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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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 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, IRVINE, CALIFORNIA 92618-3816
(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 February 28, 1997:
COMMON STOCK, $1.00 PAR VALUE -- $179,257,563
The number of shares outstanding of the issuer's class of common stock as of
February 28, 1997:
COMMON STOCK, $1.00 PAR VALUE -- 26,013,268
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1996 Annual Meeting of
Shareholders to be held April 29, 1997, are incorporated by reference into Part
III.
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WESTCORP AND SUBSIDIARIES
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business..................................................................... 2
Item 2. Properties................................................................... 45
Item 3. Legal Proceedings............................................................ 45
Item 4. Submission of Matters to a Vote of Security Holders.......................... 45
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 45
Item 6. Selected Financial Data...................................................... 46
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 47
Item 8. Financial Statements and Supplementary Data.................................. 58
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 58
Item 11. Executive Compensation....................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 58
Item 13. Certain Relationships and Related Transactions............................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 58
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PART I
ITEM 1. BUSINESS
OVERVIEW
Westcorp, a California corporation, is a financial services holding company
which specializes primarily in automobile ("consumer") lending through WFS
Financial Inc ("WFS") and residential real estate ("mortgage") lending through
Western Financial Bank, F.S.B. , formerly Western Financial Savings Bank, F.S.B.
(the "Bank"). Westcorp owns all the capital stock of the Bank, Westran Services
Corp. ("Westran") and Westcorp Investments, Inc. ("WII"). The Bank owns 81% of
the capital stock of WFS, which in turn owns all the outstanding stock of WFS
Financial Auto Loans, Inc. ("WFAL"), WFS Financial Auto Loans 2, Inc. ("WFAL2")
and WFS Investments, Inc ("WFSII").
The Bank also owns all the outstanding capital stock of The Hammond
Company, The Mortgage Bankers ("THCMB"), Western Reconveyance Company, Inc.
("RECON"), Westhrift Life Insurance Company ("Westhrift"), Western Consumer
Services, Inc. ("WCS") and Western Financial Insurance Agency, Inc., formerly
Westplan Insurance Agency, Inc. ("WFIA"). As of December 31, 1996, WFIA owns all
the outstanding capital stock of Western Financial Investments, Inc., formerly
Westplan Investments ("WFI"). On January 1, 1997, WFI became a direct
subisidiary of the Bank.
In 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 1992, Western Financial Savings Bank
converted to a federal charter and added F.S.B. to its name. As of October 1,
1996, Western Financial Savings Bank, F.S.B. changed its name to Western
Financial Bank, F.S.B. to more accurately reflect the addition of a broad array
of new products and services.
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 further subject to certain regulations of the Board
of Governors of the Federal Reserve System ("FRB") which governs reserves
required to be maintained against deposits and other matters. The Bank is also a
member of the Federal Home Loan Bank of San Francisco ("FHLB"), one of twelve
regional banks for federally insured savings and loan associations and banks
comprising the Federal Home Loan Bank System ("FHLB System"). The FHLB System is
under the supervision of the Federal Housing Finance Board. WFS and certain
other subsidiaries of the Bank are further regulated by various departments or
commissions of the states in which it does business.
The types of loans which Westcorp may originate are primarily defined by
federal statutes and regulations. Westcorp's strategy to date has been to focus
on and expand its two principal lines of business -- automobile lending and
mortgage lending. During 1996, Westcorp continued its aggressive nationwide
expansion of its automobile lending operations, growing to 136 offices at
December 31, 1996 and as of the date hereof serving a total of 31 states.
Additionally, Westcorp initiated its transition to becoming a full-service
financial institution, which included the introduction of commercial banking
services and the expansion of the products and services offered by the mortgage
banking and retail banking divisions of the Bank.
Westcorp's strategy for automobile lending is to purchase automobile loans
from new and used car dealers, securitize these loans through underwritten
public sales of securities and retain the right to service them. In order to
achieve this strategy, Westcorp focuses on developing and maintaining strong
relationships with its dealers through frequent and substantial personal
interaction. Westcorp has two automobile lending divisions, the Dealer Center
Division and the Branch Division to compete in the prime and non-prime auto
finance industry, respectively. Westcorp's segregation of the automobile lending
market by credit quality enables it to tailor the operation of its divisions to
best serve dealers while maximizing its ability to collect such loans from
obligors.
Westcorp's business plan for mortgage lending is to originate or purchase
loans, and to sell or securitize them in the secondary market and retain the
servicing rights thereon. While maintaining its
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focus on traditional mortgage lending, Westcorp has concentrated on developing
and offering new niche products to meet the special needs of customers in the
California marketplace, including alternative mortgage products for consumers
who do not qualify for conventional mortgages and home equity loans based on the
borrower's ability to pay rather than the borrower's equity in the home.
Westcorp originated and purchased loans secured by residential real estate
through 31 mortgage offices in 11 states at December 31, 1996 and as of the date
hereof. In addition, the Bank has continued to focus on expanding its servicing
portfolio through the generation of new loans and acquisition of packages of
mortgage servicing rights.
In addition to its two principal lines of business, Westcorp continues to
focus on retail banking through its 26 branch offices at December 31, 1996 and
as of the date hereof. In its retail banking operations, Westcorp attempts to
serve the needs of individuals and small businesses establishing "relationship
banking" and offering a wider range of products, such as demand deposits and
money market accounts and by expanding its alternative delivery channels, such
as automated teller machines ("ATMs").
Westcorp has recently commenced its commercial banking operations targeted
at small and medium-sized business in southern California, offering loans, lines
of credit and trade finance services, as well as account analysis, cash
management and other commercial depository services.
Management believes that Westcorp and its clients are best served by
strengthening Westcorp's focus on its ability to cross-sell products and
services to its current households. This focus includes developing a common
identity, while maximizing point of sale cross-selling opportunities. Westcorp
also intends to solicit additional potential customers through strategic direct
mail programs. Westcorp's target markets are the individual consumer and small
and medium-sized businesses, to which Westcorp intends to offer "relationship
banking", focused on proactive customer service.
The following table sets forth the loan origination, purchase and sale
activity of Westcorp for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loans originated:
Consumer loans(1).......... $2,128,152 $1,533,989 $1,183,188 $ 829,181 $ 673,473
Mortgage loans:
Existing property....... 1,278,913 507,884 665,480 879,592 570,796
Construction............ 10,207 5,697 18,853 33,511 27,013
---------- ---------- ---------- ---------- ----------
Total mortgage loans.... 1,289,120 513,581 684,333 913,103 597,809
Commercial................. 8,632
---------- ---------- ---------- ---------- ----------
Total loans originated....... 3,425,904 2,047,570 1,867,521 1,742,284 1,271,282
Loans purchased:
Mortgage loans on existing
property................ 213 252 45,373 210 2,441
---------- ---------- ---------- ---------- ----------
Total loans purchased........ 213 252 45,373 210 2,441
Loans sold or securitized:
Automobile loans........... 2,090,000 1,480,000 842,000 777,500 450,000
Mortgage loans............. 992,582 304,242 541,923 803,992 386,257
---------- ---------- ---------- ---------- ----------
Total loans sold or
securitized................ 3,082,582 1,784,242 1,383,923 1,581,492 836,257
Principal reductions(2)...... 357,507 269,483 334,627 529,683 617,017
---------- ---------- ---------- ---------- ----------
(Decrease) increase in total
loans...................... $ (13,972) $ (5,903) $ 194,344 $ (368,681) $ (179,551)
========== ========== ========== ========== ==========
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(1) Includes automobile loans purchased from automobile dealers.
(2) Includes scheduled payments, prepayments and chargeoffs.
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At December 31, 1996, Westcorp's loan portfolio totalled $1.7 billion,
which consisted of 13% consumer loans, 83% loans secured by real property used
primarily for residential purposes, 1% in commercial loans and 3% of consumer
loans (other than automobile loans). Westcorp's loan portfolio totalled $1.7
billion at December 31, 1995, which consisted of 18% consumer loans, 81% loans
secured by real property used primarily for residential purposes and 1% other
consumer loans. At December 31, 1996, Westcorp serviced $2.8 billion of consumer
loans and $4.4 billion of mortgage loans for the benefit of others. At December
31, 1995, Westcorp also serviced $1.9 billion of consumer loans and $3.7 billion
of mortgage loans for the benefit of others. Westcorp's revenues are derived
principally from interest earned on loans and servicing income. Interest on
deposits and borrowings, provisions for loan losses, and general and
administrative expenses are Westcorp's major expense items.
The following table sets forth the composition of Westcorp's loan portfolio
by type of loan, including loans held for sale, as of the dates indicated.
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
Consumer loans:
Automobile.... $ 265,629 15.3% $ 353,345 20.2% $ 507,772 29.0% $ 251,751 16.2% $ 404,381 21.0%
Other......... 52,997 3.0 20,908 1.2 5,698 0.3 6,572 0.4 10,615 0.6
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
318,626 18.3 374,253 21.4 513,470 29.3 258,323 16.6 414,996 21.6
Less: unearned
discounts..... 33,768 2.0 38,628 2.2 82,762 4.7 27,972 1.8 60,795 3.2
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total
consumer
loans..... 284,858 16.3 335,625 19.2 430,708 24.6 230,351 14.8 354,201 18.4
Mortgage loans:
Loans on
existing
property... 1,419,216 82.0 1,393,983 79.9 1,298,037 74.1 1,260,670 81.0 1,466,319 76.2
Home
improvement... 16,573 1.0 12,184 0.7 10,548 0.6 49,333 3.2 66,356 3.4
Construction 5,501 0.3 8,469 0.5 19,813 1.1 31,684 2.0 54,648 2.8
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total
mortgage
loans... 1,441,290 83.3 1,414,636 81.1 1,328,398 75.8 1,341,687 86.2 1,587,323 82.4
Less:
undisbursed
loan
proceeds...... 2,398 0.1 4,672 0.3 7,614 0.4 14,890 1.0 15,695 0.8
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total
mortgage
loans..... 1,438,892 83.2 1,409,964 80.8 1,320,784 75.4 1,326,797 85.2 1,571,628 81.6
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Commercial
loans......... 7,867 0.5
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total
loans... $1,731,617 100.0% $1,745,589 100.0% $1,751,492 100.0% $1,557,148 100.0% $1,925,829 100.0%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
Loans serviced
for the
benefit of
others:
Consumer
loans....... $2,812,637 38.8% $1,894,944 33.9% $1,210,674 42.2% $1,009,941 46.5% $ 714,665 50.7%
Mortgage
loans....... 4,436,789 61.2 3,688,730 66.1 1,656,811 57.8 1,160,485 53.5 696,034 49.3
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans
serviced for
the benefit of
others........ $7,249,426 100.0% $5,583,674 100.0% $2,867,485 100.0% $2,170,426 100.0% $1,410,699 100.0%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
SEGMENT INFORMATION
The automobile lending operations of Westcorp are conducted by its
subsidiary, WFS. WFS purchases prime and non-prime credit quality retail
installment sales contracts secured by new and used cars and light duty trucks
primarily from franchised new and used car dealers and originates direct
consumer loans secured by automobiles. Westcorp's lending activities are funded
primarily by attracting deposits from the public at its retail branch offices in
California as well as through loan sales and other borrowing sources. A summary
of the operations of each of these business segments is provided in Note
22 -- Business Segment Data in the Notes to Consolidated Financial Statements.
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LENDING -- GENERAL
Westcorp's primary sources of revenue are net interest income and
noninterest income. Net interest income is the difference between the income
earned on interest earning assets and the interest paid on interest bearing
liabilities. Noninterest income includes contractual servicing fees earned by
servicing loans for the benefit of others, retained residual interest on sold
loans, and additional fees related to servicing, such as late charges and
prepayment fees, fees related to the sales of investment products such as mutual
funds and annuities, gains on loans sold, insurance commission income and other
fee income for deposits and various other products.
Net interest income is affected by the difference between yields earned by
Westcorp on its interest earning assets and the rates paid on its interest
bearing liabilities (interest rate spread), and the relative amounts of
Westcorp's interest earning assets and interest bearing liabilities. The
following table presents information relative to the average balances and
interest rates of Westcorp for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment securities(1).... $ 138,184 $ 7,573 5.48% $ 118,926 $ 6,551 5.51% $ 109,547 $ 5,768 5.27%
Other investments........... 107,866 6,016 5.58 99,062 5,662 5.72 90,223 4,343 4.81
Mortgage-backed
securities(1)............. 786,925 57,472 7.30 653,850 47,486 7.26 218,082 13,879 6.36
Total loans:
Consumer loans............ 409,255 65,542 16.01 416,949 60,953 14.62 293,963 38,511 13.10
Mortgage loans(2)......... 1,366,509 105,681 7.73 1,336,080 101,441 7.59 1,257,434 81,138 6.45
Commercial................ 1,093 104 9.52
---------- -------- --- ---------- -------- --- ---------- -------- ---
Total interest earning
assets...................... 2,809,832 242,388 8.63 2,624,867 222,093 8.46 1,969,249 143,639 7.29
Noninterest earning assets:
Premises, equipment and real
estate owned.............. 87,159 81,804 102,354
Other assets................ 377,879 171,392 130,866
Less: allowance for loan
losses.................... 41,157 40,771 40,328
---------- ---------- ----------
Total......................... $3,233,713 $2,837,292 $2,162,141
========== ========== ==========
Interest bearing liabilities:
Deposits.................... $1,761,319 99,091 5.63 $1,751,539 101,364 5.79 $1,455,058 68,295 4.69
Public debt offerings....... 148,108 12,081 8.16 151,446 11,881 7.85 125,969 10,739 8.53
FHLB advances and other
borrowings................ 202,419 12,531 6.19 84,342 7,200 8.54 104,093 7,864 7.55
Repurchase agreements....... 299,211 15,491 5.18 325,926 18,834 5.78 51,402 1,868 3.63
---------- -------- --- ---------- -------- --- ---------- -------- ---
Total interest bearing
liabilities............... 2,411,057 139,194 5.77 2,313,253 139,279 6.02 1,736,522 88,766 5.11
Noninterest bearing
liabilities:
Unearned insurance premiums
and insurance reserves.... 4,044 5,227 5,433
Other liabilities........... 510,307 305,501 212,008
Shareholders' equity.......... 308,305 213,311 208,178
---------- -------- --- ---------- -------- --- ---------- -------- ---
Total......................... $3,233,713 $2,837,292 $2,162,141
========== ========== ==========
Net interest income and
interest rate spread........ $103,194 2.86% $ 82,814 2.44% $ 54,873 2.18%
======== === ======== === ======== ===
Net yield on average interest
earning assets.............. 3.67% 3.16% 2.79%
=== === ===
- ---------------
(1) Includes both securities available for sale and held to maturity.
(2) For the purposes of these computations, nonaccruing loans are included in
the average loan amounts outstanding.
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The following table sets forth the changes in net interest income
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 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).
1996 COMPARED TO 1995 1995 COMPARED TO 1994
------------------------------------- -------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Interest income:
Investment securities...................... $1,061 $ (35) $ (4) $ 1,022 $ 494 $ 262 $ 27 $ 783
Other investments.......................... 503 (138) (11) 354 425 821 73 1,319
Mortgage-backed securities................. 9,661 261 64 9,986 27,714 1,962 3,931 33,607
Total loans:
Consumer loans........................... (1,124) 5,795 (82) 4,589 16,111 4,468 1,863 22,442
Mortgage loans........................... 2,392 2,004 (52) 4,344 5,072 14,334 897 20,303
------- ------- ------- ------- ------- ------- ------- -------
Total interest earning assets................ $12,493 $ 7,887 $ (85) 20,295 $49,816 $21,847 $6,791 78,454
======= ======= ======= ======= ======= =======
Interest expense:
Deposits................................... $ 566 $(2,803) $ (36) (2,273) $13,904 $16,006 $3,159 33,069
Public debt offerings...................... (262) 469 (7) 200 2,173 (857) (174) 1,142
FHLB advances.............................. 10,083 (1,982) (2,770) 5,331 (1,491) 1,031 (204) (664)
Repurchase agreements...................... (1,544) (1,956) 157 (3,343) 9,965 1,105 5,896 16,966
------- ------- ------- ------- ------- ------- ------- -------
Total interest bearing liabilities........... $8,843 $(6,272) $(2,656) (85) $24,551 $17,285 $8,677 50,513
======= ======= ======= ======= ======= =======
------- -------
Net change in net interest income............ $20,380 $27,941
======= =======
The increase in interest income, interest expense and net interest income
was the result of the increase in mortgage-backed securities, investment
securities and loans receivable as well as generally higher interest rates.
Westcorp's ability to maintain a positive spread during periods of
fluctuating interest rates is determined principally by the maturities and
repricing mechanisms of its interest earning assets and interest bearing
liabilities. Synchronizing the repricing of an institution's assets and
liabilities 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.
Westcorp's asset/liability management strategy is to match its loan and
investment products with interest bearing liabilities having similar repricing
characteristics and durations. This strategy includes originating adjustable
rate loans, securitizing loans with liabilities that have similar repricing and
maturity characteristics, matching fixed rate loans held in the portfolio with
advances from the FHLB, selling fixed rate loans and utilizing financial
instrument agreements. These agreements are used by Westcorp solely to manage
interest rate risk within its portfolio and include interest rate swaps, caps,
options, floors and forward agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management."
As a result of Westcorp's practice of matching its rate sensitive
liabilities with rate sensitive assets, Westcorp had an overall positive gap of
11.15%, including a positive gap of 13.01% at December 31, 1996 for assets and
liabilities having an interest rate maturity of less than three months. In
addition, Westcorp had a negative gap of 6.87% at December 31, 1996 for assets
and liabilities having an interest rate maturity of less than one year and a
negative gap of 8.53% for assets and liabilities having an interest rate
maturity of three years or less. At December 31, 1996, 73% of Westcorp's
interest earning assets had interest rate maturities of three years or less with
43% having maturities of less than three months.
Westcorp maintained an overall positive gap by having interest sensitive
assets that adjusted to fluctuations in interest rates during 1996 almost as
frequently as its interest sensitive liabilities adjusted. Westcorp's ability to
maintain a positive gap may be significantly affected by, among other factors,
(i) a large percentage of interest earning assets based on a market lagging
index, (ii) interest
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earning assets and interest bearing liabilities repricing at different times,
(iii) interest rate caps and floors imposed on its assets, (iv) interest rates
on assets and liabilities responding differently to economic, market and
competitive factors, (v) high interest rate levels adversely affecting lending
markets in general and (vi) low interest rate levels increasing the difficulty
of originating adjustable rate mortgage loans ("ARMs") and (vii) increasing loan
prepayments, where such amounts 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, 1996. Prepayment and decay assumptions
for loans and savings accounts were developed using both Westcorp's own
prepayment experience and industry averages. For Westcorp's mortgage loans, the
prepayment assumptions range from 6% to 20% 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 20% to
25% 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 if actual experience differs from the assumptions set forth. Although
Westcorp's investment securities and mortgage-backed securities are classified
primarily as available for sale, they are presented in the repricing categories
based on their respective stated maturities adjusted for any appropriate
prepayment assumptions. Loans held for sale are presented as repricing within
three months based on management's intent relative to these assets.
INTEREST RATE SENSITIVITY ANALYSIS
AT DECEMBER 31, 1996
---------------------------------------------------------------------
3 YEARS
WITHIN 3 MONTHS 1 YEAR TO TO AFTER 5
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS YEARS TOTAL
---------- --------- --------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment securities................... $ 55,736 $ 89,779 $ 145,515
Other investments....................... $ 62,798 510 63,308
Mortgage-backed securities.............. 220,793 26,171 152,501 $138,471 $311,612 849,548
Consumer loans(1)....................... 63,898 62,143 109,211 45,361 4,245 284,858
Mortgage loans:
Adjustable rate(2).................... 858,686 271,342 11,140 2,453 840 1,144,461
Fixed rate(2)......................... 9,351 (3,579) 36,329 32,662 223,918 298,681
Construction(2)......................... 3,617 3,617
---------- --------- --------- -------- -------- ----------
Total interest earning assets........... 1,219,143 412,323 398,960 218,947 540,615 2,789,988
Interest bearing liabilities:
Deposits:
Passbook/statement accounts(3)........ 1,946 7,776 14,513 8,417 9,829 42,481
Money market deposit accounts(3)...... 27 69 288 384
Certificate accounts(4)............... 549,452 795,390 386,104 30,863 62 1,761,871
FHLB advances(4)........................ 12,000 163,000 44,500 6,500 226,000
Other borrowings(4)..................... 342,870 487 104,917 448,274
---------- --------- --------- -------- -------- ----------
Total interest bearing liabilities...... 906,295 966,722 445,405 39,280 121,308 2,479,010
---------- --------- --------- -------- -------- ----------
Excess interest earning assets
(liabilities)......................... 312,848 (554,399) (46,445) 179,667 419,307 310,978
Effect of hedging activities............ 50,000 (50,000)
---------- --------- --------- -------- -------- ----------
Hedged excess (deficit)................. $ 362,848 $(554,399) $ (46,445) $179,667 $369,307 $ 310,978
========== ========= ========= ======== ======== ==========
Cumulative excess (deficit)............. $ 362,848 $(191,551) $(237,996) $(58,329) $310,978 $ 310,978
========== ========= ========= ======== ======== ==========
Cumulative difference as a percentage of
total interest earning assets......... 13.01% (6.87)% (8.53)% (2.09)% 11.15% 11.15%
- ---------------
(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.
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THE BUSINESS OF WFS
AUTOMOBILE LENDING
Westcorp and its predecessors and affiliates have purchased and originated
automobile loans since 1973. During 1995, Westcorp combined the operations of
Westcorp's consumer finance division and the Bank's subsidiaries, Westcorp
Financial Services, Inc., WFAL and WFAL2 to create WFS. WFS Investments, Inc.
was created in 1996 and is also a subsidiary of WFS. Automobile loans are
underwritten and purchased from approved new and used automobile dealers on a
nonrecourse basis ("indirect contract") or are underwritten and originated
directly through a consumer finance office or automobile dealer center ("direct
loan"). Marketing is performed by sales managers through personal calls to
automobile dealers as well as referrals. Westcorp believes that the creation and
maintenance of close personal relationships with automobile dealers by its
branch offices and dealer centers are a major factor in promoting the growth and
sustaining the quality of its automobile loan portfolio.
Substantially all loans originated or purchased by Westcorp are reviewed to
ensure proper documentation and adherence to underwriting guidelines. Westcorp
does not have minimum or maximum maturity requirements; however, automobile
loans with less than three years' maturity or more than six years' maturity are
seldom purchased due to low customer demand. Each automobile 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 months digits (also known as the Rule of 78s) or on the simple
interest method. The interest rates charged on automobile loans are primarily
determined by the risk inherent in the borrower as determined by Westcorp's
underwriting criteria.
Westcorp generally lends to the applicant an amount not to exceed the sum
of the dealer's cost, taxes, license fees, and other miscellaneous costs.
Additional advances over the sum of such costs may be made under certain
circumstances with increasing levels of management review based on the
creditworthiness of the applicant. For used automobiles, the amount loaned
generally does not exceed the wholesale "blue book" value for the automobile
plus related expenses and any approved additional advances.
The table below presents information relative to originations of new and
used vehicles for the following periods ending:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
New vehicles........................... $ 441,529 $ 367,638 $ 354,787
Used vehicles.......................... 1,680,160 1,160,010 822,244
---------- ---------- ----------
Total volume...................... $2,121,689 $1,527,648 $1,177,031
========== ========== ==========
AUTOMOBILE LOAN SERVICING
Westcorp's servicing activities include collecting payments and protecting
its interest in the collateral. As part of these activities, Westcorp also earns
other miscellaneous fees, primarily late charges. Payment collection includes
pursuing delinquent accounts, most of which are cured promptly. If not, Westcorp
repossesses and sells the collateral in accordance with the terms of the loan
and statutory guidelines. Deficiency balances are charged off against the
allowance for loan losses. After chargeoff, Westcorp pursues collection of
deficiency balances subject to applicable law.
Each borrower with an automobile loan originated or purchased by Westcorp
is required to maintain insurance covering physical damage to the financed
vehicle, subject to certain limitations. The insurance policy must name Westcorp
as the 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
8
10
policies vary within limits prescribed under applicable insurance laws and
regulations. If a 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. A subsidiary of the Bank, WFIA, acts
as an independent agent for unaffiliated insurers in providing collateral
protection insurance coverage on automobiles securing loans serviced by
Westcorp.
ASSET-BACKED MARKET ACTIVITIES
Westcorp regularly sells automobile loans in the asset-backed market while
retaining the servicing rights thereon. Westcorp has securitized its automobile
loans using an off balance sheet structure which utilizes a separate trust for
each transaction. Automobile loan securitization provides a stable source of
funding, minimizes interest rate risk on the loans sold, enhances return on
assets and improves the capital position of the Bank. The loans are sold in
publicly underwritten securitization transactions in which Westcorp continues to
service such loans. The securities issued have been rated "AAA" by Standard &
Poor's Rating Services, a division of McGraw-Hill, Inc. ("S&P") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's"), their highest rating categories due
to both the senior/ subordinated structure of the transaction and as a result of
third party credit enhancement provided by Financial Security Assurance, Inc.
These securitizations are structured to be treated as sales without
recourse under generally accepted accounting principles ("GAAP"), thereby
removing the automobile loans sold from Westcorp's balance sheet. Westcorp
retains a residual interest in the excess interest which represents the excess
of the underlying interest rate on the pool of automobile loans sold over the
sum of the pass-through rate on the securities, credit losses, administrative
expenses and contractual servicing fees. The valuation and recognition of the
residual interest is affected by actual credit loss and prepayment history,
discount rate assumptions and other factors.
Westcorp securitized $2.1 billion and $1.5 billion of automobile loans
during 1996 and 1995, respectively. At December 31, 1996 and 1995, $186 million
and $220 million, respectively, of automobile loans were held for sale, pending
securitization.
BANK OPERATIONS
MORTGAGE BANKING
Westcorp's primary mortgage banking focus is on the following products:
conventional conforming single family residential loans, alternative mortgage
products ("AMPs") and equity loans. Other components of mortgage banking
operations include multifamily residential loans and loan servicing. Westcorp
also holds a small portfolio of construction and commercial mortgage loans.
Westcorp's mortgage products are marketed and distributed through retail
and wholesale channels. The retail network consists of 17 lending offices and 5
satellite offices that service individuals and real estate brokers and agents
assisting property buyers. The wholesale network consists of 9 wholesale offices
that service mortgage brokers, homebuilders and thrifts.
9
11
Westcorp's total mortgage loan portfolio (including those held for sale)
consisted of the following:
DECEMBER 31,
---------------------------------------------
1996 1995
-------------------- --------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds (including
AMPs)......................... $ 925,353 64.3% $ 816,948 57.9%
Second trust deeds (Equity
Lending)...................... 55,778 3.9 116,132 8.3
---------- ----- ---------- -----
981,131 68.2 933,080 66.2
Multifamily residential loans...... 453,425 31.5 469,951 33.3
Construction loans................. 5,501 0.4 8,469 0.6
Other.............................. 1,233 0.1 3,136 0.2
---------- ----- ---------- -----
1,441,290 100.2 1,414,636 100.3
Less: Undisbursed loan proceeds.... 2,398 0.2 4,672 0.3
---------- ----- ---------- -----
Total mortgage loans..... $1,438,892 100.0% $1,409,964 100.0%
========== ===== ========== =====
Mortgage loan originations are primarily generated by employees in its
wholesale and retail network. These employees receive commissions based on the
total volume of loans acquired and closed in accordance with Westcorp's product
pricing and underwriting standards. Westcorp has established criteria for the
brokers from whom it will accept loan referrals, and the commissioned employees
endeavor to increase the number of brokers approved by Westcorp for this
purpose. Westcorp routinely reviews its mortgage loans to ensure compliance with
its underwriting guidelines and with federal and state regulations.
Westcorp's lending strategy includes originating fixed rate loans, ARMs
without negative amortization and ARMs with potential negative amortization. By
diversifying its loan portfolio among three types of loan products, Westcorp
reduces its overall risk exposure, increases its flexibility in asset/liability
management and provides greater loan origination opportunities. 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.
DECEMBER 31,
---------------------------------------------
1996 1995
-------------------- --------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Fixed rate loans:
Single family.................... $ 289,869 20.1% $ 160,699 11.4%
Multifamily...................... 945 0.1 668 0.1
Adjustable rate loans:
Negative amortization............ 831,701 57.8 892,295 63.3
Without negative amortization.... 316,377 22.0 356,302 25.2
---------- ----- ---------- -----
Total mortgage loans..... $1,438,892 100.0% $1,409,964 100.0%
========== ===== ========== =====
MORTGAGE LOAN SERVICING
Mortgage loan servicing includes collecting payments and related servicing
income and protecting Westcorp's interest in the underlying collateral.
Additional fees and charges related to loan servicing include prepayment fees,
late charges, assumption fees and other miscellaneous fees. The loan servicing
group collects mortgage payments from borrowers and remits payments to investors
such as FNMA and FHLMC. The loan servicing group earns a servicing fee on all
loans serviced for others. In addition, this group services $1.4 billion in
loans owned by Westcorp. During 1996, Westcorp purchased rights to service $1.1
billion of single family residential loans for $9.9 million compared to
10
12
$1.5 billion for $14.7 million in 1995. These rights, known as purchased
mortgage servicing rights ("PMSRs"), allow Westcorp to receive servicing income
related to the servicing of these loans, in addition to the servicing retained
on loans sold from its own portfolio. The purchase price of PMSRs are
capitalized and amortized over the expected life of the underlying loans.
Westcorp requires title insurance, or in some instances lot book insurance,
which insures the priority of its liens on loans made on the security of 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.
Mortgage loan borrowers are provided a 10 to 15 day period after the date
payment is due before a late charge is assessed. Delinquent customers are
promptly contacted by Westcorp. If delinquencies on mortgage loans are not cured
promptly, Westcorp takes those steps required by law to perfect its interest in
the collateral. This process generally includes recording a notice of default
and a trustee's sale of the property. Westcorp disposes of foreclosed property
as expeditiously as possible. Due to legal restrictions and other factors,
Westcorp generally does not pursue a deficiency judgment through a judicial
foreclosure.
Single Family Residential Loans
The single family (1-4 units) mortgage loans enable borrowers to purchase,
refinance or improve residential property. Loans are originated from both retail
and wholesale distribution channels. While Westcorp has continued to originate
variable rate and non-conforming real estate loans for its own portfolio, it has
substantially increased its volume of fixed rate, Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")
conforming real estate loans for sale in the secondary market. Westcorp believes
that its current wholesale and retail branch network of real estate and mortgage
banking offices are sufficient to handle a substantial increase in origination
volume without a proportional increase in costs. As part of its mortgage banking
operations, Westcorp obtains forward financing commitments, which are then used
to fund all conforming originations. These secondary market real estate loan
sales enable Westcorp to leverage its capital efficiently, lock in interest rate
spreads, eliminate interest rate risk, increase servicing fee income and limit
credit loss exposure on real estate loans sold.
Westcorp originates both ARMs and fixed rate first trust deed loans secured
by single family residences. These loans have original principal amounts up to
$650,000, but generally do not exceed $400,000 in original principal amount.
Westcorp has established lending limits based on the amount of the loan compared
to the property's value ("LTV"). Westcorp will finance loans for the purchase of
owner occupied single family residences for up to 95% of the market value based
on the lesser of the purchase price or appraised value of the property.
Mandatory private mortgage insurance insuring the unpaid balance in excess of
75% of the property's value is required on loans with an LTV exceeding 80% at
origination. The cost of this insurance is paid by the borrower during the term
of the loan. Single family residential loans are typically made for terms of up
to 30 years and are amortized on a monthly basis with level payments of
principal and interest due each month, subject to periodic adjustment in the
case of ARMs.
Interest rates offered by Westcorp are regularly reviewed and adjusted and
generally reflect prevailing competitive terms. Loan demand and availability of
credit affect these market conditions. Loan origination fees vary with the
volume and type of loans made and with competitive conditions in the mortgage
markets. The interest rates on adjustable rate mortgage loans are adjusted
monthly, quarterly, semiannually or annually, at a rate typically between 2.25%
to 3.50% above a specified index. Westcorp originates loans using the London
Interbank Offer Rate ("LIBOR"), the 11th District Cost of
11
13
Funds Index ("COFI") published by the FHLB, Treasury indices, the Federal Cost
of Funds Index, or other generally recognized cost of funds indicies. Initial
interest rates and adjustment periods are set and reviewed based on prevailing
market conditions and, from time to time, have included initial rates below
those which would prevail under the general terms of the loan. At December 31,
1996, Westcorp held $54.7 million of loans that had yet to adjust to a
fully-indexed rate.
ARM loans are also designed with limits on the amount the interest rate may
change in a given period and with maximum lifetime interest rates, or caps, to
stimulate greater customer acceptance while maintaining the desired interest
rate flexibility. The interest rates on ARMs generally can increase or decrease
no more than 3% to 6% over the life of the loan. All ARMs are assumable by
qualified buyers at the interest rate then in effect on the loan, in some cases
with the payment of an assumption fee, but the maximum upward or downward
interest rate adjustment over the life of the assumed loan is reset at the time
of assumption. On ARMs without negative amortization, the maximum change in
interest rate per period may be limited to 2% or less on certain 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 resulting in negative amortization to principal. The monthly payment on
ARMs with negative amortization is adjusted annually, subject to a 7.5% maximum
increase, to insure that the loan fully amortizes over the remaining term to
maturity. 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),
adjustments are made regardless of the 7.5% cap. At December 31, 1996, the total
amount of negative amortization capitalized to principal totalled $3.4 million.
Alternative Mortgage Products
Westcorp introduced AMPs in mid-1996. AMPs are marketed to "sub-prime"
borrowers who would not normally qualify under conventional FNMA and FHLMC
guidelines, primarily due to past credit problems, instability of income, debt
coverage ratios in excess of traditional limits or an inability to sufficiently
document income (such as due to self-employment).
AMPs are originated through the wholesale and retail channels as well as
through Westcorp's correspondent lending network using underutilized capacity in
Westcorp's current offices. The correspondent lending department purchases
closed loans from approved mortgage bankers, banks, and other financial
institutions. These loans may be delivered one at a time (flow basis) or in a
group (bulk). Each loan is underwritten to Westcorp's guidelines and priced
taking into account various risk factors.
AMP product lines include 30 and 15 year fixed rate programs in first lien
position and ARMs tied to LIBOR, as well as loans designed for investor
property. These loans, by their nature, have greater credit risks than
conventional mortgage loans. However, Westcorp targets the top tier of this
subprime market, although Westcorp may in the future expand to lower tiers of
the subprime market after gaining sufficient experience in the high quality tier
of the market. The principal amount of loans is capped at $250,000. The Bank
also prices the loans to compensate for the additional risks. AMP interest rates
are higher than rates for conventional financing. Spreads of 250 - 400 basis
points over the typical FNMA and FHLMC rates are common. Because subprime
borrowers are not as interest rate sensitive, they are less likely to refinance
when interest rates fall. As a result, normal and excess servicing revenues
offer typically a more predictable and stable source of servicing income
compared to conventional servicing.
Since this is a new product, Westcorp's credit quality control staff
currently reviews each AMP loan for compliance with underwriting standards. As
the portfolio grows, Westcorp expects the review to be carried out on random
samples of loans.
AMP originations totalled $22 million in 1996 and Westcorp expects this
amount to increase in 1997. It is management's intention to sell these loans in
the secondary market.
12
14
Equity Lending
Westcorp also provides fixed rate loans and adjustable rate lines of credit
to homeowners in California, Arizona, Nevada, Washington, Oregon and Colorado
secured by second trust deeds. The primary emphasis is on nonconventional equity
loans with LTV ratios of 80% to 100% and "no equity" loans with LTV ratios in
excess of 100%. These credits are primarily underwritten based upon the
borrowers' ability to repay rather than the value of the underlying collateral.
Since the "no-equity" loans are not fully secured by equity in the borrowers'
properties, the minimum credit rating of the borrower is set high enough to
provide comfort that the level of delinquencies and chargeoffs will be
minimized. These loans are specifically targeted to borrowers who have a strong
credit profile, good employment and income stability, but lack sufficient equity
in their properties. These loans carry interest rates that are higher than those
offered by Westcorp for conventional home equity loans. These specialty loans
can bring yields of 11% - 16% with extremely low prepayment rates.
Principal amounts for loans with LTV ratios of 80% or less are capped at
$100,000; loans with LTV ratios above 80% to value are capped at $50,000 and "no
equity" loans are capped at $25,000. Interest rates for loans are fixed at rates
ranging from 10.75% to 15.95%. Interest rates for lines of credit are based on
LIBOR plus a margin of between 4.95% and 9.95%. Points are charged on loans, and
setup and annual fees are charged on lines of credit. Loans have maturities
ranging from 5 to 15 years; lines of credit have draw periods of 5 to 10 years.
These loans amortize on a 15 year basis or less and, depending upon the
repayment option selected by the borrower, may involve a "balloon" payment at
the end of the term. As part of the terms of the loan, 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.
At December 31, 1996, $193 million was committed to equity loans and lines
of credit, of which $156 million was outstanding. In 1996, Westcorp continued to
consolidate its operations and expand its use of telemarketing and direct mail
as a means of contacting potential borrowers for this program. Westcorp plans to
continue its aggressive marketing of these products in 1997.
Secondary Market Activities
Mortgage loans originated or purchased by Westcorp are either held in its
portfolio or sold in the secondary market. As Westcorp has become more active in
the secondary market, it has sold Federal Housing Administration ("FHA") and
Veteran's Administration ("VA") loans, as well as other conforming and
nonconforming loans to FNMA, FHLMC and other established conduits. With the
exception of FHA and VA loans which are sold servicing released, Westcorp
retains the servicing rights to these loans and earns servicing income
therefrom. These sales are generally without recourse, thereby removing the
mortgage loans sold from Westcorp's balance sheet. During 1996, Westcorp sold
$993 million of mortgage loans in the secondary market compared to $304 million
during 1995. Westcorp's portfolio of mortgage loans held for sale, consisting of
single family loans, totalled $273 million at December 31, 1996 and $149 million
at December 31, 1995.
RETAIL BANKING
Westcorp's retail banking operations are conducted through 26 retail
banking offices located in California. Historically, Westcorp has focused on
certificates of deposit as the primary source of funding for its lending
operations. In 1996, Westcorp embarked on a strategy to lower its overall cost
of funds by becoming the primary bank for its customers and attracting funds
through checking accounts and money market accounts. In addition, Westcorp
introduced alternative delivery channels, such as ATMs, debit cards and
supermarket banking. Given the industry consolidation in retail banking,
Westcorp believes it can further differentiate itself from its competition based
on providing personalized service and relationship banking. In 1997, Westcorp
will focus on cross-selling opportunities to retail banking customers, by
offering mortgage loans, automobile loans and alternative investment products
such as mutual funds and annuities to current customers.
13
15
At December 31, 1996, Westcorp's deposits in checking accounts, savings
accounts and money market accounts totalled $1.9 billion.
COMMERCIAL BANKING
In October of 1996, Westcorp commenced its commercial banking operations,
with a focus initially in the Orange County, Los Angeles County and San Diego
metropolitan areas, operating through the Irvine Banking Center. The Irvine
office is the central location for the relationship banking team. This group is
comprised of several individuals with extensive experience in the commercial
banking area. The commercial banking division provides loans, lines of credit
and trade finance services to medium-sized commercial enterprises and the
principals and employees of such enterprises as well as cash management, account
analysis, and other corporate deposit related services. Westcorp's strategy in
this market is to differentiate itself from the competition by providing high-
quality localized relationship management and fast turnaround time on loan
decisions, as well as competitive rates on all deposit and loan products.
Westcorp believes the market for its services is comprised of commercial
enterprises in the geographic areas noted above, with an aggregate demand for
approximately $4 billion of loans, lines of credit and trade financing.
At December 31, 1996, $8.7 million were committed to commercial loans,
letters of credit and lines of credit, of which $7.9 million were outstanding.
Multifamily Residential Loans
In prior years, Westcorp has not focused on multifamily residential loan
originations. Most of the multifamily originations were to refinance or
restructure loans currently in the portfolio or loans to facilitate the
disposition of real estate owned. However, based on improved market conditions
in this sector, management is reviewing the feasibility of re-entering this
market in 1997.
Construction Loans
On a limited basis, Westcorp originates construction loans primarily for
single family owner-occupied residences. These include loans for the acquisition
and development of unimproved property to be used for residential purposes.
During 1996, Westcorp originated $10.2 million in construction loans. At
December 31, 1996, Westcorp's construction loans totalled $5.5 million (of which
$2.4 million had not been disbursed). Such loans represent less than 1% of
Westcorp's total assets.
The construction loan portfolio generally consists of loans with terms
ranging from 12 to 18 months with adjustable interest rates equal to 2.0% to
3.0% above the prime rate. Advances are generally made to cover actual
construction costs and include a reserve for paying the stated interest due on
the loan.
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"). IAR performs an independent review function to measure risk within
Westcorp's asset portfolio. 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.
The Special Asset Department ("SAD") is responsible for the management,
collection and disposition of loans which have certain characteristics that
indicate current or potential credit weaknesses. These characteristics may
include, but are not limited to, delinquency, delinquent taxes, inadequate debt
service ratios and inadequate or deteriorating collateral. SAD prepares action
plans
14
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for each of these loans. These plans vary from recommendations to monitor and
review to recommendations to foreclose depending on each loan's particular
situation.
AUTOMOBILE LOAN QUALITY
During 1996, Westcorp substantially increased its servicing and collections
staff in response to the increased number of automobile loans serviced from the
lower tier of the prime credit quality market and the overall increase in the
servicing portfolio from expansion.
During the early stages of delinquency, Westcorp utilizes an automated
telephone dialing system ("autodialer") to aid in the service and collection
process. Westcorp substantially increased the capacity of its autodialers during
1996. Westcorp utilizes the auto dialer to initiate contact with delinquent
obligors. If contact is not made with the customer within 48 hours of being on
the autodialer, the account is automatically sent to a collection specialist for
review.
If satisfactory arrangements are not made or complied with as to the
payments due, the automobile is generally repossessed within 60 to 90 days of
the date of delinquency, subject to compliance with the applicable law. Westcorp
uses independent contractors to perform repossessions. If after that period the
delinquency is not cured, Westcorp writes down the value of the vehicle to fair
value. After the reinstatement period expires, Westcorp prepares the automobile
for sale. Westcorp sells substantially all of its automobiles through wholesale
auto auctions at the best price possible, subject to applicable law. Westcorp
rarely provides the financing on repossessions sold. During 1996, Westcorp began
its centralization of all its remarketing functions into one remarketing
department. Full integration of functions is expected to be completed during
1997. Once the vehicle is sold, any deficiency balances are then charged off.
After chargeoff, Westcorp will seek collection on deficiency balances
through its centralized loss recovery unit established during 1996. The loss
recovery unit will first attempt to collect directly from the obligor with its
inhouse collection staff. If efforts are not successful, the loss recovery unit
will seek a deficiency judgment through a small claims court procedure, where
available, or an attorney employed by Westcorp takes more formal judicial action
against customers with deficiency balances in excess of that which may be
brought in a small claims court proceeding. Additionally, the loss recovery unit
will attempt to obtain vehicles that could not be found for repossession by skip
tracing to locate the vehicle. The loss recovery unit also monitors payment
plans on those obligors that have filed for bankruptcy. If the obligor is not
following the payment plan stipulated by the courts, then the loss recovery unit
will seek a judgement for dismissal or discharge, or will seek to repossess the
vehicle.
It is the Company's policy to charge off all automobile loans once they
become 120 days past due, including those that are in bankruptcy. Therefore,
Westcorp continues to accrue interest on automobile loans until it is charged
off. At the time a contract is charged off, all accrued but unpaid interest
which has been previously included as income is reversed by charging the
allowance for credit losses. No assurance can be given that the future
performance of the automobile loans purchased by the Company will be similar to
that disclosed in the following tables.
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The following table sets forth information with respect to the delinquency
of Westcorp's automobile portfolio.
DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- -------------------- -------------------- --------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
AUTOMOBILE AUTOMOBILE AUTOMOBILE AUTOMOBILE AUTOMOBILE
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Automobile loans
owned........... 67,510 $233,947 58,887 $314,717 61,764 $425,010 40,042 $223,792 51,797 $343,602
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Period of
delinquency for
automobile
loans owned(1)
31-59 days..... 2,376 $ 3,285 1,332 $ 3,936 688 $ 2,069 490 $ 1,259 653 $ 2,218
60-89 days..... 820 1,488 455 1,499 209 567 138 457 276 879
90 days or
more......... 350 617 182 473 98 197 83 303 191 747
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Total automobile
loans
delinquent..... 3,546 $ 5,390 1,969 $ 5,908 995 $ 2,833 711 $ 2,019 1,120 $ 3,844
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Delinquencies for
automobile
loans as a
percentage of
number and
amount of
automobile
loans owned.... 5.25% 2.30% 3.34% 1.88% 1.61% 0.67% 1.78% 0.90% 2.16% 1.12%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
Delinquencies as
a percentage of
number and
amount of
automobile
loans
serviced(2).... 1.87% 1.80% 1.23% 1.24% 0.80% 0.74% 0.74% 0.65% 1.28% 1.19%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Includes delinquency information for loans sold which were originated and
serviced by Westcorp.
The following table sets forth information with respect to actual loss
experience of Westcorp's automobile portfolio:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Portfolio:
At end of period (net of unearned add-on
interest)......................................... $233,947 $314,717 $425,957 $217,558 $371,191
======== ======== ======== ======== ========
Average during period (net of unearned add-on
interest)......................................... $359,721 $396,683 $277,281 $325,539 $346,882
======== ======== ======== ======== ========
Gross chargeoffs of automobile loans during
period............................................ $ 15,580 $ 12,829 $ 10,919 $ 10,529 $ 9,723
Recoveries of automobile loans charged off in prior
periods........................................... 5,158 4,565 6,887 5,223 2,550
-------- -------- -------- -------- --------
Net chargeoffs...................................... $ 10,422 $ 8,264 $ 4,032 $ 5,306 $ 7,173
======== ======== ======== ======== ========
Net chargeoffs as a percent of average automobile
loans owned during period......................... 2.90% 2.08% 1.45% 1.63% 2.07%
======== ======== ======== ======== ========
Net chargeoffs as a percent of average automobile
loans serviced during period(1)................... 2.30% 1.61% 1.09% 1.53% 1.73%
======== ======== ======== ======== ========
- ---------------
(1) Includes loan loss information for loans sold that were originated and
serviced by Westcorp.
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REAL ESTATE LOAN QUALITY
Westcorp's real estate loan portfolio delinquency has stabilized over the
past several years. From mid 1992 through early 1994, the California economy,
where substantially all of the collateral for Westcorp's real estate loans is
located, experienced severe downturns in the market values of real estate, high
levels of unemployment and a continued slump in residential construction and new
home sales. The problems created by this economic slump were especially
noticeable in the multifamily mortgage portfolio. While the economy has not
fully recovered, the downward spiral appears to have stabilized, providing some
relief to California homeowners and borrowers.
The following table sets forth the delinquency percentages relative to the
dollar amounts of Westcorp's total mortgage portfolio, including loans held for
sale, for the past five years.
DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Period of delinquency:
Two payments (31-59 days)............. 0.34% 0.57% 0.56% 0.40% 0.72%
Three payments (60-89 days)........... 0.14 0.40 0.09 0.42 1.18
Four or more payments (90 days or
more)............................... 1.03 0.89 1.11 1.31 1.94
The following table of mortgage delinquencies over 60 days by loan type
highlights the fact that real estate loan related delinquencies have stabilized
over the past three years.
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
AMOUNT AMOUNT AMOUNT
PAST DUE PAST DUE PAST DUE
OVER % OF OVER % OF OVER % OF
60 DAYS CATEGORY 60 DAYS CATEGORY 60 DAYS CATEGORY
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Single family........................ $15,266 1.55% $15,185 1.63% $14,152 1.68%
Multifamily.......................... 1,756 0.38 2,908 0.62 1,710 0.37
Construction......................... 107 1.56
------- ---- ------- ---- ------- ----
$17,022 0.98% $18,200 1.29% $15,862 1.20%
======= ==== ======= ==== ======= ====
NONPERFORMING ASSETS
Nonperforming assets ("NPA") consist of nonperforming loans ("NPL") and
real estate acquired through foreclosure ("REO"). NPLs are defined as all loans
in which any accrued interest has been reversed, which includes mortgage or
commercial loans 90 days or more past due or performing loans where full
collection of principal and interest is not reasonably assured. NPLs include
loans categorized as impaired. At December 31, 1996, NPAs totalled $33.0 million
or 1.0% of total assets compared to $29.2 million or 0.90% of total assets at
December 31, 1995. NPAs consisted of $20.9 million of NPLs and $12.1 million of
REO at December 31, 1996. REOs are recorded at fair value less estimated
disposition costs.
As a result of the adoption of Statement of Financial Accounting Standards
("SFAS") 114, a loan is considered impaired when, based on current information
and events, it is probable that Westcorp will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Westcorp measures
impairment based on the fair value of the loan's collateral. Changes in the fair
value are recorded through the allowance for loan losses. At December 31, 1996
and 1995, $6.9 million and $7.5 million, respectively, were considered impaired.
17
19
When a loan is designated as nonaccrual, all previous accrued interest is
reversed and income is only recognized on a cash basis. Interest income that
would have been recorded, if these loans had been current in accordance with
their original terms, totalled $1.0 million and $0.8 million for the years ended
December 31, 1996 and 1995, respectively. The following table classifies NPLs
into significant categories:
DECEMBER 31,
---------------------
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
Loans 90 days or more past due......................... $14,052 $10,950
Impaired loans......................................... 6,887 7,450
------- -------
$20,939 $18,400
======= =======
Single family loans accounted for 69% of total NPAs at December 31, 1996
while multifamily loans accounted for 30%, although no single loan or series of
such loans predominate. The decrease in total NPAs is the result of improving
asset quality and stabilization of market values. The following tables show the
roll forward and migration of NPLs and REOs since December 31, 1994:
SINGLE
FAMILY MULTIFAMILY MULTIFAMILY
TOTAL 1-4 UNITS 5-36 UNITS 37+ UNITS CONSTRUCTION
-------- --------- ----------- ----------- ------------
NONPERFORMING LOANS
Balance December 31, 1994....... $ 17,667 $ 13,856 $ 2,616 $ 59 $ 1,136
New nonperforming loans....... 28,220 15,906 9,876 2,331 107
REO........................... (15,290) (10,850) (3,413) (1,027)
Cures and payoffs............. (10,454) (7,785) (2,536) (24) (109)
Chargeoffs.................... (1,743) (1,193) (550)
-------- -------- ------- -------- -------
Balance December 31, 1995....... 18,400 9,934 5,993 2,366 107
New nonperforming loans....... 35,910 24,454 6,948 4,508
REO........................... (20,112) (11,633) (6,754) (1,618) (107)
Cures and payoffs............. (12,550) (8,407) (2,860) (1,283)
Chargeoffs.................... (709) (709)
-------- -------- ------- -------- -------
Balance December 31, 1996....... $ 20,939 $ 13,639 $ 3,327 $ 3,973 --
======== ======== ======= ======== =======
REAL ESTATE ACQUIRED THROUGH
FORECLOSURE
Balance December 31, 1994....... $ 20,737 $ 5,271 $ 4,028 $10,499 $ 939
New REO....................... 32,200 14,166 11,146 4,361 2,527
Sales......................... (34,446) (9,962) (9,849) (14,635)
Writedowns.................... (7,663) (2,241) (2,414) (225) (2,783)
-------- -------- ------- -------- -------
Balance December 31, 1995....... 10,828 7,234 2,911 -- 683
New REO....................... 26,889 15,505 11,299 85
Sales......................... (21,478) (11,715) (9,763)
Writedowns.................... (4,176) (1,846) (1,932) (398)
-------- -------- ------- -------- -------
Balance December 31, 1996....... $ 12,063 $ 9,178 $ 2,515 -- $ 370
======== ======== ======= ======== =======
18
20
ALLOWANCE FOR LOAN LOSSES
Westcorp increased its allowance for loan losses to $40.2 million at
December 31, 1996, compared to $39.3 million at December 31, 1995. This is due
to the growth in the loan portfolio in 1996. The decrease in 1995 was primarily
due to the stabilization in the asset quality of Westcorp's loan portfolio. The
allowance for loan losses and related provisions are determined by considering
loan volumes, loan sales, prepayments, loss trends, levels of NPLs and
management's analysis of market conditions and other relevant factors. The
following table sets forth the activity in the allowance for loan losses.
AT OR FOR THE YEAR ENDED DECEMBER
31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period............................. $ 39,260 $ 41,323 $ 39,677
Chargeoffs:
Mortgage loans........................................... (5,678) (6,358) (8,268)
Consumer loans........................................... (15,580) (12,829) (10,951)
-------- -------- --------
(21,258) (19,187) (19,219)
Recoveries:
Mortgage loans........................................... 2,010 189 945
Consumer loans........................................... 5,158 4,565 6,887
-------- -------- --------
7,168 4,754 7,832
-------- -------- --------
Net chargeoffs............................................. (14,090) (14,433) (11,387)
Transfers from the allowance for real estate losses........ 800
Business acquisition adjustments(1)........................ 1,470 100
Provision for loan losses.................................. 13,571 11,470 13,033
-------- -------- --------
Balance at end of period................................... $ 40,211 $ 39,260 $ 41,323
======== ======== ========
Ratio of net chargeoffs during the period to average loans
outstanding during the period............................ 0.79% 0.82% 0.73%
- ---------------
(1) Purchase accounting adjustments related to the acquisition of The Hammond
Company and its subsidiaries.
The allowance for loan loss by loan category was as follows:
DECEMBER 31,
-------------------------------------------------
1996 1995
---------------------- ----------------------
% OF % OF
LOANS LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TO
TOTAL TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Consumer.......................................... $ 7,648 16.4% $ 7,795 19.2%
Single family residential......................... 12,321 56.8 8,825 53.6
Multifamily residential........................... 20,242 26.8 22,640 27.2
------- ----- ------- -----
$40,211 100.0% $39,260 100.0%
======= ===== ======= =====
19
21
The allowance for real estate losses was established to absorb potential
losses in the REO portfolio. Provisions for real estate losses are charged to
real estate operations. Changes in the allowance for real estate losses were as
follows:
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
---- ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.................................... $784 $1,684 $ 3,508
Provision for real estate losses.................................. (100) (2,106)
Chargeoffs, net................................................... 282
Transfers to the allowance for loan losses........................ (800)
---- ------ -------
Balance at end of the year........................................ $784 $ 784 $ 1,684
==== ====== =======
INVESTMENT SECURITIES
Westcorp's investment securities portfolio consists primarily of United
States Agency and Treasury securities and is classified as available for sale.
Accordingly, the portfolio is reported at fair value with unrealized gains and
losses being reflected as a separate component of shareholder's equity. This
portfolio is maintained primarily for liquidity purposes in accordance with
regulatory requirements. Westcorp also holds FHLB stock, which is carried at
cost, as required by its affiliation with the FHLB System. Westcorp also holds
other investments which include investment securities classified as held to
maturity. These securities are carried at amortized cost. The following table
summarizes Westcorp's investment securities at the dates indicated.
DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest bearing deposits with other
financial institutions............ $ 510 $ 689 $ 563 $ 796 $ 7,593
Other short-term investments........ 62,798 126,227 145,391 137,162 75,161
Investment securities:
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations -- available for
sale........................... 140,806 130,052 111,677 114,050 114,114
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations -- held to
maturity....................... 1,504 1,506
Obligations of states and
political subdivisions......... 1,513 3,441 3,062 3,527 998
FHLB stock........................ 31,967 29,624 24,474 17,566 20,674
Corporate bonds -- below
investment grade............... 400 803
Other............................. 1,692 25 25 25 25
-------- -------- -------- -------- --------
$240,790 $291,564 $285,192 $273,526 $219,368
======== ======== ======== ======== ========
20
22
The following table sets forth the stated maturities of Westcorp's
investment securities at December 31, 1996.
UP TO ONE YEAR FIVE YEARS TEN YEARS NO STATED
ONE YEAR TO FIVE YEARS TO TEN YEARS OR MORE MATURITY
-------- ------------- ------------ --------- ---------
(DOLLARS IN THOUSANDS)
Interest bearing deposits with other
financial institutions................. $ 510
Other short-term investments............. 62,798
Investment securities:
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations........... 78,920 $63,390
Obligations of states and political
subdivisions........................ $491 $ 1,022
Other.................................. 25 $ 1,667
FHLB stock............................. 31,967
-------- ------- ---- ------ -------
$142,228 $63,415 $491 $ 1,022 $33,634
======== ======= ==== ====== =======
Weighted average interest rate........... 5.0% 6.1% 4.9% 5.1% 6.1%
MORTGAGE-BACKED SECURITIES
Westcorp invests in mortgage-backed securities ("MBS") to generate net
interest income, to manage its mix of assets and liabilities and to invest in
certain low-income housing programs designed to provide affordable access to the
housing market. Westcorp has designated a specific portion of its MBS portfolio
as held to maturity and accounts for that portion using amortized cost and
designates the rest of the portfolio as available for sale and accounts for that
portion at fair value with unrealized gains or losses being reported as a
separate component of shareholders' equity. The following table summarizes
Westcorp's MBS portfolio by issuer.
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Held to maturity securities:
GNMA certificates.................................. $346,098 $405,582
FNMA participation certificates.................... 84,005 97,352
FHLMC participation certificates................... 7,358 9,120
Other.............................................. 1,201 164
-------- --------
$438,662 $512,218
======== ========
Available for sale securities:
GNMA certificates.................................. $321,776 $135,901
FNMA participation certificates.................... 71,983 101,344
FHLMC participation certificates................... 17,127 103,089
-------- --------
$410,886 $340,334
======== ========
The MBS held to maturity, with a total carrying value of $439 million, had
an estimated market value of $442 million and a weighted average interest rate
of 7.92% at December 31, 1996. The carrying value of the MBS available for sale
is equal to its estimated market value of $411 million and has a weighted
average interest rate of 7.90% at December 31, 1996. Westcorp's MBS portfolio
had maturities of ten years or greater at December 31, 1996, although payments
are generally received monthly throughout the life of these securities.
21
23
FUNDING SOURCES
Westcorp employs various sources to fund its operations, including
deposits, commercial paper, securitizations, 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity".
DEPOSITS
Westcorp attracts both short-term and long-term deposits from the general
public, commercial enterprises and institutions by offering a variety of
accounts and rates. Westcorp offers regular passbook accounts, various money
market accounts, demand deposit accounts, fixed interest rate certificates with
varying maturities and individual retirement accounts. In 1996, the retail
banking division embarked on an aggressive strategy to lower its overall cost of
funds. This strategy involved becoming the primary bank for its customers by
providing checking accounts, money market accounts, ATMs, debit cards, overdraft
protection and alternative investments (primarily mutual funds and annuities).
Westcorp's deposits are obtained primarily from the areas surrounding its
banking offices in California.
The following table sets forth the amount of Westcorp's deposits by type at
the dates indicated.
DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
No minimum term:
Demand deposit accounts............ $ 30,069
Passbook accounts.................. 42,532 $ 65,293 $ 104,085 $ 162,185 $ 189,895
Money market deposit accounts...... 438 602 801 1,149 1,212
Noninterest bearing deposits....... 39,032
Certificate accounts:
Certificates (30 days to five
years).......................... 1,481,847 1,462,649 1,335,805 1,026,671 1,313,771
IRA/Keogh.......................... 231,535 224,931 192,091 167,053 178,019
Brokered deposits.................... 48,489
---------- ---------- ---------- ---------- ----------
$1,873,942 $1,753,475 $1,632,782 $1,357,058 $1,682,897
========== ========== ========== ========== ==========
The variety of deposits offered by Westcorp has allowed it to remain
competitive in obtaining funds and to respond with flexibility to changes in
customer demand and competitive pressures. Generally, Westcorp, as other
financial institutions, has become 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 accounts outstanding are summarized below.
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Average certificate accounts outstanding............ $1,674,658 $1,672,920
Average interest rate paid.......................... 5.8% 5.9%
22
24
Deposit accounts are generally insured by the FDIC up to $100,000.
Westcorp's maturities of certificate accounts greater than or equal to $100,000
are as follows:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Three months or less................................... $153,186 $132,549
Over three months through six months................... 50,065 32,590
Over six months through one year....................... 121,067 132,158
Over one year through three years...................... 76,168 79,513
Over three years....................................... 5,780 6,151
-------- --------
$406,266 $382,961
======== ========
BORROWINGS AND OTHER SOURCES OF FUNDS
Westcorp's other sources of funds include issuing commercial paper and
obtaining advances from the FHLB, selling securities under agreements to
repurchase and other borrowings as well as loan repayments and cash generated
from operations. Westcorp selects from among these funding alternatives based on
the timing and duration of its cash needs, as well as the costs, maturities and
other requirements of each funding source.
The FHLB system functions in a reserve capacity for savings institutions.
As a member, Westcorp 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. 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.
At December 31, 1996, 1995 and 1994, the Bank had $25.0 million, $67.9
million and $211 million of commercial paper outstanding, respectively, with a
weighted average interest rate of 6.0%, 6.0% and 4.7%, respectively. The maximum
amount of commercial paper outstanding at any month-end was $398 million and
$240 million during 1996 and 1995, respectively. The average amount of
commercial paper outstanding during 1996, 1995 and 1994 was $163 million, $124
million and $67 million, respectively.
Savings associations such as the Bank also have authority to borrow from
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 ("CRA") performance with access to long term advances
from FHLB to member institutions. The Bank received a "satisfactory" in its most
recent CRA evaluation.
SUBORDINATED CAPITAL DEBENTURES
In 1993, Westcorp, through the Bank, issued $125 million of 8.5%
Subordinated Capital Debentures due 2003, of which $105 million are currently
outstanding. In addition to being a funding source, the Bank is permitted to
include these Debentures in supplementary capital for purposes of determining
compliance with risk-based capital requirements. See "Supervision and
Regulation -- Regulatory Capital Requirements".
23
25
SUBSIDIARIES
WESTERN FINANCIAL BANK, F.S.B. (THE BANK)
The Bank is a federally chartered and insured savings bank. The Bank
provides diversified financial services through commercial, real estate,
mortgage and related lending programs, depository accounts and investment
services. The Bank has 26 retail banking offices and 31 mortgage banking offices
in 11 states. Substantially all of Westcorp's operations are conducted through
the Bank and its subsidiaries. The Bank's subsidiaries are WFS (which in turn
owns all of the stock of WFAL, WFAL2 and WFSII), WFIA, WFI, RECON, WCS,
Westhrift and THCMB. On January 1, 1997, WFI became a direct subsidiary of the
Bank. Each of these entities are described in detail below.
WFS FINANCIAL INC (WFS)
WFS is in the business of consumer finance and operates through 136 offices
in 31 states at December 31, 1996. Each of its offices are licensed to the
extent required by law to conduct business in each respective state. WFS was
created in 1995 by the combination of the Bank's automobile lending operations
and the Bank's subsidiaries, Westcorp Financial Services, Inc., WFAL and WFAL2.
Westcorp owns an 81% interest in WFS. The remaining interest is traded on the
NASDAQ under the ticker symbol "WFSI." During 1996, WFS originated $2.1 billion
of automobile loans. The loans which WFS originates are generally sold in
securitized offerings by its subsidiaries WFAL and WFAL2. See "Business -- The
Business of WFS -- Automobile Lending."
WFS FINANCIAL AUTO LOANS, INC. (WFAL)
WFAL is a wholly owned, limited purpose subsidiary of WFS. WFAL was
organized primarily for the purpose of purchasing automobile loans from WFS and
securitizing such loans in the asset-backed market. A total of four
securitization transactions totalling $2.1 billion were completed during 1996.
WFS FINANCIAL AUTO LOANS 2, INC. (WFAL2)
WFAL2 is a wholly owned, limited purpose subsidiary of WFS. WFAL2 was
organized primarily for the purpose of purchasing automobile loans from WFS, and
securitizing such loans in the secondary market and engaging in other
asset-backed financing transactions.
WFS INVESTMENTS, INC (WFSII)
WFSII is a limited purpose, wholly owned subsidiary of WFS, a California
corporation. WFSII was incorporated in California on June 11, 1996 for the
purpose of purchasing ownership interests in owner trusts in connection with
securitization transactions. WFSII is limited by its Articles of Incorporation
from engaging in any business activities not incidental or necessary to its
stated purpose.
WESTERN FINANCIAL INSURANCE AGENCY, INC. (WFIA)
WFIA is a California based insurance agency which acts as an agent for
independent insurers in providing property and casualty insurance coverage on
collateral, primarily automobiles, securing loans made by Westcorp, collateral
protection insurance and other noncredit related life and disability programs.
WFIA's revenues consist of commissions received on policies sold to customers.
In addition, WFIA held all outstanding stock of WFI at December 31, 1996.
WESTERN FINANCIAL INVESTMENTS, INC. (WFI)
WFI began operations in 1994 as a licensed broker-dealer selling mutual
funds as well as fixed and variable annuities to the general public. In 1996,
the Bank re-engineered its sales program by licensing some of its banking office
employees to augment its dedicated sales force by selling annuities. As a result
of this reorganization, the sales of mutual funds and annuities is expected to
play a larger role in the retail banking operation.
24
26
WESTERN RECONVEYANCE COMPANY, INC. (RECON)
RECON is a California corporation which acts primarily as the trustee under
trust deed loans made by Westcorp and is not a significant source of revenues or
expenses.
WESTERN CONSUMER SERVICES, INC. (WCS)
WCS conducts real estate development activities through a California
limited liability company ("LLC"). The purpose of the LLC is to acquire, develop
and ultimately sell single family residences. Westcorp's interest includes a
participating share of the profits realized upon the sale of each unit.
WCS also owns three branch locations of Westcorp. One location was
transferred in 1993, and two additional locations were transferred in 1996.
These transfers occurred as a result of a determination that these properties
could not be treated as branch premises for regulatory purposes since the Bank
did not occupy 25% 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 its investment in WCS. Two of the three properties have been sold to
unrelated parties as of December 31, 1996.
WESTHRIFT LIFE INSURANCE COMPANY (WESTHRIFT)
Westhrift, an Arizona corporation, is engaged in the business of reinsuring
credit life and credit disability insurance offered to borrowers of Westcorp and
underwritten by an independent insurer. The credit life insurance policies
provide for full payment to Westcorp of the insured's financial obligation in
the event of the insured's death. The credit disability insurance policies
provide for payment to Westcorp of an insured's financial obligation during a
period of disability resulting from illness or physical injury. Westhrift has a
Certificate of Authority from the California Insurance Commissioner authorizing
it to conduct insurance business in California. At December 31, 1996, credit
life and disability insurance in force was $9.8 million.
For Arizona statutory purposes, Westhrift is required to maintain reserves
for losses on credit life and credit disability policies. Westhrift's aggregate
reserves for credit life and credit disability policies at December 31, 1996
were $0.6 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
Westcorp, not to exceed $25 thousand per loan. Westhrift also maintains a $0.5
million deposit in accordance with California statutory deposit requirements.
Westhrift does not engage in any business except with respect to customers of
Westcorp and WFS.
THE HAMMOND COMPANY, THE MORTGAGE BANKERS (THCMB)
An 80% interest in The Hammond Company ("THC") and its subsidiaries was
acquired by the Bank on December 21, 1995. On June 19, 1996 the Bank acquired
the remaining 20% of THC. On August 13, 1996, THC was merged into its subsidiary
The Hammond Company, The Mortgage Bankers ("THCMB"). In addition, in December
1996, the two subsidiaries of THCMB, Sunstate Insurance and Hammond Service
Corporation, were dissolved. In late 1996, the Bank combined all of THCMB,
except for its VA and California Housing Finance Authority ("CHFA") mortgage
lending with the Bank's Mortgage Banking Division, as the retail mortgage arm of
the Bank. All of this THCMB business now operates as the retail group of the
Mortgage Banking Division. THCMB is a mortgage banking company involved in the
origination and sale of CHFA and VA mortgage loans. THCMB is not a significant
source of revenues or expenses.
25
27
WESTCORP INVESTMENTS, INC. (WII)
WII is a limited-purpose, wholly owned subsidiary of Westcorp. WII was
incorporated in California on February 9, 1996 for the purpose of purchasing an
ownership interest in an owner trust created for a Westcorp automobile loan
securitization transaction. WII is limited by its Articles of Incorporation from
engaging in any business activities not incidental or necessary to its stated
purpose.
WESTRAN SERVICES CORP. (WESTRAN)
Westran, is a California corporation, which provides travel related
services for Westcorp and its subsidiaries. It is not a significant source of
revenues or expenses for Westcorp.
COMPETITION
Westcorp faces strong competition in both its lending and deposit gathering
activities. Westcorp believes it can differentiate itself from its competition
based on product pricing and because it offers a high degree of quality and
professionalism in the services it provides through longstanding relationships
with borrowers, real estate brokers, automobile dealers and retail deposit
customers.
Competition in originating mortgage 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 and real estate brokers.
The competition for the equity lending group comes primarily from other
consumer finance companies. Westcorp's equity lending group is able to provide
excellent customer services and very short processing time from the time an
application is taken until the time a loan is funded. Also, Westcorp offers
products such as the "no-equity" loan which is not widely offered by other
institutions.
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. The "Riegle-Neal Interstate Banking and Branch
Efficiency Act of 1994" legislated broader interstate banking authority to
financial institutions. At this time, Westcorp does not know the full extent, if
any, this Act might have on Westcorp or its competitors. Westcorp competes for
deposits primarily on the basis of interest rates paid and quality of service
provided to its customers. Westcorp does not rely on any individual, group or
entity for a material portion of its deposits. The deposits are placed by
depositors in the geographic areas in which Westcorp's retail banking offices
are located.
Competition in the commercial banking business comes primarily from other
commercial banks with a presence in the same geographic area. In general, many
commercial banks are more sizeable institutions with larger lending capacity and
lower cost of funds than Westcorp. However, Westcorp, because of the experience
of the individuals it has recruited, plans to differentiate itself based on
outstanding relationship management as well as on the ability to provide quick
credit decisions, competitive interest rates and competitive pricing on loans,
deposits and other services.
WFS faces strong competition in the purchase of automobile dealer generated
automobile loans from competitors including automobile manufacturer finance
subsidiaries, consumer finance companies, commercial banks, and credit unions.
WFS competes for the purchase of such loans on the basis of price and the level
of service provided to the respective dealers, including its promptness in
processing and approving automobile applications submitted by the dealer.
26
28
TAXATION
FEDERAL INCOME TAXES
Westcorp and its subsidiaries file a calendar year consolidated federal
income tax return. All entities included on the consolidated financial
statements are included in the consolidated tax return except for Westhrift,
which files separately.
The Bank is a savings and loan association for federal tax purposes. Prior
to 1996, savings and loan associations satisfying certain conditions were
permitted under the Internal Revenue Code ("IRC") to establish reserves for bad
debts and to make annual additions to these reserves which qualified as
deductions from income. However, in 1996 new legislation was enacted which
eliminated the reserve method of accounting for bad debts for tax purposes for
savings and loan associations. The repeal of the reserve method is effective for
tax years beginning after December 31, 1995. Savings and loan associations are
now subject to the same tax laws regarding bad debt reserves as banks. A bank
which qualifies as a "small bank" may still be allowed to use the reserve method
of accounting for bad debts, but may only calculate its addition to the reserve
using the experience method, not the percentage of taxable income method. A bank
which qualifies as a "large bank" is not allowed to use the reserve method and
is only allowed amounts which are specifically charged off to be taken as a tax
deduction. The Bank is considered a "large bank" for federal income tax purposes
and, therefore, will be required to use the specific charge off method for
deducting bad debts for federal income tax purposes beginning in 1996.
The tax reserves for bad debts which were added after 1987 and which still
exist as of the date of this change, are required to be recaptured into income
ratably over a period of six years starting with the first taxable year after
1995. However, savings and loan associations which meet the "residential loan
requirement" will be allowed to defer the recapture of their reserves for up to
two years. In order to meet the residential loan requirement, the principal
amount of residential loans made by a savings and loan association must equal or
exceed the average principal amount of the residential loans made by the savings
and loan association during the six most recent tax years beginning before 1996.
The tax reserves related to pre-1988 additions to the reserves, are not required
to be recaptured into income as a result of this legislation. The balance of the
Bank's post-1987 reserve as of December 31, 1995, which will be required to be
recaptured into income is $17 million. The Bank met the residential loan
requirement for 1996 and, thus, has postponed recapture of its post-1987
reserves for this year.
Prior to the new legislation discussed above, the Bank, if it met certain
criteria, was permitted to compute its addition to the bad debt reserve on loans
using one of the following two methods: (i) the percentage of taxable income
method; or (ii) the experience method. The Bank has used whichever method has
provided the maximum tax deduction in the past. A savings and loan association
which utilized the percentage of taxable income method is subject to recapture
taxes on such reserves if it makes certain distributions to its stockholders.
Dividends may be paid without the imposition of any tax on the Bank if 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, stock
redemptions and other distributions with respect to stock, 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 accumulated under the experience
method. The amount of tax that would be payable upon any distribution which is
treated as having been made from the bad debt reserve for qualifying real
property loans are also deemed to have been paid from the reserve to the extent
thereof. Management does not contemplate making distributions 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. Despite the new laws
regarding tax bad debt reserves, to the extent that the Bank has not recaptured
its reserves into income as discussed above, and makes distributions deemed to
have been made from their remaining reserves, the Bank would still be subject to
the recapture tax discussed above.
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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. In the past, Westcorp has not
generally paid alternative minimum tax and does not expect that they will in the
current year.
Currently Westcorp and its subsidiaries are under examination by the
Internal Revenue Service for the tax years ended December 31, 1993 and 1994.
Management does not anticipate any significant changes based upon these
examinations.
CALIFORNIA FRANCHISE TAX AND OTHER STATE PROVISIONS
At the end of 1996, Westcorp and subsidiaries had a tax presence in
approximately 31 states. However, the majority of the activity of the group and
the resulting income should be taxed as California source income, with minor
amounts apportioned or allocated outside California.
The California franchise tax applicable to the Bank is higher than the rate
of tax 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 years ending after December 31, 1995, the tax rate for a financial
corporation is equal to the tax rate on a regular corporation plus 2%, or 11.3%.
Under California law, a savings and loan association may determine its bad
debt deduction using one of two methods. The first method allows a deduction for
debts which become wholly or partially worthless during the tax year (i.e., the
specific charge off method). The second method allows a reasonable addition to a
reserve to be deducted. A reasonable addition can be calculated using an
experience ratio, or may be determined by management to be greater than the
experience ratio, but not greater than the amount deducted for regulatory and
financial statement purposes, and not greater than 1% of outstanding loans at
year end. The Bank generally determines its California bad debt deduction using
an experience ratio. California has not yet conformed to the federal repeal of
the reserve method of accounting for bad debts for a savings and loan
association, but may do so in the future.
Westcorp and its subsidiaries compute their taxable income for California
purposes an a unitary basis, or as if they were one business unit, and file one
combined California franchise tax return (excluding Westhrift). The California
returns of Westcorp and subsidiaries for the tax years 1990 through 1993 were
examined by the Franchise Tax Board. A claim for refund is still pending. All
other issues for those years have been settled.
SUPERVISION AND REGULATION
GENERAL
The adoption of Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") 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. In 1994, the Riegle Community
Development and Regulatory Improvement Act of 1994 ("RCDA") was adopted, which
modified several of the requirements initiated by FDICIA. In addition, the
Deposit Insurance Fund Act (the "Fund Act") has further modified certain of
these requirements.
Set forth below is a discussion of the statutory and regulatory framework
for Westcorp and the Bank as affected by FIRREA, FDICIA, RCDA and the Fund Act
and the regulations promulgated
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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 the
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 ("HOLA"), as
amended by FIRREA. 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 with 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 that 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, as well as being subject to similar regulations
adopted by the OTS. Section 23A of the FRA puts certain quantitative
limitations, based upon a percentage of the savings association's capital stock
and surplus, 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 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. The Board of Governors
of the Federal Reserve System (the "Board") has revised the definition of
capital stock and surplus for purposes of Section 23A to conform that definition
to that used by the Board in calculating the limits in Regulation O for insider
lending and by the Office of the Comptroller of the Currency ("OCC") in
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calculating the limit on loans by a national bank to a single borrower. The
revised definition will permit subordinated debt that qualifies for inclusion in
Tier 2 capital to be included.
In addition, 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.
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 regulations, consistent with the provisions of Sections
23A and 23B, 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.
Amendments made by FIRREA and FDICIA require that savings associations
comply with the requirements of FRA Sections 22(g) and 22(h), and FRB Regulation
O promulgated thereunder, in the same manner as member banks, with respect to
loans to executive officers, directors and principal shareholders. The RCDA
permits loans secured by a first lien on an executive officer's residence to be
made without prior approval of the board of directors of the financial
institution. As a matter of policy, Westcorp 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. The OTS has adopted regulations to the effect that State laws
pertaining to the operations of federal savings associations and their operating
subsidiaries are preempted.
Federal Home Loan Bank System
The Bank, as a member of the FHLB, is required to own capital stock in the
FHLB in an amount at least equal to the greater of 1% of the aggregate
outstanding balance of its loans secured by residential real property or 5% 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 bank in the FHLB system 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 bank in the FHLB system is required
to transfer a percentage of its annual net earnings to the Affordable Housing
Program, as defined in FIRREA. This amount, as of January 1, 1996, is a minimum
of 10% of the annual net income of each bank in the FHLB system.
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. Commenc-
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ing in 1989, the deposits of the Bank became insured through the SAIF to the
maximum amount permitted by law (currently $100,000).
During 1996 the Bank was required to pay insurance premiums of $4.2
million, not including the SAIF special assessment discussed below. FDICIA
required the FDIC to implement 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 final rule, effective January 1, 1994. Under this rule, 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 for SAIF insured institutions such as the Bank is
assigned an assessment rate. Under the regulations, an institution is precluded
from disclosing the risk-based assessment category to which it has been
assigned.
Pursuant to the provisions of FIRREA, the FDIC adopted a significant
reduction in the insurance premiums to be paid by those financial institutions,
primarily commercial banks, whose deposits are insured under the BIF. For BIF
insured institutions, the assessment rate ranged from 0 to 27 basis points per
annum of the institution's deposit assessment base, with a minimum premium of
$2,000 per year, while for SAIF insured institutions it ranged from 23 to 31
basis points per annum. The Fund Act, signed into law by President Clinton on
September 30, 1996, provides for elimination of the differential in premiums. In
addition, the Fund Act authorized a one-time special assessment of 65.7 basis
points of SAIF-assessable deposits as of March 31, 1995, to be paid by SAIF
insured institutions to recapitalize the SAIF. On November 27, 1996, the FDIC
collected from the Bank a special assessment of $11.6 million. As a result of
the special assessment required by the Fund Act, the SAIF was capitalized at the
target Designated Reserve Ratio ("DRR") of 1.25% of estimated insured deposits
on October 1, 1996. Therefore, the FDIC lowered the rates on assessments paid to
the SAIF, while simultaneously widening the spread between the lowest and
highest rates, to avoid collecting more than needed to maintain the DRR, and to
improve the effectiveness of the risk-based system. Effective October 1, 1996,
for all SAIF insured institutions other than SAIF-member savings associations,
the assessment rate ranged from 0 to 27 basis points per annum. On January 1,
1997, the adjusted rates became effective for all institutions including the
Bank. A special interim rate schedule of 18 to 27 basis points per annum was
also established for SAIF-member savings associations for the period of October
1, 1996, to January 1, 1997, reflecting the fact that assessments paid to the
Financing Corporation ("FICO") are included in the SAIF rates for these
institutions during that interval. The Fund Act separated, effective January 1,
1997, the FICO assessment from the SAIF assessment. Excess assessments collected
under the prior assessment schedule will be refunded or credited with interest.
The Fund Act also provides for the eventual merger of the BIF and SAIF funds on
January 1, 1999, provided that legislation is adopted which will eliminate the
federal thrift charter.
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. The Fund Act provides that the
moratorium will now terminate on the earlier of January 1, 2000 or when the bank
and savings association charters are united and the BIF and SAIF are merged.
There are several exceptions to this moratorium. Most importantly, a SAIF member
may convert to a bank charter if the resulting bank remains a SAIF member during
the term of the moratorium. Additionally, conversions to a 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
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33
from the acquisition of a troubled institution that is in default or in danger
of default and is approved by the FDIC; or (iii) it results from a merger or
consolidation of a bank and a savings association and is approved by the FDIC or
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% of
its average daily balance of net withdrawal accounts and borrowings payable on
demand or in one year or less. The Bank must also maintain an average daily
balance of short-term liquid assets (generally those having maturities of one
year or less) equal to at least 1% of its average daily balance of net
withdrawable accounts plus short-term debt. 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, the Bank would be subject to various OTS
enforcement procedures, including monetary penalties. At December 31, 1996, such
percentages were 7.36% and 3.54%, 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."
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. The RCDA affirmatively
excludes well capitalized institutions from the definition of deposit brokers,
thereby eliminating the need for well capitalized institutions to register as
deposit brokers.
At December 31, 1996, the Bank met the capital requirements of a well
capitalized association as defined by the regulation. At that date, the Bank
held $48.5 million of brokered deposits.
Regulatory Capital Requirements
The HOLA, as amended by FIRREA, mandates that the OTS promulgate capital
regulations which provide capital standards no less stringent than the capital
standards applicable to national banks.
The HOLA and the OTS regulation require savings associations to maintain
"core capital" in an amount not less than 3% of adjusted total assets. Core
capital is defined in the OTS capital regulations as including, among other
things, (i) common shareholders' 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
and originated mortgage servicing rights ("MSRs") and purchased credit card
relationships ("PCCRs") meeting certain valuation requirements. The maximum
amount of MSRs and PCCRs which can be included in core capital and tangible
capital may not exceed, in the aggregate, an amount equal to 50% of the
institutions core capital, with PCCRs limited to 25% of core capital. At
December 31, 1996 the Bank had $28.6 million of MSRs, but
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held no PCCRs. Of the MSRs held by the Bank, $2.9 million are in excess of the
amount which may be included within the Bank's core capital.
The regulations of the OCC, the principal national bank regulator, require
a minimum core capital requirement of 3% of adjusted total assets for national
banks with a composite 1 rating (the highest rating available) under the
Capital, Asset quality, Management, Earnings, Liquidity, Sensitivity toward
market risk ("CAMELS") rating system for national banks and substantially higher
core capital requirements for lower rated national banks. Most national banks
are required to maintain core capital of 4% to 5% under this regulation. Because
HOLA 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% of adjusted
total assets core capital requirement in the same manner. Under the OTS
proposal, only savings associations rated composite CAMELS 1 will be permitted
to operate at the regulatory minimum core capital ratio of 3%. For all other
savings associations, the minimum core capital ratio will be 3% plus at least an
additional 100 to 200 basis points, which thus will increase the core capital
ratio requirement to 4% to 5% (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 capital regulations already permit the OTS to impose a higher
individual minimum capital requirement on a case-by-case basis. The Bank is not
currently subject to any such requirement. The Bank's core capital ratio at
December 31, 1996 was 10.53%.
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 MSRs and PCCRs
to the extent includable in core capital as described above. At December 31,
1996, the Bank's tangible capital was 10.53%.
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. Effective July 1, 1996, the Bank is required to deduct from its
core and tangible capital its investments in WCS (both equity and extensions of
credit), as WCS is engaged in residential real estate activities not permitted
by national banks. At December 31, 1996, the amount excluded from the Bank's
core and tangible capital was $13.1 million.
As of December 31, 1996, the Bank's core capital was $349 million,
exceeding the Bank's regulatory requirement by $250 million. The Bank's tangible
capital at December 31, 1996 was $349 million, exceeding the applicable
regulatory requirement by $299 million.
The risk-based component of the capital standards requires that an
association have total capital equal to 8.0% of risk-weighted assets. 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 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's risk-based capital
requirement at December 31, 1996
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included $306 million due to its recourse liability relating to grantor and
owner trust financings, including fully capitalized assets.
The RCDA requires the federal banking agencies, including the OTS, to
review their risk-based capital recourse rules, and to adopt new rules for
assets sold with low levels of recourse to ensure that the risk-based capital
held for such assets does not exceed the contractual maximum recourse liability
retained by the institution upon the sale of those assets. The federal banking
agencies, including the OTS have adopted such regulations. As the existing OTS
low level recourse regulations were already consistent with those called for by
the RCDA, the OTS regulations discussed in the preceding paragraph were not
modified. Accordingly, these regulations will not affect the Bank.
Also in response to the RCDA, the federal banking agencies, including the
OTS, have adopted regulations pertaining to the amount of risk-based capital
which must be held upon the sale, with recourse, of qualifying small business
loans. Under these regulations, a well capitalized institution, such as the
Bank, upon the sale of loans which meet the criteria for loans to small
business, as defined by the Small Business Administration, needs to maintain
capital only against the amount of recourse retained, provided a reserve is
established, under GAAP, for that recourse liability. In addition, the maximum
amount of recourse retained under this regulation may not exceed 15% of the
Bank's total capital. The effect of this regulation is to substantially reduce
the amount of risk-based capital which must be maintained upon the sale of
qualifying small business loans.
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 exist for on balance sheet assets. The four
risk-weighted categories are zero percent (generally cash and securities issued
by or backed by the full faith and credit of the United States), twenty percent
(generally US government backed mortgage securities), fifty percent (generally
qualifying mortgage loans and mortgage backed securities not within lower
categories) and one hundred percent (all other assets).
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 credit conversion factors is
appropriate. There is a one hundred percent conversion of direct credit
substitutes, and net assets sold under an agreement to repurchase; a fifty
percent conversion factor for transaction-related contingencies and the unused
portions of nonexempt loan commitments; a twenty percent conversion for
trade-related contingencies, such as commercial letters of credit; and a zero
percent conversion for the unused portion of exempt loan commitments and unused,
unconditionally cancellable retail credit card lines. Interest rate contracts
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 fifty percent risk-weight. As
of December 31, 1996 the Bank's total risk-weighted assets equaled $4.3 billion.
In addition to regulations pertaining to risk-based capital for interest
rate risk, FDICIA also requires the adoption of risk-based capital regulations
regarding excessive exposure to concentration of credit risk and the risks
associated with nontraditional activities. The OTS individual minimum capital
regulations include these factors as additional grounds upon which the OTS could
impose such requirements. The regulations do not set specific standards, but
leave it to the discretion of the OTS to impose additional capital requirements
on a case by case basis. The RCDA requires the federal banking agencies to add
the size and activities of an institution to that list of factors which may
justify the need for additional risk-based capital. Under the RCDA the federal
banking agencies are not to cause undue reporting burdens in connection with
such regulations. The OTS has not yet proposed new regulations in response to
this law.
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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 (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% loan-to-value ratio. Supplementary capital is comprised
of three elements: (i) permanent capital instruments not included in core
capital; (ii) maturing capital instruments; and (iii) general valuation loan and
lease loss allowance.
The Bank currently has $107 million (excluding discount) of its 8.5%
Debentures outstanding. Pursuant to the approval from the OTS to treat those
debentures as supplementary capital, subsequent to September 30, 1995 the amount
of those debentures which may be included as supplementary capital may not
exceed one-third of the Bank's total capital. At December 31, 1996, the 8.5%
Debentures then outstanding represented 22.8% 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 Bank's total capital at December 31, 1996 was $468 million
and its risk-based capital ratio was 10.91%.
As required by the provisions of FDICIA, the OTS has adopted an interest
rate risk component to its capital rules. 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. The OTS has postponed the effective date as of which an
IRR component will be required to be deducted from a savings association's
capital to permit the OTS to review the interest rate risk regulations currently
being promulgated by the other federal banking agencies for their respective
institutions. Even were the rule currently being applied, the Bank would not be
required to reduce its total capital by an IRR component, and does not
anticipate being required to do so during 1997.
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's 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, 1996.
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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 (i) determines (after notice and an opportunity for
hearing) that the institution is in an unsafe or unsound condition or (ii) 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 ratio of 3% or greater and is rated
composite 1 under the CAMELS 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
CAMELS rating
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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, 1996, the Bank met the
capital requirements of a "well capitalized" institution, as its total
risk-based capital ratio was 10.91%, its Tier 1 risk-based capital ratio was
8.14% and its leverage ratio was 10.46%.
Loans to One Borrower
Under the HOLA as amended by 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, 1996, 15% of the Bank's unimpaired capital
and unimpaired surplus for loans to one borrower purposes was $61.2 million. The
largest amount outstanding at December 31, 1996 to one borrower (and related
entities) was $11.8 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 corporation subsidiaries was
$16.8 million and its equity investments in operating subsidiaries was $158
million as of December 31, 1996.
Qualified Thrift Lender Test
A Qualified Thrift Lender ("QTL") test was enacted as a part of FIRREA, and
was modified by FDICIA and the Economic Growth and Regulatory Paperwork
Reduction Act ("EGRPRA"). 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. For a three year period 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
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every 12 consecutive months. Savings associations have the option of
substituting compliance with the IRC "domestic building and loan association"
(DBLA) test for compliance with the amended QTL requirements. Qualified thrift
investments include: (i) all loans or mortgage-backed securities held by an
association which are secured or relate to domestic residential or manufactured
housing; (ii) investments in educational, small business, credit card, and
credit card account loans; and (iii) FHLB 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 20% 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, 1996 the Bank's percentage of qualified thrift investments
to portfolio assets was 87%. 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). 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 preceding 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 proposed that savings associations which are not
subsidiaries of holding companies and which are rated CAMELS 1 or CAMELS 2 may
make distributions without advance notice to the OTS. 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
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January 1, 1997 plus 50% of its surplus capital or 75% of its net income over
the four-quarter period ending December 31, 1996. 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 $51.0 million for the fourth quarter of 1996. During 1996, Westcorp made
an additional investment to the Bank of $60.0 million which increased the
availability of a capital distribution. In 1995, the available capital
distribution was $8.3 million. Westcorp received dividends from the Bank during
1996 in the aggregate amount of $5.0 million.
Community Reinvestment Act
The Community Reinvestment Act ("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 1996, which was made public in 1996. The
Bank's rating was "satisfactory." An institution in this group has a
satisfactory 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 other federal banking regulatory agencies,
revised the CRA regulations in 1995. The procedures contained in the revised
regulations 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 regulations replace
the current process-based assessment system with a new evaluation system that
will rate institutions based on actual performance in meeting community credit
needs. The new system will 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. Under the regulations, an association may seek to
be assessed on its CRA performance under a strategic plan prepared by the
association and approved by the OTS. The 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 as
adopted, will differ materially from its performance under the previously
existing CRA regulations.
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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. 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 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 revised its asset classification scheme. The OTS removed the
specific description of assets classified as "substandard," "doubtful" and
"loss" from the regulatory text, and is now providing such descriptions in
guidance, as is the practice of the federal banking regulatory agencies. As of
December 31, 1996 the Bank had established allowances for loan and real estate
losses of $41 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.
Investment Powers
Pursuant to the Interagency Guidelines for Real Estate Lending Policies,
the Bank is required to have 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 origination requires either private mortgage insurance or
other readily marketable collateral. The Bank's LTV standards are consistent
with these supervisory limitations. In addition, the OTS and the other federal
banking agencies have adopted uniform real estate appraisal guidelines which
require the board of directors of financial institutions to adopt appraisal and
evaluation programs which will cover the selection of appraisers, monitoring
their
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activities, require needed independence from the real estate transaction at
issue, establish criteria for reports, formats and the use thereof.
The EGRPRA expanded the small business and agricultural lending authority
of federal associations. Federal associations can make loans secured by business
or agricultural real estate in amounts up to 400% of capital, and can make
additional secured and unsecured loans to businesses and farms in amounts up to
20% of total assets, provided that amounts in excess of 10% of assets may only
be used for "small business loans." The OTS also no longer aggregates commercial
loans made by a savings association's service corporation with commercial loans
made by the savings association itself for purposes of the statutory 10% of
assets limitation.
In addition, the EGRPRA amended section 5 of the HOLA to conform and
clarify that federal savings associations may engage in credit card lending
without a percentage of assets investment limitation, as OTS has maintained. The
EGRPRA also amended HOLA section 5 to permit federal associations to make
education loans without investment restriction, as opposed to the previous limit
of 5% of total assets.
Pass-Through Investments
A federal savings association may invest in entities, such as limited
partnerships and mutual funds, that hold only assets, and engage only in
activities, permissible for federal savings associations. A savings association
does not have to give advance notice to the OTS if the pass-through investment
satisfies the following: (1) The savings association does not invest more than
15% of its total capital in one company; (2) The book value of the association's
aggregate pass-through investment does not exceed 50% of its total capital after
making the investment; (3) Its investment would not give it direct or indirect
control of the company; (4) Its liability is limited to the amount of its
investment; and (5) The company falls into one of the following categories: (i)
A limited partnership; (ii) An open-end mutual fund; (iii) A closed-end
investment trust; (iv) A limited liability company; or (v) An entity which is
invested in primarily to use the company's services (e.g. data processing). A
savings association must provide 30 day's advance written notice to OTS before
making any pass-through investment that does not meet these standards. Loans
that a savings association makes to an entity in which it has made a
pass-through equity investment will be subject to the loans to one borrower rule
in the same manner as loans by a savings association to any third party. A
thrift's investment in its operating subsidiaries is not subject to these
restrictions. The Bank does not currently have any pass-through investments.
Accounting Requirements
The OTS has 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
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 the 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
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities,"
for fiscal years commencing on or after January 1, 1994.
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Under SFAS 115, savings associations will be required to recognize unrealized
gains and losses on "available for sale" securities when measuring shareholder's
equity. The OTS has determined that SFAS 115 will not be used as a component in
core capital or as a part of supplementary capital. The Bank recognized an
increase in shareholder's equity of approximately $186 thousand at December 31,
1995 as a result of SFAS 115. For additional information see the Consolidated
Financial Statements.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125") was issued by the Financial
Accounting Standards Board in June 1996. SFAS 125 established standards for the
recognition and measurement of transactions involving transfers of financial
assets. SFAS 125 adopts a financial components approach which, after a transfer
of financial assets, requires recognition of assets which continue to be
controlled by the transferor and derecognition of assets for which control has
been surrendered. SFAS 125 is to be applied prospectively to transactions
occurring after January 1, 1997. Transactions prior to adoption are not
affected. The adoption of SFAS 125 is not expected to have a material impact on
the financial condition or results of operations of Westcorp arising from the
securitization activities of WFS.
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 institution every twelve
months. The Bank's last annual examination ended on February 16, 1996.
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 other appropriate regulated agencies. 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 agencies; 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 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, as amended by the RCDA, requires the federal banking regulatory
agencies to prescribe, by regulation or guidelines, 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) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation fees and benefits. In addition, the federal
banking regulatory agencies are required to prescribe standards relating to
asset quality, earnings and stock valuation as they determine to be appropriate.
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The OTS, in conjunction with the federal banking regulatory agencies, has
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness to meet the amended FDICIA requirements. In general, the
guidelines are designed to 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. The guidelines call for each insured
institution to have policies, procedures and systems appropriate to its size and
the nature of its assets and liabilities which address the specific criteria
identified in the guidelines for each of the six items identified above. The
guidelines do not set any specific numerical targets or minimum requirements.
In the event the OTS determines that a savings association has failed to
satisfy the safety and soundness standards called for by the guidelines, 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 a notice of intent to issue an order (or in an appropriate case
an immediate order, subject to appeal by the association) requiring that
association to correct a safety and soundness deficiency or to take or refrain
from other actions.
OTS Prohibitions
The OTS prohibits directors, officers, and natural persons having the power
to control the management or policies of savings associations from receiving,
directly, or indirectly, any commission, fee or other compensation in connection
with the procurement of any loan by the savings association or a subsidiary of
the savings association. This regulation does not apply to holding companies and
holding company affiliates of savings associations. Therefore, this regulation
does not apply to Westcorp, but does apply to the Bank.
Furthermore, the OTS prohibits directors, officers, employees, persons
having the power to control management or policies of savings associations, and
other persons who perform fiduciary duties for savings associations, from
advancing their own personal or business interests, or those of others with whom
they have a personal business relationship, at the expense of the institutions
they serve. Generally, a person will not be deemed to be advancing his, her or
its interests at the expense of the institution if the transaction complies with
sections 23A and 23B of the Federal Reserve Act ("FRA"), Regulation O, or the
OTS' safe harbor provision. Likewise, the rule does not prohibit an executive
officer, director or principal shareholder from receiving a loan from the
association which they serve under certain circumstances.
The OTS also prohibits directors or officers of savings associations,
persons having the power to control the management or policies of savings
associations and other persons who owe a fiduciary duty to savings associations
from taking advantage of corporate opportunities belonging to their savings
association or its subsidiaries. A corporate opportunity will be deemed to
belong to the savings association if: (i) it is within the corporate powers of
the savings association or its subsidiary; and (ii) the opportunity is of
present or potential practical advantage to the savings association, directly or
through its subsidiary. The OTS will not deem a person to have taken advantage
of a corporate opportunity belonging to the savings association if a
disinterested and independent majority of the savings association's board of
directors, after receiving a full and fair presentation of the matter, rejected
the opportunity as a matter of sound business judgement.
WFS
WFS is an operating subsidiary of the Bank. WFS purchases retail
installment sales contracts from new and used motor vehicle dealers and makes
installment loans to individual consumers secured, in both instances, by
automobiles and light duty trucks (collectively, "contracts"). WFS maintained
136 offices in 31 states at December 31, 1996. WFS is licensed in each state in
which it operates as a consumer finance lender by a state licensing agency in
each such state. As such, it is subject to audit and examination by the
applicable state agencies for these states, as well as being subject to
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examination and supervision by the OTS and the FDIC. WFS engages local counsel
familiar with the applicable consumer finance and auto finance, licensing and
titling laws and regulations of each of the states in which it has offices and
from which it purchases contracts to the extent it purchases contracts from
states in which it has no office. WFS will continue to do so as to each of the
states into which WFS intends to expand. At December 31, 1996, and as of the
date hereof, WFS is in compliance with the licensing and operating laws and
regulations applicable to each of its offices in these states.
Numerous federal and state consumer protection laws and regulations impose
requirements applicable to the contracts purchased and serviced by WFS. Among
these enactments are the federal Truth-in-Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
California Rees-Levering Act and similar retail installment sales laws and
similar laws of other states in which WFS originates contract. Most of the
states in which WFS is originating contracts have statutes or regulations
pertaining to the repossession and sale process WFS must follow when seeking to
recover on a defaulted contracts. Generally, WFS must follow those requirements
with precision to ensure its ability to maximize its recovery on a defaulted
contract. In addition, some states, such as Texas, have consumer protection laws
which limit the assets WFS may reach in order to recover on any deficiency
following repossession and sale of the vehicle which secures a defaulted
contract.
As an operating subsidiary of the Bank, WFS is precluded by regulations of
the OTS from engaging in any business activity which the Bank could not itself
undertake. All of its current business activities are permitted activities for
the Bank. Also, as an operating subsidiary of the Bank, the Bank is required to
retain ownership of at least a majority of the voting stock of WFS. WFS may not
engage in any new business activity nor may it acquire a business from a third
party, even if such business activities are permitted to the Bank and thereby to
WFS, until the Bank has first given notice thereof to the FDIC and to the OTS.
EMPLOYEES
At December 31, 1996, Westcorp had 2,602 full-time and 104 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.
FORWARD-LOOKING STATEMENTS
The preceding Business section contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for certain forward-looking statements.
This Annual Report on Form 10-K contains forward-looking statements which
reflect Westcorp's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those identified below, which could cause actual
results to differ materially from historical results or those anticipated. The
forward-looking terminology such as "believe", "expect", "anticipate", "intend",
"may", "will", "should", "estimate", "continue", and/or the negative thereof or
other comparable expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. Westcorp
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the level of demand for consumer,
mortgage and commercial loans, which is affected by such external factors as the
level of interest rates, the strength of the various segments of the economy,
debt burden held by the consumer and demographics of Westcorp's lending markets;
(2) the direction of interest rates; (3) fluctuations between interest rates and
the cost of funds; (4) federal and state regulation of Westcorp's operations;
(5) competition within the financial services industry; (6) the availability and
cost of securitization transactions and (7) continued dealer and broker
relationships.
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ITEM 2. PROPERTIES
At December 31, 1996, Westcorp owned 20 properties in California and leases
additional properties at various locations in other states.
The executive offices are located at 23 Pasteur Road, Irvine, California.
The remaining owned and leased properties are used as branch offices, finance
company offices, dealer centers, and mortgage banking offices. At December 31,
1996, the net book value of property and leasehold improvements was
approximately $54.7 million. Westcorp leases space at five locations from
companies controlled by a major shareholder. For further information see "Item
13 -- Certain Relationships and Related Transactions".
ITEM 3. LEGAL PROCEEDINGS
Westcorp is involved as a party to certain legal proceedings incidental to
its business. Management believes that the outcome of such proceedings will not
have a material effect upon Westcorp's financial condition, results of
operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE BY QUARTER
The common stock of Westcorp has been publicly traded since 1986 and is
currently traded on the New York Stock Exchange ("NYSE"), identified by the
symbol, WES. The following table (1995 prices are adjusted for 5% stock dividend
in 1996) illustrates the high and low prices by quarter in 1996 and 1995, as
reported by NYSE, which prices are believed to represent actual transactions:
1996 1995
--------------------- ----------------------
HIGH LOW HIGH LOW
---------- -------- ---------- ---------
First Quarter................................... $ 18 11/16 $16 3/16 $ 10 51/54 $ 7 31/54
Second Quarter.................................. 19 17/32 17 5/8 15 19/32 10 19/32
Third Quarter................................... 21 7/8 17 21 29/32 14 17/32
Fourth Quarter.................................. 23 7/8 20 1/4 21 35/64 14 41/54
There were approximately 1,300 shareholders of Westcorp common stock at
December 31, 1996. 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 $0.10 per share quarterly cash dividend and a 5% stock
dividend during 1996. Westcorp paid a $0.086 per share quarterly cash dividend
and a 5% stock dividend during 1995. The 1995 dividends and earnings per share
and share amount have been retroactively adjusted to give effect of the 1996 and
1995 5% stock dividends. On February 5, 1997, Westcorp declared a quarterly cash
dividend of $0.10 per share for shareholders of record as of February 18, 1997,
and paid on March 4, 1997.
Westcorp is not restricted by regulation or agreement in its ability to pay
dividends.
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ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Interest income...................... $ 242,388 $ 222,093 $ 143,639 $ 157,946 $ 212,354
Interest expense..................... 139,194 139,279 88,766 101,203 137,955
----------- ----------- ----------- ----------- -----------
Net interest income................ 103,194 82,814 54,873 56,743 74,399
Provision for loan losses............ 13,571 11,470 13,033 22,584 34,270
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses................. 89,623 71,344 41,840 34,159 40,129
Noninterest income................... 181,264 105,660 85,932 73,839 32,864
Noninterest expenses................. 203,646 115,433 95,133 83,625 69,354
----------- ----------- ----------- ----------- -----------
Income before income taxes and
extraordinary loss................. 67,241 61,571 32,639 24,373 3,639
Income taxes......................... 28,095 25,235 13,819 10,386 1,384
----------- ----------- ----------- ----------- -----------
Income before minority interest...... 39,146 36,336 18,820 13,987 2,255
Minority interest in earnings of
subsidiaries....................... 7,349 2,908
----------- ----------- ----------- ----------- -----------
Income before extraordinary loss..... 31,797 33,428 18,820 13,987 2,255
Extraordinary loss, net of applicable
income tax benefit of $811(1)...... (1,113)
----------- ----------- ----------- ----------- -----------
Net income........................... $ 31,797 $ 33,428 $ 18,820 $ 12,874 $ 2,255
=========== =========== =========== =========== ===========
Book value per share at December
31(2).............................. $ 12.23 $ 11.54 $ 8.32 $ 8.09 $ 7.89
Weighted average number of shares and
common share equivalents(2)........ 26,199,537 25,917,018 25,531,182 22,966,693 20,471,963
Income before extraordinary item..... $ 1.21 $ 1.29 $ 0.74 $ 0.61 $ 0.11
Extraordinary loss due to redemption
of subordinated debentures......... (0.05)
----------- ----------- ----------- ----------- -----------
Net income per share (2)............. $ 1.21 $ 1.29 $ 0.74 $ 0.56 $ 0.11
=========== =========== =========== =========== ===========
Dividends............................ $ 0.39 $ 0.34 $ 0.27 $ 0.17 $ 0.16
Dividend payout ratio................ 32.2% 26.4% 36.5% 30.4% 145.5%
- ---------------
(1) During the third quarter of 1993, the Bank redeemed its 11% Subordinated
Capital Debentures due 1999 at a loss.
(2) Gives effect to the issuance of 4.3 million shares of common stock in 1993
and 5% stock dividends in 1994, 1995 and 1996.
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DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FINANCIAL SUMMARY
Assets:
Cash and other assets.............. $ 513,090 $ 333,232 $ 234,936 $ 247,018 $ 266,541
Loans:
Consumer(1)..................... 284,858 335,625 430,708 230,351 354,201
Mortgage(2)..................... 1,446,759 1,409,964 1,320,784 1,326,797 1,571,628
Mortgage-backed securities......... 849,548 852,552 470,669 94,567 107,757
Investments and time deposits...... 240,790 291,564 285,192 273,526 219,368
----------- ----------- ----------- ----------- -----------
Total assets....................... $3,335,045 $3,222,937 $2,742,289 $2,172,259 $2,519,495
=========== =========== =========== =========== ===========
Liabilities:
Deposits........................... $1,873,942 $1,753,475 $1,632,782 $1,357,058 $1,682,897
Public debt offerings.............. 160,862 216,690 314,429 271,318 326,763
FHLB advances and other
borrowings...................... 513,412 546,024 335,074 126,000 184,500
Other liabilities.................. 440,507 387,044 247,692 212,768 164,637
----------- ----------- ----------- ----------- -----------
Total liabilities............... 2,988,723 2,903,233 2,529,977 1,967,144 2,358,797
Minority interest in equity of
subsidiaries.................... 28,392 21,965
Shareholders' equity............... 317,930 297,739 212,312 205,115 160,698
----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity.......... $3,335,045 $3,222,937 $2,742,289 $2,172,259 $2,519,495
=========== =========== =========== =========== ===========
OTHER SELECTED FINANCIAL DATA
Average assets....................... $3,233,713 $2,837,292 $2,162,141 $2,279,393 $2,568,899
Return on average assets............. 0.98% 1.18% 0.87% 0.56% 0.09%
Average shareholders' equity......... $ 308,305 $ 213,311 $ 208,178 $ 182,999 $ 167,494
Return on average shareholders'
equity............................. 10.31% 13.51% 9.04% 7.04% 1.35%
Equity-to-assets ratio............... 9.53 9.24 7.74 9.44 6.38
Originations:
Consumer loans..................... $2,128,152 $1,533,989 $1,183,188 $ 829,181 $ 673,473
Mortgage loans..................... 1,297,752 513,581 684,333 913,103 597,809
----------- ----------- ----------- ----------- -----------
Total originations.............. $3,425,904 $2,047,570 $1,867,521 $1,742,284 $1,271,282
=========== =========== =========== =========== ===========
Interest rate spread................. 2.86% 2.44% 2.18% 2.48% 2.91%
- ---------------
(1) Net of unearned discount.
(2) Net of undisbursed loan proceeds.
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 continued to focus on automobile, mortgage, equity and commercial
lending during 1996. Westcorp originated (including loans purchased from
dealers) record levels of automobile loans in 1996 totalling $2.1 billion
compared to $1.5 billion in 1995. The 39% increase in production was due
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to increased production within existing offices, expansion into new markets and
a strong automobile lending market in general.
Westcorp continues to expand its automobile operations and at year end
operated in 31 states. Mortgage loan production during 1996 increased to $1.3
billion compared to $487 million during 1995. The increase in real estate
originations was the result of a more favorable market environment in
California, utilization of THCMB for the entire 1996 year and a better
utilization of Westcorp's expanding origination capacity.
During 1996, sales and securitizations of loans in the secondary market
totalled $3.1 billion compared to $1.8 billion in 1995. This included sales or
securitizations of $2.1 billion of consumer loans compared to $1.5 billion in
1995 and sales or securitizations of $993 million of mortgage loans compared to
$304 million in 1995. Loans serviced for the benefit of others increased 30% to
$7.2 billion at December 31, 1996 compared to $5.6 billion at December 31, 1995
and consisted of $2.8 billion of consumer loans and $4.4 billion of mortgage
loans. Secondary market activity is primarily a function of origination levels
and market conditions.
At December 31, 1996, nonperforming assets totalled $33.0 million, or 1.0%
of total assets, compared to $29.2 million, or 0.9% of total assets, at December
31, 1995. At December 31, 1996, loans past due 60 days or more as a percentage
of total loans in Westcorp's consumer and real estate loan portfolios were 0.9%
and 1.2%, respectively, compared to 0.6% and 1.3% at December 31, 1995.
Westcorp currently exceeds all regulatory capital requirements. At December
31, 1996, the Bank's FDICIA regulatory capital ratios for Tier 1, risk-based,
and leverage capital were 8.14%, 10.91% and 10.46%, respectively. The Bank's
FIRREA regulatory capital ratios for tangible, core and risk-based were 10.53%,
10.53% and 10.91%, respectively.
RESULTS OF OPERATIONS
GENERAL
The primary sources of income for Westcorp are net interest income and
noninterest income which are generated through the effective management of its
interest rate sensitive assets and liabilities and loan sales. Other significant
factors that affect Westcorp's income are asset quality, automobile lending,
mortgage banking, other miscellaneous income, noninterest expenses and income
taxes.
Westcorp's net income was $31.8 million for the year ended December 31,
1996, compared to $33.4 million for the year ended December 31, 1995 and $18.8
million for the year ended December 31, 1994. The increases in net income for
the years ended December 31, 1996 and 1995 compared to 1994 are attributable to
continued sales and securitizations in the secondary market, expanded
automobile, mortgage and equity lending operations, an improving real estate
market and improved asset quality. These activities have resulted in increased
net interest income, noninterest income, and lower provisions for loan losses.
Net income was primarily affected by the following factors:
- - Net interest income increased as Westcorp increased its purchases of
mortgage-backed securities and as originations of mortgage loans increased.
- - Automobile lending income increased primarily due to an increase in loan
origination volume, the amounts securitized, wider interest rate spreads and
an increase in the overall servicing portfolio.
- - Mortgage banking income increased as a result of the adoption of SFAS 122
which recognizes the value of originated mortgage servicing rights.
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- - Insurance expense increased as a result of a one-time pre-tax charge of $11.6
million for the special assessment to recapitalize SAIF.
- - Several noninterest expense categories increased primarily as a result of
expansion of operations in the automobile lending, mortgage banking and
commercial banking businesses.
ASSET/LIABILITY MANAGEMENT
Asset/liability management is the process of measuring and controlling
interest rate risk through matching the maturity and repricing characteristics
of interest earning assets with those of interest bearing liabilities.
Westcorp's approach to asset/liability management includes originating
adjustable rate loans, securitizing loans with liabilities that have similar
repricing and maturity characteristics, matching fixed rate loans held in the
portfolio with advances from the FHLB and using other financial instrument
agreements. Net interest income in 1996 was $103 million compared with $82.8
million in 1995 and $54.8 million in 1994. Net interest income has been affected
over the last two years by changes in interest rates and changes in average
interest earning assets and interest bearing liabilities.
Interest rates on Westcorp's interest earning assets, particularly its
consumer and mortgage loan portfolios, have increased since 1994 corresponding
with the direction of overall market interest rates. The average yield on
interest earning assets increased to 8.6% for the year ended December 31, 1996,
from 8.5% and 7.3%, for the years ended 1995 and 1994, respectively. Mortgage
loans and mortgage-backed securities comprise the majority of Westcorp's assets
and are principally adjustable rate products. Furthermore, these assets are
primarily indexed to the COFI. COFI was 4.8% in December 1996, compared to 5.1%
in December 1995 and 4.6% in December 1994. As COFI decreased, the yield on
Westcorp's real estate loan portfolio, which represents the majority of
Westcorp's interest earning assets, also increased to 7.7% for the year ended
December 31, 1996, compared to 7.6% and 6.5% for the years ended December 31,
1995 and 1994, respectively. Consumer loan rates, which are less sensitive to
market conditions, were 16.0% for the year ended December 31, 1996 compared to
14.6% and 13.1% for the years ended December 31, 1995 and 1994, respectively.
The increase in consumer loan yields is primarily the result of Westcorp
shifting a larger percentage of its product mix to higher yielding consumer
loans.
Interest costs on Westcorp's interest bearing liabilities decreased to 5.8%
for the year ended December 31, 1996, compared with 6.0% for the year ended
December 31, 1995 and increased compared to 5.1% for the year ended December 31,
1994. However, the rate of increase for interest bearing liabilities has been
less dramatic than that for interest earning assets principally due to the
lagging of deposit repricing compared to that of Westcorp's interest earning
assets. The cost of deposits for the year ended December 31, 1996 was 5.6%
compared to 5.8% and 4.7% for the years ended December 31, 1995 and 1994,
respectively.
During 1996, average interest earning assets were $2.8 billion compared to
$2.6 billion in 1995 and $2.0 billion in 1994. The increase in average interest
earning assets is primarily attributable to increases in Westcorp's
mortgage-backed securities portfolio. Westcorp invests in mortgage-backed
securities to generate additional net interest income as well as to manage the
average interest rate risk characteristics of its balance sheet. The average
automobile finance, mortgage loan and equity portfolio increased $22.7 million
and $201 million for 1996 and 1995, respectively. These increases were
attributable to increased originations of consumer loans and decreased sales of
mortgage loans.
Average interest bearing liabilities totalled $2.4 billion during 1996
compared to $2.3 billion in 1995 and $1.7 billion in 1994. These increases are
due primarily to increasing the deposit base commensurate with the higher asset
base. Average deposits, which represent over 60% of Westcorp's average
liabilities, have remained constant at $1.8 billion in 1996 compared with 1995
and increased compared to $1.5 billion in 1994. Average interest bearing
liabilities as a percentage of average interest earning assets totalled 85.8% in
1996 compared to 88.1% in 1995 and 88.2% in 1994.
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On a limited basis, Westcorp also manages interest rate risk through
financial instrument agreements. Westcorp uses interest rate swaps, options,
caps, floors and forward agreements as part of its hedging strategy to reduce
the sensitivity of certain assets to changes in interest rates. These
instruments are carried at, and included as part of, the basis of the underlying
assets.
Westcorp's interest rate swaps consist of agreements to pay fixed-rate
interest and receive floating-rate interest at specified intervals based on an
agreed notional amount, a specified index and settled on a net basis. Westcorp
minimizes the effect of changes in interest rates on loans held for sale by
entering into forward agreements that protect the hedged assets from changes in
interest rates. Westcorp has entered into or committed to interest rate caps and
swaps as hedges against market value changes in designated portions of its MBS
portfolio. At December 31, 1996, caps with notional amounts totalling $150
million and a swap of $50 million were outstanding. The cap agreements have
strike rates from 7.5% to 8.0% with expiration dates ranging from 1999 and 2003.
The swap has a pay rate of 5.9% and expires in December 2002. Westcorp uses only
counterparties with high credit ratings and further reduces its risk by avoiding
any material concentration with a single counterparty. Credit exposure is
limited to those agreements with a positive fair value and only to the extent of
that fair value.
Master netting agreements are arranged or collateral is obtained through
physical delivery of, or rights to, securities to minimize Westcorp's exposure
to credit losses in the event of nonperformance by counterparties to financial
instruments.
The overall interest rate spread for Westcorp was 2.9% during 1996 compared
to 2.4% and 2.2% during 1995 and 1994, respectively. The net yield on average
interest earning assets was 3.7% for the year ended December 31, 1996 and 3.2%
and 2.8% for the years ended December 31, 1995 and 1994, respectively. For
additional information on Westcorp's interest sensitive assets, see
"Business -- Lending -- General."
ASSET QUALITY
Nonperforming assets and loan delinquency are considered key measures of
asset quality at Westcorp. Asset quality, in turn, affects the determination of
the allowance for loan losses. In addition to nonperforming assets and loan
delinquency levels, valuation allowances for estimated losses on loans and real
estate are also determined by taking into consideration general economic
conditions in the markets Westcorp serves, historical loss experience,
individual loan reviews and the level of assets relative to reserves.
Westcorp's total nonperforming assets ("NPA") increased $3.8 million, or
13%, to $33.0 million at December 31, 1996 compared to $29.2 million at December
31, 1995. At December 31, 1996, NPAs represented 1.0% of total assets compared
to 0.9% at December 31, 1995. See "Business -- Asset Quality -- Nonperforming
Assets." During 1992 and 1993, the national economy was adversely affected by
negative or low rates of economic growth and high unemployment. The effect in
California, Westcorp's predominant real estate market, was especially severe.
Since 1994, real estate markets have stabilized, although weaknesses still exist
in certain sectors of the market.
NPAs consist of nonperforming loans ("NPL") and real estate acquired
through foreclosure and real estate acquired for investment or development
("REO"). REOs are carried at lower of cost or market. NPLs are defined as all
loans on nonaccrual, which include mortgage loans 90 days or more past due or
performing loans where full collection of principal and interest is not
reasonably assured. NPLs include loans categorized as impaired. When a loan is
designated as nonaccrual, all previously accrued interest is reversed. Interest
on nonperforming loans excluded from interest income was $1.0 million at
December 31, 1996 compared to $0.8 million at December 31, 1995.
As defined in SFAS No. 114, a loan is considered impaired when, based on
current information and events, it is probable that Westcorp will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Westcorp measures impairment based on, among other
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factors, the fair value of the loan's collateral. Changes in the fair value of
loans are recorded through the allowance for loan losses. At December 31, 1996
and December 31, 1995, impaired loans were $6.9 million and $7.5 million,
respectively.
The percentage of owned loans 60 days or more delinquent decreased to 1.1%
at December 31, 1996 compared to 1.2% at December 31, 1995. Mortgage loans past
due 60 days or more at December 31, 1996 totalled $17.0 million, or 1.0% of
total real estate loans. Automobile loans past due 60 days or more at December
31, 1996 totalled $2.1 million, or 0.9% of total consumer loans. Equity loans
past due 60 days or more at December 31, 1996 totalled $2.9 million or 1.9% of
total equity loans. Mortgage loans past due 60 days or more at December 31,
1995, totalled $18.2 million, or 1.3% of total real estate loans, compared to
$15.9 million, or 1.2% at December 31, 1994. Equity loans past due 60 days or
more totalled $2.4 million and $2.6 million at December 31, 1995 and 1994,
representing 1.8% of total equity loans at the respective dates. See
"Business -- Asset Quality -- Real Estate Loan Quality." Automobile loans past
due 60 days or more totalled $2.1 million and $0.8 million at December 31, 1995
and 1994, representing 0.6% and 0.2% of total consumer loans at the respective
dates. See "Business -- The Business of WFS -- Automobile Lending -- Automobile
Loan Quality."
Westcorp's allowance for loan losses is $40.2 million at December 31, 1996
compared to $39.3 million at December 31, 1995 and $41.2 million at December 31,
1994. The allowance for loan losses is reduced by net chargeoffs and increased
by the provision for loan losses. For the year ended December 31, 1996, the
provision for loan losses totalled $13.6 million compared to $11.5 million and
$13.0 million for the years ended December 31, 1995 and 1994, respectively. Net
chargeoffs for the years ended December 31, 1996, 1995 and 1994 were $14.1
million, $14.4 million and $11.4 million, respectively. See "Business -- Asset
Quality -- Allowance for Loan Losses." Westcorp believes that the allowance for
loan losses is currently adequate to absorb potential losses in the portfolio.
While Westcorp's portfolio consists primarily of single family loans, no single
loan, borrower or series of such loans comprise a significant portion of the
total portfolio. The provision and allowance for loan losses are indicative of
loan volumes, loss trends and management's analysis of market conditions.
The allowance for real estate losses remained constant at $0.8 million at
December 31, 1996 and 1995. The allowance for real estate losses is charged with
writedowns of foreclosed assets for changes in estimated fair value occurring
subsequent to foreclosure. At the time of foreclosure, individual properties are
written down to estimated fair value and the allowance for loan losses is
charged. Management believes that the allowance for real estate losses is
currently adequate to absorb potential
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losses in the foreclosed portfolio. The following table presents summarized data
relative to the allowances for loan and real estate losses.
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Total loans......................................... $1,731,617 $1,745,589
Allowance for loan losses........................... 40,211 39,260
Allowance for real estate losses.................... 784 784
Loans past due 60 days or more...................... 19,546 20,255
Nonperforming loans................................. 20,939 18,400
Nonperforming assets(1)............................. 33,002 29,228
Allowance for loan losses as a percent of:
Total loans(2).................................... 2.4% 2.2%
Loans past due 60 days or more.................... 205.7 193.8
Nonperforming loans............................... 192.0 213.4
Total allowance as a percent of nonperforming
assets............................................ 124.2 137.0
Nonperforming loans as a percent of total loans..... 1.2 1.1
Nonperforming assets as a percent of total assets... 1.0 0.9
- ---------------
(1) Nonperforming loans and real estate owned.
(2) Loans, net of unearned discounts and undisbursed loan proceeds.
NET INTEREST INCOME
Net interest income is the difference between the rate earned on loans held
on balance sheet and the interest costs associated with Westcorp's borrowings.
Net interest income totalled $103 million in 1996 compared to $82.8 million and
$54.9 million in 1995 and 1994, respectively. The increase in net interest
income for the year ended December 31, 1996 compared to 1995 and 1994 was
attributable to the increase in investment and mortgage-backed securities as
well as the increase in loans held on balance sheet and wider interest margins.
As Westcorp sells or securitizes its on-balance sheet loans, revenue
previously recognized as net interest income will, upon sale or securitization,
be recognized as noninterest income. Noninterest income from automobile loans is
recorded as a component of automobile lending income and servicing income from
single family residential loans is recorded as a component of mortgage banking
income.
The total interest rate spread increased 42 basis points for 1996, compared
to 1995 due to an increase of 17 basis points in the yield on interest earning
assets while the cost of funds decreased by 25 basis points.
The increase in income on interest earning assets for 1996, compared to
1995 was affected by a 139 basis point increase in the yield on the consumer
loan portfolio, which is due to a shift in product mix to higher yielding loans
and a 14 basis point increase in the yield on mortgage loans due to both
increased yields and volume.
The decrease in the cost of funds was affected by a 31 basis point decrease
in public debt offerings, a 60 basis point decrease in the rate paid on
repurchase agreements and a 235 basis point decrease in the rate paid on FHLB
advances and other borrowings for 1996 compared to 1995 due to lower borrowing
rates.
52
54
NONINTEREST INCOME
AUTOMOBILE LENDING
Westcorp originates and sells automobile loans with servicing rights
retained in the asset-backed market. Westcorp originated $2.1 billion of
automobile loans in 1996 compared to $1.5 billion in 1995. Income from
automobile lending includes gains from the sale of loans, loan servicing income
net of amortization of capitalized servicing, and other related income such as
document fees and late charges. For the year ended December 31, 1996, automobile
lending generated income of $153.1 million compared to $91.4 million and $70.2
million for the years ended December 31, 1995 and 1994, respectively.
Automobile lending is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
Gains on sale of automobile loans............ $ 42,120 $19,367 $ 1,321
Loan servicing income........................ 79,623 50,713 55,182
Other fee income............................. 31,355 21,354 13,664
-------- ------- -------
$153,098 $91,434 $70,167
======== ======= =======
Gains on the sale of automobile loans totalled $42.1 million for the year
ended December 31, 1996, compared to $19.4 million and $1.3 million for 1995 and
1994, respectively. Gains on loans sold are primarily a function of loan rates,
market pricing and interest rates. The increase in gains on sale of automobile
loans reported during 1996 is the result of the increase in the amount of
securitized loans as well as higher gross interest rate spreads for
securitization transactions completed in 1996 compared to securitization
transactions completed in 1995 and 1994. Automobile loans sold during 1996
totalled $2.1 billion compared to $1.5 billion during 1995. Automobile loans
held for sale at December 31, 1996 totalled $186 million compared to $220
million at December 31, 1995.
While the assumptions used in determining gain on sale of contracts have
not materially changed during the last three years, the gain on sale of
contracts has fluctuated as a result of changes in the gross interest rate
spread of contracts securitized. The gross interest rate spread is affected by
general market conditions and overall market interest rates. The risks inherent
in interest rate fluctuations are substantially reduced through hedging
activities.
Loan servicing income increased to $79.6 million for the year ended
December 31, 1996 compared to $50.7 million and $55.2 million for 1995 and 1994,
respectively. The increase in loan servicing income is the result of increased
loans serviced by Westcorp. Westcorp serviced automobile loans owned and those
sold and serviced for the benefit of others, of $3.1 billion at December 31,
1996, $2.2 billion at December 31, 1995 and $1.6 billion at December 31, 1994.
Other fee income, consisting primarily of documentation fees, late charges
and deferment fees, increased to $31.4 million during 1996 compared to $21.4
million and $13.7 million in 1995 and 1994, respectively, representing increases
of 47% and 56%, respectively. These increases in other fee income are related to
the increase in the number of automobile loans purchased or originated.
MORTGAGE BANKING
Westcorp originates first trust deed loans secured by single family
residences primarily for sale in the secondary market. During 1996, Westcorp
originated $1.3 billion of mortgage loans of which $882 million was generated
through the wholesale distribution channel and $369 million was generated
through the retail channel. This compares to $447 million in wholesale and $40.0
million in retail (one month of activity from THCMB) totalling $487 million in
1995. Income from mortgage banking includes gains on the sale of loans, loan
servicing income net of amortization of capitalized servicing, and other income
which primarily consists of late charges.
53
55
As shown in the following table, total mortgage banking income was $18.0
million, $3.2 million and $2.1 million, for the years ended December 31, 1996,
1995 and 1994, respectively.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Net gains (losses) from sale of mortgage
loans....................................... $10,095 $(2,021) $(2,525)
Loan servicing income......................... 5,988 3,925 3,751
Other......................................... 1,963 1,255 902
------- ------- -------
$18,046 $ 3,159 $ 2,128
======= ======= =======
Gains on sales of mortgage loans for 1996 totalled $10.1 million compared
to losses of $2.0 million and $2.5 million for the years ended December 31, 1995
and 1994, respectively. The increase in gain on sale of mortgage loans is a
result of the adoption of SFAS 122 which recognizes the value of originated
servicing rights. Mortgage loans sold during 1996 totalled $993 million compared
to $304 million and $542 million for 1995 and 1994, respectively. The
significant increase in 1996 is largely due to the increase in origination
volume which creates the availability of loans available for sale. Mortgage
loans held for sale increased from $149 million at December 31, 1995 to $273
million at December 31, 1996.
Net loan servicing income totalled $6.0 million, $3.9 million and $3.8
million for the years ended December 31, 1996, 1995 and 1994, respectively. The
increase in servicing income was principally from a larger servicing portfolio.
At December 31, 1996, Westcorp serviced, including loans owned and those
serviced for the benefit of others, mortgage loans of $5.9 billion compared to
$5.1 billion and $3.0 billion at December 31, 1995 and 1994, respectively.
OTHER NONINTEREST INCOME
Noninterest income includes primarily insurance income and real estate
operations. Insurance income, which totalled $12.9 million, $8.8 million and
$9.0 million for the years ended December 31, 1996, 1995 and 1994, includes
premiums and commissions earned on insurance and insurance-related products,
including credit life and collateral protection insurance. Sales of mutual funds
and annuities totalled $1.4 million in 1996 and $0.9 million in 1995.
Real estate operations include the costs of managing and disposing of
foreclosed real estate as well as the gains and losses realized upon
disposition. In addition, real estate operations include the gains and losses
relative to the operation of joint ventures. Total real estate operations losses
for 1996 were $2.4 million compared to a loss of $267 thousand and income of
$4.5 million for 1995 and 1994, respectively. The income generated in 1994 is
primarily the result of sales of foreclosed assets at prices in excess of their
carrying values.
NONINTEREST EXPENSES
Noninterest expenses, which consist of salaries and employee benefits,
occupancy, data processing, insurance and other miscellaneous expenses increased
to $204 million in 1996 compared to $115 million in 1995 and $95.1 million in
1994. As discussed in the summary section, the 1996 increase relates in part to
the one-time charge for the SAIF insurance fund recapitalization. On November
27, 1996, Westcorp paid a special assessment of $11.6 million with respect to
the SAIF insurance fund recapitalization. SAIF-insured institutions will benefit
from a reduction in insurance premiums beginning January 1, 1997. Other
miscellaneous expenses include primarily marketing, telephone, supplies, legal
and professional fees. The increase in expenses is related to increased loan
servicing portfolios and the cost of the aggressive nationwide expansion of WFS
during 1996. The ratio of other expenses to average serviced assets was 2.2% in
1996 compared to 1.8% in 1995 and 2.0% in 1994.
54
56
INCOME TAXES
Westcorp's effective tax rate was 42% for the year ended December 31, 1996
compared to 41% and 42% for the years ended December 31, 1995 and 1994,
respectively.
CAPITAL RESOURCES AND LIQUIDITY
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
automobile 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.
Other sources of funds include a commercial paper facility totalling $400
million, repurchase agreements and FHLB advances. At December 31, 1996, Westcorp
had $25 million of commercial paper outstanding with $375 million still
available from this source. FHLB advances outstanding at December 31, 1996
totalled $226 million. Westcorp's unused line of credit at December 31, 1996
totalled $378 million. Dollar reverse repurchase agreements outstanding at
December 31, 1996 totalled $287 million and currently represent an inexpensive
source of short-term liquidity.
During 1996, Westcorp purchased $301 million of mortgage-backed securities
to generate additional net interest income. These securities have been
segregated, on an individual security basis, into the available for sale
portfolio and the held to maturity portfolio in the financial statements in
accordance with management's intent and ability to hold the securities to
maturity. These purchases included both fixed and adjustable rate
mortgage-backed securities.
Westcorp uses its funds to meet its business needs, which include funding
maturing certificates of deposit, savings, money market and demand deposit
withdrawals, repaying borrowings, funding loan and investment commitments,
meeting operating expenses, and maintaining minimum regulatory liquidity and
capital levels. OTS regulations require Westcorp, as a savings association, to
maintain a specified level of liquid assets such as cash, short term U.S.
government and other qualifying securities. Such liquid assets must not be less
than 5.0% of Westcorp'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. At December 31, 1996 and
1995, such ratios were 7.4% and 6.9%, respectively.
The Bank is a federally chartered savings bank. As such, it is subject to
certain minimum capital requirements. The FDICIA separates all financial
institutions into one of five capital categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." In order to be considered "well capitalized,"
an institution must have a total risk-based capital ratio of 10% or greater, a
Tier 1 (i.e., core) risk-based capital ratio of 6% or greater, a leverage ratio
of 5% or greater and not be subject to any OTS order or directive to meet and
maintain a specific capital level for any capital measure. At December 31, 1996,
the Bank had a Tier 1 risk-based capital ratio of 8.14%, a total risk-based
capital ratio of 10.91% and a leverage ratio of 10.46%. The Bank
55
57
currently meets all the requirements of a "well capitalized" institution. Its
regulatory capital position at December 31, 1996, for this purpose, was as
follows:
TIER 1
RISK- RISK-
TANGIBLE CORE BASED BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
Actual Capital:
Amount........................................ $348,938 $348,938 $348,938 $467,563
Capital ratio................................. 10.53% 10.53% 8.14% 10.91%
FIRREA minimum required capital:
Amount........................................ $ 49,707 $ 99,414 N/A $342,915
Capital ratio................................. 1.50% 3.00% N/A 8.00%
Excess........................................ $299,231 $249,524 N/A $124,648
FDICIA well capitalized required capital:
Amount........................................ N/A $166,838 $257,187 $428,644
Capital ratio................................. N/A 5.00% 6.00% 10.00%
Excess........................................ N/A $182,100 $ 91,751 $ 38,919
DECEMBER 31, 1995
Actual Capital:
Amount........................................ $267,894 $267,894 $267,894 $391,252
Capital ratio................................. 8.32% 8.32% 7.82% 11.15%
FIRREA minimum required capital:
Amount........................................ $ 48,290 $ 96,579 N/A $274,173
Capital ratio................................. 1.50% 3.00% N/A 8.00%
Excess........................................ $219,604 $171,315 N/A $117,079
FDICIA well capitalized required capital:
Amount........................................ N/A $161,350 $205,630 $342,716
Capital ratio................................. N/A 5.00% 6.00% 10.00%
Excess........................................ N/A $106,544 $ 62,264 $ 48,536
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principles ("GAAP") to the Bank's tangible, core
and risk-based capital as of December 31, 1996 and 1995:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Bank shareholder's equity-GAAP basis................................... $337,958 $253,442
Adjustment: Unrealized gains under SFAS 115............................ (1,083) (186)
Less: Non-permissible activities at required phase-in (1)............ (13,135) (6,044)
Add: Minority interest in equity of subsidiaries..................... 28,061 21,965
Less: Excess qualifying PMSRs........................................ (2,863) (1,283)
-------- --------
Total tangible and core capital........................................ 348,938 267,894
Adjustments for risk-based capital:
Subordinated debentures (2).......................................... 106,559 106,466
General loan valuation allowance (3)................................. 36,298 37,438
Less: Fully capitalized assets....................................... (24,232) (14,858)
Equity investments................................................... (5,688)
-------- --------
Risk-based capital................................................... $467,563 $391,252
======== ========
- ---------------
(1) Non-permissible activities phase-in (60%) applicable to 1995 only.
(2) Excludes capitalized discounts and issue costs
(3) Limited to 1.25% of risk-weighted asset
56
58
As a member of the FHLB, the Bank is required to maintain a specified ratio
of cash, short-term United States government and other qualifying securities to
net withdrawable accounts and borrowings payable in a year or less. The required
liquidity ratio is currently 5%. The Bank has maintained liquidity in excess of
the required amount in 1996.
EFFECT OF INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant effect on the Bank's performance than the general level of
inflation. See "Management's Discussion and Analyses of Financial Condition and
Results of Operations -- Results of Operations -- Asset/Liability Management."
CURRENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), was issued by the Financial Accounting
Standards Board in October 1995 and is effective for fiscal years beginning
after December 15, 1995. SFAS 123 provides for companies to recognize
compensation expense associated with stock-based compensation plan over the
anticipated service period based on the fair value of the award on the date of
the grant. As allowed by SFAS 123, however, Westcorp has elected to continue to
measure compensation costs as prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" "APB 25"), with pro forma
disclosures of net income and earnings per share, if material.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), was issued by the Financial Accounting Standards Board in June
1996. SFAS 125 establishes standards for the recognition and measurement of
transactions involving transfers of financial assets. SFAS 125 adopts a
financial components approach which, after a transfer of financial assets,
requires recognition of assets which continue to be controlled by the transferor
and derecognition of assets for which control has been surrendered. SFAS 125 is
to be applied prospectively to transactions occurring after January 1, 1997.
Transactions prior to adoption are not affected. The adoption of SFAS 125 is not
expected to have a material impact on the financial condition or results of
operations of Westcorp.
FORWARD-LOOKING STATEMENTS
The preceding Management Discussion and Analysis of Financial Condition and
Results of Operation section contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a new "safe harbor" for certain forward-looking statements. This Annual
Report on Form 10-K contains forward-looking statements which reflect Westcorp's
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The forward-looking
terminology such as "believe", "expect", "anticipate", "intend", "may", "will",
"should", "estimate", "continue", and/or the negative or other comparable
expressions thereof which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. Westcorp
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the level of demand for consumer,
mortgage and commercial loans, which is affected by such external factors as the
level of interest rates, the strength of the various segments of the economy,
debt burden held by the consumer and demographics of Westcorp's lending markets;
(2) the direction of interest rates; (3) fluctuations between interest rates and
the cost of funds; (4) federal and state regulation of Westcorp's operations;
(5) competition within the financial services industry; (6) the availability and
cost of securitization transactions and (7) continued dealer and broker
relationships.
57
59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Westcorp's Consolidated Financial Statements begin on page F-3 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, as
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 April 29, 1997 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
"Compensation of Executive Officers" 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 Directors
and Nominees " in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and the
Company 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 at December 31, 1996
and 1995
Consolidated Statements of Income for the years ended December 31,
1996, 1995, and 1994.
58
60
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995, and 1994.
Notes to Consolidated Financial Statements.
(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 NO. EXHIBIT
------------ ---------------------------------------------------------------------
3.1 Certificate of Incorporation(a)
3.2 Bylaws(a)
4.1 Indenture dated as of June 17, 1993 issued by Western Financial Bank,
F.S.B., with respect to $125,000,000 in aggregate principal amount of
8.5% Subordinated Capital Debentures due 2003(b)
10.1 Westcorp Incentive Stock Option Plan(c)
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan(a)
10.3 Westcorp 1991 Stock Option Plan(d)
10.4 WFS Financial Inc ("WFS")1996 Incentive Stock Option Plan(e)
10.5 Westcorp Employee Stock Ownership and Salary Saving Plan(f)
10.6 Employment Agreement(g)
11.1 Statement Regarding Computation of Earnings Per Share
22.1 Subsidiaries of Westcorp
23.1 Consent of Independent Auditors
27 Financial Data Schedule
- ---------------
(a) 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 Numbers indicated.
(b) Exhibit previously filed with Western Financial Bank, F.S.B., formerly
Western Financial Savings Bank, F.S.B. Offering Circular with the OTS, dated
June 17, 1993 (will be provided to the SEC upon request).
(c) Exhibit previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-04295), filed May 2, 1986, incorporated herein by reference
under Exhibit Number indicated.
(d) 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.
(e) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 333-07485), filed July 3, 1996, incorporated herein by reference under
the Exhibit Number indicated.
Amendment No.1 dated as of July 26, 1996 to the WFS Registration Statement
on Form S-8 (File No. 333-07485) incorporated herein by reference under
Exhibit Number indicated.
(f) Exhibit previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039) and the related Form 11K (File No. 001-09910), filed
August 29, 1996 and June 28, 1996, respectively, incorporated herein by
reference under the Exhibit Number indicated.
(g) Employment Agreement, in letter form, dated January 11, 1996 between the
registrant and Donald H. Kasle (will be provided to the SEC upon request).
59
61
(B) REPORT ON FORM 8-K
A report of Form 8-K was filed December 4, 1996 announcing that
Richard A. Palmer was elected Senior Vice President and Chief Financial
Officer of the Bank.
60
62
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
Dated: March 17, 1997 By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
Senior Executive Vice President and
Chief Operating Officer;
President and Chief Operating
Officer
WFS Financial Inc
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
- ----------------------------------------------- ---------------------------- ---------------
/s/ ERNEST S. RADY Chairman of the Board, March 17, 1997
- ----------------------------------------------- President and Chief
Ernest S. Rady Executive Officer
/s/ JOY SCHAEFER Senior Executive Vice March 17, 1997
- ----------------------------------------------- President and Chief
Joy Schaefer Operating Officer; President
and Chief Operating Officer
WFS Financial Inc
/s/ DONALD H. KASLE Senior Executive Vice March 17, 1997
- ----------------------------------------------- President and Chief
Donald H. Kasle Administrative Officer;
President and Chief
Executive Officer
Western Financial Bank,
F.S.B.
- ----------------------------------------------- Director March 17, 1997
Judith M. Bardwick
/s/ WILLIAM J. CRAWFORD Director March 17, 1997
- -----------------------------------------------
William J. Crawford
Director March 17, 1997
- -----------------------------------------------
Stanley E. Foster
Director March 17, 1997
- -----------------------------------------------
Alan L. Milligan
/s/ HOWARD C. REESE Director March 17, 1997
- -----------------------------------------------
Howard C. Reese
/s/ LEE A. WHATCOTT Senior Vice President March 17, 1997
- ----------------------------------------------- (Principal Financial and
Lee A. Whatcott Accounting Officer) and
Chief Financial Officer
61
63
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, 1996
and 1995............................................................................ F-3
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994................................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994.................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
F-1
64
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westcorp
We have audited the consolidated financial statements of Westcorp and
Subsidiaries listed in the accompanying Index to Consolidated 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 Consolidated Financial Statements (Item 14(a)) present fairly, in all
material respects, the consolidated financial position of Westcorp and
Subsidiaries at December 31, 1996 and 1995 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
January 28, 1997
F-2
65
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
ASSETS
Cash................................................................ $ 75,115 $ 35,969
Interest bearing deposits with other financial institutions......... 510 689
Other short-term investments........................................ 62,798 126,227
Investment securities held to maturity (fair value: 1996, $3,160;
1995, $1,493)..................................................... 3,171 1,506
Investment securities available for sale............................ 142,344 133,518
Mortgage-backed securities held to maturity (fair value: 1996,
$442,229; 1995, $522,529)......................................... 438,662 512,218
Mortgage-backed securities available for sale....................... 410,886 340,334
Loans receivable, net of allowance for loan losses (1996: $40,211;
1995: $39,260).................................................... 1,232,267 1,339,423
Loans held for sale................................................. 458,941 368,533
Capitalized servicing............................................... 150,237 96,948
Premises and equipment, net......................................... 82,137 70,052
Real estate owned, net.............................................. 11,279 10,044
Interest receivable................................................. 15,794 17,476
Excess of purchase cost over net assets acquired.................... 930 1,015
Federal Home Loan Bank stock........................................ 31,967 29,624
Other assets........................................................ 218,007 139,361
---------- ----------
$3,335,045 $3,222,937
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................................ $1,873,942 $1,753,475
Securities sold under agreements to repurchase...................... 287,412 354,024
Short-term borrowings............................................... 55,945 112,330
Federal Home Loan Bank advances..................................... 226,000 192,000
Amounts held on behalf of trustee................................... 393,449 341,693
Unearned insurance premiums and insurance reserves.................. 2,614 5,102
Other liabilities................................................... 44,444 40,249
---------- ----------
2,883,806 2,798,873
SUBORDINATED DEBENTURES............................................. 104,917 104,360
MINORITY INTEREST IN EQUITY OF SUBSIDIARIES......................... 28,392 21,965
SHAREHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 45,000,000
shares; issued and outstanding 25,996,618 shares in 1996 and
24,563,419 shares in 1995......................................... 25,997 24,563
Paid-in capital..................................................... 185,742 167,039
Retained earnings................................................... 105,108 105,951
Unrealized gains on securities available for sale, net of tax....... 1,083 186
---------- ----------
317,930 297,739
---------- ----------
$3,335,045 $3,222,937
========== ==========
See accompanying notes to consolidated financial statements.
F-3
66
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
Interest income:
Loans, including fees............................. $ 171,328 $ 162,394 $ 119,649
Mortgage-backed securities........................ 57,471 47,486 13,879
Investment securities............................. 7,620 6,551 5,768
Other............................................. 5,969 5,662 4,343
----------- ----------- -----------
TOTAL INTEREST INCOME............................... 242,388 222,093 143,639
Interest expense:
Deposits.......................................... 99,091 101,364 68,295
Federal Home Loan Bank advances and other
borrowings..................................... 24,612 19,081 18,603
Securities sold under agreements to repurchase.... 15,491 18,834 1,868
----------- ----------- -----------
TOTAL INTEREST EXPENSE.............................. 139,194 139,279 88,766
----------- ----------- -----------
NET INTEREST INCOME................................. 103,194 82,814 54,873
Provision for loan losses........................... 13,571 11,470 13,033
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 89,623 71,344 41,840
Noninterest income:
Automobile lending................................ 153,099 91,200 70,108
Mortgage banking.................................. 18,046 3,159 2,128
Investment and mortgage-backed securities (losses)
gains.......................................... (1,620) 1,829 336
Insurance income.................................. 12,905 8,837 8,957
Real estate operations............................ (2,428) (267) 4,497
Rental operations................................. (378) (307) (607)
Miscellaneous..................................... 1,640 1,209 513
----------- ----------- -----------
TOTAL NONINTEREST INCOME............................ 181,264 105,660 85,932
Noninterest expenses:
Salaries and employee benefits.................... 110,494 64,844 51,116
Occupancy......................................... 11,605 7,107 5,959
Insurance......................................... 16,382 5,766 5,033
Miscellaneous..................................... 65,165 37,716 33,025
----------- ----------- -----------
TOTAL NONINTEREST EXPENSES.......................... 203,646 115,433 95,133
----------- ----------- -----------
INCOME BEFORE INCOME TAXES.......................... 67,241 61,571 32,639
Income taxes........................................ 28,095 25,235 13,819
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST..................... 39,146 36,336 18,820
Minority interest in earnings of subsidiaries....... 7,349 2,908
----------- ----------- -----------
NET INCOME.......................................... $ 31,797 $ 33,428 $ 18,820
=========== =========== ===========
NET INCOME PER COMMON SHARE AND COMMON SHARE
EQUIVALENTS....................................... $ 1.21 $ 1.29 $ 0.74
=========== =========== ===========
Weighted average number of common shares and common
share equivalents................................. 26,199,537 25,917,018 25,531,182
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
67
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNREALIZED
GAINS
(LOSSES)
ON
COMMON STOCK SECURITIES
-------------------- AVAILABLE
PAID-IN RETAINED FOR SALE,
SHARES PAR VALUE CAPITAL EARNINGS NET OF TAX TOTAL
----------- --------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE JANUARY 1, 1994.......... 21,894,805 $21,895 $ 92,393 $ 90,827 $205,115
Adjustment to beginning balance
for change in accounting
method, net of tax.......... $ 995 995
Stock options exercised........ 153,292 153 1,066 1,219
Stock dividend................. 1,097,543 1,098 8,917 (10,015)
Cash dividends................. (6,844) (6,844)
Net income..................... 18,820 18,820
Change in unrealized gains
(losses) on securities
available for sale, net of
tax......................... (6,993) (6,993)
---------- ------- -------- -------- ------- -------
BALANCE DECEMBER 31, 1994........ 23,145,640 23,146 102,376 92,788 (5,998) 212,312
Stock options exercised........ 260,485 260 1,906 2,166
Stock dividend................. 1,157,294 1,157 10,416 (11,573)
Cash dividends................. (8,692) (8,692)
Issuance of subsidiary common
stock....................... 52,341 52,341
Net income..................... 33,428 33,428
Change in unrealized gains
(losses) on securities
available for sale, net of
tax......................... 6,184 6,184
---------- ------- -------- -------- ------- -------
BALANCE DECEMBER 31, 1995........ 24,563,419 24,563 167,039 105,951 186 297,739
Stock options exercised........ 134,017 134 923 1,057
Stock dividend................. 1,233,742 1,234 21,285 (22,519)
Employee Stock Ownership and
Salary Savings Plan stock
contribution................ 65,440 66 1,115 1,181
Cash dividends................. (10,121) (10,121)
Repurchase of subsidiary
stock....................... (4,620) (4,620)
Net income..................... 31,797 31,797
Change in unrealized gains
(losses) on securities
available for sale, net of
tax......................... 897 897
---------- ------- -------- -------- ------- -------
BALANCE DECEMBER 31, 1996........ 25,996,618 $25,997 $185,742 $105,108 $1,083 $317,930
========== ======= ======== ======== ======= =======
See accompanying notes to consolidated financial statements.
F-5
68
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income..................................................................... $ 31,797 $ 33,428 $ 18,820
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for losses......................................................... 13,571 11,370 11,327
Depreciation and amortization................................................ 10,145 7,681 7,119
Amortization of deferred fees................................................ 101 2,221 688
Amortization of capitalized servicing........................................ 68,297 47,700 36,587
Amortization of bond issuance costs and discount............................. 557 509 562
Decrease (increase) in interest receivable................................... 1,682 (4,167) (1,705)
Losses (gains) on sales of investment securities and mortgage-backed
securities................................................................. 1,620 (1,829) (336)
(Gains) losses on sales of loans............................................. (32,025) (17,346) 1,204
Gains on sales of real estate owned.......................................... (2,116) (3,719) (7,750)
Increase (decrease) in interest payable...................................... 794 (285) 1,004
Deferred income taxes expense (benefit)...................................... 13,465 (6,474) 7,837
(Decrease) increase in unearned insurance premiums and insurance reserves.... (2,488) 6 (877)
Stock Contribution to Employee Stock Ownership and Salary Savings Plans...... 1,181
Net change in loans held for sale.............................................. 122,433 (46,680) (4,978)
Other, net..................................................................... (8,138) 18,052 3,968
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... 220,876 40,467 73,470
INVESTING ACTIVITIES
Investment securities held to maturity:
Purchases.................................................................... (1,667)
Investment securities available for sale:
Purchases.................................................................... (42,809) (37,271) (24,508)
Proceeds from sale........................................................... 1,915
Proceeds from maturities..................................................... 33,000 26,000 20,000
Mortgage-backed securities held to maturity:
Purchases.................................................................... (1,336) (241,518) (203,992)
Mortgage-backed securities available for sale:
Purchases.................................................................... (299,683) (397,935) (196,485)
Proceeds from sales.......................................................... 197,531 202,970 119,117
Payments received on mortgage-backed securities................................ 104,799 58,414 9,907
Net change in loans receivable................................................. (108,351) 57,925 (334,726)
Increase in capitalized servicing.............................................. (105,902) (84,388) (32,938)
Purchases of mortgage servicing rights......................................... (15,684) (14,383) (2,328)
Additions to premises and equipment............................................ (22,156) (11,182) (5,984)
Dispositions of real estate owned.............................................. 22,617 17,583 51,694
Purchases of FHLB stock........................................................ (4,114) (6,842) (9,440)
Proceeds from sales of FHLB stock.............................................. 1,771 1,692 2,532
Net increase in trust receivable............................................... (81,238) (41,604) (17,819)
Net increase in trustee accounts............................................... 51,756 125,489 33,299
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.......................................... (269,551) (345,050) (591,671)
FINANCING ACTIVITIES
Increase in deposits........................................................... 120,467 120,693 275,724
(Decrease) increase in securities sold under agreements to repurchase.......... (66,612) 107,950 246,074
Increase (decrease) in FHLB advances........................................... 34,000 103,000 (37,000)
(Decrease) increase in short-term borrowings................................... (56,385) (98,248) 59,682
Repurchase of subsidiary stock................................................. (4,620)
Retirement of subordinated debentures.......................................... (16,918)
Proceeds from issuance of common stock......................................... 1,057 2,166 1,219
Increase in minority interest.................................................. 6,427 21,965
Issuance of subsidiary common stock............................................ 52,341
Cash dividends................................................................. (10,121) (8,692) (6,844)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES...................................... 24,213 301,175 521,937
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................... (24,462) (3,408) 3,736
Cash and equivalents at beginning of period.................................... 162,885 166,293 162,557
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 138,423 $ 162,885 $ 166,293
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest....................................................................... $ 138,400 $ 139,563 $ 87,761
Income taxes................................................................... 18,322 28,050 10,100
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Acquisition of real estate acquired through foreclosure........................ $ 26,889 $ 32,200 $ 39,569
Securitization of mortgage loans............................................... 108,033
See accompanying notes to consolidated financial statements.
F-6
69
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Westcorp ("Westcorp"), its wholly-owned subsidiaries,
Westran Services Corp., Westcorp Investments, Inc. and Western Financial Bank,
F.S.B. formerly Western Financial Savings Bank, F.S.B. ("the Bank") and the
Bank's subsidiaries. All significant intercompany accounts and transactions have
been eliminated upon consolidation. Certain prior year amounts have been
reclassified to conform with the current year's presentation.
WFS Financial Inc ("WFS") was created in 1995 by the combination of the
Bank's consumer finance division and the Bank's subsidiaries, Westcorp Financial
Services, Inc., WFS Financial Auto Loans, Inc. and WFS Financial Auto Loans 2,
Inc. On August 8, 1995, WFS sold to the public 5.1 million shares of common
stock at a price of $15.00 per share raising $70.1 million in additional
capital. The Bank retained an ownership interest in WFS of 81%.
On December 21, 1995, the Bank acquired an 80% ownership interest in The
Hammond Company ("THC") and its subsidiaries. On June 19, 1996, the Bank
acquired the remaining 20% of THC. On August 13, 1996, THC was merged into its
subsidiary The Hammond Company, The Mortgage Bankers ("THCMB"). In addition, in
December 1996, the two subsidiaries of THCMB, Sunstate Insurance and Hammond
Service Corporation, were dissolved.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Nature of Operations: Westcorp is a financial services holding company
which specializes in automobile lending, retail banking, equity lending,
mortgage banking, commercial banking and other related services. At December 31,
1996, Westcorp performed these functions through 193 offices located in 31
states.
Cash and Cash Equivalents: Cash and cash equivalents include cash,
interest-bearing deposits with other financial institutions and other short-term
investments which have no material restrictions as to withdrawal or usage.
Investment Securities and Mortgage-Backed Securities Held to
Maturity: Westcorp holds certain investment securities and mortgage-backed
securities which management has both the intent and the ability to hold until
maturity. Accordingly, these securities are carried at their amortized cost.
Unrealized holding gains and losses are not recognized in the financial
statements until realized or until a decline in fair value below cost is deemed
to be other than temporary. The method used in determining the cost of
investments sold is specific identification.
Westcorp also enters into various off-balance sheet transactions, primarily
interest rate cap agreements, to manage interest rate risk exposure on its held
to maturity portfolio. These financial instruments are recorded at cost and are
amortized to interest income over the life of the agreement. The interest rate
differential to be received is accrued and included as part of interest income,
thereby adjusting the overall yield on securities for which management is
attempting to reduce its exposure to interest rate risk.
Investment Securities and Mortgage-Backed Securities Available for
Sale: Investments and mortgage-backed securities intended to be held for an
indefinite period of time but which may be sold in response to events reasonably
expected in the foreseeable future are classified as available for sale and
carried at fair value. Unrealized holding gains and losses on such investments
are recorded as a separate component of shareholders' equity, net of income
taxes. Any decline in the fair value of the
F-7
70
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
investments which is deemed to be other than temporary is charged against
current earnings. The method used in determining the cost of investments sold is
specific identification.
Westcorp enters into various off-balance sheet transactions, primarily
interest rate cap agreements to manage interest rate risk exposure on its
available for sale portfolios. These financial instruments are also recorded at
fair value and are included in the basis of the designated available for sale
securities. The interest rate differential to be paid or received is accrued and
included as part of interest income, thereby adjusting the overall yield on
securities for which management is attempting to reduce its exposure to interest
rate risk.
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
portfolios. 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.
Sales of Loans and Capitalized Servicing: Certain mortgage and consumer
receivables are originated and sold to investors with servicing rights retained
by Westcorp. Gains and losses on sales of loans are determined by the difference
between sales proceeds and the cost of the loans, adjusted for the present value
of the difference, if any, between the estimated future servicing revenues and
normal servicing revenues for those loans where servicing is retained by
Westcorp. The resulting excess servicing is included as a component of
capitalized servicing.
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122"), which amended Statement of Financial
Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities" was adopted by Westcorp as of January 1, 1996. SFAS 122 requires
allocation of the cost of originated and purchased loans between the mortgage
servicing rights and the loans (without the mortgage servicing rights) based
upon their relative fair values at the date the loans are purchased or
originated. The allocated cost of mortgage servicing rights is included as a
component of capitalized servicing.
Retention of servicing rights entitles Westcorp to servicing income which
is included in noninterest income. Capitalized servicing assets are amortized
against noninterest income over the period of, and in proportion to, the
expected repayment term of the underlying loans.
The carrying value of capitalized servicing assets is based upon the fair
value of such assets. Fair value is determined based upon the present value of
estimated cash flows. Significant assumptions used in determining the present
value of estimated cash flows are based upon loan type, coupon and term and
market assumptions as to prepayments, credit losses, defaults, servicing costs
and market discount rates. On a quarterly basis, Westcorp evaluates the carrying
value of capitalized servicing assets in light of the actual repayment
experience of the underlying loans, adjusting the assumptions and reducing the
carrying value, if appropriate.
As servicer of securitized automobile loans, Westcorp holds and remits
funds collected from the borrowers on behalf of the trustee. These amounts are
reported as amounts held on behalf of the trustee. Servicing income earned by
Westcorp for which Westcorp has not yet received repayment from the trust is
included in other assets.
Nonaccrual Loans: Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest is suspended on all real estate loans 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 not assured. When a loan is placed on nonaccrual,
interest accrued is reversed
F-8
71
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
against interest income. Interest income is suspended on all loans, except
consumer loans. On these loans, interest continues to accrue until the loan is
charged off, which occurs automatically after the loan is past due 120 days,
whereupon all accrued interest is also charged off.
Loans Held for Sale: Loans held for sale are stated at the lower of
aggregate amortized cost or market. The carrying amount of the specific loan
pools sold is used to compute gains or losses. Market value is based on
prevailing market quotes for real estate loans and discounted cash flow
calculations for consumer loans.
Westcorp enters into forward agreements to hedge the value of its loans
held for sale. Gains or losses on these forward agreements are deferred and
included in the basis of the loans held for sale and realized at the time of
sale.
Premises and Equipment: Premises and equipment are recorded at cost and are
depreciated over their estimated useful lives principally using the
straight-line method for financial reporting and accelerated methods for tax
purposes. 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 cost or fair value less estimated costs to sell. Costs of holding
this real estate, and related gains and losses on disposition, are credited or
charged to real estate operations as incurred. These values are periodically
reviewed and write-downs are recorded, if appropriate.
Real estate owned is carried net of an allowance for potential losses which
is maintained at a level believed by management to be adequate to absorb any
potential losses in the portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the past loss experience, current
economic conditions, selling costs and other relevant factors.
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.
Interest Income and Fee Income: Interest income on real estate and some
consumer loans is earned using the effective yield method and classified on the
balance sheets as interest receivable to the extent not collected. Certain
consumer loans use the sum of the months digits method, which approximates the
interest method.
Westcorp defers loan origination and commitment fees and certain loan
origination costs. The net amount is amortized as an adjustment to the related
loan's yield over the contractual life of the related loans. Commitment fees
based on a percentage of a customer's unused line of credit are recognized over
the commitment period. Fees for other services are recorded as income when
earned.
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.
Income Taxes: Westcorp files consolidated federal and state tax returns
with all of its subsidiaries except for Westhrift, which files separate tax
returns.
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.
F-9
72
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Current Accounting Pronouncements: Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), was
issued by the Financial Accounting Standards Board in October 1995 and is
effective for fiscal years beginning after December 15, 1995. SFAS 123 provides
for companies to recognize compensation expense associated with a stock-based
compensation plan over the anticipated service period based on the fair value of
the award on the date of the grant. As allowed by SFAS 123, however, Westcorp
has elected to continue to measure compensation costs as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), with pro forma disclosures of net income and earnings per
share, if material.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"), was issued by the Financial Accounting Standards Board in June
1996. SFAS 125 establishes standards for the recognition and measurement of
transactions involving transfers of financial assets. SFAS 125 adopts a
financial components approach which, after a transfer of financial assets,
requires recognition of assets which continue to be controlled by the transferor
and derecognition of assets for which control has been surrendered. SFAS 125 is
to be applied prospectively to transactions occurring after January 1, 1997.
Transactions prior to adoption are not affected. The adoption of SFAS 125 is not
expected to have a material impact on the financial condition or results of
operations of Westcorp.
NOTE 2 -- INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity all mature within one to five years
and consisted of the following at December 31:
1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations............ $ 1,504 $ 11 $ 1,493
Other.................................. 1,667 1,667
-------- ---- ------ --------
$ 3,171 $ 11 $ 3,160
======== ==== ====== ========
1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations............ $ 1,506 $ 13 $ 1,493
-------- ---- ------ --------
$ 1,506 $ 13 $ 1,493
======== ==== ====== ========
F-10
73
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3 -- INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consisted of the following at
December 31:
1996
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations............ $141,981 $1,175 $140,806
Obligations of states and political
subdivisions......................... 1,512 $ 1 1,513
Other.................................. 79 54 25
-------- ---- ------ --------
$143,572 $ 1 $1,229 $142,344
======== ==== ====== ========
1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S. Government
agencies and corporations............ $130,306 $265 $ 519 $130,052
Obligations of states and political
subdivisions......................... 3,521 80 3,441
Other.................................. 25 25
-------- ---- ------ --------
$133,852 $265 $ 599 $133,518
======== ==== ====== ========
At December 31, 1996, the stated maturities of investment securities
available for sale were as follows:
ONE YEAR TO FIVE YEARS TEN YEARS
UP TO ONE YEAR FIVE YEARS TO TEN YEARS OR MORE
------------------- ------------------- ------------------ -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- ------ --------- -----
(DOLLARS IN THOUSANDS)
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations....................... $51,744 $51,603 $90,237 $89,203
Obligations of states and political
subdivisions....................... 1,002 996 $ 510 $517
Other................................ 25 25 54
------- ------- ------- ------- ------ ------ ---- ----
$51,744 $51,603 $91,264 $90,224 $ 564 $517
======= ======= ======= ======= ====== ====== ==== ====
Proceeds from the sale of investment securities available for sale totalled
approximately $1.9 million in 1996. Westcorp had gross realized gains of $139
thousand in 1996 and had no gross realized losses.
F-11
74
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4 -- MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity consisted of the following at
December 31:
1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates............................ $346,098 $5,447 $2,497 $349,048
FNMA participation certificates.............. 84,005 394 84,399
FHLMC participation certificates............. 7,358 223 7,581
Other participation certificates............. 1,201 1,201
-------- ------ ------ --------
$438,662 $6,064 $2,497 $442,229
======== ====== ====== ========
1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates............................ $405,582 $ 10,943 $2,246 $414,279
FNMA participation certificates.............. 97,352 1,460 98,812
FHLMC participation certificates............. 9,120 154 9,274
Other participation certificates............. 164 164
-------- ------ ------ --------
$512,218 $ 12,557 $2,246 $522,529
======== ====== ====== ========
Westcorp's mortgage-backed securities held to maturity had maturities at
December 31, 1996 of ten years or more, although payments are generally received
monthly throughout the life of these securities.
NOTE 5 -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale consisted of the following at
December 31:
1996
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates............................ $318,505 $5,206 $1,935 $321,776
FNMA participation certificates.............. 72,214 61 292 71,983
FHLMC participation certificates............. 17,092 118 83 17,127
-------- ------ ------ --------
$407,811 $5,385 $2,310 $410,886
======== ====== ====== ========
1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
GNMA certificates............................ $138,175 $2,017 $4,291 $135,901
FNMA participation certificates.............. 99,859 1,485 101,344
FHLMC participation certificates............. 101,639 2,121 671 103,089
-------- ------ ------ --------
$339,673 $5,623 $4,962 $340,334
======== ====== ====== ========
F-12
75
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Proceeds from the sale of mortgage-backed securities available for sale
totalled approximately $198 million and $203 million in 1996 and 1995,
respectively. Westcorp had gross realized gains of $1.6 million and $2.1 million
in 1996 and 1995, respectively, and gross realized losses of $3.1 million and
$319 thousand in 1996 and 1995, respectively.
Westcorp's mortgage-backed securities available for sale all had maturities
at December 31, 1996 of ten years or more, although payments are generally
received monthly throughout the life of these securities.
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
issued by Westcorp had a total outstanding balance of $151 million and $198
million at December 31, 1996 and 1995, respectively.
Westcorp has provided for possible losses that may occur as a result of its
recourse obligations. The maximum remaining exposure under these recourse
provisions at December 31, 1996 and 1995 was $114 million and $127 million,
respectively. Westcorp has pledged $15.2 million and $32.5 million of securities
as collateral under these recourse provisions at December 31, 1996 and 1995,
respectively.
NOTE 6 -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following at December 31:
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
Real Estate:
Mortgage.................................................... $1,435,789 $1,406,167
Commercial.................................................. 7,867
Construction................................................ 5,501 8,469
---------- ----------
1,449,157 1,414,636
Less: Undisbursed loan proceeds............................... 2,398 4,672
---------- ----------
1,446,759 1,409,964
Consumer:
Sales contracts............................................. 267,715 353,345
Other....................................................... 50,911 20,908
Unearned discounts.......................................... (33,768) (38,628)
---------- ----------
284,858 335,625
---------- ----------
1,731,617 1,745,589
Allowance for loan losses..................................... (40,211) (39,260)
Net deferred loan (fees) costs................................ (198) 1,627
---------- ----------
1,691,208 1,707,956
Less: Loans held for sale
Mortgage.................................................... 272,638 148,616
Consumer.................................................... 186,303 219,917
---------- ----------
458,941 368,533
---------- ----------
$1,232,267 $1,339,423
========== ==========
F-13
76
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Loans serviced by Westcorp for the benefit of others totalled approximately
$7.2 billion, $5.6 billion and $2.9 billion at December 31, 1996, 1995, and
1994, respectively. These amounts are not included in the Consolidated
Statements of Financial Condition.
Changes in the allowance for loan losses were as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of year.......................... $39,260 $41,323 $39,677
Provision for loan losses............................. 13,571 11,470 13,033
Chargeoffs............................................ (21,258) (19,187) (19,219)
Recoveries............................................ 7,168 4,754 7,832
Transfers from the allowance for real estate losses... 800
Business acquisition adjustment....................... 1,470 100
------- ------- -------
Balance at end of year................................ $40,211 $39,260 $41,323
======= ======= =======
NOTE 7 -- CAPITALIZED SERVICING
Capitalized servicing consisted of the following at December 31:
1996 1995
-------- -------
(DOLLARS IN
THOUSANDS)
Excess consumer servicing........................................ $121,597 $78,045
Excess mortgage servicing........................................ 195 1,843
Purchased mortgage servicing rights.............................. 20,799 12,843
Originated mortgage servicing rights............................. 7,646 4,217
-------- -------
$150,237 $96,948
======== =======
Excess Consumer Servicing
Excess consumer servicing included as part of capitalized servicing
consists of the present value of estimated future cash flows to be received by
Westcorp from the excess spread created in securitizations. The estimated future
cash flows are determined by taking into account certain assumptions principally
regarding prepayments, credit losses and servicing costs. These cash flows are
then discounted at a rate management believes to be at market. The balance of
the excess consumer servicing is then amortized against automobile lending in
noninterest income on a monthly basis. The assumptions used are evaluated each
quarter and adjusted, if appropriate, to reflect performance of the contracts.
The following table presents the balances and activity for excess consumer
servicing:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance................................... $ 78,045 $ 43,426 $ 46,241
Additions........................................... 104,071 78,505 32,938
Amortization........................................ (60,519) (43,886) (35,753)
-------- -------- --------
Ending balance...................................... $121,597 $ 78,045 $ 43,426
======== ======== ========
Additions to excess consumer servicing result from new securitizations and
reflect the initial estimate of the present value of the future cash flows of
the contracts securitized. The amortization of
F-14
77
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
excess consumer servicing represents the decline in the excess consumer
servicing for the respective periods based upon the present value of the
remaining estimated future cash flows at the end of the period.
In initially valuing its excess consumer servicing, Westcorp establishes an
off balance sheet allowance for expected losses under the spread account
provisions of the securitization transactions and this allowance is included as
a component in calculating the excess consumer servicing. The allowance is based
upon historical experience and management's estimate of future performance
regarding primarily prepayments, credit losses, and servicing costs. The amount
is reviewed periodically and adjustments are made if actual experience or other
factors indicate that future performance may differ from management's prior
expectations.
The following table presents the estimated future undiscounted cash flows
to be received from securitizations, net of estimated costs to service and after
giving effect to estimated prepayments. To arrive at the excess consumer
servicing, this amount is reduced by the off balance sheet allowance established
for future losses and by discounting these cash flows to present value.
DECEMBER 31,
1996
------------
(DOLLARS IN
THOUSANDS)
Estimated net undiscounted cash flows.................................... $ 288,733
Off balance sheet allowance for losses................................... (152,797)
Discount to present value................................................ (14,339)
---------
Excess consumer servicing................................................ $ 121,597
=========
Outstanding balance of contracts sold through securitizations............ $2,812,637
Allowance for losses as a percent of contracts sold through
securitizations........................................................ 5.43%
Mortgage Servicing Rights
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122"), which amended Statement of Financial
Accounting Standards No. 65 "Accounting for Certain Mortgage Banking Activities"
("SFAS 65"), was adopted by Westcorp as of January 1, 1996. SFAS 122 requires
allocation of the cost of originated or purchased mortgage loans between the
servicing rights and the loans based upon their relative fair values at the date
the loans are purchased or originated.
For the year ended December 31, 1996, Westcorp capitalized $22.3 million
compared to $20.3 million for the year ended December 31, 1995 in connection
with originating or purchasing the right to service mortgage loans. The mortgage
servicing rights are included in capitalized servicing and the amortization is
included as a component of mortgage banking in noninterest income. The amortized
cost basis of mortgage servicing rights capitalized in accordance with SFAS 122
at December 31, 1996 and 1995 was $28.6 million and $18.9 million, respectively.
The fair value at December 31, 1996 and 1995 was $38.3 million and $20.3
million, respectively. Fair value was determined based on the present value of
estimated future cash flows. Significant assumptions were based upon loan type,
loan coupon, loan term as well as market assumptions regarding prepayment,
default, servicing cost and discount rate.
Amortization of mortgage servicing rights is reflected as a component of
mortgage banking in noninterest income. Amortization expense for the years ended
December 31, 1996, 1995 and 1994 was $7.8 million, $3.8 million and $0.8
million, respectively.
F-15
78
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8 -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31:
1996 1995
-------- -------
(DOLLARS IN
THOUSANDS)
Land............................................................ $ 20,468 $20,443
Buildings and improvements...................................... 57,662 50,354
Furniture and equipment......................................... 35,132 25,330
Automobiles and airplanes....................................... 2,049 1,995
-------- -------
115,311 98,122
Less: Accumulated depreciation and amortization................. 33,174 28,070
-------- -------
$ 82,137 $70,052
======== =======
NOTE 9 -- NONPERFORMING ASSETS
Nonperforming loans consisted of the following at December 31:
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
Loans 90 days or more past due................................... $14,052 $10,950
Impaired loans................................................... 6,887 7,450
------- -------
$20,939 $18,400
======= =======
Interest forgone on nonaccrual loans was $1.0 million, $0.8 million and
$0.9 million for the years ended December 31, 1996, 1995 and 1994, respectively.
The following table presents a breakdown of impaired loans and the
impairment allowance related to impaired loans at December 31:
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
Recorded investment with allowance............................... $ 7,090 $ 3,057
Less: Impairment allowance....................................... 1,678 1,097
------- -------
5,412 1,960
Recorded investment without allowance............................ 1,475 5,490
------- -------
$ 6,887 $ 7,450
======= =======
For the years ended December 31, 1996 and 1995, average impaired loans were
$9.1 and $5.8 million, respectively. For the years ended December 31, 1996 and
1995, Westcorp recognized $1.0 and $0.8 million, respectively, of interest
income on impaired loans, all of which was recognized on a cash basis.
Real estate owned consisted of the following at December 31:
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
Real estate acquired through foreclosure......................... $12,063 $10,828
Less: Allowance for losses....................................... 784 784
------- -------
$11,279 $10,044
======= =======
F-16
79
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Changes in the allowance for real estate losses were as follows:
FOR THE YEAR ENDED DECEMBER
31,
---------------------------
1996 1995 1994
---- ------ -------
(DOLLARS IN THOUSANDS)
Balance at beginning of year.............................. $784 $1,684 $ 3,508
Provision for real estate losses.......................... (100) (2,106)
Chargeoffs, net........................................... 282
Transfers to the allowance for loan losses................ (800)
-----
--
------- -------
Balance at end of year.................................... $784 $ 784 $ 1,684
======= ======= =======
NOTE 10 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following at December 31:
1996 1995
------- -------
(DOLLARS IN
THOUSANDS)
Interest on loans receivable..................................... $ 8,665 $ 9,817
Interest on securities........................................... 7,125 7,604
Interest on other................................................ 4 55
------- -------
$15,794 $17,476
======= =======
NOTE 11 -- DEPOSITS
Deposits consisted of the following at December 31:
WEIGHTED
AVERAGE RATE
FOR THE YEAR
ENDED
1996 1996 1995
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Demand deposit accounts....................... 0.2% $ 30,069
Passbook accounts............................. 2.6 42,532 $ 65,293
Money market deposit accounts................. 3.1 438 602
Certificate accounts.......................... 5.8 1,713,382 1,687,580
Brokered certificate accounts................. 4.3 48,489
Noninterest bearing deposits.................. 39,032
---------- ----------
$1,873,942 $1,753,475
========== ==========
The aggregate amount of certificate accounts in denominations greater than
or equal to $100,000 at December 31, 1996 and 1995 was $439 million and $383
million, respectively.
F-17
80
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Scheduled maturities of certificate accounts as of December 31, 1996 are as
follows:
AMOUNT
WEIGHTED ----------
AVERAGE RATE (DOLLARS
------------ IN
THOUSANDS)
Six months or less......................................... 5.8% $ 806,970
More than six months through one year...................... 5.9 489,383
More than one year through three years..................... 6.0 386,104
More than three years through five years................... 6.8 30,925
----------
$1,713,382
==========
Interest expense on deposits consisted of the following for the year ended
December 31:
1996 1995 1994
------- -------- -------
(DOLLARS IN THOUSANDS)
Demand deposit accounts.............................. $ 335
Passbook accounts.................................... 1,414 $ 2,367 $ 3,895
Money market deposit accounts........................ 14 20 33
Certificate accounts................................. 97,180 98,977 64,367
Brokered certificate accounts........................ 148
------- -------- -------
$99,091 $101,364 $68,295
======= ======== =======
Accrued interest payable on deposits at December 31, 1996 and 1995 was $445
thousand and $372 thousand, respectively, which is included in other liabilities
in the Consolidated Statements of Financial Condition.
The following table summarizes certificate accounts by interest rate within
maturity categories at December 31:
1996
-----------------------------------------------------------------------------
1997 1998 1999 2000 2001 THEREAFTER TOTAL
---------- -------- ------- ------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
0% - 3.99%............ $ 1,407 $ 15 $ 1,422
4.00% - 5.99%............ 988,275 $248,597 11,366 $ 2,446 $ 745 $ 62 1,251,491
6.00% - 7.99%............ 306,473 118,237 7,865 27,673 460,248
8.00% - 9.99%............ 197 24 221
---------- -------- ------- ------- ------- ------- ----------
$1,296,352 $366,858 $19,246 $30,119 $ 745 $ 62 $1,713,382
========== ======== ======= ======= ======= ======= ==========
1995
-----------------------------------------------------------------------------
1996 1997 1998 1999 2000 THEREAFTER TOTAL
---------- -------- ------- ------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
0% - 3.99%............ $ 6,547 $ 36 $ 36 $ 6,619
4.00% - 5.99%............ 885,686 72,021 24,053 $ 1,847 $ 2,834 $ 5 986,446
6.00% - 7.99%............ 383,148 241,558 36,757 5,842 26,811 694,116
8.00% - 9.99%............ 216 161 22 399
---------- -------- ------- ------- ------- ------- ----------
$1,275,597 $313,776 $60,868 $ 7,689 $29,645 $ 5 $1,687,580
========== ======== ======= ======= ======= ======= ==========
F-18
81
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 12 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Balance at end of period....................................... $287,412 $354,024
Balance at end of period, including accrued interest........... 287,991 355,188
Estimated fair value at end of period.......................... 287,933 354,091
Average amount outstanding during the period................... 299,211 325,926
Maximum amount outstanding at any given month-end during the
period....................................................... 403,871 411,218
Weighted average interest rate during the period............... 5.2% 5.8%
Weighted average interest rate at end of period................ 5.5 5.8
Mortgage-backed securities available for sale sold under dollar reverse
repurchase agreements were delivered to dealers who arranged the transactions.
The dealers may have sold, loaned, or otherwise disposed of such securities to
other parties in the normal course of their operations, and have agreed to
resell to Westcorp substantially identical securities at the maturities of the
agreements. The agreements at December 31, 1996 mature within 30 days. The
agreements at December 31, 1995 mature with terms between 30 to 90 days. Average
amounts are computed based upon daily ending balances.
NOTE 13 -- SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1996 consisted of a commercial paper
line with the Federal Home Loan Bank ("FHLB") and a line of credit with a bank.
At December 31, 1995, short-term borrowings consisted of a commercial paper line
with the FHLB and a revolving line of credit with two banks.
The FHLB commercial paper line totalled $25.0 million and $67.9 million at
December 31, 1996 and 1995, respectively, net of discount (1996, $41.7 thousand;
1995, $66.1 thousand). The line is collateralized by eligible mortgage loans
with an approved line of up to $400 million in 1996 and 1995, and a weighted
average interest rate of 6.0% at December 31, 1996 and 1995. The maximum amount
of commercial paper outstanding at any month-end during 1996 and 1995 was $398
million and $240 million, respectively. The average amount of commercial paper
outstanding during 1996 and 1995 was $163 million and $124 million,
respectively, with a weighted average fixed interest rate of 5.4% and 6.0% for
December 31, 1996 and 1995, respectively. The FHLB commercial paper line
generally matures within 30 days from the issuance date.
At December 31, 1996, Westcorp had a $25.0 million line of credit with a
bank which was the maximum available and outstanding, maturing in June 30, 1997
with an interest rate tied to the FHLB Reference Rate plus 0.5%.
At December 31, 1995 Westcorp had a $40.0 million revolving line of credit
(warehouse line), which was the maximum available and outstanding, with two
banks under an agreement to finance certain mortgage loans. This was paid off
during 1996. The weighted average interest rate at December 31, 1995 was 6.6%.
F-19
82
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 14 -- FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB are collateralized with mortgages and
mortgage-backed securities. The FHLB commercial paper line disclosed in Note
13 -- Short-Term Borrowings is also pledged by the same collateral. The FHLB
advances and the FHLB commercial paper line are collateralized with mortgages
totalling $454 million and $496 million at December 31, 1996 and 1995,
respectively, and mortgage-backed securities totalling $178 million and $119
million at December 31, 1996 and 1995, respectively.
Information as to interest rates and maturities on the advances from the
FHLB as of December 31 are as follows:
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
Range of interest rates................................. 5.7% - 8.2% 5.4% - 8.5%
Weighted average interest rate.......................... 6.3% 6.3%
Year due:
1996.................................................. $147,000
1997.................................................. $142,000 32,000
1998.................................................. 70,000
1999.................................................. 6,500 6,500
2000..................................................
Thereafter............................................ 7,500 6,500
-------- --------
$226,000 $192,000
======== ========
Westcorp had an unused line of credit with the FHLB at December 31, 1996 of
approximately $378 million.
NOTE 15 -- SUBORDINATED DEBENTURES
Subordinated capital debentures of the Bank ("subordinated debentures")
totalled $105 million at December 31, 1996 and $104 million at December 31,
1995, net of discount (1996, $2.4 million; 1995, $3.0 million). The subordinated
debentures are unsecured with an interest rate of 8.5% due in 2003. They 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 as of
the date of redemption. For regulatory purposes, the subordinated debentures,
which are subject to certain limitations, are included as part of the Bank's
supplementary capital.
F-20
83
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancellable operating leases on premises
and equipment with terms of one year or more were as follows at December 31:
1996
----------------------
(DOLLARS IN THOUSANDS)
1997................................................... $ 6,282
1998................................................... 5,758
1999................................................... 4,643
2000................................................... 3,541
2001................................................... 2,037
Thereafter............................................. 2,335
-------
$ 24,596
=======
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment amounted
to $5.5 million, $3.2 million and $2.5 million in 1996, 1995 and 1994,
respectively.
Westcorp's outstanding commercial, mortgage loan commitments and mortgage
loans sold with recourse were as follows at December 31:
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Commercial letter of credit and unused lines of credit
provided..................................................... $ 40,293 $ 34,339
======== ========
Commitments to fund mortgage loans:
Fixed rate loans............................................. $ 89,477 $158,305
Variable rate loans.......................................... 32,106 53,137
-------- --------
$121,583 $211,442
======== ========
Commitments to sell mortgage loans............................. $320,794 $158,724
======== ========
Mortgage loans sold with recourse.............................. $ 72,475 $167,324
======== ========
Westcorp has pledged certain assets relative to amounts held on behalf of
trustees as follows at December 31:
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
FNMA participation certificates................................ $115,959 $ 85,038
FHLMC participation certificates............................... 14,596 33,510
GNMA certificates.............................................. 175,376 73,582
Residential second mortgages................................... 55,521 67,644
Multifamily first mortgages.................................... 75,478 83,462
-------- --------
$436,930 $343,236
======== ========
Westcorp is also involved as a party to certain legal proceedings
incidental to its business. Management of Westcorp believes that the outcome of
such proceedings will not have a material effect upon its business or financial
condition.
F-21
84
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 17 -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
In 1991, Westcorp reserved 3,150,000 shares of common stock for future
issuance to certain employees under the 1991 Westcorp Stock Option Plan.
Reserved, unissued shares totalled 2,126,973 and 2,592,062 shares at December
31, 1996 and 1995, respectively. The options may be exercised, when vested, at
prices ranging from $6.58 to $22.75 per share, in whole or in part, within five
years after the date of grant. Additionally, the weighted average life of the
options at December 31, 1996 and 1995 were 4.5 years and 2.8 years,
respectively, and the weighted average price of the options at December 31, 1996
and 1995 were $17.30 per share and $8.69 per share, respectively.
At December 31, 1996, there were 894,206 exercisable stock options under
the 1991 plan. Stock option activity is summarized as follows:
PRICE PER
SHARES SHARE
-------- -------------
Outstanding at January 1, 1994............................. 770,639 $6.58 - 10.28
Issued................................................... 335,614 6.58 - 10.32
Exercised................................................ (169,005) 6.58 - 7.99
Cancelled................................................ (94,060) 6.58 - 9.42
-------- ------------
Outstanding at December 31, 1994........................... 843,188 6.58 - 10.32
Issued................................................... 30,975 6.58 - 12.38
Exercised................................................ (274,724) 6.58 - 10.32
Cancelled................................................ (30,611) 6.58 - 10.32
-------- ------------
Outstanding at December 31, 1995........................... 568,828 6.58 - 12.38
Issued................................................... 470,958 17.13 - 22.75
Exercised................................................ (139,711) 6.58 - 18.45
Cancelled................................................ (5,869) 7.37 - 17.13
-------- ------------
Outstanding at December 31, 1996........................... 894,206 $6.58 - 22.75
======== ============
In June 1996, Westcorp replaced the Stock Appreciation Rights Plan for WFS
with the WFS 1996 Incentive Stock Option Plan ("WFS 1996 Plan"). The new plan
was implemented to eliminate the quarterly volatility in earnings per share
caused by the Stock Appreciation Rights Plan.
In 1996, Westcorp reserved 550,000 shares of WFS Common Stock for future
issuance to certain employees under the WFS 1996 Plan. Reserved, unissued shares
totalled 30,431 at December 31, 1996. The options may be exercised at a price of
$18.00 per share after the first year, in whole or in part, within five years
after the date of grant. Additionally, the weighted average life of the options
at December 31, 1996 was 4.6 years and the weighted average price of the options
is $18.00 per share.
At December 31, 1996, there were no exercisable stock options under the WFS
1996 plan. Stock option activity is summarized as follows:
PRICE PER
SHARES SHARE
-------- -------------
Outstanding at January 1, 1996
Issued................................................... 519,569 $ 18.00
Exercised................................................
Cancelled................................................
-------- ------------
Outstanding at December 31, 1996........................... 519,569 $ 18.00
======== ============
F-22
85
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Effective January 1, 1996 Westcorp adopted Statement of Financial
Accounting Standards 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 provides for companies to recognize compensation expense
associated with stock-based compensation plans over the anticipated service
period based on the fair value of the award on the date of grant. However, SFAS
123 allows companies to continue to measure compensation costs prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Companies electing to continue accounting for stock-based
compensation plans under APB 25 must make pro forma disclosures of net income
and earnings per share as if SFAS 123 has been adopted if the fair value of the
options has material impact on earnings. Westcorp has continued to account for
stock-based compensation plans under APB 25.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Westcorp's and WFS' stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value for the Westcorp and WFS options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions for 1995 and 1996: risk-free interest rate of 6.2%; a dividend yield
in the range of 8.8% through 19.6% for Westcorp; volatility factor of the
expected market price of common stock of .30 and an expected life of the option
of 5 years.
The impact of applying SFAS 123 in 1996 and 1995 is immaterial to the
financial statements to Westcorp.
NOTE 18 -- REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions supervised by the
Office of Thrift Supervision ("OTS"). The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off balance sheet items as calculated
under regulatory accounting practices. An institution that fails to comply with
its regulatory capital requirements must obtain OTS approval of a capital plan
and can be subject to a capital directive and certain restrictions on its
operations which could have a direct material effect on the Bank's financial
statements.
At December 31, 1996 and 1995, the Bank's most recent notification from the
OTS categorized the Bank as "well capitalized" under the prompt corrective
action ("PCA") regulations adopted by the OTS pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be categorized as
"well capitalized", the Bank must maintain minimum capital ratios as set forth
in the table below. The Bank's capital is subject to review by federal
regulators for the components, amounts, risk weighting classifications and other
factors. There are no conditions or events since December 31, 1996 that
management believes have changed the Bank's category.
F-23
86
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The following table summarizes the Bank's actual capital and required
capital as of December 31, 1996 and 1995:
TIER 1
TANGIBLE RISK-BASED RISK-BASED
DECEMBER 31, 1996 CAPITAL CORE CAPITAL CAPITAL CAPITAL
- ----------------------------------------------- -------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Actual Capital:
Amount....................................... $348,938 $348,938 $348,938 $467,563
Capital ratio................................ 10.53% 10.53% 8.14% 10.91%
FIRREA minimum required capital:
Amount....................................... $ 49,707 $ 99,414 N/A $342,915
Capital ratio................................ 1.50% 3.00% N/A 8.00%
Excess....................................... $299,231 $249,524 N/A $124,648
FDICIA well capitalized required capital:
Amount....................................... N/A $166,838 $257,187 $428,644
Capital ratio................................ N/A 5.00% 6.00% 10.00%
Excess....................................... N/A $182,100 $ 91,751 $ 38,919
DECEMBER 31, 1995
Actual Capital:
Amount....................................... $267,894 $267,894 $267,894 $391,252
Capital ratio................................ 8.32% 8.32% 7.82% 11.15%
FIRREA minimum required capital:
Amount....................................... $ 48,290 $ 96,579 N/A $274,173
Capital ratio................................ 1.50% 3.00% N/A 8.00%
Excess....................................... $219,604 $171,315 N/A $117,079
FDICIA well capitalized required capital:
Amount....................................... N/A $161,350 $205,630 $342,716
Capital ratio................................ N/A 5.00% 6.00% 10.00%
Excess....................................... N/A $106,544 $ 62,264 $ 48,536
F-24
87
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principles ("GAAP") to the Bank's tangible, core
and risk-based capital as of December 31, 1996 and 1995:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Bank shareholder's equity -- GAAP basis......................... $337,958 $253,442
Adjustment: Unrealized gains under SFAS 115..................... (1,083) (186)
Less: Non-permissible activities at required phase-in(1)...... (13,135) (6,044)
Add: Minority interest in equity of subsidiaries.............. 28,061 21,965
Less: Excess qualifying PMSRs................................. (2,863) (1,283)
-------- --------
Total tangible and core capital................................. 348,938 267,894
Adjustments for risk-based capital:
Subordinated debentures (2)................................... 106,559 106,466
General loan valuation allowance(3)........................... 36,298 37,438
Less: Fully capitalized assets................................ (24,232) (14,858)
Equity investments............................................ (5,688)
-------- --------
Risk-based capital............................................ $467,563 $391,252
======== ========
- ---------------
(1) Non-permissible activities phase-in (60%) applicable to 1995 only.
(2) Excludes capitalized discounts and issue costs.
(3) Limited to 1.25% of risk-weighted assets.
NOTE 19 -- DIVIDENDS
Westcorp paid cash dividends of $0.39, $0.34 and $0.27 per share for the
years ended December 31, 1996, 1995 and 1994, respectively. Westcorp declared a
stock dividend of 5% in 1996, 1995 and 1994. The 1995 and 1994 dividends and
earnings per share and share amounts have been retroactively adjusted to give
effect of the 1996 and 1995 5% stock dividends.
NOTE 20 -- PENSION PLAN
Westcorp has an Employee Stock Ownership and Salary Savings Plan ("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 under the Employement Retirement Income
Security Act of 1974. Contributions to the Plan are fully expensed in the year
to which the contribution applies.
Westcorp's contribution to the Plan amounted to $3.4 million, $2.4 million
and $1.2 million in 1996, 1995 and 1994, respectively.
F-25
88
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 21 -- INCOME TAXES
Income tax expense consisted of the following for the year ended December
31:
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Current:
Federal............................................. $11,290 $23,860 $ 4,271
State............................................... 3,340 7,849 1,711
------ ------ ------
14,630 31,709 5,982
Deferred:
Federal............................................. 10,273 (5,628) 5,994
State............................................... 3,192 (846) 1,843
------ ------ ------
13,465 (6,474) 7,837
------ ------ ------
$28,095 $25,235 $13,819
====== ====== ======
A reconciliation of total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
as follows for the year ended December 31:
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Tax at statutory rate................................. $23,534 $21,550 $11,423
State tax (net of Federal tax benefit)................ 4,246 3,685 2,396
Other................................................. 315
------ ------ ------
$28,095 $25,235 $13,819
====== ====== ======
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. Amounts previously reported as
current and deferred income tax expense have been restated. Such changes to the
components of the expense occur because all tax alternatives available to
Westcorp are not known for a number of months subsequent to year-end.
F-26
89
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Significant components of Westcorp's deferred tax assets and liabilities
are as follows at December 31:
DEFERRED TAX POSITION
ASSETS/(LIABILITIES)
1996 1995
-------- -------
(DOLLARS IN
THOUSANDS)
Deferred tax assets:
Loan loss reserves............................................ $ 9,450 $ 9,957
Joint venture losses and write-downs in excess of tax
losses..................................................... 8 1,169
Asset securitization income recognized for tax purposes....... 1,679
Deferred compensation accrual................................. 2,594 2,549
Tax basis difference -- marketable securities................. 1,229 510
Originated mortgage service rights............................ 687
Other, net.................................................... 4,626 3,602
-------- -------
18,594 19,466
Deferred tax liabilities:
Loan fee income deferred for tax purposes..................... (3,919) (3,725)
FHLB dividends................................................ (4,007) (3,195)
Accelerated depreciation for tax purposes..................... (1,364) (1,256)
Loan costs.................................................... (1,185) (1,419)
SFAS 115 deferred taxes....................................... (1,323) (140)
Asset securitization income recognized for book purposes...... (6,243)
Other, net.................................................... (3,716)
-------- -------
(21,757) (9,735)
-------- -------
$ (3,163) $ 9,731
======== =======
F-27
90
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 22 -- BUSINESS SEGMENT DATA
In addition to its principal operations in banking, Westcorp conducts a
significant amount of automobile lending as presented below at December 31:
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Revenues:
Automobile lending........................... $ 207,514 $ 135,199 $ 93,107
Banking operations........................... 76,846 52,253 48,197
Operating profit:
Automobile lending........................... $ 86,932 $ 62,645 $ 43,251
Banking operations........................... 11,662 20,227 9,818
General corporate expenses................... (31,353) (21,301) (20,430)
---------- ---------- ----------
Pretax income.................................. $ 67,241 $ 61,571 $ 32,639
========== ========== ==========
Identifiable assets:
Automobile lending........................... $ 675,572 $ 583,588 $ 542,962
Banking operations........................... 2,632,172 2,614,708 2,164,852
General corporate assets..................... 27,301 24,641 34,475
---------- ---------- ----------
Total assets................................... $3,335,045 $3,222,937 $2,742,289
========== ========== ==========
The automobile lending operations involve the purchase, origination, sale
and servicing of automobile loans and contracts. The banking operations include
activities normally associated with retail banking, equity lending, mortgage
banking, commercial banking and other ancillary services. The revenues for each
segment are generated through lending and related activities from unaffiliated
customers.
NOTE 23 -- FINANCIAL INSTRUMENT AGREEMENTS
Westcorp uses interest rate swaps, purchased options, floors and caps to
minimize its exposure to interest rate risk. The fair value of these agreements
may vary substantially with changes in interest rates. At December 31,
Westcorp's portfolio of such agreements consisted of the following:
1996
---------------------
NOTIONAL CREDIT
AMOUNT EXPOSURE
-------- --------
(DOLLARS IN
THOUSANDS)
Interest rate swaps............................................. $ 50,000 $ 1,490
Interest rate caps.............................................. 150,000 1,729
-------- -------
$200,000 $ 3,219
======== =======
1995
---------------------
NOTIONAL CREDIT
AMOUNT EXPOSURE
-------- --------
(DOLLARS IN
THOUSANDS)
Interest rate swaps............................................. $188,500 $ 7,945
Interest rate caps, floors and options.......................... 165,000 3,847
-------- ------
$353,500 $11,792
======== ======
F-28
91
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Notional amounts do not represent amounts exchanged by parties and, thus,
are not a measure of Westcorp's exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.
Westcorp's interest rate swaps consist of agreements with other parties to
exchange, at specified intervals, the difference between fixed rate and floating
rate interest amounts calculated by reference to an agreed notional amount and a
specified index. Westcorp pays a fixed interest rate and receives a floating
interest rate on all of its interest rate swaps. At December 31, 1996 and 1995,
the terms of Westcorp's interest rate swaps were to pay a weighted average fixed
rate of 5.9% and 6.6%, respectively, and to receive a weighted average variable
rate of 5.6% and 5.9%, respectively, maturing between 1998 and 2002 with
collateral requirement of 1.0% to 4.0%. Variable interest rates may change in
the future.
Westcorp purchases interest rate caps, floors and options to effectively
remove lifetime interest rate caps on mortgage-backed securities, to hedge
interest rate fluctuations on assets available for sale and to limit the erosion
of net interest income under increases in interest rates. The interest rate cap
agreements have strike rates from 7.5% to 8.0% with expiration dates ranging
from 1999 to 2003 for 1996 and 7.0% to 8.0% with expiration dates ranging from
1999 to 2002 for 1995. All option contracts previously outstanding expired in
1996. Westcorp purchases interest rate floors to limit the decline of net
interest income under periods of decreasing interest rates. At December 31,
1996, there were no floor agreements outstanding. At December 31, 1995, the
floor agreement has a strike rate of 5.75% expiring in October, 2000.
The current credit exposure under these agreements is limited to the fair
value of the agreements with a positive fair value at the reporting date. Master
netting agreements are arranged or collateral is obtained through physical
delivery of, or rights to, securities to minimize Westcorp's exposure to credit
losses in the event of nonperformance by counterparties to financial
instruments. Westcorp also minimizes its counterparty risk by entering into
agreements only with highly rated counterparties.
Due to a lower than investment grade rating on its subordinated debentures,
the Bank has been required to deliver securities with a market value at December
31, 1996 of approximately $437 thousand, as collateral on its interest rate swap
positions.
NOTE 24 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair Values of Financial Instruments: Fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value, are reported using quoted market
prices. 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. Fair values for certain financial instruments and all non-financial
instruments are not required to be disclosed. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of Westcorp.
The following methods and assumptions were used by Westcorp in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents and other short-term investments: The
carrying amounts reported in the balance sheet for cash and short-term
instruments approximate those assets' fair values.
F-29
92
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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 (including held for sale): For variable-rate loans
that reprice frequently, fair values are based on carrying values. The fair
values for fixed-rate mortgage 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 are estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality.
Capitalized servicing: The fair values are estimated using discounted
cash flows based on a current market interest rate. These cash flows
generally include servicing fees, float income from payments and escrow
accounts, servicing costs, foreclosure costs and interest expense for funds
advanced.
Interest rate swaps: Interest rate swaps are carried at fair value as
hedges of available for sale securities. The fair value is determined by
obtaining market quotes from brokers.
Interest rate options, floors and caps: The carrying amount comprises
the unamortized premiums paid for the contracts. The fair value is
estimated by obtaining market quotes from brokers.
Forward agreements: The carrying amount comprises the amount of the
gain deferred on expired agreements. The fair value is estimated by
obtaining market quotes from brokers.
Loan Commitments (including fixed and variable): The fair values of
the loan commitments are based on quoted market prices of similar loans
sold in the secondary market.
Deposits: The fair values disclosed for demand deposit accounts,
passbook accounts, certificate accounts, brokered certificate 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 cash flow calculation that applies interest rates
currently being offered on certificates of deposit to a schedule of
aggregated expected monthly maturities on time deposits.
Securities sold under agreements to repurchase: The fair value is
estimated by using discounted cash flow analyses, based on Westcorp's
current incremental borrowing rates for similar types of borrowing
arrangements.
Short-term borrowings: The carrying amounts of the commercial paper
line with the FHLB and the line of credit with two banks approximate their
fair values.
Federal Home Loan Bank advances: The fair value is estimated by using
discounted cash flow analyses, based on Westcorp's current incremental
borrowing rates for similar types of borrowing arrangements.
Subordinated debentures: The fair values of the subordinated
debentures are estimated using discounted cash flow analyses, based on the
current incremental borrowing rates for similar types of borrowing
arrangements.
F-30
93
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The estimated fair values of Westcorp's financial instruments are as
follows at December 31:
1996 1995
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash equivalents............... $ 75,625 $ 75,625 $ 36,658 $ 36,658
Other short-term investments............ 62,798 62,798 126,227 126,227
Investment securities and
mortgage-backed securities........... 989,777 995,125 978,097 990,519
Loans receivable (including held for
sale)................................ 1,731,419 1,775,141 1,747,216 1,732,371
Capitalized servicing................... 150,237 164,592 96,948 99,333
Financial instrument agreements held for
purposes other than trading:
Interest rate swaps..................... 1,490 1,490 5,633 5,633
Interest rate options, floors and
caps................................. 3,796 2,004 3,846 1,722
Forward agreements...................... (328)
Fixed rate loan commitments............. 89,477 89,486 158,305 159,777
Variable rate loan commitments.......... 32,106 32,305 53,137 53,945
Financial liabilities:
Deposits................................ $1,873,942 $1,873,898 $1,753,475 $1,765,657
Securities sold under agreements to
repurchase........................... 287,412 287,933 354,024 354,091
Short-term borrowings................... 55,945 55,945 112,330 112,330
Federal Home Loan Bank advances......... 226,000 226,410 192,000 192,036
Subordinated debentures................. 104,917 112,154 104,360 112,479
NOTE 25 -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1996 1995
-------- --------
(DOLLARS IN
THOUSANDS)
Assets
Cash......................................................... $ 9,155 $ 41,219
Investment in subsidiaries................................... 343,374 255,372
Other........................................................ 1,675 1,325
-------- --------
$354,204 $297,916
======== ========
Liabilities and shareholders' equity
Other liabilities............................................ $ 36,274 $ 177
-------- --------
36,274 177
Shareholders' equity........................................... 317,930 297,739
-------- --------
$354,204 $297,916
======== ========
F-31
94
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(DOLLARS IN THOUSANDS)
Income
Interest............................................ $ 20 $ 9 $ 127
Dividends from subsidiaries......................... 5,000 21,500 24,600
Other............................................... (1) 1,128 129
-------- -------- --------
5,019 22,637 24,856
Noninterest expenses.................................. 1,816 1,016 1,350
-------- -------- --------
Income before income taxes and equity in net income of
subsidiaries........................................ 3,203 21,621 23,506
Income tax expense (benefit).......................... (669) 49 (351)
-------- -------- --------
Income before equity in net income of subsidiaries.... 3,872 21,572 23,857
Equity in undistributed net income (loss) of
subsidiaries........................................ 27,925 11,856 (5,037)
-------- -------- --------
NET INCOME............................................ $31,797 $33,428 $18,820
======== ======== ========
F-32
95
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income......................................... $ 31,797 $ 33,428 $ 18,820
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses........................ (104) (475)
Depreciation and amortization.................... 6,262
Amortization of goodwill......................... 84 85
Write-down of investments........................ 400
Contribution to employee stock option plan....... 1,181
Infusion of capital to subsidiary................ (60,400) (2,000)
Equity in undistributed net income of
subsidiaries.................................. (27,925) (11,856) 5,037
Other, net....................................... 10,106 415 393
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES....................................... (38,979) 19,967 24,260
INVESTMENT ACTIVITIES
Addition to premises and equipment................. (9,021)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES.............. (9,021)
FINANCING ACTIVITIES
Increase in short-term borrowings.................. 25,000
Dividends paid..................................... (10,121) (8,692) (6,844)
Proceeds from sale of common stock................. 1,057 2,166 1,219
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 15,936 (6,526) (5,625)
-------- -------- --------
(DECREASE) INCREASE IN CASH........................ (32,064) 13,441 18,635
Cash at beginning of year.......................... 41,219 27,778 9,143
-------- -------- --------
CASH AT END OF YEAR................................ $ 9,155 $ 41,219 $ 27,778
======== ======== ========
F-33
96
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 26 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1996 and 1995. Certain quarterly amounts have been
adjusted to conform with the year-end presentation.
FOR THE THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996
Interest income............................ $59,081 $58,847 $ 61,231 $63,229
Interest expense 36,224 32,634 34,082 36,254
------- ------- ------- -------
Net interest income...................... 22,857 26,213 27,149 26,975
Provision for loan losses.................. 5,600 1,454 3,097 3,420
Noninterest income (expenses).............. 2,387 (3,101) (14,349) (7,319)
------- ------- ------- -------
Income before income taxes............... 19,644 21,658 9,703 16,236
Income taxes............................... 8,074 9,090 4,237 6,694
------- ------- ------- -------
Income before minority interest............ 11,570 12,568 5,466 9,542
Minority interest in earnings of
subsidiaries............................. 1,722 1,894 1,987 1,746
------- ------- ------- -------
Net income............................... $ 9,848 $10,674 $ 3,479 $ 7,796
======= ======= ======= =======
Net income per common share................ $ 0.38 $ 0.41 $ 0.13 $ 0.30
======= ======= ======= =======
1995
Interest income............................ $49,056 $54,935 $ 58,194 $59,908
Interest expense........................... 30,832 34,661 36,595 37,191
------- ------- ------- -------
Net interest income...................... 18,224 20,274 21,599 22,717
Provision for loan losses.................. 638 4,094 3,641 3,097
Noninterest expenses....................... (6,252) (2,501) (600) (420)
------- ------- ------- -------
Income before income taxes............... 11,334 13,679 17,358 19,200
Income taxes............................... 4,722 5,656 7,125 7,732
------- ------- ------- -------
Income before minority interest............ 6,612 8,023 10,233 11,468
Minority interest in earnings of
subsidiaries............................. 1,160 1,748
------- ------- ------- -------
Net income............................... $ 6,612 $ 8,023 $ 9,073 $ 9,720
======= ======= ======= =======
Net income per common share................ $ 0.24 $ 0.31 $ 0.35 $ 0.37
======= ======= ======= =======
F-34
97
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER NUMBER
- ------- -------
3.1 Certificate of Incorporation(a)...................................
3.2 Bylaws(a).........................................................
4.1 Indenture dated as of June 17, 1993 issued by Western Financial
Bank, F.S.B., with respect to $125,000,000 in aggregate principal
amount of 8.50% Subordinated Capital Debentures due 2003(b).......
10.1 Westcorp Incentive Stock Option Plan(c)...........................
10.2 Westcorp Employee Stock Ownership and Salary Savings Plan(a)......
10.3 Westcorp 1991 Incentive Stock Option Plan(d)......................
10.4 WFS Financial Inc ("WFS") 1996 Incentive Stock Option Plan(e).....
10.5 Westcorp Employee Stock Ownership and Salary Savings Plan(f)......
10.6 Employment Agreement(g)...........................................
11.1 Statement Regarding Computation of Earnings Per Share............. F-36
22.1 Subsidiaries of Westcorp.......................................... F-37
23.1 Consent of Independent Auditors................................... F-38
27 Financial Data Schedule...........................................
- ---------------
(a) 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 Numbers indicated.
(b) Exhibit previously filed with Western Financial Bank, F.S.B., formerly
Western Financial Savings Bank, F.S.B. Offering Circular with the OTS, dated
June 17, 1993 (will be provided to the SEC upon request).
(c) Exhibit previously filed with Westcorp Registration Statement in Form S-1
(File No. 33-04295), filed May 2, 1986 incorporated herein by reference
under Exhibit Number indicated.
(d) 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.
(e) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 333-07485), filed July 3, 1996, incorporated herein by reference under
the Exhibit Number indicated.
Amendment No.1 dated as of July 26, 1996 to the WFS Registration Statement
on Form S-8 (File No. 333-07485) incorporated herein by reference under the
Exhibit Number indicated.
(f) Exhibit previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039) and the related Form 11-K (File No. 001-09910, filed
August 29, 1996 and June 28, 1996, respectively, incorporated herein by
reference under the Exhibit Number indicated.
(g) Employment Agreement, in letter form, dated January 11, 1996, between the
registrant and Donald H. Kasle (will be provided to the SEC upon request).
F-35