ii) soliciting any deposits by offering rates of interest that are
"significantly" higher (defined as more than 75 basis points) than the
prevailing rates of interest on insured deposits (i) in such institution's
market area or (ii) in the market area in which such deposits would otherwise be
accepted. The terms "well capitalized," "adequately capitalized" and
"undercapitalized" have the same meanings as under the regulations pertaining to
prompt corrective regulatory action described under "Prompt Corrective
Regulatory Action."
At December 31, 1993, the Bank met the capital requirements of a well
capitalized association as defined by the regulation. Nonetheless, the Bank does
not currently accept brokered deposits as defined by the regulation.
Regulatory Capital Requirements
FIRREA includes capital requirements intended to require the owners of
savings associations to invest more of their own funds in the associations they
control, thus providing a greater incentive for the owners of the associations
to limit the risks such associations incur. FIRREA mandated that the OTS
promulgate final capital regulations which provide capital standards no less
stringent than the capital standards applicable to national banks. Those
regulations were adopted by the OTS and became effective on December 7, 1989.
Additionally, FIRREA requires that these capital standards contain (i) a
leverage limit (core capital) requirement; (ii) a tangible capital requirement;
and (iii) a risk-weighted capital requirement.
FIRREA requires savings associations to maintain "core capital" in an
amount not less than 3.0% of adjusted total assets. Core capital is defined in
the OTS capital regulations as including, among other things, (i) common
stockholders' equity (including retained earnings); (ii) a certain portion of
the association's qualifying supervisory goodwill; (iii) noncumulative perpetual
preferred stock and related surplus; and (iv) purchased mortgage servicing
rights meeting certain valuation requirements ("PMSRs"). FDIC regulations
required that the maximum amount of such PMSRs which can be included in core
capital and tangible capital not exceed, in the aggregate, an amount equal to
50% of the institutions core capital. Effective March 4, 1994, qualifying
intangibles, including PMSRs and purchased credit card relationships ("PCCRs")
may be included in core and tangible capital, up to a maximum of 50% of core
capital with PCCRs, however, limited to 25% of core capital. At December 31,
1993 the Bank had no PMSRs or PCCRs.
Effective December 31, 1990, the OCC, the principal national bank
regulator, amended its capital regulations by requiring a minimum core capital
requirement of 3.0% of adjusted total assets for national banks with a composite
1 rating (the highest rating available) under the CAMEL rating system for
national
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banks and substantially higher core capital requirements for lower rated
national banks. It is expected that most national banks will be required to
maintain core capital of 4.0% to 5.0% under the new regulation. Because FIRREA
generally requires that the capital standards applicable to savings institutions
be "no less stringent" than those applicable to national banks, there is a high
likelihood that the OTS will impose substantially equivalent requirements, and
in April 1991, the OTS proposed to modify the 3.0% of adjusted total assets core
capital requirement in the same manner. Under the OTS proposal, only savings
associations rated composite 1 under the OTS MACRO rating system will be
permitted to operate at the regulatory minimum core capital ratio of 3.0%. For
all other savings associations, the minimum core capital ratio will be 3.0% plus
at least an additional 100 to 200 basis points, which thus will increase the
core capital ratio requirement to 4.0% to 5.0% (or more) of adjusted total
assets. In determining the amount of additional core capital any savings
institution will be required to maintain, the OTS will assess both the quality
of risk management systems and the level of overall risk in each individual
savings association through the supervisory process on a case-by-case basis. The
OTS has not yet issued a final rule. The OTS may currently impose a higher
individual minimum capital requirement on a case-by-case basis. During 1993, the
Bank was required by an Agreement with the OTS, (the "OTS Agreement") to
maintain core capital of 4.5%. At December 31, 1993, the Bank's core capital was
8.6%. The OTS Agreement was terminated by the OTS effective January 25, 1994.
See "Agreement with the Office of Thrift Supervision".
A savings association must maintain "tangible capital" in an amount not
less than 1.5% of adjusted total assets. "Tangible capital" means core capital
less any intangible assets (including supervisory goodwill), plus PMSRs and
PCCRs to the extent includable in core capital as described above. At December
31, 1993, the Bank's tangible capital was 8.6%.
A savings institution's investments in and extensions of credit to a
subsidiary engaged in any activities not permissible for national banks
("nonincludable subsidiaries") generally are deducted from the institution's
core capital and tangible capital in determining compliance with capital
standards. This deduction is not required for investments in and extensions of
credit to a subsidiary engaged solely in mortgage banking, to certain
subsidiaries which are themselves insured depository institutions or, unless the
FDIC determines otherwise in the interests of safety and soundness, to a
subsidiary which engages in such impermissible activities solely as agent for
its customers. The Bank is required to deduct from its core and tangible capital
its investments in WCS and Westplan (both equity and extensions of credit), as
the former is engaged in residential real estate activities not permitted to
national banks, and the latter is engaged in an insurance agency business not
permitted to national banks. The amount of the deduction related to WCS is to be
phased-in through June 30, 1996, while the amount of the deduction related to
Westplan is not subject to a phase-in period. By letter dated December 29, 1992,
the OTS approved the inclusion in the Bank's core and tangible capital of its
investment in WCS at the 75% level through June 30, 1994, at the 60% level from
July 1, 1994 through June 30, 1995, and at the 40% level from July 1, 1995
through June 30, 1996. After July 1, 1996 the Bank will not be permitted to
include any of its remaining investment in WCS in its core or tangible capital.
At December 31, 1993 the amount of its investment in WCS excluded from the
Bank's core and tangible capital was $5.8 million (25% of the investment in that
subsidiary)and the amount of its investment in Westplan excluded from core and
tangible capital was $2.2 million (100% of the investment in that subsidiary).
As of December 31, 1993, the Bank's core capital was $186.0 million,
exceeding the regulatory requirement of the OTS as set by the OTS Agreement by
$88.6 million. The Bank's tangible capital at December 31, 1993 was $186.0
million, exceeding the regulatory requirement of the OTS by $153.5 million.
The risk-based component of the capital standards requires that an
association have total capital equal to 8.0% of risk-weighted assets on and
after December 31, 1992. The OTS risk-based capital regulation provides that for
assets sold as to which any recourse liability is retained (including on-balance
sheet assets related to the assets sold which are at risk) a savings association
must hold capital as a part of its risk-based capital requirement equal to the
lesser of (i) the amount of that recourse liability or (ii) the risk-weighted
capital requirement for assets sold off-balance sheet as though the assets had
not been sold. In addition, in the former instance, when calculating the Bank's
risk-based capital ratio (a) the value of those on-balance sheet assets which
are subject to recourse, to the extent of that recourse liability
("fully-capitalized assets"), is deducted
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from the Bank's total capital and (b) neither the risk-weighted value of the
asset sold off-balance sheet nor the amount of the fully capitalized assets is
included in the Bank's total risk-weighted assets. The Bank held $142.2 million
of additional risk-based capital at December 31, 1993 as a result of this
requirement due to its recourse liability relating to the Bank's grantor trust
financings, all of which related to fully capitalized assets. The Bank's
risk-based capital ratio at that date was 15.58%.
The Bank's total risk-weighted assets are determined by taking the sum of
the products obtained by multiplying each of the Bank's assets and certain
off-balance sheet items by a designated risk-weight. Before an off-balance sheet
item can be assigned a risk-weight, it must be converted to an on-balance sheet
credit equivalent amount.
Four risk-weight categories now exist for on-balance sheet assets; a fifth
category (of 200% risk-weighing) was deleted by the OTS with the reassignment of
these assets to the 100% risk-weighted category. The four risk-weighted
categories are:
CATEGORY 1: Zero percent risk-weight. Includes, among other assets,
cash, securities issued by, or backed by the full faith and credit of, the
U.S. government including GNMA mortgage-backed securities, notes and
obligations issued by either the FSLIC or FDIC and backed by the full faith
and credit of the U.S. government, and assets directly and unconditionally
guaranteed by the U.S. government or its agencies;
CATEGORY 2: Twenty percent risk-weight. Includes, among other assets,
cash items in the process of collection, mortgage related securities issued
or guaranteed by FNMA or FHLMC, mortgages guaranteed by the VA or FHA,
obligations collateralized by securities issued or guaranteed by the U.S.
government, privately issued mortgage related securities qualifying as such
under the Secondary Mortgage Enhancement Act, stock in the FHLB, and claims
or balances due from the FHLB, the FRB or from domestic depository
institutions;
CATEGORY 3: Fifty percent risk-weight. Includes, among other assets,
qualifying mortgage loans (including certain qualifying residential
construction loans) and qualifying multifamily mortgage loans, mortgage
related securities backed by qualifying mortgage loans;
CATEGORY 4: One hundred percent risk-weight. Includes, among other
assets, consumer loans (including motor vehicle loans), commercial loans,
home equity loans, nonqualifying multifamily mortgage loans, nonqualifying
residential construction loans, land loans, investments in fixed assets and
premises, and intangible assets including goodwill not deducted from
capital and equity investments permissible for both savings associations
and national banks.
Before a risk-weight category can be applied to a consolidated off-balance
sheet item, such item must be converted into a credit-equivalent amount by
multiplying its face amount by whichever of four conversion factors is
appropriate. There is a (i) 100% conversion of direct credit substitutes,
including financial guarantees, financial standby letters of credit, assets sold
with recourse (unless the full amount of the recourse retained is less than the
amount of capital required by the credit-risk component for the total assets
sold, in which case the appropriate credit risk component is the full amount of
the recourse) and assets sold under an agreement to repurchase; (ii) a 50.0%
conversion factor is applied to transaction-related contingencies, such as
performance bonds or performance-based standby letters of credit and the unused
portions of nonexempt loan commitments; (iii) a 20.0% conversion of
trade-related contingencies, such as commercial letters of credit; (iv) a 0%
conversion factor applies to the unused portion of exempt loan commitments
(those which are unconditionally cancelable, with each draw treated as a
separate potential loan to be evaluated) and unused, unconditionally cancelable
retail credit card lines. Interest-rate contracts (e.g. swaps, caps, collars,
options and forward rate agreements) have special credit equivalent amounts
equal to the sum of their current credit exposure plus their potential credit
exposure. The risk-weight category to be applied to such amounts in determining
the credit risk component would depend on the obligor, but in no event would be
higher than 50.0% risk-weight. As of December 31, 1993, the Bank's total
risk-weighted assets equaled $1.9 billion.
Total capital, as defined by OTS regulations, is core capital plus
supplementary capital (supplementary capital cannot exceed 100% of core capital)
less direct equity investments not permissible to national banks
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(subject to a phase-in schedule), reciprocal holdings of depository institution
capital investments, and that portion of land loans and nonresidential
construction loans in excess of 80.0% loan-to-value ratio. Supplementary capital
is comprised of three elements: (i) permanent capital instruments; (ii) maturing
capital instruments; and (iii) general valuation loan and lease loss allowance.
During 1993 the Bank sold $125.0 million of its 8.5% Subordinated Capital
Debentures, due 2003 (the "8.5% Debentures"), using the proceeds of that
offering to redeem all of its outstanding 11% Subordinated Capital Debentures,
due 1999 (the "11% Debentures") and for general corporate purposes. Both the 11%
Debentures and the 8.5% Debentures are maturing capital instruments as defined
by the OTS capital regulations. Those regulations require that as the maturity
date of a maturing capital instrument approaches, a specified amount of that
instrument must be deducted from total capital each year. Because the 11%
Debentures included a sinking fund obligation along with its May 1, 1999
maturity date, the Bank was permitted as of May 1, 1993 to include only $35.1
million of the $52.0 of those debentures outstanding in its total capital.
The OTS approved the Bank's application to include the 8.5% Debentures as
supplementary capital on August 4, 1993. Following that approval and the
subsequent redemption of all of the outstanding 11% Debentures on September 10,
1993, the Bank did include the 8.5% Debentures in its supplementary capital. By
the terms of that approval, the amount of the 8.5% Debentures which may be
included in supplementary capital may not exceed 40% of the Bank's total
capital, and by September 30, 1995, the amount which may be included may not
exceed one-third of the Bank's total capital. At December 31, 1993 the $125.0
million of 8.5% Debentures represented 37.5% of the Bank's total capital.
Consistent with the OTS capital regulations, the amount of the 8.5% Debentures
which may be included as supplementary capital will decrease at the rate of 20%
of the amount originally outstanding per year (net of redemptions), commencing
on July 1, 1998.
The OTS has adopted an interest rate risk component to its capital rules,
effective January 1, 1994. The new rule establishes a method for determining an
appropriate level of capital to be held by savings associations subject to the
supervision of the OTS, such as the Bank, against interest rate risk ("IRR").
The new rule generally provides that if a savings association's IRR, calculated
in accordance with the rule, exceeds a specified percentage, the savings
association must deduct from its total capital an IRR component when calculating
its compliance with the risk-based capital requirement.
Specifically, the rule provides that a savings association's IRR is to be
determined by the decline in that association's Net Portfolio Value ("NPV")
(i.e. the value of the association's assets as determined in accordance with the
provisions of the rule) resulting from a 200 basis point change in market
interest rates (increase or decrease, whichever results in a lower NPV) divided
by the NPV prior to that change. If that result is a decrease of greater than
2%, the association must deduct from its total capital an amount equal to
one-half of the decline in its NPV in excess of 2% of its NPV prior to the
interest rate change (the "IRR component"). The reduction of an association's
total risk-based capital is effective on the first day of the third quarter
following the reporting date of the information used to make the required
calculations. The rule also contains provisions (i) reducing the IRR component
if the association reduces its IRR by the end of the quarter following the
reporting date and (ii) permitting the OTS to waive or defer the IRR component
on a showing that the association has made meaningful steps to reduce or control
its interest rate risk. Westcorp does not believe it will be required to reduce
its total capital by an IRR component at July 1, 1994.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS' capital regulation
provides that such actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. The OTS must prohibit
asset growth by any institution that is in violation of the foregoing minimum
capital requirements, and must require any such institution to comply with a
capital directive issued by the OTS. See "Prompt Corrective Regulatory Action".
In summary, the Bank exceeded the current minimum requirements for core
capital, tangible capital and risk-weighted capital as of December 31, 1993.
However, the required deductions from capital for its
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investments in WCS, Westplan and direct real estate investments in facilities in
which the Bank uses less than 25% of the available space in its operations are
still being phased-in. The Bank's core, tangible and risk-weighted capital
ratios at December 31, 1993, on a fully phased-in basis, would be 7.8%, 7.8% and
14.8%, respectively. Accordingly, the Bank meets all of the fully phased-in
capital requirements. Westcorp believes that the Bank will continue to meet all
of the fully phased-in requirements when required.
Prompt Corrective Regulatory Action
FDICIA requires each applicable agency and the FDIC to take prompt
corrective action to resolve the problems of insured depository institutions
that fall below certain capital ratios. Such action must be accomplished at the
least possible long-term cost to the appropriate deposit insurance fund.
In connection with such action, each agency must promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the adequacy of its regulatory capital
level: well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. The critically
undercapitalized level cannot be set lower than 2% of total assets or higher
than 65% of the required minimum leverage capital level. In addition to the
various capital levels, FDICIA allows an institution' s primary federal
regulatory agency to treat an institution as if it were in the next lower
category if that agency (1) determines (after notice and an opportunity for
hearing) that the institution is in an unsafe or unsound condition or (2) deems
the institution to be engaged in an unsafe or unsound practice.
At each successive downward level of capital, institutions are subject to
more restrictions and regulators are given less flexibility in deciding how to
deal with the bank or thrift. For example, undercapitalized institutions will be
subject to asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business. For
significantly undercapitalized institutions, the appropriate agency must require
the institution to sell shares in order to raise capital, must restrict interest
rates offered by the institution, and must restrict transactions with affiliates
unless, in each case, the agency determines that such actions would not further
the purposes of the prompt corrective action system. In addition, for critically
undercapitalized institutions, the agency must require prior agency approval for
any transaction outside the ordinary course of business, and the institution
must be placed in receivership or conservatorship unless the appropriate agency
and FDIC make certain affirmative findings regarding the viability of the
institution (which findings must be reviewed every 90 days).
FDICIA prohibits any insured institution (regardless of its capitalization
category) from making capital distributions to anyone or paying management fees
to any persons having control of the institution if after such transaction the
institution would be undercapitalized. Any undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate agency within
45 days of becoming undercapitalized.
A capital restoration plan will be acceptable only if each company having
control over an undercapitalized institution guarantees that the institution
will comply with the capital restoration plan until the institution has been
adequately capitalized on an average during each of four consecutive calendar
quarters and provides adequate assurances of performance. The aggregate
liability of such guarantee is limited to the lesser of (i) an amount equal to
5% of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time the institution fails to comply with its capital
restoration plan.
The OTS, in conjunction with the other federal financial institution
regulatory agencies, adopted regulations defining the five categories of
capitalization and implementing a framework of supervisory actions, including
those described above, applicable to savings institutions in each category. The
regulations provide that a savings association will be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier 1 (i.e., core) risk-based capital ratio of 6% or greater, a leverage ratio
of 5% or greater and is not subject to any OTS order or directive to meet and
maintain a specific capital level for any capital measure; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8% or greater; has a
Tier 1 risk-based capital ratio of 4% or greater and has either (a) a leverage
ratio of 4% or greater or (b) a leverage
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ratio of 3% or greater and is rated composite 1 under the MACRO rating system in
the most recent examination of the institution; (iii) "undercapitalized" if it
has a total risk-based capital ratio that is less than 8%, has a Tier 1
risk-based capital ratio that is less than 4%, has a leverage ratio that is less
than 4% or, if rated composite 1 under the MACRO rating system in the most
recent examination of the institution, has a leverage ratio that is less than
3%; (iv) "significantly undercapitalized" if it has a total risk-based capital
ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than
3% or a leverage ratio that is less than 3%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2%. At December 31, 1993, the Bank met the capital
requirements to be considered "well capitalized".
Loans to One Borrower
Under FIRREA, the loans-to-one borrower limitations for national banks
apply to all savings associations in the same manner and to the same extent as
they do to national banks. Thus, savings associations generally are not
permitted to make loans to a single borrower in excess of 15% to 25% of the
savings associations' unimpaired capital and unimpaired surplus (depending upon
the type of loan and the collateral provided therefore), except that a savings
association may make loans to one borrower in excess of such limits under one of
the following circumstances: (i) for any purpose, in any amount not to exceed
$500,000; (ii) to develop domestic residential housing units, in an amount not
to exceed the lesser of $30.0 million or 30% of the savings association's
unimpaired capital and unimpaired surplus, provided that the association
receives the written approval of the OTS to do so (which approval the Bank has
not sought) and certain other conditions are satisfied; or (iii) to finance the
sale of real property which it owns as a result of foreclosure, providing that
no new funds are advanced. In addition, further restrictions on a savings
association's loans-to-one borrower authority may be imposed by the OTS if
necessary to protect the safety and soundness of the savings association. At
December 31, 1993, 15.0% of the Bank's unimpaired capital and unimpaired surplus
for loans-to-one borrower purposes was $51.9 million. The largest amount
outstanding at December 31, 1993 to one borrower (and related entities) was
$17.5 million.
Equity Risk Investment Limitations
The Bank generally is not authorized to make equity investments other than
investments in subsidiaries. A savings association may not acquire a new
subsidiary or engage in a new activity through an existing subsidiary without
giving 30 days prior notice to the OTS and the FDIC, and must conduct the
activities of the subsidiary in accordance with the regulations and orders of
the OTS. Under certain circumstances, the OTS also may order a savings
association to divest its interest in, terminate the activities of, or take
other corrective measures with respect to, an existing subsidiary.
The Bank's aggregate investment in service corporations subsidiaries was
$9.9 million as of December 31, 1993.
Qualified Thrift Lender Test
A Qualified Thrift Lender ("QTL") test was enacted as a part of FIRREA, and
was modified by FDICIA. An association that fails to become or remain a QTL must
either (i) convert to a bank subject to the banking regulations or (ii) be
subject to severe restrictions, including being forbidden to invest in or
conduct any activity that is not permissible to both a savings association and a
national bank, and certain other restrictions on branching, advances from its
Federal Home Loan Bank, and dividends. Effective three years after an
association fails to meet its QTL requirements, the association is forbidden
from retaining any investment or continuing any activity not permitted for a
national bank and must repay promptly all FHLB advances. In addition, companies
that control savings associations that fail the QTL test must, within one year
of such failure, become a bank holding company subject to the Bank Holding
Company Act.
Under the existing QTL requirements, a savings association's "qualified
thrift investments" must equal not less than 65% of the association's "portfolio
assets" measured on a monthly basis, in 9 of every 12 consecutive months.
Qualified thrift investments include all loans or mortgage-backed securities
held by an association which are secured or relate to domestic residential or
manufactured housing, as well as FHLB
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stock and certain obligations of the FDIC and related entities. Certain other
investments are included as qualified thrift investments, but are limited to 20%
of an association's portfolio assets, including (i) 50% of residential mortgage
loans sold by an association within 90 days of their origination, (ii)
investments in subsidiaries which derive at least 80% of their revenue from
domestic residential or manufactured housing, (iii) subject to certain
limitations, 200% of investments relating to "starter homes" or housing and
community facilities in "credit-needy areas", (iv) consumer loans in the
aggregate of not more than 10% of portfolio assets, and (v) FHLMC and FNMA
stock. Portfolio assets are total assets less goodwill and other intangible
assets, the value of the association's facilities and the association's liquid
assets maintained to meet its liquidity requirements (but not over 20% of its
total assets).
At December 31, 1993 the Bank's percentage of qualified thrift investments
to portfolio assets was 87.3%. Westcorp anticipates that the Bank will continue
to remain a QTL.
Dividend Regulations
The OTS has adopted regulations limiting the amount of capital
distributions a savings association may make. The regulation divides savings
associations into three tiers; those which meet all of the fully phased-in
capital requirements of the OTS both before and after the proposed distribution
(Tier 1 Associations), those which meet all of the current capital requirements
both before and after the proposed distribution (Tier 2 Associations), and those
which fail to meet one or more of the current capital requirements (Tier 3
Associations). Tier 2 Associations are further divided into two levels, based
upon the association's degree of compliance with the risk-based capital
standard. A Tier 1 Association may make capital distributions in an amount equal
to the greater of (i) 100% of its net income for the current calendar year to
the date of capital distribution, plus the amount that would reduce by one-half
its "surplus capital ratio" (the amount by which the association's total
capital-to-risk-weighted assets ratio exceeds its fully phased-in requirement of
8%) at the beginning of the current calendar year (i.e. at the end of the
immediately prior calendar year), or (ii) 75% of its net income over the most
recent four-quarter period preceding the quarter in which the capital
distribution is to be made. A Tier 2 Association may make capital distributions
of up to 75% of its net income over the past four-quarter period. A Tier 3
Association may not make any capital distribution without the prior
authorization of the OTS. Although Tier 1 and Tier 2 Associations do not need to
obtain prior approval to make a capital distribution which complies with the
requirements of the OTS regulation, the savings association must file a notice
with the OTS at least 30 days in advance of the date on which the distribution
is to be made. The OTS has the authority, under the regulation, to preclude a
savings association from making capital distributions, notwithstanding its
qualification to do so on the above tests, if the OTS determines that the
savings association is in need of more than normal supervision, or if the
proposed distribution will constitute an unsafe or unsound practice given the
condition of the savings association. In addition, a Tier 1 Association deemed
to be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 Association as a result of such determination. A savings
association may also apply to the OTS for approval to make a capital
distribution even though it does not meet the above tests, or for an amount
which exceeds the amount permitted by the express terms of the regulation.
In addition, another OTS regulation pertaining to holding companies
requires that the OTS be given a 30 day advance notice before a savings
association subsidiary pays a dividend to its holding company. The notice
described above can also constitute the notice for this purpose, if so
designated.
The Bank is a Tier 1 Association. As of the date hereof, under the
limitations of the OTS capital distributions regulation, the Bank may pay
dividends up to the greater of 100% of its net income since January 1, 1994 plus
50% of its surplus capital or 75% of its net income over the four-quarter period
ending December 31, 1993. However, the Bank is also subject to certain
limitations on the payment of dividends by the terms of the indenture for its
8.5% Debentures, which limitations are more severe than the OTS capital
distribution regulations. Under the most restrictive of those limitations, the
greatest capital distribution which the Bank could currently make is $14.7
million. See "Market for Registrant's Common Equity and Related Stockholder
Matters -- Dividends." Westcorp did not receive any dividends from the Bank
during 1993. The Bank anticipates making quarterly dividend payments to Westcorp
during 1994.
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Community Reinvestment Act
The CRA requires financial institutions regulated by the federal financial
supervisory agencies to ascertain and help meet the credit needs of their
delineated communities, including low-and moderate-income neighborhoods within
those communities, consistent with safe and sound banking practices. The CRA was
amended by FIRREA. The FIRREA amendments require that the federal financial
supervisory agencies evaluate an institution's CRA performance based on a four
tiered descriptive rating system, and that these ratings and written evaluations
be made public. The four possible ratings are: (i) Outstanding record of meeting
community credit needs; (ii) Satisfactory record of meeting community credit
needs; (iii) Needs to improve record of meeting community credit needs; and (iv)
Substantial noncompliance in meeting community credit needs.
Many factors play a role in assessing a financial institution's CRA
performance. The institution's regulator must consider its financial capacity
and size, legal impediments, local economic conditions and demographics,
including the competitive environment in which it operates. The evaluation does
not rely on absolute standards and the institutions are not required to perform
specific activities or to provide specific amounts or types of credit.
The Bank received a CRA audit in 1992, which was made public in 1993. The
Bank's rating was "outstanding." An institution in this group, the highest
possible under the CRA, has an outstanding record of ascertaining and helping to
meet the credit needs of its entire delineated community, including low-and
moderate-income neighborhoods, in a manner consistent with its resources and
capabilities.
Each year, the Bank prepares a CRA statement for public viewing. This
document contains the Bank's CRA strategic plan, CRA notice, ascertainment of
community credit needs, marketing and types of credit offered and extended,
community outreach activities, geographical distribution and record of opening
and closing offices, practices intended to discourage discrimination, community
development and a file of public comments.
The OTS, concurrently with the federal banking regulatory agencies, has
proposed to revise the CRA regulations. The proposed procedures are designed to
focus on performance rather than process, to promote consistency in assessments,
to permit more effective enforcement against institutions with poor performance,
and to reduce unnecessary compliance burden while stimulating improved
performance. Specifically, the proposed regulations replace the current
process-based assessment system with a new evaluation system that would rate
institutions based on actual performance in meeting community credit needs. The
new system would evaluate the degree to which an institution is providing (i)
loans, (ii) branches and other services, and (iii) investments to low and
moderate-income areas. The proposed regulations also emphasize the importance of
an institution's CRA performance in the corporate application process, and seek
to make the regulations more enforceable. The Bank does not believe that its
performance, as might be measured by the regulations if they become adopted as
proposed will differ materially from its performance under the existing CRA
regulations.
Classification of Assets
The OTS has adopted a classification system for problem assets of insured
institutions. Problem assets are classified as "special mention," "substandard,"
"doubtful" or "loss," depending on the presence of certain characteristics. An
asset will be considered "special mention" when assets do not currently expose a
savings association to a sufficient degree of risk to warrant classification but
possess credit deficiencies or potential weaknesses deserving management's close
attention; an asset is "substandard" if it is inadequately protected by the
current capital and paying capacity of the obligor or by the collateral pledged,
if any. "Substandard" assets exhibit a well-defined weakness or weaknesses,
including the "distinct possibility" that the institution will sustain "some
loss" if the deficiencies are not corrected or that liquidation would not be
timely even if there is little likelihood of loss. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses make
"collection or liquidation in full," on the basis of currently existing facts,
conditions and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance
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as assets without the establishment of a specific loss reserve is not warranted.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Comparison of Results of Operations -- Provision for Loan and Real
Estate Losses."
Insured institutions are required to classify their own assets and to
establish general valuation allowances (reserves) where appropriate. Assets
classified as substandard or doubtful may be reviewed by the OTS examiner and
valuation allowances may be required to be increased subject to review by the
OTS Regional Director. For the portion of assets classified as loss, the OTS
permits 100% of the amount classified to be charged off or the establishment of
a specific valuation allowance.
The OTS has proposed that it revise its current asset classification scheme
with regard to special mention assets. The OTS is proposing to remove the
specific reference to special mention assets from its asset classification
regulation, and instead issue regulatory guidance on this topic that will more
closely align its treatment of special mention assets with the Interagency
Policy Statement on Credit Availability issued by the four federal banking
regulatory agencies and the OTS. Basically, the guidance will clarify the
supervisory treatment of special mention assets and emphasize that such assets
are not considered adversely classified assets. In addition, the OTS is
considering removing the specific description of assets classified as
"substandard," "doubtful" and "loss" from the regulatory text and providing such
descriptions in guidance, as is the practice of the federal banking regulatory
agencies. Westcorp does not anticipate that this proposal, when finalized, will
result in any increase in its classified assets. As of December 31, 1993 the
Bank had established allowances for loan and real estate losses of $43.2
million.
Insurance Operations
The insurance subsidiaries of the Bank are subject to regulation and
supervision in the jurisdictions in which they do business. The method and
extent of such regulation varies, but the insurance laws of most states
establish agencies with broad regulatory and supervisory powers. These powers
relate primarily to the establishment of solvency standards which must be met
and maintained, the licensing of insurers and their agents, the nature and
amount of investments, approval of policy forms and rates, and the form and
content of required financial statements. The Bank, through its insurance
subsidiaries, is also subject to various state laws and regulations covering
extraordinary dividends, transactions with insurance subsidiaries and other
matters. The Bank is in compliance with these state laws and regulations.
Consumer Finance Operations
Westcorp Financial has offices in California, Oregon, Nevada and Arizona.
As such it is subject to audit and examination by the OTS, the FDIC, the
California Department of Corporations, the Oregon Department of Insurance and
Finance and the Arizona Corporation Commission. At December 31, 1993, and as of
the date hereof, Westcorp Financial is in compliance with the licensing and
operation laws and regulations applicable to each of its offices in these
states. The Bank does not guarantee nor is the Bank responsible for the
activities of Westcorp Financial in any of these states.
Investment Powers
Pursuant to FDICIA, the OTS and the other federal financial institution
regulatory agencies promulgated final rules, which became effective March 19,
1993, pertaining to real estate lending standards. Those standards, entitled
Interagency Guidelines for Real Estate Lending Policies, require insured
institutions to adopt lending policies consistent with the guidelines, including
as to loan portfolio management considerations, underwriting standards and loan
administration. In particular, the regulation establishes supervisory
loan-to-value ("LTV") limits for real property secured loans. Each insured
institution is to set its own policy with respect to LTV, but those LTV limits
are not to exceed the LTV limits of the guidelines, except as specifically
permitted by the guidelines. Generally, the LTV limits are as follows: for raw
land, 65%; for land development, 75%; for construction of 1 to 4 family
residential housing, 85%, and 80% for other construction loans; and for improved
property, 85%. Loans secured by owner occupied 1 to 4 family residences are not
subject to a supervisory LTV limit, except that any such loan with a LTV ratio
of greater than 90% at
32
34
origination requires either private mortgage insurance or other readily
marketable collateral. The Bank's LTV standards are consistent with these
supervisory limitations.
Accounting Requirements
FIRREA requires the OTS to establish accounting standards to be applicable
to all savings associations for purposes of complying with regulations, except
to the extent otherwise specified in the capital standards. Such standards must
incorporate generally accepted accounting principles to the same degree as is
prescribed by the federal banking agencies for banks or may be more stringent
than such requirements. Such standards must be fully implemented by January 1,
1994 and must be phased-in as provided in federal regulations in effect on May
1, 1989.
Effective April 1, 1990, the OTS adopted a statement of policy which
provides guidance regarding the proper classification of, and accounting for,
securities held for investment, sale and trading. Securities held for
investment, sale or trading may be differentiated based upon an institution's
desire to earn an interest yield (held for investment), to realize a holding
gain from assets held for indefinite periods of time (held for sale), or to earn
a dealer's spread between the bid and asked prices (held for trading). Critical
to the proper classification of an accounting for securities as investments is
the intent and ability of an institution to hold the securities until maturity.
A positive intent to hold to maturity, not just a current lack of intent to
dispose, is necessary for securities acquired to be considered to be held for
investment purposes. Securities held for investment purposes may be accounted
for at amortized cost while securities held for sale are to be accounted for at
lower of cost or market and securities held for trading are to be accounted for
at market. The Bank believes that its investment activities have been and will
continue to be conducted in accordance with the requirements of OTS policies and
generally accepted accounting principles.
The Federal Financial Institutions Examination Council determined in August
of 1993 that all federal financial institution regulatory agencies must adopt
FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," for
fiscal years commencing on or after January 1, 1994. Under FAS 115, savings
associations will be required to recognize unrealized gains and losses on
"available for sale" securities when measuring shareholders' equity. Several
issues are under consideration regarding the implementation of FAS 115 by such
institutions. The OTS has not yet determined whether to include this equity
component in core capital or as a part of supplementary capital. Also to be
resolved is how capital shortfalls produced by market movements should be
managed from a regulatory standpoint. The OTS is expected to finalize these
issues during 1994. While FAS 115 has not yet been adopted, had it been in
effect at December 31, 1993 Westcorp would have recognized an increase in
shareholders' equity of approximately $1 million. For additional information see
Note U to the Consolidated Financial Statements.
Annual Examinations
FDICIA significantly reduces regulatory discretion by mandating the
appropriate federal financial institution regulatory agency to conduct a full
scope, on-site examination of each insured depository institutions every twelve
months. The Bank's last annual examination ended on December 17, 1993.
FDIC Back-up Enforcement Authority
The FDIC has the statutory authority under FDICIA to direct an insured
institution's principal regulator to take enforcement action, and to take that
action itself if the principal regulator fails to act timely, or in an emergency
situation.
Financial Reporting
FDICIA requires insured institutions to submit independently audited annual
reports to the FDIC and the appropriate agency. These publicly available reports
must include: (i) annual financial statements prepared in accordance with
generally accepted accounting principles and such other disclosure requirements
as required by the FDIC or the appropriate agency and (ii) a report, signed by
the chief executive officer and the chief financial officer or chief accounting
officer of the institution which contains statements, attested to by
33
35
independent auditors, about the adequacy of internal controls and compliance
with laws and regulations. Insured institutions such as the Bank are required to
monitor these activities through an independent audit committee.
FDICIA also directs the FDIC to develop with other appropriate agencies a
method for insured depository institutions to provide supplemental disclosure of
the estimated fair market value of assets and liabilities, to the extent
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution.
Standards for Safety and Soundness
FDICIA requires the federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) audit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation fees
and benefits. The compensation standards would prohibit employment contracts,
compensation or benefit arrangements, stock option plans, fee arrangements or
other compensatory arrangements that would provide excessive compensation, fees
or benefits or could lead to material financial loss. In addition, the federal
banking regulatory agencies are required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; and (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies.
The OTS, in conjunction with the federal banking regulatory agencies, has
proposed safety and soundness standards to meet the FDICIA requirements. In
general, the proposed standards identify emerging safety and soundness problems
and ensure that such action is taken to address those concerns before they pose
a risk to the deposit insurance fund. More specifically, the proposed rules
establish safety and soundness standards addressing (i) Internal Controls and
information systems, (ii) Internal audit system, (iii) Loan documentation, (iv)
Credit underwriting, (v) Interest rate exposure, (vi) Asset growth, and (vii)
Compensation, fees and benefits. In addition, the agencies have proposed
standards specifying (i) Maximum ratio of classified assets to capital and (ii)
Minimum earnings sufficient to absorb losses without impairing capital. The OTS
determined not to propose a minimum ratio of market value to book value for
publicly traded equity securities as such ratio would not be a feasible means to
achieve the safety and soundness objectives of Congress in enacting the relevant
provisions of FDICIA.
Generally, the standards proposed do not call for savings institutions to
meet specific numerical goals. The proposed rules require savings institutions
to take specific actions or adopt particular policies or practices designed to
reduce safety and soundness concerns. However, the proposed regulations do set a
maximum ratio of 1.0 for classified assets to total capital plus general
valuation reserves otherwise not includable in total capital. If adopted, the
Bank's ratio would have been .55% at December 31, 1993. In addition, the minimum
earnings requirement proposed is such earnings over the past four quarters
(whether positive or negative) which, if repeated over the next four quarters,
will not result in the savings association becoming capital deficient as to any
minimum capital requirement.
In the event the OTS determines that a savings association has failed to
satisfy the safety and soundness standards pursuant to the proposed rules, the
OTS may, upon requisite notice, require such association to submit a compliance
plan that sets forth the steps it will take and the time frame required to
correct the deficiency. If the association fails to comply with the OTS request,
the OTS may then issue an order, subject to appeal by the association, requiring
such association to correct a safety and soundness deficiency or to take or
refrain from other actions.
RTC Restructuring Act and RTCCA
The RTC's ability to serve as receiver for insolvent thrifts was extended
from August 9, 1992 to September 30, 1993 by the RTC Restructuring Act. The
RTCCA subsequently extended that period to a date between January 1, 1995 and
July 1, 1995, as determined by the Chairman of the Thrift Depositor Protection
34
36
Oversight Board. Furthermore the RTC Restructuring Act and the RTCCA restructure
the RTC and provide additional funding to carry out the purposes of the RTC.
The RTC Restructuring Act clarifies that certain qualifying loans made for
construction of a residence consisting of one to four dwelling units and certain
qualifying loans made for the purchase of multifamily rental and homeowner
properties secured by a first lien on a residence consisting of more than four
dwelling units are to be included in the 50.0% risk-weighted category in
calculating an institution's compliance with its risk-based capital
requirements. See "Regulatory Capital Requirements."
Agreement with the Office of Thrift Supervision
On May 14, 1992, the Bank entered into the OTS Agreement. The Bank entered
into the OTS Agreement at the request of the OTS, based on the belief of the OTS
that certain acts and practices of the Bank required corrective action. Pursuant
to the terms of the OTS Agreement the Bank took certain corrective actions,
including adding William J. Crawford and Stanley E. Foster to its Board of
Directors, reorganized its management information systems department, upgraded
its internal audit and control functions and implemented a restructuring of its
Internal Asset Review Department. In further compliance with the OTS Agreement
the Bank reduced its level of classified assets as a percentage of GAAP capital
plus general valuation allowances and enhanced its compliance with the need to
maintain separate corporate identities as between itself and its subsidiaries.
The OTS determined during its most recent regular examination of the Bank, which
concluded on December 17, 1993 that the Bank had substantially complied with the
requirements of the OTS Agreement and on January 25, 1994 advised the Bank, in
writing, that the OTS Agreement was terminated.
Growth Limitations
OTS Regulatory Bulletin 3a-1 ("RB 3a-1") prohibits those savings
associations subject to its provisions from increasing their total assets from
one quarter to the next in excess of an amount equal to the interest credited to
their deposits during the quarter without the prior written approval of the
institution's Regional Director. The savings associations which are subject to
RB 3a-1 are those considered by the OTS as requiring more than normal
supervision. As a result of determinations made by the OTS at the Bank's
examination completed February 7, 1993, the Bank became subject to RB 3a-1. As a
result of determinations made by the OTS at the completion on December 17, 1993
of the Bank's latest examination, the Bank is no longer subject to RB 3a-1. The
Bank's activities during 1993 were not adversely affected by its compliance with
RB 3a-1.
TAXATION
Federal Income Tax Provisions
Westcorp and its subsidiaries file a calendar tax year consolidated federal
income tax return.
The Bank is a savings and loan association for federal tax purposes.
Savings and loan associations satisfying certain conditions are permitted under
the Code to establish reserves for bad debts and to make annual additions to
these reserves which qualify as deductions from income. The Bank is permitted to
compute its additions to its bad debt reserve on qualifying real property loans
using one of the following two methods: (i) the percentage of taxable income
method; or (ii) the experience method. Qualifying real property loans are
generally loans secured by an interest in real property and nonqualifying loans
are all other loans. The deduction with respect to nonqualifying loans must be
computed under the experience method. The Bank intends, when permitted, to
compute its annual bad debt reserve deduction for qualifying real property loans
under the method which permits the Bank to obtain the maximum allowable
deduction.
Under the experience method, a savings and loan association is permitted to
deduct the greater of (i) an amount based on average yearly loan losses over the
current and previous five years or (ii) an amount that would increase its
reserve to an amount not in excess of the reserve balance at December 31, 1987.
Under the percentage of taxable income method, as revised by the Act, the
Bank may generally deduct an amount equal to 8% of its taxable income, after
deducting (i) shareholder distributions included under section
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37
593 of the Internal Revenue Code, (ii) net gains from sales of stocks or tax
exempt obligations, (iii) dividends for which a dividend received deduction was
allowed, reduced by 8% of the dividend received deduction, and (iv) the capital
gain rate differential portion of the lessor of (a) the tax year's net long-term
capital gain or (b) the tax year's net long-term capital gain from the sale of
property other than stock sales or sales of tax-exempt obligations, as an
addition to its bad debt reserve. This amount is then reduced by any addition to
the reserve for nonqualifying loans. In addition, the bad debt deduction under
the percentage of taxable income method is allowed only to the extent that it
does not exceed the amount necessary to increase the accumulated reserve for
qualifying real property loans to 6% of such loans at year end. Finally, the bad
debt deduction under the percentage of taxable income method when added to the
deduction with respect to nonqualifying loans, is limited to the larger of (i)
the amount by which 12% of the total deposits and withdrawable accounts at year
end exceeds the sum of surplus, undivided profits and reserves at the beginning
of the year or (ii) the reserve amount computed using the experience method.
The allowable deduction under the percentage of taxable income method is
available only if at least 60% of the total dollar amount of the Bank's assets
are qualifying assets. Qualifying assets include, among other things, cash, U.S.
government obligations, certificates of deposit, loans secured by an interest in
residential real property and loans made for the payment of expenses of a
college or university education. As of December 31, 1993, the Bank exceeds the
60.0% requirement for qualifying assets.
The net effect of the percentage of taxable income method deduction is that
the maximum effective federal income tax rate applicable to a savings and loan
association fully able to use this method will be approximately 32.2%, assuming
a statutory tax rate of 35%.
A savings association, such as the Bank, which files its federal income tax
return as part of a consolidated group, is required to reduce proportionately
its bad debt deduction (if computed under the percentage of taxable income
method) for tax losses attributable to activities on non-savings and loan
members of the group that are functionally related to the activities of the
savings and loan association member of the group. The Bank does not expect this
provision to have a significant impact on its otherwise allowable bad debt
deduction.
A savings and loan association which utilizes the percentage of taxable
income method is subject to recapture taxes on such reserves if it makes certain
distributions to stockholders. Dividends may be paid without the imposition of
any tax on the Bank to the extent that the amounts paid as dividends do not
exceed the Bank's current or accumulated earnings and profits as calculated for
federal income tax purposes. Dividends paid in excess of current and accumulated
earnings and profits, distributions in redemption of stock and other
distributions with respect to stock such as distributions in partial or complete
liquidation, are deemed to be made from the bad debt reserve for qualifying real
property loans, to the extent that this reserve exceeds the amount that could
have been accumulated under the experience method. The amount of tax that would
be payable upon any distribution which is treated as having been from the bad
debt reserve for qualifying real property loans is also deemed to have been paid
from the reserve to the extent thereof. Management does not contemplate using
the reserve in a manner that will create taxable income, but assuming a 35% tax
rate, distributions to stockholders which are treated as having been made from
the bad debt reserve for qualifying real property loans could result in a
federal recapture tax which is approximately equal to one-half of the amount of
such distributions, unless offset by net operating losses. In addition, certain
large savings and loan associations (including the Bank) are required to
recapture their existing bad debt reserves in the event that for any taxable
year less than 60% of the association's assets are qualifying assets.
A savings and loan association is denied any deduction for interest on debt
incurred or continued to purchase or carry tax-exempt obligations acquired after
August 7, 1986, although an exception is provided for "qualified tax-exempt
obligations," which, among other things, must not be issued by an issuer that
reasonably anticipates to issue, together with subordinate entities, not more
than $10 million of tax-exempt obligations other than private activity bonds
during the calendar year. Both bonds qualifying under this exception and certain
other bonds acquired after December 31, 1982 and before August 8, 1986, will be
permanently subject to the disallowance of 20% of the deduction with respect to
interest on indebtedness treated as incurred to purchase or carry tax-exempt
bonds.
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Moreover, Westcorp will be subject to the alternative minimum tax if such
tax is larger than the regular federal tax otherwise payable. Generally,
alternative minimum taxable income is a taxpayer's regular taxable income,
increased by the taxpayer's tax preference items for the year and adjusted by
computing certain deductions in a special manner which negates the acceleration
of such deductions under the regular federal tax. This amount is then reduced by
an exemption amount and is subject to tax at a 20% rate. Alternative minimum tax
items generally applicable to savings and loan associations include (i) 100% of
the excess of a savings and loan association's bad debt deduction over the
amount that would have been allowable under the experience method; (ii) interest
on certain private activity tax-exempt bonds issued after August 7, 1986; (iii)
an amount equal to 75% of the amount by which a corporation's adjusted current
earnings exceed its alternative minimum taxable income (computed without regard
to this adjustment or the net operating loss deduction); and (iv) a portion of
accelerated depreciation on property owned by and used or leased by Westcorp and
its subsidiaries. For alternative minimum tax purposes, net operating losses can
offset no more than 90% of alternative minimum taxable income. In addition, for
taxable years beginning after December 31, 1986 and before January 1, 1996
Westcorp will be subject to an additional environmental tax of .12% of its
alternative minimum taxable income with certain adjustments and exclusions.
As of December 31, 1993, Westcorp had no net operating loss carry-forwards.
For net operating losses incurred in taxable years beginning after 1986, there
is a 3-year carryback and a 15-year carry-forward period.
The returns of Westcorp and its subsidiaries and affiliates were examined
for the years 1982 and 1983 without material change. The returns of Westcorp for
the year 1988 and 1989 are currently under examination.
California Franchise Tax Provisions
The California franchise tax applicable to the Bank is a variable rate tax.
This rate is computed under a formula which is higher than the rate applicable
to nonfinancial corporations because it includes an amount "in lieu" of local
personal property and business license taxes paid by nonfinancial corporations
(but not generally paid by financial institutions such as the Bank). For taxable
year 1993, the total tax rate was set at 11.107%. Under California regulations,
bad debts may be treated by savings and loan associations in either of two ways,
as debts are ascertained to be worthless in whole or in part or by deducting
from income a reasonable reserve addition. The Bank utilizes the latter method,
the amount being determined by multiplying loans outstanding at the close of the
income year by the ratio of total bad debts sustained to the sum of loans
outstanding, using annual averages computed over a three-year or six-year
forward period, whichever is greater. The Bank and its subsidiaries file
separate tax returns using the combined reporting method.
The returns of Westcorp and its subsidiaries and affiliates were examined
for the years 1984 through 1987. Assessed amounts were paid by the affiliate
company. The returns for the years 1988 and 1989 are currently under
examination.
For additional information regarding the federal and state taxes payable by
Westcorp, see Note Q to the Consolidated Financial Statements.
EMPLOYEES
At December 31, 1993, Westcorp had 1,181 full-time and 37 part-time
employees. None of these employees is represented by a collective bargaining
unit or union, and Westcorp and its subsidiaries believe they have good
relations with their respective personnel.
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ITEM 2 -- PROPERTIES
As of December 31, 1993, the Bank owns 21 properties in California and
leases an additional 44 properties, 2 of which are located in Oregon, 2 in
Nevada and 1 in Arizona. WCS owns one property as well. Neither Westcorp, nor
any of its other subsidiaries, has any material properties.
The executive offices, located at 23 Pasteur Road, Irvine, California are
owned by the Bank. The remaining owned and leased properties are used as branch
offices, dealer centers, mortgage banking offices, and finance company offices.
As of December 31, 1993, the net book value of property and leasehold
improvements was approximately $59.7 million. The following table sets forth
certain information with respect to offices of Westcorp.
NET BOOK VALUE
OF PROPERTY
LEASE AND LEASEHOLD
EXPIRATION IMPROVEMENTS
---------- --------------
HOME OFFICE:
23 Pasteur Rd.(1)(2)(5) Owned $ 16,228,043
BRANCH OFFICES:
Beverly Hills -- 8911 Wilshire Boulevard Leased 10/31/96 3,362
Carlsbad -- 2630 El Camino Real Owned 2,862,807
Costa Mesa -- 2000 Harbor Boulevard(3) Owned 1,001,201
Downey -- 9550 East Firestone Boulevard(1) Leased 10/31/98 13,278
Encino -- 17323 Ventura Boulevard(1)(2)(4) Leased 08/31/98 23,034
Fremont -- 39350 Fremont Boulevard Owned 738,402
Fresno -- 1377 West Shaw Avenue, #A-1 Owned 758,609
Glendale -- 320 West Colorado Boulevard Owned 1,396,805
La Mesa -- 7877 Parkway Drive(1) Owned 1,346,004
Laguna Hills -- 27051 Moulton Parkway Owned 7,980,494
Long Beach -- 4501 Pacific Coast Highway(1) Owned 316,716
Mountain View -- 160 El Camino Real East(2) Owned 657,919
Orange -- 1111 East Katella Avenue(1)(3) Owned 2,836,483
Redwood City -- 660 Woodside Road Owned 355,350
Riverside -- 3501 Adams Street Owned 298,269
Sacramento -- 1565 Exposition Boulevard(1)(3) Owned 737,313
San Diego -- 12950 Carmel Country Road(1)(4) Leased 08/31/00 24,407
San Diego -- 3681 Sports Arena Boulevard(1) Owned 270,514
San Jose -- 1077 South Winchester Boulevard(1)(2) Owned 660,956
San Rafael -- 950 Northgate Drive(1) Owned 4,407,899
Stockton -- 7337 Pacific Avenue Owned 309,780
Thousand Oaks -- 2920 Thousand Oaks Boulevard(1) Owned 4,338,660
Torrance -- 2424 West Sepulveda Boulevard #A Leased 12/31/98 7,710
Upland -- 300 North Mountain Avenue(1)(3) Owned 1,048,986
Victorville -- 12595 Hesperia Road Owned 964,116
Walnut Creek -- 1575 Treat Boulevard #100(1)(4) Leased 12/31/97 20,245
DEALER CENTERS:
Cerritos, 10900 East 183rd Street #120 Leased 07/31/98 2,233
Colton -- 1461 East Cooley Drive, Suite #240 Leased 03/24/97
San Diego -- 5725 Kearny Villa Road(4) Leased 06/30/96
Stockton -- 3158 Auto Center Circle, #D Leased 06/01/98 10,069
WESTCORP FINANCIAL SERVICES OFFICES:
Irvine -- 16485 Laguna Canyon (home office) Owned 10,019,050
Bakersfield -- 2400 Wible Road, Suite #12 & #13 Leased 02/19/95 7,613
Beaverton, Oregon -- 2790 SW Cedar Hills Boulevard Leased 02/28/97 2,991
Carlsbad -- 2588 El Camino Real, #J Leased 06/07/96 3,845
Concord -- 1855 Gateway Boulevard, Suite #180 Leased 11/01/98 2,633
Covina -- 412 South Citrus Leased (6) 4,005
Downey -- 9470 Firestone Boulevard Leased 08/14/95 1,830
Fairfield -- 2500 North Texas Street, Suite H Leased (6) 4,114
Fremont -- 39111 Paseo Padre Parkway, Suite #111 Leased 12/31/93 1,380
Fresno -- 4049 North Blackstone, Suite B Leased 02/02/95
Glendale -- 425 East Colorado Boulevard, Suite #110 Leased 04/30/94 2,514
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NET BOOK VALUE
OF PROPERTY
LEASE AND LEASEHOLD
EXPIRATION IMPROVEMENTS
---------- --------------
Grants Pass, Oregon -- 1883 N.E. 7th Street, Suite H Leased 12/01/98 $ 3,725
Lancaster -- 707 West Lancaster Boulevard Leased 07/14/97 1,110
Las Vegas, NV -- 3300 East Flamingo Rd., Suite #23 Leased 12/31/98 3,628
Modesto -- 3600 Sisk Road, Suite #4-J Leased 08/30/98
Oxnard -- 2083 North Oxnard Boulevard Leased (6) 10,146
Phoenix, AZ -- 2710 West Bell Road, #1223 Leased (6) 8,500
Portland, OR -- 1724 N.E. 122nd Avenue Leased 10/31/98 3,725
Rancho Mirage -- 71511 Highway 111, Suite A Leased 02/01/94 2,128
Redding -- 1890 Park Marina Drive, Suite #101 Leased 04/30/94 1,358
Redwood City -- 363 Main Street, Suite A Leased 03/01/98 3,963
Reno, NV -- 394 East Moana Lane, Suite #C-3 Leased 12/01/98 2,995
Riverside -- 10020 Indiana, Suite #3 Leased 01/31/95 2,947
Roseville -- 151 North Sunrise Avenue, Suite #703 Leased 04/01/94 2,208
Salem, Oregon -- 3872 Center Street, N.E. Leased 06/08/98 6,446
Salinas -- 506 East Laurel Drive Leased 03/21/96 1,921
San Bernardino -- 1995 South Diners Court Leased 12/31/94 2,467
San Diego -- 5531 Clairemont Mesa Boulevard Leased 03/30/96
San Jose -- 4300 Stevens Creed Boulevard, Suite #175 Leased 09/14/98
Santa Maria -- 1954 South Broadway, Suite L Leased 08/31/98 2,995
Santa Rosa -- 443 Dutton Avenue, Suite #15 Leased 06/30/94 2,287
Stockton -- 2701 Hammer Lane, Suite #102 Leased 04/01/94 1,773
Tarzana -- 18455 Burbank Boulevard, Suite #102 Leased 06/14/95 412
Torrance -- 22753 Hawthorne Boulevard Leased 01/31/95 2,727
Visalia -- 2917 South Mooney Boulevard Leased 05/31/95 902
--------------
Total $ 59,738,002
--------------
--------------
- ---------------
(1) A mortgage banking office is also located at this address.
(2) A dealer center is also located at this address.
(3) A Westcorp Financial Services office is also located at this address.
(4) Branches are leased from companies controlled by a major stockholder.
(5) A branch office is also located at this address.
(6) Leased on month to month term.
ITEM 3 -- LEGAL PROCEEDINGS
Westcorp is involved as a party to certain legal proceedings incidental to
its business. Westcorp believes that the outcome of such proceedings will not
have a material effect upon Westcorp's business or financial condition.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range by Quarter
The common stock of Westcorp began trading in the over-the-counter market
on May 5, 1986. On June 17, 1993, Westcorp commenced trading on the New York
Stock Exchange (NYSE), identified by the symbol, WES. From January 25, 1988 to
June 17, 1993 Westcorp was registered with the American Stock Exchange (AMEX),
also identified by the symbol WES. The following table illustrates the high and
low sale prices by quarter in 1993 and 1992, as reported by NYSE or AMEX, as
applicable, which prices are believed to represent actual transactions:
1993 1992
----------- -----------
HIGH LOW HIGH LOW
---- ---- ---- ----
First Quarter................................... $9 3/8 $7 1/8 $15 1/2 $12 3/8
Second Quarter.................................. 9 3/4 7 3/4 13 7/8 10 7/8
Third Quarter................................... 10 5/8 8 1/4 11 1/8 7 3/8
Fourth Quarter.................................. 11 8 3/4 8 7/8 6 3/4
There were approximately 1,000 shareholders of Westcorp common stock at
December 31, 1993. The number of shareholders was determined by the number of
record holders, including the number of individual participants, in security
position listings.
Dividends
Westcorp paid a $.05 per share cash dividend for each of the four quarters
of 1993. Westcorp paid a $.04 per share cash dividend for the first quarter of
1992, and $.05 per share cash dividend for each of the last three quarters of
1992. On February 28, 1994, Westcorp declared a cash dividend of $.075 per
share.
While Westcorp is not restricted in its ability to pay dividends, the Bank
is restricted by regulation and by the indenture relating to the Bank's
subordinated debentures as to the amount of funds which can be transferred to
Westcorp in the form of dividends. Under the most restrictive of these terms, on
December 31, 1993, the maximum dividend the Bank could declare would be $14.7
million. The Bank must notify the OTS of its intent to declare cash dividends 30
days before declaration, and may not pay a dividend or make a loan to Westcorp
for any purpose to the extent Westcorp engages in any activity not permitted for
a bank holding company. During 1993, the Bank did not pay any dividends to
Westcorp. The Bank anticipates making quarterly dividend payments to Westcorp
during 1994.
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ITEM 6 -- SELECTED FINANCIAL DATA
DECEMBER 31,
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS)
FINANCIAL SUMMARY
Assets Loans:
Consumer(1)........................ $ 230,351 $ 354,201 $ 378,140 $ 818,645 $ 956,171
Real estate(2)..................... 1,326,797 1,571,628 1,727,240 1,645,297 1,359,089
Mortgage-backed securities........... 94,567 107,757 189,182 182,760 216,780
Investments and time deposits(3)..... 273,526 219,368 153,462 131,642 179,820
Cash and other assets................ 247,018 266,541 241,017 190,936 178,242
---------- ---------- ---------- ---------- ----------
Total Assets............... $2,172,259 $2,519,495 $2,689,041 $2,969,280 $2,890,102
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Liabilities Deposits....... $1,357,058 $1,682,897 $1,814,938 $1,756,780 $1,410,991
Public Debt Offerings(4)............. 142,496 295,029 271,422 426,033 653,213
FHLB advances and other borrowings... 254,822 216,234 297,283 617,189 651,215
Other liabilities.................... 212,768 164,637 145,057 28,340 44,059
---------- ---------- ---------- ---------- ----------
Total Liabilities.......... 1,967,144 2,358,797 2,528,700 2,828,342 2,759,478
Shareholders' equity................. 205,115 160,698 160,341 140,938 130,624
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity............................. $2,172,259 $2,519,495 $2,689,041 $2,969,280 $2,890,102
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OTHER SELECTED FINANCIAL DATA
Average assets....................... $2,279,393 $2,568,899 $2,843,993 $2,984,854 $2,708,954
Return on average assets............. 0.56% 0.09% 0.74% 0.39% 0.34%
Average shareholders' equity......... $ 182,999 $ 167,494 $ 150,375 $ 137,412 $ 128,059
Return on average shareholders'
equity............................. 7.04% 1.35% 14.01% 8.50% 7.22%
Equity-to-Assets Ratio............... 9.44 6.38 5.96 4.75 4.52
Originations:
Consumer loans..................... $ 829,181 $ 673,473 $ 604,069 $ 544,975 $ 546,644
Real estate loans.................. $ 913,103 $ 597,809 $ 520,306 $ 544,848 $ 613,980
Interest rate spread................. 2.48% 2.91% 3.17% 2.99% 2.41%
Number of retail branch offices...... 26 27 26 24 21
- ---------------
(1) Net of unearned discount, and including loans available for sale of
$101,724,718 at December 31, 1993.
(2) Net of undisbursed loan proceeds, and including loans available for sale of
$199,006,560 at December 31, 1993.
(3) Includes investments available for sale of $118,001,821 at December 31,
1993.
(4) Includes bonds outstanding issued by finance subsidiaries of the Bank,
subordinated debentures issued by the Bank which are included as part of
risk-based capital and commercial paper issued by the Bank.
41
43
DECEMBER 31
--------------------------------------------------------------
1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest income...................... $ 157,946 $ 212,353 $ 288,305 $ 329,926 $ 295,217
Interest expense..................... 101,203 137,954 200,402 242,067 226,554
---------- ---------- ---------- ---------- ----------
Net interest income........ 56,743 74,399 87,903 87,859 68,663
Provision for loan losses............ 22,584 34,271 24,562 19,573 13,586
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses.................... 34,159 40,128 63,341 68,286 55,077
Other income......................... 73,839 32,865 37,645 14,305 11,281
Other expenses....................... 83,625 69,354 65,315 62,838 52,405
---------- ---------- ---------- ---------- ----------
Income before income taxes
and extraordinary loss... 24,373 3,639 35,671 19,753 13,953
Income taxes......................... 10,386 1,384 14,597 8,067 4,701
---------- ---------- ---------- ---------- ----------
Income before extraordinary
loss..................... 13,987 2,255 21,074 11,686 9,252
Extraordinary loss, net of applicable
income tax benefit of $811(1)...... (1,113)
---------- ---------- ---------- ---------- ----------
Net Income........................... $ 12,874 $ 2,255 $ 21,074 $ 11,686 $ 9,252
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Book value per share at December
31(1).............................. $ 9.37 $ 9.14 $ 9.21 $ 8.12 $ 7.61
Weighted average number of shares and
common share equivalents........... 19,807,092 17,684,451 17,496,372 17,381,682 17,301,813
Income before extraordinary item..... $ 0.71 $ 0.13 $ 1.20 $ 0.67 $ 0.53
Extraordinary loss due to redemption
of subordinated debentures......... (0.06)
---------- ---------- ---------- ---------- ----------
Net income per share(2).............. $ 0.65 $ 0.13 $ 1.20 $ 0.67 $ 0.53
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Dividends............................ $ 0.20 $ 0.19 $ 0.13 $ 0.12 $ 0.10
Dividend Payout Ratio................ 30.77% 146.15% 10.83% 17.91% 18.87%
- ---------------
(1) During the third quarter of 1993, the Bank redeemed its 11% Subordinated
Capital Debentures due 1999 at a loss. See Note K to the financial
statements.
(2) Gives effect to 4 1/2 to 1 stock split effective March 14, 1986, the
issuance of 5.1 million shares of new common stock in 1986, a 5% stock
dividend in 1991 and the issuance of 4.3 million shares of common stock in
1993.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and notes thereto.
OVERVIEW
Westcorp originated record levels of motor vehicle loans and single family
residential loans during 1993 in spite of the continued recessionary
environment. Specifically, Westcorp originated consumer and real estate loans of
$829 million and $913 million, respectively, during 1993. This compared to $673
million and $598 million, respectively, during 1992, an overall increase of 37%
over 1992's record combined origination level of $1.3 billion. Westcorp
continued its ongoing program of motor vehicle and real estate loan sales and
securitizations. During 1993, Westcorp sold or securitized $778 million of
consumer loans and $804 million of real estate loans compared to $450 million
and $385 million, respectively, in 1992.
42
44
Westcorp continued to focus on improving asset quality and experienced a
27% decline in nonperforming assets to $75 million at year-end 1993 compared to
$102 million at the end of 1992. Westcorp's capital was also enhanced by
completing an offering of 4.3 million shares of common stock and issuing $125
million of subordinated debentures through the Bank. At the end of 1993,
Westcorp's equity to assets ratio stood at 9.4% compared to 6.4% at December 31,
1992 and total assets at the end of 1993 totalled $2.2 billion compared to $2.5
billion at the end of 1992. In addition, the Bank's tangible, core, and
risk-based capital of 8.6%, 8.6% and 15.6%, respectively, exceeded all
regulatory capital requirements. Subsequent to December 31, 1993, the OTS
Agreement was also terminated as it was determined by the OTS that the Bank had
complied with its terms in all material respects.
RESULTS OF OPERATIONS
General
Westcorp's net income was $12.9 million for the year ended December 31,
1993 compared to $2.3 million for the year ended December 31, 1992 and $21.1
million for the year ended December 31, 1991. The increase in net income for the
year ended December 31, 1993 compared to 1992 was primarily attributable to
lower provisions for loan and real estate losses and higher loan servicing
income, offset by lower net interest income. The decrease in net income in 1992
relative to 1991 was the result of higher provisions for loan and real estate
losses combined with lower net interest margins in the real estate portfolio.
Provisions for loan and real estate losses were $22.6 million in 1993 compared
with $34.3 million and $24.6 million in 1992 and 1991, respectively. Westcorp is
continuing to provide loan loss reserves deemed necessary to absorb potential
losses in the loan portfolio.
Westcorp's loan portfolio decreased 26.0% between 1991 and 1993, from $2.1
billion at December 31, 1991 to $1.9 billion and $1.6 billion at December 31,
1992 and December 31, 1993, respectively. Offsetting this decrease, loans
outstanding originated by Westcorp and sold to others with servicing retained
increased 85% between 1991 and 1993, to $2.2 billion at December 31, 1993
compared to $1.4 billion and $1.2 billion at December 31, 1992 and 1991,
respectively. During 1993, Westcorp generated $35.9 million in loan servicing
fees compared to $22.8 million and $8.8 million in 1992 and 1991, respectively.
Gains on the sale of such loans increased to $18.6 million in 1993 as compared
to $11.8 million and $7.3 million in 1992 and 1991, respectively.
NET INTEREST INCOME
The net interest income of Westcorp depends upon the difference between the
income it receives from its interest-earnings assets and its cost of funds,
which difference is, in turn affected significantly by, first, the spread
between yields earned by Westcorp on its interest-earning assets and the rates
of interest paid by Westcorp on its interest-bearing liabilities (referred to as
interest rate spread), second, the relative amounts of Westcorp's
interest-earning assets and interest-bearing liabilities and, third, a
combination of the first two. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income.
The following table sets forth certain information regarding changes in
interest income and interest expense of Westcorp for the periods indicated. For
each category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in average portfolio volume multiplied by prior period average rate), (ii)
changes in rates (change in weighted average
43
45
interest rate multiplied by prior period average portfolio balance), and (iii)
the combined effect of changes in rates and volume (change in weighted average
interest rate multiplied by change in average portfolio balance).
1993 COMPARED TO 1992 1992 COMPARED TO 1991
---------------------------------------- ---------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- -------- ------- -------- -------- -------- ------ --------
(DOLLARS IN THOUSANDS)
Interest income:
Investment securities................. $ 3,139 $ (421) $ (337) $ 2,381 $ (1,267) $ (782) $ 170 $ (1,879)
Other investments..................... 761 79 33 873 377 (2,041) (187) (1,851)
Mortgage-backed securities............ (4,683) (2,710) 1,047 (6,346) (3,796) (3,031) 476 (6,351)
Total loans:
Consumer loans...................... (8,209) 177 (24) (8,056) (36,384) 506 (261) (36,139)
Real estate loans................... (21,437) (23,431) 3,541 (41,327) 19 (32,699) 16 (32,664)
-------- -------- ------- -------- -------- -------- ------ --------
Total interest earning assets... $(30,429) $(26,306) $4,260 (52,475) $(41,051) $(38,047) $ 214 (78,884)
Interest expense:
Savings deposits...................... $(10,131) $(14,244) $1,587 (22,788) $ (1,730) $(31,931) $ 411 (33,250)
Public debt offerings................. (862) (720) 49 (1,533) (13,281) (3,396) 1,512 (15,165)
FHLB advances......................... (13,939) 3,434 (1,986) (12,491) (14,324) 447 (156) (14,033)
Repurchase agreements................. 60 60
-------- -------- ------- -------- -------- -------- ------ --------
Total interest bearing liabilities...... $(24,932) $(11,530) $ (290) (36,752) $(29,335) $(34,880) $1,767 (62,448)
-------- -------- ------- -------- -------- -------- ------ --------
-------- -------- ------- -------- -------- ------ --------
Net change in net interest income....... $(15,723) $(16,436)
-------- --------
-------- --------
Net interest income in 1993 was $56.7 million compared with $74.4 million
in 1992 and $87.9 million in 1991. The decrease in net interest income resulted
from a decrease in both the amount of interest earning assets and a decrease in
the interest rate spread in 1993, offset by a decrease in interest bearing
liabilities. The decrease in interest earning assets to $1.9 billion for 1993
compared with $2.2 billion for 1992 and $2.4 billion for 1991 is primarily
attributable to ongoing consumer and real estate loan sales and increased real
estate loan payoffs. The loan sales are part of Westcorp's strategy of
securitizing its loans. See "Business--Loan Sales and Securitizations."
Increased real estate loan payoffs and mortgage-backed securities reductions
during 1993 occurred as borrowers took advantage of low interest rates to
refinance home mortgages. The Bank elected to not replace these loans with new
portfolio loans, but to concentrate on originating loans for sale. See
"Business -- Loan Sales and Securitizations". The decrease in interest bearing
liabilities resulted primarily from a decrease in deposits due to a pricing
strategy aimed at reducing the deposit base commensurate with the lower asset
base.
Since 1990, interest rates have generally declined for Westcorp's
interest-earning assets. This decline correlates with overall market interest
rate decline. Average yield on interest earning assets decreased to 7.82% for
the year ended December 31, 1993 from 9.0%, and 10.9% for the years ended 1992
and 1991, respectively. The yield on the real estate portfolio at December 31,
1993 was 7.2% compared to 8.6% and 10.5% for the years ended December 31, 1992
and 1991, respectively. Consumer loan rates, which are less sensitive to market
conditions, were 13.3% for the year ended December 31, 1993 compared to 13.2%
for the years ended December 31, 1992 and 1991.
The decrease in interest income is primarily the result of an increase in
nonaccrual and foreclosed loans and consistent decreases in the 11th District
Cost of Funds Index ("COFI") during each month of 1993. The continuing
deterioration of the California real estate market has led to higher levels of
nonaccrual loans and foreclosed assets. Interest income was reduced by $1.2
million in 1993 compared to $8.1 million in 1992 and $2.9 million in 1991. The
decrease in COFI was reflected in a decrease in interest earned on interest
earning assets, especially for loan rates which were indexed to COFI, and
adjustable rate mortgages in particular.
These yield declines have been offset to some degree by decreases in
interest costs, particularly in the savings deposit portfolio. Westcorp's
average cost of funds declined to 5.3% for the year ended December 31, 1993 from
6.1% and 7.7% in the years of 1992 and 1991, respectively. The cost of savings
deposits for the year ended December 31, 1993 was 4.8% compared to 5.6% and 7.3%
for the years ended December 31, 1992 and
44
46
1991, respectively. Other short-term interest costs, such as those for
commercial paper have experienced similar reductions.
The cost of FHLB advances during this period has not fallen as quickly
because FHLB advances are fixed rate and have longer maturities. The cost of
debt (including those characterized as public debt offerings) has remained high
primarily due to the 11% Debentures of approximately $52.0 million which were
outstanding for most of the year. The weighted average interest cost for other
public offerings during 1993 was 7.5% compared to 7.9% and 8.9% for 1992 and
1991, respectively. The decreases are chiefly the result of replacing the
issuance of on-balance sheet collateralized bonds with sales of consumer loans
in the secondary market beginning in late 1990 as well as the issuance of 8.5%
Debentures in 1993 replacing the 11% Debentures previously outstanding.
The interest rate spread was 2.5% during 1993 compared to 2.9% and 3.2%
during 1992 and 1991, respectively. The following tables present the average
interest bearing balances, interest, yield on assets, rates on liabilities and
the spread between the combined average yields earned on interest earning assets
and average rates paid on interest bearing liabilities for the periods
indicated. Average balances are determined on a daily basis.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1993 1992 1991
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment securities... $ 106,705 $ 6,328 5.93 % $ 59,424 $ 3,947 6.64 % $ 75,955 $ 5,826 7.67 %
Other investments....... 81,015 3,190 3.94 60,988 2,317 3.80 55,920 4,168 7.45
Mortgage-backed
securities............ 100,890 5,788 5.74 164,270 12,134 7.39 195,551 17,485 8.94
Total loans(1):
Consumer loans........ 293,820 39,017 13.28 355,872 47,073 13.23 632,561 83,212 13.15
Real estate loans..... 1,436,468 103,623 7.21 1,685,736 144,950 8.60 1,685,547 177,614 10.54
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest
earning assets.... 2,018,898 157,946 7.82 2,326,290 210,421 9.04 2,645,534 288,305 10.90
Non interest-earning
assets:
Premises and equipment
and real estate
owned................. 134,601 143,945 135,269
Other assets............ 169,899 135,080 90,927
Less allowance for loan
losses................ 44,005 36,416 27,737
---------- ---------- ----------
TOTAL............. $2,279,393 $2,568,899 $2,843,993
---------- ---------- ----------
---------- ---------- ----------
Interest bearing
liabilities:
Savings deposits........ $1,598,585 76,316 4.77 $1,780,484 99,103 5.57 $1,804,056 132,353 7.34
Public debt offerings... 178,553 13,342 7.47 189,546 14,875 7.85 339,622 30,040 8.85
FHLB advances and other
borrowings............ 116,930 11,485 9.82 279,210 23,976 8.59 447,933 38,009 8.49
Repurchase agreements... 2,146 60 2.80
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Total interest
bearing
liabilities....... 1,896,214 101,203 5.34 2,249,240 137,954 6.13 2,591,611 200,402 7.73
Liabilities and
Shareholder's Equity
Non Interest-bearing
liabilities:
Unearned insurance
premiums and
insurance
reserves............ 5,413 5,784 5,894
Other liabilities..... 194,767 146,381 96,113
Shareholders' equity...... 182,999 167,494 150,375
---------- ---------- ----------
TOTAL............. $2,279,393 $2,568,899 2,843,993
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
---------- ---------- ----------
Net interest income and
interest rate spread.... $ 56,743 2.48 % $ 72,467 2.91 % $ 87,903 3.17 %
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
Net yield on average
interest earning
assets.................. 2.81 % 3.12 % 3.32 %
------ ------ ------
------ ------ ------
- ---------------
(1) For the purposes of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
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47
The following table sets forth the weighted average interest rate on
Westcorp's interest earning assets, the weighted average rates paid on
Westcorp's interest bearing liabilities and the resultant interest rate spread
as of each of the three years ended December 31, 1993, 1992, and 1991.
DECEMBER 31,
-------------------------
1993 1992 1991
----- ----- -----
Weighted average rate on:
Investments and time deposits..................... 4.16% 6.63% 8.13%
Mortgage-backed securities........................ 5.40 6.44 8.39
Total loans:
Consumer loans................................. 12.44 12.88 13.78
Real estate loans.............................. 7.07 7.83 9.58
----- ----- -----
Weighted average yield on interest earning
assets....................................... 7.19 8.52 9.95
Weighted average rate paid on:
Savings deposits.................................. 4.48 5.15 6.46
Public debt offerings............................. 8.82 5.55 8.02
FHLB advances and other borrowings................ 5.50 7.36 8.22
----- ----- -----
Weighted average rate paid on interest bearing
liabilities.................................. 4.98 5.41 6.85
----- ----- -----
Interest rate spread................................ 2.21% 3.11% 3.10%
----- ----- -----
----- ----- -----
Westcorp's ability to maintain a positive spread during periods of
fluctuating interest rates is determined principally by the relative maturities
of its interest-earning assets and interest-bearing liabilities, and the
relative repricing mechanisms of its interest sensitive assets and liabilities.
Synchronizing the repricing of an institution's liabilities and assets to
minimize interest rate risk is commonly referred to as "gap management."
"Negative gap" occurs when an institution's liabilities reprice more rapidly
than its assets and "positive gap" occurs when an institution's assets reprice
more rapidly than its liabilities.
As a result of Westcorp's practice of matching its rate sensitive
liabilities with rate sensitive assets, it had a "positive gap" of 19.4% at
December 31, 1993 for assets and liabilities having an interest rate maturity of
one year or less and 14.2% for assets and liabilities having an interest rate
maturity of three years or less. At December 31, 1993, over 86% of Westcorp's
interest earning assets had interest rate maturities of under three years.
Westcorp's asset/liability management strategy is to match its loan
products against interest-bearing liabilities with similar repricing
characteristics and durations. As part of this strategy, Westcorp has continued
to originate fixed-rate consumer loans for securitization and sale in the
secondary market. These securitizations allow Westcorp to match assets and
liabilities and reduce interest rate risk on this portfolio. Westcorp has also
continued to sell fixed-rate mortgage loans in the secondary market in response
to these market changes. See "Business -- Loan Originations, Sales and
Securitizations." Westcorp also manages its exposure to interest rates by
originating ARMs and by match funding fixed rate real estate loans with advances
from the FHLB. Westcorp has also introduced loan products tied to current market
interest indices such as LIBOR, Treasury and the Federal Cost of Funds Index to
reduce the exposure associated with loan products tied to the COFI, which is a
lagging market index.
During 1993, Westcorp maintained a positive interest spread despite
fluctuations in general interest rates as a result of the short interest rate
maturities of its loan portfolio adjusting almost as frequently as its
liabilities to changes in interest rates. Westcorp's ability to maintain a
positive gap is significantly affected by changes in interest rates due, among
other factors, to (i) the lagging nature of the index on which interest rate
adjustments on a large percentage of Westcorp's interest earning assets are
based, (ii) the fact that Westcorp's interest earning assets and interest
bearing liabilities reprice at different times, (iii) the effect of interest
rate caps on its assets, (iv) the fact that interest rates on such assets and
liabilities may respond to different economic, market and competitive factors,
(v) the fact that sustained high levels of interest rates may adversely affect
real estate loans, motor vehicle loans and lending markets in general, and (vi)
the fact that
46
48
sustained low levels of interest rates may increase the difficulty of
originating ARMs as well as increase loan prepayments, which prepayments may be
reinvested at lower interest rates.
The following table illustrates the projected interest rate maturities,
based upon certain assumptions regarding the major asset and liability
categories of Westcorp at December 31, 1993. Prepayment and decay assumptions
for mortgage loans and savings accounts are developed using both industry
averages as provided by the OTS and Westcorp's own prepayment experience. For
Westcorp's mortgage loans, the prepayment assumptions range from 7% to 29% of
loans prepaying per year depending upon the interest rate, type of loan and
contractual repricing terms. For passbook and money market deposit accounts
Westcorp uses a rate of 14% to 79% decay per year depending upon the
characteristics of each type of account. The interest rate sensitivity of
Westcorp's assets and liabilities illustrated in the following table could vary
substantially if different assumptions were used or actual experience differs
from the assumptions set forth. Although Westcorp's investment securities and
mortgage-backed securities are classified as available for sale, they are
presented in the repricing categories relative to their respective stated
maturities adjusted for any appropriate prepayment assumptions. Loans available
for sale are presented as repricing within three months based on management's
intent relative to these assets.
AFTER AFTER
AFTER ONE YEAR THREE AFTER
3 MONTHS THROUGH YEARS FIVE YEARS AFTER
WITHIN THROUGH THREE THROUGH THROUGH TEN
3 MONTHS ONE YEAR YEARS FIVE YEARS TEN YEARS YEARS TOTAL
---------- --------- --------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment securities available for
sale................................... $ 19,907 $ 5,000 $ 89,168 $ 1,680 $ 2,247 $ 118,002
Other investments........................ $ 137,858 100 137,958
Mortgage-backed securities available for
sale................................... 88,826 3,721 323 272 570 855 94,567
Total loans:
Consumer loans(1)...................... 18,390 43,744 100,213 53,864 13,995 145 230,351
Real estate loans:
Adjustable interest rate mortgage
loans(2)........................... 917,204 179,886 15,295 4,682 6,138 540 1,123,745
Fixed rate mortgage loans(2)......... 9,346 25,016 57,051 36,153 54,100 4,591 186,257
Construction loans(2)................ 16,795 16,795
---------- --------- --------- ---------- ---------- -------- ----------
Total interest earning assets.......... 1,188,419 272,374 177,882 184,139 76,483 8,378 1,907,675
Interest bearing liabilities:
Savings deposits:
Passbook/statement accounts(3)......... 6,893 19,800 46,068 28,616 42,567 18,242 162,186
Money market deposit accounts(3)....... 227 546 233 89 54 1,149
Certificate accounts(4)................ 369,007 456,256 200,574 167,658 228 1,193,723
FHLB advances(4)......................... 5,000 32,000 44,000 32,000 13,000 126,000
Other borrowings(4)(5)................... 132,320 16,756 223 204 121,815 271,318
---------- --------- --------- ---------- ---------- -------- ----------
Total interest bearing liabilities..... 513,447 525,358 291,098 228,567 177,664 18,242 1,754,376
---------- --------- --------- ---------- ---------- -------- ----------
Excess interest bearing assets
(liabilities)............................ $ 674,972 $(252,984) $(113,216) $(44,428) $(101,181) $ (9,864) $ 153,299
---------- --------- --------- ---------- ---------- -------- ----------
---------- --------- --------- ---------- ---------- -------- ----------
Cumulative excess.......................... $ 674,972 $ 421,988 $ 308,772 $264,344 $ 163,163 $153,299 $ 153,299
---------- --------- --------- ---------- ---------- -------- ----------
---------- --------- --------- ---------- ---------- -------- ----------
Cumulative differences as a percentage of
total assets............................. 31.07% 19.43% 14.21% 12.17% 7.51% 7.06% 7.06%
- ---------------
(1) Based on contractual maturities adjusted by Westcorp's historical prepayment
rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the OTS.
(4) Based on contractual maturity.
(5) The motor vehicle loan collateralized bonds are amortized based on the
scheduled payments of the collateral.
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49
PROVISIONS FOR LOAN AND REAL ESTATE LOSSES
Valuation allowances for estimated losses on loans and real estate are
determined by taking into consideration several factors, including, but not
limited to, general economic conditions in the markets Westcorp serves,
historical losses, delinquency, individual loan reviews and levels of
nonperforming loans and assets relative to reserve levels.
The allowance for loan losses ("ALL") decreased from $40.7 million at
December 31, 1992 to $39.7 million at December 31, 1993. The provision for loan
losses totaled $22.6 million during 1993 offset by net charge-offs totaling
$23.6 million. This was a decrease in provisions of $11.7 million and $2.0
million compared to 1992 and 1991 respectively. This balance reflects Westcorp's
reduction in nonperforming loans during 1993. Westcorp believes that the ALL,
which is 124.2% of nonperforming loans, 166.1% of loans past due 60 days or more
and 2.55% of total loans, is currently adequate to absorb potential losses in
the portfolio.
The allowance for real estate losses totaled $3.5 million at December 31,
1993 compared to $20.2 million at December 31, 1992. The allowance for real
estate losses decreased $16.7 million during 1993 due primarily to the
charge-offs taken in the first quarter of 1993 related to certain properties for
which specific reserves were provided in the fourth quarter of 1992. In
addition, Westcorp's inventory of real estate (including REO acquired through
foreclosure, insubstance foreclosures, and real estate held for investment or
development) declined 50.0% to $47.5 compared to $94.9 at December 31, 1992.
Furthermore, in addition to general loss reserves, individual properties are
written down to estimated current fair value at time of foreclosure. Any
additional deterioration in fair value is recorded in a specific reserve on each
individual property. Westcorp did not have an allowance or provision related to
REO prior to 1992.
The table below provides comparative data relative to the allowance for
loan and real estate losses for the periods indicated.
AT DECEMBER 31,
---------------------------
1993 1992
----------- -----------
Total loans (in thousands)........................ $ 1,557,148 $ 1,925,829
Allowance for loan losses......................... 39,676,719 40,655,934
Allowance for real estate losses.................. 3,508,123 20,185,024
Loans past due 60 days or more.................... 23,885,549 51,867,273
Nonperforming loans............................... 31,966,238 57,819,128
Nonperforming assets(1)........................... 74,972,203 102,465,566
Allowance for loan losses as a percent of:
Total loans(2).................................. 2.55% 2.11%
Loans past due 60 days or more.................. 166.11 78.38
Nonperforming loans............................. 124.12 70.32
Total allowance as a percent of nonperforming
assets.......................................... 57.60 59.38
Nonperforming loans as a percent of total
loans(2)........................................ 2.05 3.00
a percent of total assets....................... 3.45 4.06
- ---------------
(1) Nonperforming loans, insubstance foreclosures (including real estate
investments classified as insubstance foreclosures) and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
In the past several years, the national economy has been adversely affected
by negative or low rates of economic growth and high unemployment. The effects
of the economic downturn have been acute in California, where essentially all of
Westcorp's real estate loan portfolio is located. Nonetheless, Westcorp
experienced a decrease in delinquencies and nonperforming assets during 1993.
Real estate loans past due 60 days or more at December 31, 1993 decreased to
$23.0 million or 1.7% of total real estate loans from $49.4 million or 3.1% at
year-end 1992. In the same time frame, nonperforming assets decreased 26.8% to
$75.0 million from $102.5 million. The decrease has, in part, been the result of
loans migrating from
48
50
delinquent loans to nonperforming loans and, in turn, to ISF or REO. These
properties, in turn, have been disposed of by Westcorp's Special Asset
Department. The types and migration of nonperforming assets are shown in the
tables that follow.
SINGLE FAMILY MULTIFAMILY MULTIFAMILY
TOTAL RESIDENTIAL 5-36 UNITS 37+ UNITS OTHER
------------ ------------- ----------- ----------- -----------
NONPERFORMING LOANS
Balance at 12/31/91............ $ 32,645,110 $ 8,501,989 $ 4,294,619 $19,385,070 $ 463,432
New nonperforming loans...... 124,272,857 42,781,641 12,542,083 44,156,317 24,792,816
REO/ISF...................... (65,033,799) (16,463,204) (5,184,774) (31,621,105) (11,764,716)
Cures and Payoffs............ (14,638,858) (5,625,952) (4,881,673) (3,012,013) (1,119,220)
Chargeoffs................... (19,426,182) (8,894,709) (1,097,568) (8,506,553) (927,352)
------------ ------------- ----------- ----------- -----------
Balance 12/31/92............... 57,819,128 20,299,765 5,672,687 20,401,716 11,444,960
New nonperforming loans...... 69,090,231 35,981,786 14,587,543 9,734,791 8,786,111
REO/ISF...................... (75,657,187) (25,343,330) (14,748,115) (19,397,027) (16,168,715)
Cures and payoffs............ (15,095,632) (11,396,786) (2,346,448) (604,957) (747,441)
Chargeoffs................... (4,190,302) (3,819,623) (180,561) (190,118)
------------ ------------- ----------- ----------- -----------
Balance 12/31/93............... $ 31,966,238 $ 15,721,812 $ 2,985,106 $10,134,523 $ 3,124,797
------------ ------------- ----------- ----------- -----------
------------ ------------- ----------- ----------- -----------
INSUBSTANCE FORECLOSURES
Balance 12/31/91............... $ 2,230,369 $ 2,230,369
New ISF...................... 30,517,945 2,924,825 $20,931,115 $ 6,662,005
Transfer to REO.............. (6,749,547) (5,155,194) (1,594,353)
Cures........................ (329,463) (329,463)
Writedowns................... (3,114,357) (3,114,357)
------------ ------------- ----------- ----------- -----------
Balance 12/31/92............... 22,554,947 16,222,405 6,332,542
New ISF...................... 53,181,119 $ 6,051,864 36,929,255 10,200,000
Transfer to REO.............. (40,615,811) (3,900,544) (26,244,143) (10,471,124)
Cures........................ (5,060,000) (5,060,000)
Writedowns................... (9,234,722) (909,320) (6,988,984) (1,336,418)
------------ ------------- ----------- ----------- -----------
Balance 12/31/93............... $ 20,825,533 $ 1,242,000 $14,858,533 $ 4,725,000
------------ ------------- ----------- ----------- -----------
------------ ------------- ----------- ----------- -----------
REAL ESTATE ACQUIRED THROUGH
FORECLOSURE
Balance 12/31/91
New REO...................... $ 41,265,403 $ 16,463,204 $ 7,415,141 $12,284,346 $ 5,102,712
Sales, Deposits.............. (15,977,070) (7,524,645) (5,383,425) (3,069,000)
Writedowns................... (3,196,842) (1,375,031) (499,344) (1,322,467)
------------ ------------- ----------- ----------- -----------
Balance 12/31/92............... 22,091,491 7,563,528 1,532,372 7,892,879 5,102,712
New REO...................... 85,400,134 25,972,245 10,932,717 31,811,990 16,683,182
Sales, Deposits.............. (63,864,715) (21,594,547) (9,150,198) (29,275,629) (3,844,341)
Writedowns................... (26,221,946) (4,472,842) (2,589,794) (10,429,240) (8,730,070)
------------ ------------- ----------- ----------- -----------
Balance 12/31/93............... $ 17,404,964 $ 7,468,384 $ 725,097 $ $ 9,211,483
------------ ------------- ----------- ----------- -----------
------------ ------------- ----------- ----------- -----------
Through its Internal Asset Review department, Westcorp has identified and
regularly reviews its problem credits as well as potential problem credits. To
the extent that the California economy continues to suffer through a severe and
protracted downturn, additional loans may begin to experience credit problems.
However, the possibility and extent of such an occurrence is impossible to
predict at this time.
49
51
OTHER INCOME
Other income consists of income derived from loan servicing fees, loan
related fee income such as late charges and extension fees, gains on sales of
loans, mortgage-backed securities and investments, insurance agency activity as
well as reinsurance of credit life and credit disability, and real estate
operations. Other income totaled $73.8 million for the year ended December 31,
1993, compared to $32.9 million and $37.6 million for the years ended December
31, 1992 and 1991, respectively.
Loan servicing fees increased to $35.9 million in 1993 from $22.8 million
and $8.8 million in 1992 and 1991, respectively. Loans serviced for others, all
of which were originated by Westcorp, totaled $2.2 billion at December 31, 1993
compared to $1.4 billion at December 31, 1992 and $1.2 billion at December 31,
1991. Servicing income has continued to increase because of the increased
servicing portfolio and larger servicing fee spreads on more recent consumer
loan transactions. The following tables indicate the motor vehicle and real
estate loan originations and securitizations for each of the years ended
December 31, 1993, 1992 and 1991 and the weighted average yield on assets
securitized and weighted average off-balance sheet financing costs for motor
vehicle securitizations during such periods:
DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS)
Motor vehicle loan originations............ $829,181 $673,473 $604,069
Motor vehicle loan sales................... 777,500 450,000 725,000
Real estate loan originations(1)........... 913,103 600,250 520,306
Real estate loan sales and
securitization........................... 803,992 386,257 166,898
Motor vehicle sales:
Weighted average yield on contracts...... 14.71% 13.23% 14.06%
Weighted average financing cost(2)....... 5.53 5.64 7.19
-------- -------- --------
Net spread....................... 9.18% 7.59% 6.87%
-------- -------- --------
-------- -------- --------
- ---------------
(1) Includes loans purchased.
(2) Represents the weighted average interest rate on securitized transactions.
The combined portfolio of loans owned and loans serviced for others
generates income from late charges, extension fees, documentation fees,
reconveyance fees, and so forth. The increased portfolio, as well as heightened
origination activity combined to generate $46.5 million in income during 1993
compared to $32.5 million and $18.2 million in 1992 and 1991, respectively.
Gains on the sale of loans, mortgage-backed securities and investment
securities increased to $21.1 million in 1993 from $13.3 million and $8.0
million in 1992 and 1991 respectively. In 1993, Westcorp sold $1.6 billion of
loans compared to $834.8 million and $851.3 million for the years ended December
31, 1992 and 1991, respectively. Gains increased during the year ended December
31, 1993 over the years ended December 31, 1992 and 1991 due to higher loan
sales volumes and more favorable pricing in the secondary market due to the
decline in interest rates.
Insurance related income for 1993 totalled $7.1 million compared to $5.3
and $5.2 for 1992 and 1991, respectively. This income is generated through
various insurance products including credit life and disability policies and
annuity sales.
Real estate operations reflected a net expense for the year ended December
31, 1993 of $5.9 million compared to net expense of $19.3 million in 1992 and
net income of $2.8 million in 1991. The net expense in 1993 and 1992 was
primarily attributable to the real estate loss provisions previously discussed
as well as the expenses of holding and disposing of REO. Real estate operations
includes the management and disposition of real estate acquired through
foreclosure and real estate joint ventures constructed for development and sale
and real estate joint ventures held as operating units. Interests held by
Westcorp in these joint venture projects range from 51% to 100%. Westcorp's
investment in real estate joint venture projects declined to $9.2 million at
50
52
December 31, 1993 compared to $50.3 million at December 31, 1992 and $59.2
million at December 31, 1991. See "Business -- Subsidiaries -- Western Consumer
Services, Inc."
Losses (before elimination of intercompany expenses) from joint venture
operations were $2.0 million in 1993 compared to losses of $1.5 million in 1992
and $1.3 million in 1991. Westcorp intends to continue to reduce its involvement
in this type of activity.
OTHER EXPENSE
Other expenses, which consist of salaries and employee benefits, occupancy,
insurance and other miscellaneous expenses increased to $83.6 million in 1993
from $69.4 million in 1992 and $65.3 million in 1991. Other miscellaneous
expenses include marketing, telephone, supplies and legal and professional fees.
The increases in expenses is related to increased loan servicing portfolios,
expansion into other states, higher levels of nonperforming assets and the OTS
Agreement reflected in both an increase in personnel and higher personnel costs.
In addition, the premium paid to the Savings Association Insurance Fund
increased as a result of an increase in premium rates. The ratio of other
expenses to average serviced assets was 2.08% in 1993 compared to 1.85% in 1992,
and 1.79% in 1991.
INCOME TAXES
Westcorp's effective tax rate was 43% for the year ended December 31, 1993
compared to 38% for the year ended December 31, 1992 and 41% for the year ended
December 31, 1991.
On August 10, 1993, the Omnibus Budget Reconciliation act of 1993 was
signed into law. Among other things, it provided for a higher federal tax rate
of 35% to be paid by Westcorp (previously the tax rate was 34%). This new tax
rate was effective beginning January 1, 1993. Approximately $0.3 million has
been included in Westcorp's deferred tax asset as a result of this law change.
CAPITAL RESOURCES AND LIQUIDITY
Westcorp's funds are generated primarily through the operations of the Bank
and its subsidiaries. In addition, Westcorp completed a public offering of 4.3
million shares of common stock during 1993. The Bank also completed a $125
million offering of subordinated debentures. The proceeds of these offerings
were used to pay off higher cost subordinated debentures, to provide the Bank
additional capital under regulatory guidelines, and to generate the capital
resources to expand.
Westcorp and its subsidiaries have diversified sources of funds generated
through its operations. Primary sources of funds include deposits, loan
principal and interest payments received, sales of real estate loans and motor
vehicle loans, sales of and payments on mortgage-backed securities, and the
maturity or sale of investment securities. 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 recent decline in interest rates resulted in substantially
higher levels of loan prepayments during 1993 and 1992. It is difficult to
predict whether this trend will continue. The decrease in deposits resulted from
a pricing strategy designed to reduce the deposit base commensurate with the
lower asset base.
Other sources of funds include a commercial paper facility totalling $200
million, reverse repurchase agreements and FHLB advances. At December 31, 1993,
Westcorp had $125 million of commercial paper outstanding with approximately $75
million still available from this source. FHLB advances outstanding at December
31, 1993 totalled $126 million with approximately $203 million still available
under such line. At December 31, 1993, Westcorp had no reverse repurchase
agreements.
When conditions are favorable, structured finance capital markets are
accessed regularly with respect to Westcorp's motor vehicle loans. In 1993,
$777.5 million was raised by Westcorp through motor vehicle loan sale
transactions using an off-balance sheet grantor trust structure. An additional
$200 million were sold on March 11, 1994. In 1992 and 1991, $450 and $725
million, respectively, were raised in similar loan sale transactions. All of
those transactions received the highest rating given by Moody's Investors
Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P") at the time
of sale based on the structure of the
51
53
transaction and credit enhancement provided by Financial Security Assurance Inc.
("FSA"). In each transaction, FSA issued a financial guaranty insurance policy
pursuant to which the payment of interest and principal was guaranteed to the
holders of the beneficial interests in the related grantor trust. In addition,
during 1993, Westcorp sold $804 million of real estate loans as part of its
mortgage banking activity. Westcorp will engage in motor vehicle and real estate
loan sales when market conditions are appropriate. If Westcorp does not sell
such loans it will hold them in its portfolio, relying on its other sources of
funds to meet its liquidity needs.
Westcorp uses its funds to meet its business needs, which include funding
maturing certificates of deposit and savings withdrawals, repaying of
borrowings, funding loan and investment commitments and real estate operations,
meeting operating expenses, and maintaining minimum regulatory liquidity and
capital levels. OTS regulations require the Bank, as a savings association, to
maintain a specified level of liquid assets such as cash, and short term U.S.
government and other qualifying securities. Such liquid assets must not be less
than 5.0% of the Bank's average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less, with short term liquid
assets (which generally have a term of less than one year) consisting of not
less than 1.0% of that average daily balance amount. For the twelve month
periods ended December 31, 1993, 1992 and 1991, such ratios were 10.3%, 5.7% and
6.0%, respectively.
EFFECT OF INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of Westcorp are monetary in nature. As a
result, interest rates have a more significant effect on Westcorp's performance
than the general level of inflation.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Westcorp's consolidated financial statements begin on page F-2 of this
report.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is omitted from this report, in
that Westcorp will file a definitive proxy statement (the "Proxy Statement")
within 120 days after the end of its fiscal year pursuant to Regulation 14A of
the Securities Exchange Act of 1934 for its Annual Meeting of Stockholders to be
held May 26, 1994 and the information included therein is incorporated herein by
reference.
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.
ITEM 11 -- EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Executive Compensation Summary" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management and
Certain Stockholders" in the Proxy Statement and is incorporated herein by
reference.
52
54
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and Westcorp
or its Subsidiaries" in the Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent auditors of Westcorp and subsidiaries are included in
this Report commencing on page F-2.
Report of Independent Auditors
Consolidated statements of financial condition -- December 31,
1993 and 1992.
Consolidated statements of income -- Years ended December 31,
1993, 1992, and 1991.
Consolidated statements of shareholders' equity -- Years ended
December 31, 1993, 1992, and 1991.
Consolidated statements of cash flows -- Years ended December 31,
1993, 1992, and 1991.
Notes to consolidated financial statements -- December 31, 1993.
(2) FINANCIAL STATEMENT SCHEDULES
Schedules to the consolidated financial statements are omitted
because the required information is inapplicable or the
information is presented in Westcorp's consolidated financial
statements or related notes.
(3) Exhibits
EXHIBIT
NUMBER
-------
3.1 Certificate of Incorporation*
3.2 Bylaws*
10.1 Westcorp Incentive Stock Option Plan**
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan*
10.3 Westcorp 1991 Stock Option Plan***
10.4 Agreement with the Office of Thrift Supervision****
11.1 Statement Re Computation of Earnings Per Share
22.1 Subsidiaries of Westcorp
23.1 Consent of Independent Auditors
- ---------------
* Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
** Exhibit previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference
under Exhibit Number indicated.
*** Exhibit previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under the Exhibit Number indicated.
53
55
**** Exhibit previously filed with Westcorp 10-Q filed May 15, 1992 incorporated
herein by reference under exhibit number indicated.
(b) Report on Form 8-K
A report on Form 8-K was filed November 24, 1993 announcing Westcorp's
quarterly dividend and a Board resolution authorizing its Executive Committee to
repurchase up to 1,000,000 shares of its common stock.
A report on Form 8-K was filed February 1, 1994 announcing that on January
25, 1994, the Bank was informed by the OTS that the OTS agreement will be
lifted.
54
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By STEPHEN W. PROUGH
Stephen W. Prough
President and
Dated: March 15, 1994 Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- ---------------
ERNEST S. RADY Chairman of the Board and March 15, 1994
Ernest S. Rady Chief Executive Officer
ROBERT W. JENKINS Vice Chairman, Director March 15, 1994
Robert W. Jenkins
STEPHEN W. PROUGH President and Chief Operating March 15, 1994
Stephen W. Prough Officer, Director
ALAN L. MILLIGAN Director March 15, 1994
Alan L. Milligan
STANLEY E. FOSTER Director March 15, 1994
Stanley E. Foster
WILLIAM J. CRAWFORD Director March 15, 1994
William J. Crawford
DOUGLAS J. PEACHER Director March 15, 1994
Douglas J. Peacher
JAY SCHAEFER FACKLER Vice President, March 15, 1994
Joy Schaefer Fackler (Principal Financial and
Accounting Officer),
Chief Financial Officer
55
57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WESTCORP
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
PAGE
-----
REPORT OF INDEPENDENT AUDITORS......................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition At The Years Ended
December 31, 1993 and 1992........................................................ F-3
Consolidated Statements of Income For The Years Ended
December 31, 1993, 1992 and 1991.................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity For The Years Ended
December 31, 1993, 1992 and 1991.................................................. F-5
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1993, 1992 and 1991.................................................. F-6
Notes to Consolidated Financial Statements........................................... F-8
F-1
58
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westcorp
We have audited the consolidated statements of financial condition of Westcorp
and Subsidiaries listed in the accompanying Index to Financial Statements (Item
14(a)). These financial statements are the responsibility of Westcorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying Index to
Financial Statements (Item 14(a)) present fairly, in all material respects, the
consolidated financial position of Westcorp and Subsidiaries at December 31,
1993 and 1992, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1993 in
conformity with generally accepted accounting principles.
ERNST & YOUNG
Los Angeles, California
January 19, 1994
F-2
59
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
DECEMBER 31,
----------------------------------
1993 1992
--------------- ---------------
Cash......................................................... $ 24,598,720 $ 31,249,766
Interest-bearing deposits with other financial
institutions............................................... 795,576 7,592,795
Other short-term investments................................. 137,162,368 75,160,856
Investment securities available for sale (market value: 1993,
$118,448,938; 1992, $117,325,000).......................... 118,001,821 115,940,161
Mortgage-backed securities available for sale (market value:
1993, $95,834,925; 1992, $109,259,000)..................... 94,566,598 107,757,180
Loans receivable net of allowance for loan losses (1993:
$39,676,719; 1992: $40,655,934)............................ 1,220,249,876 1,649,836,368
Loans available for sale..................................... 300,731,278 241,943,262
Premises and equipment....................................... 67,516,294 69,672,908
Real estate owned, net....................................... 43,970,459 74,753,893
Accrued interest receivable.................................. 11,603,937 13,909,527
Excess of purchase cost over net assets acquired............. 1,183,885 1,268,448
Federal Home Loan Bank stock................................. 17,566,386 20,674,286
Other assets................................................. 134,312,140 109,735,291
--------------- ---------------
$ 2,172,259,338 $ 2,519,494,741
--------------- ---------------
--------------- ---------------
LIABILITIES
Savings deposits............................................. $ 1,357,058,337 $ 1,682,897,217
Short-term borrowings........................................ 124,511,000 210,691,409
Federal Home Loan Bank Advances.............................. 126,000,000 184,500,000
Other borrowings............................................. 26,384,518 72,326,452
Amounts held on behalf of trustee............................ 182,905,242 143,448,681
Unearned insurance premiums and insurance reserves........... 5,973,210 5,704,435
Other liabilities............................................ 23,889,709 15,483,219
--------------- ---------------
1,846,722,016 2,315,051,413
SUBORDINATED DEBENTURES...................................... 120,422,201 43,745,000
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 21,894,805 shares
in 1993 and 17,584,520 shares in 1992...................... 21,894,805 17,584,520
Paid-in capital.............................................. 92,392,771 61,212,124
Retained earnings............................................ 90,827,545 81,901,684
--------------- ---------------
205,115,121 160,698,328
--------------- ---------------
$ 2,172,259,338 $ 2,519,494,741
--------------- ---------------
--------------- ---------------
See notes to consolidated financial statements.
F-3
60
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
----------------------------------------------
1993 1992 1991
------------ ------------ ------------
Interest income:
Loans, including fees.......................... $142,639,509 $192,023,189 $260,826,108
Investment securities.......................... 6,327,526 3,947,399 5,825,495
Mortgage-backed securities..................... 5,788,323 12,134,341 17,485,220
Other.......................................... 3,190,428 4,248,842 4,168,237
------------ ------------ ------------
TOTAL INTEREST INCOME............................ 157,945,786 212,353,771 288,305,060
Interest expense:
Savings deposits............................... 76,315,818 99,102,745 132,353,645
Federal Home Loan Bank advances and other
borrowings.................................. 24,826,554 38,851,553 65,463,487
Securities sold under agreements to
repurchase.................................. 60,299 2,585,247
------------ ------------ ------------
TOTAL INTEREST EXPENSE........................... 101,202,671 137,954,298 200,402,379
------------ ------------ ------------
NET INTEREST INCOME.............................. 56,743,115 74,399,473 87,902,681
Provision for loan losses........................ 22,583,656 34,270,698 24,561,569
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES......................................... 34,159,459 40,128,775 63,341,112
Other income:
Loan servicing fees............................ 35,874,738 22,772,223 8,813,136
Late charges and extension fees................ 6,566,892 6,612,004 6,373,781
Gain on sale of loans.......................... 18,643,709 11,786,058 7,308,128
Investment and mortgage-backed securities
gains....................................... 2,503,132 1,492,701 688,492
Insurance income............................... 7,062,269 5,261,791 5,175,241
Real estate operations......................... (5,881,063) (19,256,808) 2,776,412
Miscellaneous.................................. 9,069,474 4,196,093 6,509,195
------------ ------------ ------------
TOTAL OTHER INCOME............................... 73,839,151 32,864,062 37,644,385
Other expenses:
Salaries and employee benefits................. 44,464,200 35,958,568 31,730,135
Occupancy...................................... 7,706,548 8,099,504 8,546,536
Insurance...................................... 7,050,059 6,018,517 5,678,759
Miscellaneous.................................. 24,404,462 19,277,428 19,358,999
------------ ------------ ------------
TOTAL OTHER EXPENSES............................. 83,625,269 69,354,017 65,314,429
------------ ------------ ------------
INCOME BEFORE INCOME TAXES....................... 24,373,341 3,638,820 35,671,068
Income taxes..................................... 10,385,608 1,384,062 14,597,507
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM................. 13,987,733 2,254,758 21,073,561
Extraordinary loss from the redemption of
subordinated debentures, net of applicable
income tax benefit of $811,295................. (1,113,486)
------------ ------------ ------------
NET INCOME....................................... $ 12,874,247 $ 2,254,758 $ 21,073,561
------------ ------------ ------------
------------ ------------ ------------
Net income per common share and common share
equivalent:
Before extraordinary loss........................ $ .71 $ .13 $ 1.20
Extraordinary loss due to the redemption of
subordinated debentures........................ (.06)
------------ ------------ ------------
NET INCOME PER COMMON SHARE AND COMMON SHARE
EQUIVALENT..................................... $ .65 $ .13 $ 1.20
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of shares and common
share equivalents.............................. 19,807,092 17,684,451 17,496,372
------------ ------------ ------------
------------ ------------ ------------
See notes to consolidated financial statements.
F-4
61
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ----------- ----------- ----------- ------------
Balance January 1, 1991......... 16,519,782 $16,519,782 $52,100,147 $72,318,357 $140,938,286
Stock options exercised....... 58,560 58,560 419,867 478,427
Stock dividend................ 826,858 826,858 7,441,722 (8,268,580)
Cash dividends................ (2,149,170) (2,149,170)
Net income.................... 21,073,561 21,073,561
---------- ----------- ----------- ----------- ------------
Balance December 31, 1991....... 17,405,200 17,405,200 59,961,736 82,974,168 160,341,104
Stock options exercised....... 118,323 118,323 534,324 652,647
Stock issued.................. 60,997 60,997 716,064 777,061
Cash dividends................ (3,327,242) (3,327,242)
Net income.................... 2,254,758 2,254,758
---------- ----------- ----------- ----------- ------------
Balance December 31, 1992....... 17,584,520 17,584,520 61,212,124 81,901,684 160,698,328
Stock options exercised....... 26,435 26,435 179,456 205,891
Stock issued.................. 4,283,850 4,283,850 31,001,191 35,285,041
Cash dividends................ (3,948,386) (3,948,386)
Net income.................... 12,874,247 12,874,247
---------- ----------- ----------- ----------- ------------
Balance December 31, 1993....... 21,894,805 $21,894,805 $92,392,771 $90,827,545 $205,115,121
---------- ----------- ----------- ----------- ------------
---------- ----------- ----------- ----------- ------------
See notes to consolidated financial statements.
F-5
62
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------------------------
1993 1992 1991
------------- ------------- -------------
OPERATING ACTIVITIES
Net Income.................................... $ 12,874,247 $ 2,254,758 $ 21,073,561
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for losses..................... 16,095,116 51,965,148 25,425,984
Depreciation and amortization............ 6,973,725 6,984,065 6,343,029
Amortization of deferred fees............ (2,089,173) (3,744,212) (4,487,443)
Amortization of issuance costs........... 377,593 590,134 1,117,442
Decrease in interest receivable.......... 2,305,590 3,176,551 2,495,180
Loss (gain) on nonoperating activities... 1,004,874 (12,944,769) (9,016,102)
Increase (decrease) in interest
payable................................ 3,006,322 (2,231,720) (3,245,646)
Increase (decrease) in unearned
insurance.............................. 268,775 613,325 (1,152,126)
Deferred income tax expense (benefit).... 5,790,468 (12,027,339) (16,029,386)
Extraordinary loss, net of taxes............ 1,113,486
Other, net............................... (13,449,215) (13,188,966) 8,266,895
Net change in loans available for sale........ (40,144,307) (230,157,204)
------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES.................................. (5,872,499) (208,710,229) 30,791,388
INVESTING ACTIVITIES
Purchase of investment securities available
for sale.................................... (93,881,830) (83,510,086) (40,432,031)
Proceeds from sales of investment securities
available for sale.......................... 65,375,887 29,294,932 81,402,092
Proceeds from maturities of investment
securities available for sale............... 28,906,099 4,147,380
Payments received on mortgage-backed
securities available for sale............... 15,470,026 43,646,775 26,623,873
Purchases of mortgage-backed securities
available for sale.......................... (7,052,468) (6,080,351) (52,357,826)
Proceeds from sale of mortgage-backed
securities available for sale............... 4,662,134 47,328,986 61,188,292
Net change in loans........................... 311,488,772 338,741,166 (547,441,786)
Sale of loans................................. 858,586,128
Purchase of loans............................. (210,000) (2,441,000)
Additions to premises and equipment........... (4,152,946) (6,656,001) (13,265,904)
Disposition of real estate owned.............. 112,506,100 22,973,036 27,860,769
Purchases of FHLB stock....................... (493,600) (1,787,200) (4,374,200)
Proceeds from sales of FHLB stock............. 3,601,500 2,287,200 7,513,700
Net increase in trust receivable.............. (11,963,881) (3,171,998) (29,334,842)
Increase in trustee accounts.................. 39,456,561 22,013,713 103,957,508
------------- ------------- -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES..... 463,712,354 406,786,552 479,925,773
F-6
63
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31
-------------------------------------------------
1993 1992 1991
------------- ------------- -------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits........... (325,838,880) (132,040,874) 58,157,722
Decrease in securities sold under agreements
to repurchase, net.......................... (138,004,869)
Decrease in FHLB advances, net................ (58,500,000) (78,500,000) (200,000,000)
(Decrease) increase in short-term borrowings,
net......................................... (86,180,409) 112,801,056 75,584,497
Proceeds from other borrowings................ 4,225,000
Repayment of other borrowings................. (45,975,129) (83,690,586) (205,326,468)
Proceeds from issuance of subordinated
debentures.................................. 120,523,750
Redemption of subordinated debentures......... (44,858,486)
Reduction in subordinated debentures.......... (8,230,000) (10,846,500)
Proceeds from sale of common stock............ 35,490,932 1,429,708 478,424
Cash dividends................................ (3,948,386) (3,327,242) (2,149,170)
------------- ------------- -------------
NET CASH USED IN FINANCING ACTIVITIES......... (409,286,608) (191,557,938) (417,881,364)
------------- ------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS......... 48,553,247 6,518,385 92,835,797
Cash equivalents at beginning of period....... 114,003,417 107,485,032 14,649,235
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 162,556,664 $ 114,003,417 $ 107,485,032
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest.................................... $ 98,196,349 $ 140,186,018 $ 204,472,772
Income taxes................................ 8,813,500 27,503,500 14,900,000
SUPPLEMENTAL DISCLOSURES OF NONCASH
TRANSACTIONS:
Acquisition of real estate acquired through
foreclosure.............................. $ 97,965,442 $ 64,704,337 $ 16,857,464
Securitization of loans..................... 1,656,248 40,620,000
See notes to consolidated financial statements.
F-7
64
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
NOTE A -- A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of Westcorp, its wholly-owned subsidiary,
Western Financial Savings Bank (the "Bank") and its subsidiaries ("Westcorp").
All significant intercompany accounts and transactions have been eliminated upon
consolidation. Westcorp is a majority owned subsidiary of American Assets, Inc.
Investment Securities and Mortgage-Backed Securities Available for
Sale: Securities to be held for indefinite periods of time and not necessarily
intended to be held to maturity or on a long-term basis are classified as
available for sale and carried at the lower of amortized cost or market value.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management strategy and
that may be sold in response to changes in interest rates and resultant
prepayment risk, or other factors. Effective December 31, 1992, management
classified the entire investment securities and mortgage-backed securities
portfolios as available for sale and have recorded these portfolios at the lower
of amortized cost or market value. Management may, in the future, originate or
purchase investment securities or mortgage-backed securities for investment
purposes. Gains and losses on sales of securities are determined by the
difference between sales proceeds and the carrying value of the specific
securities being sold.
Interest on Fee Income: Interest income on discounted retail installment
sales contracts is being determined on a monthly basis using the
sum-of-the-months digits method which approximates the interest method. These
contracts are charged off in the normal course of business after 120 days past
due, including any interest accrued thereon, unless Westcorp can clearly
demonstrate that repayment would occur regardless of delinquency status, i.e.,
the loan is well secured by collateral and is in the process of collection.
Interest income on real estate loans is accrued daily based upon the principal
amount outstanding. The accrual of interest is discontinued when, in
management's judgement, the interest will not be collectible in the normal
course of business or when the loan is 90 days or more past due or full
collection of principal is suspect. When a loan is placed on nonaccrual status,
interest accrued to date is reversed against interest income.
Westcorp amortizes loan origination and commitment fees and certain
deferred loan origination costs. The net amount is amortized as an adjustment to
the related loan's yield. Westcorp is amortizing these amounts over the
contractual life of the related loans. Commitment fees based on a percentage of
a customer's unused line of credit and fees related to standby letters of credit
are recognized over the commitment period. Fees for other services are recorded
as income when earned. Unearned fees on loans sold or paid in full are
recognized as income.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level believed adequate by management to absorb potential losses in the loan
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for loan losses
charged against income.
Loans Available for Sale: Loans available for sale are stated at the lower
of aggregate amortized cost or market. The carrying amount of specific loan
pools sold is used to compute gain or loss. Market value is based on prevailing
market quotes. Westcorp converts loans to mortgage-backed securities ("MBS")
guaranteed by agencies of the federal government, either holding such securities
for its own portfolio or selling such securities to investors and servicing
underlying mortgage loans. Upon securitization, Westcorp reviews its financial
position and liquidity needs in determining the classification of the MBS.
Westcorp has also sold mortgage loans to third parties including FNMA and FHLMC
without prior securitization.
F-8
65
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Westcorp also securitizes and sells retail installment sales contracts
while retaining servicing rights. As servicer, Westcorp holds and remits funds
collected from the borrowers on behalf of the trustee. These amounts are
reported as amounts held on behalf of trustee.
Gains and losses on sales of loans and contracts are determined by the
difference between sales proceeds and the cost of the loans or contracts
adjusted for the present value of the difference, if any, between the estimated
future servicing revenues and normal servicing revenues for those loan sales
where servicing is retained by Westcorp. Premiums resulting from the present
value of such excess revenues are capitalized and amortized over the estimated
lives of the loans or contracts.
Westcorp regularly evaluates the reasonableness of the assumptions used in
the present value gain calculation to reflect actual experience and changes in
economic conditions and adjusts the carrying value.
Premises and Equipment: Premises and equipment are stated at cost, less
accumulated depreciation and amortization computed principally on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter.
Real Estate Owned: Real estate acquired through foreclosure is recorded at
the lower of the unpaid principal balance on the loan at the foreclosure date or
fair value less selling costs. Subsequent valuation adjustments are made if the
fair value of the property falls below the carrying amount.
Real Estate Owned also includes properties classified as insubstance
foreclosed loans. Loans are classified as insubstance foreclosed when, in
management's judgement, the risks and rewards of ownership have been shifted
from the borrower to Westcorp as defined by generally accepted accounting
principles. These properties are transferred to real estate owned at the lower
of the unpaid balance on the loan or fair value. Subsequent valuation
adjustments are made if the fair value of the property falls below the carrying
amount.
The accompanying consolidated financial statements also include the
accounts of certain real estate joint venture partnerships. Westcorp has an
ownership interest of greater than 50% in all of its real estate partnership
transactions. All significant intercompany transactions have been eliminated in
consolidation.
Real estate acquired for development and sale is carried at the lower of
cost or net realizable value. Improvements and holding costs, including
interest, are capitalized during construction. The recognition of gains from the
sale of real estate is dependent on a number of factors relating to the nature
of the property sold, the terms of the sale and the future involvement of
Westcorp in the property sold.
Real estate owned is carried net of an allowance for potential losses and
is maintained at a level believed adequate by management to absorb potential
losses in the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loss experience,
current economic conditions, selling costs and other relevant factors.
Income Taxes: Westcorp files consolidated federal and state tax returns
with all its subsidiaries except for Westhrift, which files a separate tax
return. In February 1992, the Financial Accounting Standards Board issued
Statement No. 109, "Accounting for Income Taxes." On January 1, 1992, Westcorp
adopted the provisions of the new standard in its financial statements for the
year ended December 31, 1992. Under Statement 109, the liability method is used
in accounting for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
Prior to the adoption of Statement 109, income tax expense was determined using
the liability method prescribed by Statement 96, which is superseded by
Statement 109. Among other changes, Statement 109 changes the recognition and
measurement criteria for deferred tax assets included in
F-9
66
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Statement 96. The adoption of Statement 109 had no effect on the net income of
Westcorp and prior years' financial statements have not been restated.
Excess of Purchase Cost over Net Assets Acquired: The excess of amounts
paid over the fair value of assets acquired of a business purchased in 1982 is
being amortized over twenty-five years, using the straight-line method.
Insurance Commissions: Commissions on insurance policies sold are
recognized as income over the life of the policies.
Insurance Premiums: Premiums for life and accident/health insurance
policies are recognized as income over the term of the insurance contract.
Net Income Per Common Share: Net income per common share is based on
average shares outstanding during each year plus the net effect of dilutive
stock options.
Fair Values of Financial Instruments: In December 1991, the Financial
Accounting Standards Board issued Statement No. 107, "Disclosures about Fair
Value of Financial Instruments". It requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and in many cases,
could not be realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of Westcorp.
Cash and Cash Equivalents: Cash and cash equivalents include cash,
interest-bearing deposits with other financial institutions and other short-term
investments and have no material restrictions as to withdrawal or usage.
Reclassifications: Certain amounts for 1992 and 1991 have been reclassified
to conform with the 1993 presentation.
NOTE B -- INVESTMENT SECURITIES AVAILABLE FOR SALE
The aggregate carrying amounts and approximate market values of investment
securities available for sale at December 31 were:
1993 1992
--------------------------- ---------------------------
CARRYING MARKET CARRYING MARKET
AMOUNTS VALUE AMOUNTS VALUE
------------ ------------ ------------ ------------
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations........... $114,049,969 $114,522,852 $114,114,152 $115,465,000
Corporate bonds....................... 400,000 400,000 803,000 803,000
Obligations of states and political
subdivisions........................ 3,526,852 3,501,086 998,009 1,032,000
Other................................. 25,000 25,000 25,000 25,000
------------ ------------ ------------ ------------
$118,001,821 $118,448,938 $115,940,161 $117,325,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
F-10
67
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Gross unrealized and realized gains and losses for 1993 were as follows:
UNREALIZED REALIZED
----------------------- -----------------------
GAINS LOSSES GAINS LOSSES
---------- -------- ---------- --------
U.S. Treasury securities and obligations of
other U.S. Government agencies and
corporations............................... $1,072,642 $599,759 $2,935,645
Obligations of state and political
subdivisions............................... 1,740 27,506
Corporate bonds.............................. $400,000
---------- -------- ---------- --------
$1,074,382 $627,265 $2,935,645 $400,000
---------- -------- ---------- --------
---------- -------- ---------- --------
Gross unrealized and realized gains and losses for 1992 were as follows:
UNREALIZED
----------------------- REALIZED
GAINS LOSSES GAINS
---------- -------- --------
U.S. Treasury securities and obligations of other U.S.
Government agencies and corporations.................... $1,477,490 $126,644 $134,721
Obligations of states and political subdivisions.......... 33,991 345
---------- -------- --------
$1,511,481 $126,644 $135,066
---------- -------- --------
---------- -------- --------
Westcorp has no realized losses during 1992.
At December 31, 1993, the stated maturities of Westcorp's investment
securities available for sale were as follows:
ONE YEAR TO FIVE YEARS TO TEN YEARS
UP TO ONE YEAR FIVE YEARS TEN YEARS OR MORE
------------------ ------------------ ----------------- -----------------
CARRYING MARKET CARRYING MARKET CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------- -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations................ $19,907 $19,968 $94,143 $94,554
Corporate Bonds............... $ 400 $ 400
Obligations of states and
political subdivisions...... $1,680 $1,672 1,847 1,830
Other......................... 25 25
-------- ------- -------- ------- -------- ------ -------- ------
$19,907 $19,968 $94,168 $94,579 $1,680 $1,672 $2,247 $2,230
-------- ------- -------- ------- -------- ------ -------- ------
-------- ------- -------- ------- -------- ------ -------- ------
F-11
68
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE C -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities ("MBS") available for sale consisted of the
following at December 31:
1993 1992
--------------------------- -----------------------------
CARRYING MARKET CARRYING MARKET
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ------------ ------------
GNMA certificates........... $ 2,019,992 $ 2,135,226 $ 3,377,946 $ 3,505,000
FNMA participation
certificates.............. 88,782,456 89,851,873 99,492,647 100,779,000
FHLMC participation
certificates.............. 3,591,647 3,675,323 4,716,488 4,805,000
Other participation
certificates.............. 172,503 172,503 170,099 170,099
----------- ----------- ------------ ------------
$94,566,598 $95,834,925 $107,757,180 $109,259,099
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Unrealized gains and losses for 1993 and 1992 were as follows:
1993 1992
UNREALIZED UNREALIZED
---------------------- -------------------------
GAINS LOSSES GAINS LOSSES
---------- ------- ---------- ----------
GNMA certificates................... $ 131,535 $16,301 $ 155,224 $ 28,170
FNMA participation certificates..... 1,069,417 1,286,353
FHLMC participation certificates.... 83,676 88,512
---------- ------- ---------- ----------
$1,284,628 $16,301 $1,530,089 $ 28,170
---------- ------- ---------- ----------
---------- ------- ---------- ----------
Realized gains and losses for 1993 and 1992 were as follows:
1993 1992
REALIZED REALIZED
-------- ----------------------
LOSSES GAINS LOSSES
-------- ---------- -------
FHLMC participation certificates............ $1,870,270 $15,735
Other participation certificates............ $ 32,513
-------- ---------- -------
$ 32,513 $1,870,270 $15,735
-------- ---------- -------
-------- ---------- -------
The stated maturities of Westcorp's mortgage-backed securities available
for sale at December 31, 1993 were as follows:
TEN YEARS OR MORE
---------------------------
CARRYING MARKET
AMOUNT VALUE
----------- -----------
GNMA certificates................................. $ 2,019,992 $ 2,135,226
FNMA participation certificates................... 88,782,456 89,851,873
FHLMC participation certificates.................. 3,591,647 3,675,323
Other participation certificates.................. 172,503 172,503
----------- -----------
$94,566,598 $95,834,925
----------- -----------
----------- -----------
Westcorp has issued certain mortgage-backed securities that include
recourse provisions. Subject to certain limitations, Westcorp is required for
the life of the loans to repurchase the buyer's interest in individual loans on
which foreclosure proceedings have been completed. Securities with recourse sold
by Westcorp had a total outstanding balance of $36.6 million and $37.7 million
at December 31, 1993 and 1992, respectively.
F-12
69
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Westcorp has provided for possible losses that may occur as a result of its
recourse obligations through the allowance for loan losses. The maximum
remaining exposure under these recourse provisions at December 31, 1993 and 1992
was $32.5 and $33.1 million, respectively. Westcorp has pledged $30.3 million of
securities as collateral under these recourse provisions.
NOTE D -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following at December 31:
1993 1992
-------------- --------------
Real Estate:
Mortgage................................... $1,310,002,524 $1,532,674,612
Construction............................... 31,684,392 54,648,249
-------------- --------------
1,341,686,916 1,587,322,861
Less undisbursed loan proceeds............... 14,889,648 15,694,912
-------------- --------------
1,326,797,268 1,571,627,949
Consumer:
Sales contracts............................ 258,323,072 414,995,731
Less unearned discounts.................... 27,972,283 60,794,639
-------------- --------------
230,350,789 354,201,092
-------------- --------------
1,557,148,057 1,925,829,041
Allowance for loan losses.................... (39,676,719) (40,655,934)
Deferred loan fees........................... (5,849,187) (7,004,146)
Other........................................ 9,359,003 13,610,669
-------------- --------------
1,520,981,154 1,891,779,630
Less loans available for sale:
Consumer................................... 101,724,718 179,586,960
Mortgage................................... 199,006,560 62,356,302
-------------- --------------
300,731,278 241,943,262
-------------- --------------
$1,220,249,876 $1,649,836,368
-------------- --------------
-------------- --------------
The allowance for loan loss by loan category was as follows at December 31:
1993 1992
--------------------------- ---------------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY TO CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
----------- ----------- ----------- -----------
Consumer................. $ 5,571,333 14.8% $ 8,773,234 18.4%
Single family
residential............ 5,054,419 53.0 2,724,865 53.3
Multifamily
residential............ 29,050,967 32.2 29,157,835 28.3
----------- ----------- ----------- -----------
$39,676,719 100.0% $40,655,934 100.0%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Loans serviced by Westcorp for the benefit of others totaled approximately
$2,170,426,000, $1,410,699,000 and $1,172,994,000 at December 31, 1993, 1992,
and 1991, respectively. These amounts are not reflected in the accompanying
consolidated financial statements.
F-13
70
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Changes in the allowance for loan losses were as follows:
1993 1992 1991
------------ ------------ ------------
Balance at beginning of year..... $ 40,655,934 $ 33,932,677 $ 22,839,480
Provision for loan losses........ 22,583,656 34,270,698 24,561,569
Charged-off loans................ (32,506,961) (30,397,007) (15,177,019)
Recoveries....................... 8,944,090 2,849,566 1,708,647
------------ ------------ ------------
Balance at end of year........... $ 39,676,719 $ 40,655,934 $ 33,932,677
------------ ------------ ------------
------------ ------------ ------------
At the end of the year, interest on nonaccrual loans excluded from interest
income was $1.2 million in 1993 and $8.1 million in 1992.
NOTE E -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
1993 1992
----------- -----------
Land.............................................. $20,771,515 $20,675,041
Buildings and improvements........................ 48,810,438 48,538,413
Furniture and equipment........................... 17,379,315 20,004,266
Automobiles....................................... 197,910 134,840
----------- -----------
87,159,178 89,352,560
Less accumulated depreciation and amortization.... 19,642,884 19,679,652
----------- -----------
$67,516,294 $69,672,908
----------- -----------
----------- -----------
Interest cost capitalized for the year ended December 31, 1993 was $4,902.
NOTE F -- REAL ESTATE OWNED
Real estate owned consisted of the following at December 31:
1993 1992
----------- -----------
Real estate acquired for investment or
development..................................... $ 9,248,085 $50,292,479
Real estate acquired through foreclosure.......... 17,404,964 22,091,491
Insubstance foreclosures.......................... 20,825,533 22,554,947
----------- -----------
47,478,582 94,938,917
Less: allowance for losses........................ 3,508,123 20,185,024
----------- -----------
$43,970,459 $74,753,893
----------- -----------
----------- -----------
Changes in the allowance for real estate losses were as follows:
1993 1992
------------ -----------
Balance at beginning of year..................... $ 20,185,024
Provision for real estate losses................. (6,488,540) $22,015,872
Charge-offs...................................... (10,188,361) (1,830,848)
------------ -----------
Balance at end of year........................... $ 3,508,123 $20,185,024
------------ -----------
------------ -----------
Westcorp has entered into various partnership agreements to acquire and
develop real property. Westcorp's interest in each project is greater than 50%
and, in some cases, includes a participating share of the profits realized upon
sale.
F-14
71
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Condensed financial information for these partnerships follows:
1993 1992
---------- -----------
(UNAUDITED)
Statements of Financial Condition:
Total Assets..................................... $9,248,085 $50,292,479
---------- -----------
---------- -----------
Loans from Westcorp.............................. $6,371,328 $25,959,220
Loans from outside sources....................... 2,400,661 17,731,509
---------- -----------
Total liabilities................................ 8,771,989 43,690,729
Equity........................................... 476,096 6,601,750
---------- -----------
Total Liabilities and Equity..................... $9,248,085 $50,292,479
---------- -----------
---------- -----------
1993 1992 1991
----------- ----------- -----------
(UNAUDITED)
Statements of Operations:
Rental Income..................... $ 2,144,929 $ 4,248,528 $ 4,904,006
Sales of real estate, net......... 561,614 7,478 630,680
Other income...................... 143,921 315,583 957,931
----------- ----------- -----------
2,850,464 4,571,589 6,492,617
Interest expense(1)............... 1,641,009 3,470,580 4,842,941
General and administrative
expense........................ 3,222,058 2,579,151 2,977,590
----------- ----------- -----------
4,863,067 6,049,731 7,820,531
----------- ----------- -----------
Net Income (Loss)................. $(2,012,603) $(1,478,142) $(1,327,914)
----------- ----------- -----------
----------- ----------- -----------
- ---------------
(1) These amounts are eliminated or reclassified upon consolidation.
NOTE G -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31:
1993 1992
----------- -----------
Interest on loans receivable...................... $ 7,125,200 $10,072,655
Interest on securities............................ 2,546,555 1,904,690
Interest on other................................. 1,932,182 1,932,182
----------- -----------
$11,603,937 $13,909,527
----------- -----------
----------- -----------
NOTE H -- SAVINGS DEPOSITS
Savings deposits consisted of the following:
WEIGHTED
AVERAGE
RATE FOR
THE YEAR
ENDED DECEMBER 31,
DEC. 31, ---------------------------------
1993 1993 1992
-------- -------------- --------------
Passbook accounts................. 2.99% $ 162,185,355 $ 189,895,533
Money market deposit accounts..... 3.11 1,148,836 1,212,253
Certificate accounts.............. 4.99 1,193,724,146 1,491,789,431
-------------- --------------
$1,357,058,337 $1,682,897,217
-------------- --------------
-------------- --------------
F-15
72
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The aggregate amount of savings deposits in denominations greater than or
equal to $100,000 at December 31, 1993 was $355,901,000.
Scheduled maturities of certificate accounts as of December 31, 1993 are as
follows:
WEIGHTED
AVERAGE
RATE AMOUNT
-------- --------------
Six months or less................................. 3.81% $ 553,515,649
More than six months through one year.............. 4.98 271,748,143
More than one year through three years............. 5.01 200,574,271
More than three years through five years........... 6.86 167,886,083
--------------
$1,193,724,146
--------------
--------------
Interest expense on savings deposits consisted of the following at December
31:
1993 1992 1991
----------- ----------- ------------
Passbook accounts.................. $ 5,124,879 $ 7,984,057 $ 8,543,334
Money market deposit accounts...... 36,418 65,439 118,899
Certificate accounts............... 71,154,521 91,053,249 123,691,412
----------- ----------- ------------
$76,315,818 $99,102,745 $132,353,645
----------- ----------- ------------
----------- ----------- ------------
The following table summarizes certificate accounts by interest rate within
maturity categories at December 31, 1993 and 1992:
1994 1995 1996 THEREAFTER TOTAL
-------------- ------------ ----------- ------------ --------------
December 31, 1993
0%-3.99%................. $ 504,104,419 $ 13,324,033 $ 386,548 $ 86,350 $ 517,901,350
4.00%-5.99%.............. 225,755,567 103,179,166 46,068,841 13,324,352 388,327,926
6.00%-7.99%.............. 88,593,542 25,956,241 8,164,756 154,315,904 277,030,443
8.00%-9.99%.............. 5,917,451 4,174,591 202,622 169,763 10,464,427
-------------- ------------ ----------- ------------ --------------
TOTAL.................... $ 824,370,979 $146,634,031 $54,822,767 $167,896,369 $1,193,724,146
-------------- ------------ ----------- ------------ --------------
-------------- ------------ ----------- ------------ --------------
1993 1994 1995 THEREAFTER TOTAL
-------------- ------------ ----------- ------------ --------------
December 31, 1992
0%-3.99%................. $ 317,197,358 $ 1,155,696 $ 193,073 $ 134,494 $ 318,680,621
4.00%-5.99%.............. 541,571,889 67,122,714 13,122,499 4,554,050 626,371,152
6.00%-7.99%.............. 262,462,494 87,042,525 25,450,807 157,568,466 532,524,292
8.00%-9.99%.............. 3,976,070 5,894,452 3,999,395 343,449 14,213,366
-------------- ------------ ----------- ------------ --------------
$1,125,207,811 $161,215,387 $42,765,774 $162,600,459 $1,491,789,431
-------------- ------------ ----------- ------------ --------------
-------------- ------------ ----------- ------------ --------------
F-16
73
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE I -- SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following at December 31:
1993 1992
------------ ------------
Commercial paper line with the Federal Home Loan Bank
("FHLB"), net of discount (1993, $489,000; 1992,
$958,951), collateralized by eligible real estate
loans with an approved line of up to $200 million, and
a weighted average interest rate of 3.26% at December
31, 1993 and 3.62% at December 31, 1992............... $124,511,000 $199,041,409
Line of credit with another bank up to $15 million,
bearing interest at the lending bank's current prime
interest rate......................................... 11,650,000
------------ ------------
$124,511,000 $210,691,409
------------ ------------
------------ ------------
The maximum amount of commercial paper outstanding at any month-end during
1993 and 1992 was $199,606,000 and $199,041,000, respectively. The average
amount of commercial paper outstanding during 1993 and 1992 was $53,079,000 and
$58,377,000, respectively, with a weighted average interest rate of 3.30% and
4.06%, respectively.
NOTE J -- FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank (FHLB) are collateralized by the
pledge of certain real estate loans with an uncollected principal balance of
approximately $603,527,000 and $778,744,000 at December 31, 1993 and 1992,
respectively.
Information as to interest rates and maturities on the advances from the
FHLB as of December 31, 1993 and 1992 follows:
1993 1992
------------ ------------
Range of interest rates................... 5.62%-8.46% 3.72%-9.11%
Weighted average interest rate............ 7.58 7.42
Year due:
1993.................................... $ 58,500,000
1994.................................... 37,000,000 37,000,000
1995.................................... 17,000,000 17,000,000
1996.................................... 27,000,000 27,000,000
1997.................................... 32,000,000 32,000,000
Thereafter................................ 13,000,000 13,000,000
------------ ------------
$126,000,000 $184,500,000
------------ ------------
------------ ------------
The Bank had an unused line of credit with the FHLB at December 31, 1993 of
approximately $203,255,000.
F-17
74
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE K -- OTHER BORROWINGS AND SUBORDINATED DEBT
Other borrowings consisted of the following at December 31:
1993 1992
------------ ------------
Bonds, net of discount (1993, $11,815; 1992, $45,010),
collateralized by certain automobile installment sales
contracts and cash of approximately $22,577,892 due in
1995 with an interest rate of 8.35%................... $ 22,073,829 $ 52,242,768
First trust deed notes payable, collateralized by real
property due in various installments with interest
rates ranging from 5.5% to 10%........................ 4,310,689 20,083,684
Subordinated debentures, net of discount (1993
$4,577,799) due in 2003 with an interest rate of
8.5%.................................................. 120,422,201
Subordinated debentures due in 1999 with an interest
rate of 11%........................................... 43,745,000
------------ ------------
$146,806,719 $116,071,452
------------ ------------
------------ ------------
On June 17, 1993, the Bank issued $125,000,000 of 8.5% Subordinated Capital
Debentures. Underwriting discounts and expenses totaling $4,851,797 associated
with the issuance were capitalized and are being amortized over seven years. The
debentures are redeemable, in whole or in part, at the option of the Bank, on or
after July 1, 2000 at 100% of the principal amount being redeemed plus accrued
interest to the date of redemption. For regulatory purposes, the subordinated
debentures, subject to certain limitations, are included as part of the
supplementary capital.
On April 29, 1987, the Bank issued $75,000,000 of 11% subordinated
debentures, due May 1, 1999. Underwriting discounts and expenses totaling
$2,024,000 associated with the issuance were capitalized and amortized over five
years. The debentures were redeemed, in whole at the option of the Bank, using
the proceeds from the new subordinated debenture offering, on September 10, 1993
at 104.4% of the principal amount then outstanding. This early redemption
created an extraordinary loss of $1,113,486 net of respective tax benefit of
$811,295.
The Bank notified holders of the Bonds of its intent to redeem on April 1,
1994, the bonds due in 1995 as allowed within the Bond indenture.
The aggregate amount of maturities for each of the next five years,
adjusted for the planned bond redemption, are as follows:
1994........................... $ 22,874,959
1995........................... 102,994
1996........................... 160,742
1997........................... 40,541
Thereafter..................... 123,627,483
------------
$146,806,719
------------
------------
F-18
75
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE L -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more as of December 31, 1993, are as
follows:
1994............................. $1,707,912
1995............................. 1,348,329
1996............................. 1,071,819
1997............................. 874,592
1998............................. 568,214
Thereafter....................... 318,349
----------
$5,889,215
----------
----------
Rental expense for premises and equipment amounted to $1,958,996,
$1,653,886, and $1,816,043 in 1993, 1992, and 1991, respectively.
Westcorp's outstanding loan commitments were as follows at December 31:
1993 1992
----------- -----------
Fixed-Rate........................ $22,435,000 $ 5,662,000
Variable-Rate..................... 8,459,000 23,322,000
----------- -----------
$30,894,000 $28,984,000
----------- -----------
----------- -----------
At December 31, 1993 Westcorp had a letter of credit outstanding for $1,016,000,
which expires September 23, 1994.
Westcorp has pledged certain assets relative to amounts held on behalf of
trustees at December 31, 1993 as follows:
FNMA Participation Certificates........................ $ 31,901,887
Consumer Loans......................................... 108,110,523
Residential Second Mortgages........................... 104,073,541
Multifamily First Mortgages............................ 100,403,515
------------
Total Collateral Pledged............................... $344,489,466
------------
------------
NOTE M -- STOCK OPTIONS
In 1986, Westcorp reserved 945,000 shares of common stock for future
issuance to certain employees under an incentive stock option plan. Reserved,
unoptioned shares totaled 352,433 and 349,388 shares at December 31, 1993 and
1992, respectively. The options may be exercised at $7.62 per share at any time,
in whole or in part, within five years after the date of grant.
In 1991, Westcorp reserved an additional 3,150,000 shares of common stock
for future issuance to certain employees under a stock option plan. Reserved,
unoptioned shares totaled 2,538,316 and 2,746,916 shares at December 31, 1993
and 1992, respectively. The options may be exercised at prices ranging from
$7.62 to $11.90 per share at any time, in whole or in part, within five years
after the date of grant.
F-19
76
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Stock option activity, adjusted for the 1991 stock dividend, is summarized
as follows:
PRICE PER
SHARES SHARE
-------- -----------
Outstanding at December 31, 1990.................... 301,718 $4.76- 8.90
Issued............................................ 428,873 7.14-11.90
Exercised......................................... (61,488) 4.76- 8.90
Cancelled......................................... (15,960) 4.76- 8.10
-------- -----------
Outstanding at December 31, 1991.................... 653,143 4.76-11.90
Issued............................................ 6,050 8.10- 9.25
Exercised......................................... (118,323) 4.76- 8.10
Cancelled......................................... (20,998) 4.76- 8.10
-------- -----------
Outstanding at December 31, 1992.................... 519,872 6.79-11.90
Issued............................................ 409,065 9.25-10.50
Exercised......................................... (26,435) 6.79- 9.25
Cancelled......................................... (203,510) 7.14-11.90
-------- -----------
Outstanding at December 31, 1993.................... 698,992 $7.62-11.90
-------- -----------
-------- -----------
At December 31, 1993, there were 89,964 and 206,774 exercisable stock
options under the 1986 and 1991 plans, respectively.
NOTE N -- REGULATORY CAPITAL
One of the most significant changes made by FIRREA was that new capital
requirements be adopted for savings institutions similar to those of national
banks. The new capital standards include three minimum requirements: (1) a
leverage (core) ratio; (2) a tangible capital requirement; and (3) a risk-based
capital requirement.
F-20
77
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
The Bank currently exceeds all current capital standards. A reconciliation
of the Bank's capital under generally accepted accounting principles (GAAP) as
included in its consolidated balance sheet and regulatory capital at December
31, 1993 is as follows:
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
Bank shareholder equity-GAAP
basis...................... $194,025 $194,025 $194,025
Non-permissible activities at
required phase-in.......... (8,065) (8,065) (8,065)
Supplemental capital:
Subordinated debentures...... 123,948
General loan valuation
allowance.................. 23,631
Less: Fully capitalized
assets..................... (41,099)
-------- -------- --------
Regulatory capital........... 185,960 8.60%(1) 185,960 8.60%(1) 292,440 15.58%(2)
Minimum OTS capital
requirement................ 32,439 1.50% 97,317 4.50%(3) 150,199 8.00%
-------- -------- --------
Excess capital............... $153,521 $ 88,643 $142,241
-------- -------- --------
-------- -------- --------
- ---------------
(1) As a percentage of total adjusted assets.
(2) As a percentage of risk-weighted assets.
(3) Subsequent to December 31, 1993 this requirement was reduced to 3%.
NOTE O -- DIVIDENDS AND OTHER RESTRICTIONS
Westcorp paid cash dividends of $.20, $.19, and $.13 per share for the
years ended December 31, 1993, 1992, and 1991, respectively.
The Bank is restricted by regulation and by the indenture for its 8.50%
Subordinated Capital Debentures (see Note K) as to the amount of funds which can
be transferred to Westcorp in the form of dividends. Under the most restrictive
of these terms, on December 31, 1993, restricted shareholder's equity of the
Bank totaled $179.3 million. The Bank must notify the OTS of its intent to
declare cash dividends 30 days before declaration, and may not make a loan to
Westcorp to the extent Westcorp engages in any activity not permitted for a bank
holding company. During 1993, the Bank paid no dividends to Westcorp.
NOTE P -- PENSION PLAN
Westcorp has an Employee Stock Ownership and Salary Savings Plan, which
covers essentially all full-time employees who have completed one year of
service. Contributions to the plan are discretionary and determined by the Board
of Directors within limits set forth by Treasury regulations. Contributions to
the plan are fully expensed in the year to which the contribution applies.
Westcorp's contribution to the plan amounted to $1,000,000 in 1993.
Westcorp did not contribute to the plan in 1992. Contributions to the plan
amounted to $1,256,826 in 1991.
F-21
78
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE Q -- INCOME TAXES
Federal and state franchise taxes (receivable) payable at December 31, were
as follows:
1993 1992
------------ ------------
Current......................................... $ (5,239,894) $ (1,636,847)
Deferred........................................ (13,946,090) (24,215,044)
------------ ------------
$(19,185,984) $(25,851,891)
------------ ------------
------------ ------------
Other assets include federal and state tax receivables of $4,732,058 at
both December 31, 1993 and 1992.
Income tax expense (benefit) consisted of the following:
1993 1992 1991
---------- ------------ ------------
Current:
Federal.................................. $2,844,349 $ 10,381,543 $ 23,430,225
State franchise.......................... 939,500 3,029,858 7,196,668
---------- ------------ ------------
3,783,849 13,411,401 30,626,893
Deferred:
Federal.................................. 4,802,283 (9,232,416) (12,459,687)
State franchise.......................... 988,181 (2,794,923) (3,569,699)
---------- ------------ ------------
5,790,464 (12,027,339) (16,029,386)
---------- ------------ ------------
$9,574,313 $ 1,384,062 $ 14,597,507
---------- ------------ ------------
---------- ------------ ------------
The difference between total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes are
due to:
1993 1992 1991
---------- ---------- -----------
Tax at statutory rate......................... $8,530,667 $1,237,200 $12,128,163
California franchise tax (net of Federal tax
benefit).................................... 1,687,495 155,058 2,475,410
Tax on extraordinary item..................... (811,295)
Other......................................... 167,446 (8,196) (6,066)
---------- ---------- -----------
$9,574,313 $1,384,062 $14,597,507
---------- ---------- -----------
---------- ---------- -----------
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law. Among other things, it provided for a higher tax rate of 35%
(previously the tax rate was 34%). This new tax rate was effective beginning
January 1, 1993. Approximately $0.3 million has been included in Westcorp's
deferred tax asset as a result of this change in the law.
F-22
79
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Westcorp's deferred tax liabilities and assets as of December 31, 1993 and 1992
are as follows:
DEFERRED TAX POSITION
ASSETS/(LIABILITIES)
(IN THOUSANDS)
1993 1992
-------- --------
Deferred tax assets:
Loan loss reserves................................... $ 17,759 $ 19,813
Joint venture losses and write-downs in excess of tax
losses............................................ 4,841 2,902
Grantor trust income recognized for tax purposes..... 4,861 10,518
Nondeductible deferred compensation accrual.......... 1,965 1,792
-------- --------
Total deferred tax assets.............................. 29,426 35,025
Deferred tax liabilities:
Loan fee income deferred for tax purposes............ (7,130) (4,780)
Loan expenses capitalized for financial statement
purposes.......................................... (1,403)
FHLB dividends....................................... (2,495) (2,319)
Accelerated depreciation for tax purposes............ (1,321) (1,356)
Other -- net......................................... (4,534) (952)
-------- --------
Total deferred tax liabilities......................... (15,480) (10,810)
-------- --------
Net deferred tax asset................................. $ 13,946 $ 24,215
-------- --------
-------- --------
NOTE R -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Westcorp in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and short-term instruments approximate those assets'
fair values.
Investment securities (including mortgage-backed securities): Fair
values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans Receivable: For variable-rate loans that reprice frequently,
fair values are based on carrying values. The fair values for certain
mortgage loans (e.g., one-to-four family residential), and other consumer
loans (including automobile loans) are based on quoted market prices of
similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. The fair values for other
loans (e.g., rental property mortgage loans) are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Savings Deposits: The fair values disclosed for passbook accounts, and
certain types of money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are estimated
using a discounted
F-23
80
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
cash flow calculation that applies interest rates currently being offered
on certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Short-term borrowings: The carrying amounts of a commercial paper line
with the FHLB and a bank line of credit approximate their fair values.
Long-term borrowings: The fair values of Westcorp's long-term
borrowings (other than deposits) are estimated using discounted cash flow
analyses, based on Westcorp's current incremental borrowing rates for
similar types of borrowing arrangements.
The estimated fair values of Westcorp's financial instruments are as
follows:
1993 1992
-------------- --------------
Financial Assets:
Cash and cash equivalents.......................... $ 25,394,295 $ 38,842,561
Other short term investments....................... 137,162,368 75,160,856
Investment securities and mortgage-backed
securities...................................... 214,283,863 226,584,000
Loans (including available for sale)............... 1,547,794,975 2,127,601,140
Financial Liabilities:
Deposits........................................... 1,377,448,286 1,710,025,537
Federal Home Loan Bank Advances.................... 131,546,680 198,923,651
Short-term borrowings.............................. 125,003,584 210,691,409
Other borrowings................................... 26,384,518 74,615,598
Subordinated debentures............................ 123,524,143 46,269,087
NOTE S -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------------
1993 1992
------------- -------------
Assets
Cash.................................................. $ 642,725 $ 3,386,043
Other short-term investments.......................... 8,500,000
Investment securities................................. 400,000 9,030,000
Investment in subsidiaries............................ 194,024,779 156,901,147
Other................................................. 1,622,923 3,073,604
------------- -------------
$ 205,190,427 $ 172,390,794
------------- -------------
------------- -------------
Liabilities and Equity
Short-term borrowings................................. $ 11,650,000
Other liabilities..................................... $ 75,305 42,466
------------- -------------
75,305 11,692,466
Shareholders' Equity.................................... 205,115,122 160,698,328
------------- -------------
$ 205,190,427 $ 172,390,794
------------- -------------
------------- -------------
F-24
81
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
STATEMENTS OF INCOME
DECEMBER 31,
--------------------------------------------
1993 1992 1991
----------- ----------- ------------
Income
Cash Dividends............................ $ 7,485,000 $ 500,800
Interest.................................. $ 773,993 1,094,595 1,168,010
Other..................................... 1,592,523 578,435 465,683
----------- ----------- ------------
2,366,516 9,158,030 2,134,493
Other expenses.............................. 2,416,484 1,811,766 896,349
----------- ----------- ------------
(Loss) income before income taxes and equity
in undistributed net income of
subsidiaries.............................. (49,968) 7,346,264 1,238,144
Income tax (benefit) expense................ (6,562) 434,281 344,609
----------- ----------- ------------
(Loss) income before equity in undistributed
net income of subsidiaries................ (43,406) 6,911,983 893,535
Equity in undistributed net income (loss) of
subsidiaries.............................. 12,917,641 (4,657,225) 20,180,026
----------- ----------- ------------
NET INCOME........................ $12,874,235 $ 2,254,758 $ 21,073,561
----------- ----------- ------------
----------- ----------- ------------
F-25
82
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------------
1993 1992 1991
------------ ----------- ------------
OPERATING ACTIVITIES
Net income.................................... $ 12,874,235 $ 2,254,758 $ 21,073,561
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for loan losses................... 567,505 (368) (140,655)
Amortization of investment discount
(premium)................................ 9,858 4,288 (170,949)
Amortization of goodwill.................... 84,563 84,564 84,565
Gain on redemption of subordinated
debentures............................... (279,366)
Gain on sale of investments................. (657,227)
Writedown of investments.................... 400,000
Dividends from subsidiaries................. (7,485,000) (500,800)
Equity in undistributed income (loss) of
subsidiary............................... (12,917,641) 4,657,225 (20,180,026)
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. 739,154 (1,141,760) 165,696
INVESTMENT ACTIVITIES
Proceeds from sale of investment securities... 15,912,734
Proceeds from the redemption of subordinated
debentures.................................. 8,509,366
Purchase of investment securities............. (9,126,900) (10,846,500)
Dividends from subsidiaries................... 7,485,000 500,800
Contributions to subsidiaries................. (25,000,000) (8,200,000)
Proceeds from disposition of subsidiary....... 1,486,398
Other, net.................................... 129,196 335,668 (21,284)
------------ ----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES............................. (14,875,040) 6,406,502 (10,366,984)
FINANCING ACTIVITIES
(Decrease) increase in short-term
borrowings.................................. (11,650,000) (1,671,800) 11,006,400
Dividends paid................................ (3,948,386) (3,327,242) (2,149,170)
Proceeds from sale of common stock............ 35,490,954 1,429,685 478,427
------------ ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES............................. 19,892,568 (3,569,357) 9,335,657
------------ ----------- ------------
INCREASE (DECREASE) IN CASH.............. 5,756,682 1,695,385 (865,631)
Cash at beginning of year..................... 3,386,043 1,690,658 2,556,289
------------ ----------- ------------
CASH AT END OF YEAR...................... $ 9,142,725 $ 3,386,043 $ 1,690,658
------------ ----------- ------------
------------ ----------- ------------
F-26
83
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE T -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1993 and 1992. Certain quarterly amounts have been
adjusted to conform with the year-end presentation.
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ ------------
1993
Interest income............ $43,766,929 $40,334,984 $ 38,386,048 $ 35,457,825
Interest expense........... 27,599,838 25,950,058 25,355,889 22,296,886
Net interest income........ 16,167,091 14,384,926 13,030,159 13,160,939
Provision for loan
losses................... 6,679,619 7,446,304 6,192,184 2,265,549
Investment and mortgage-
backed security gains.... 2,301,115 202,017
Income before income
taxes.................... 4,949,581 5,914,689 7,608,867 5,900,204
Income taxes............... 1,904,109 2,762,791 3,290,458 2,428,250
Income before extraordinary
item..................... 3,045,472 3,151,898 4,318,409 3,471,954
Extraordinary loss......... (1,113,486)
Net income................. 3,045,472 3,151,898 3,204,923 3,471,954
Net income per common share
before extraordinary
loss..................... 0.17 0.18 0.21 0.15
Extraordinary loss due to
the redemption of
subdebt.................. (0.06)
Net income per common
share.................... 0.17 0.18 0.15 0.15
1992
Interest income............ $60,540,474 $54,924,621 $ 50,944,997 $ 45,943,679
Interest expense........... 38,490,767 35,429,888 33,781,921 30,251,722
Net interest income........ 22,049,707 19,494,733 17,163,076 15,691,957
Provision for losses....... 5,372,929 4,962,448 15,458,012 8,477,309
Investment and mortgage-
backed security gains.... 242 134,720 (96,196) 1,453,935
Income before income
taxes.................... 10,083,073 7,212,546 510,468 (14,167,267)
Income taxes............... 4,230,465 3,031,214 223,320 (6,100,937)
Net income................. 5,852,608 4,181,332 287,148 (8,066,330)
Net income per common
share.................... 0.33 0.24 0.01 (0.45)
F-27
84
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993
NOTE U -- CURRENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS
114") which is effective for fiscal years beginning after December 15, 1994.
SFAS 114 is not expected to have a material impact on Westcorp's financial
statements.
In May 1993, the Financial Accounting Standards Board ("FASB") issued
standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") which is effective for fiscal years beginning after
December 15, 1993. Under SFAS 115, Westcorp would be required to recognize
unrealized gains and losses on "available for sale" securities as a component of
shareholders' equity.
While SFAS 115 has not been adopted by Westcorp, had it been in effect at
December 31, 1993 Westcorp would have recognized an increase of approximately
$1.0 million (net of tax) in shareholders' equity.
F-28
85
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
- ------ ------
3.1 Certificate of Incorporation*..............................................
3.2 Bylaws*....................................................................
10.1 Westcorp Incentive Stock Option Plan**.....................................
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan*.................
10.3 Westcorp 1992 Stock Option Plan***.........................................
11.1 Statement Re Computation of Earnings Per Share............................. F-30
22.1 Subsidiaries of Westcorp................................................... F-31
23.1 Consent of Independent Auditors............................................ F-32
- ---------------
* Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
** Exhibit previously filed with Westcorp Registration Statement in Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated by reference under
Exhibit Number indicated.
*** Exhibit previously filed with Westcorp Registration Statement on Form S-8
(No. 33-43898), filed December 11, 1991 incorporated by reference under the
Exhibit Number indicated.
F-29