Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from..................to.............................
Commission file number 1-3521
WASHINGTON MUTUAL FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4128205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8900 Grand Oak Circle, Tampa, FL 33637-1050
(Address of principal executive offices) (Zip Code)
(813) 632-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: None
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 past 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 the 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:
Not applicable
The aggregate market value of Common Stock held by non-affiliates: None
As of February 28, 2000, there were 1,000 shares of Common Stock outstanding.
Documents incorporated by reference: None
Registrant meets the conditions set forth in General Instruction (I)(1)(a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
2
WASHINGTON MUTUAL FINANCE CORPORATION
ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
PART I
Item 1. Business .........................................................3
Item 2. Properties ......................................................11
Item 3. Legal Proceedings................................................11
Item 4. Submission of Matters to a Vote of Security Holders...............*
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters...............................12
Item 6. Selected Financial Data..........................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......22
Item 8. Financial Statements and Supplementary Data......................24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...........................44
PART III
Item 10. Directors and Executive Officers of the Registrant................*
Item 11. Executive Compensation............................................*
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................*
Item 13. Certain Relationships and Related Transactions....................*
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...........................................45
* Items 4, 10, 11, 12 and 13 are not included as per conditions
met by Registrant set forth in General Instruction I(1)(a) and
(b) of Form 10-K.
3
This document contains forward-looking statements, which are not historical
facts and pertain to our future operating results. These forward-looking
statements are within the meaning of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements include, but are not limited to,
statements about our plan, objectives, expectations and intentions and other
statements contained in this report that are not historical facts. When used in
this report, the words "expects," "anticipate," "intends," "plans," "believes,"
"seeks," "estimates," and similar expressions are generally intended to identify
forward-looking statements. These forward-looking statements are inherently
subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future
business strategies and decisions that are subject to change. Actual results may
differ materially from the results discussed in these forward-looking statements
for the reasons, among others, discussed under the heading "Business-Risk
Factors" included in this Form 10-K.
PART I
Item 1. Business
General
Washington Mutual Finance Corporation (the "Company"), incorporated in Delaware
in 1986 as a successor to a company incorporated in 1927, is a holding company
headquartered in Tampa, Florida whose subsidiaries are engaged in the consumer
financial services business. All of the Company's equity securities are owned
indirectly by Washington Mutual, Inc. ("Washington Mutual"). Effective March 1,
2000, the Company changed its name from Aristar, Inc.
The Company's operations consist principally of a network of approximately 540
branch offices located in 25 states, primarily in the Southeast, Southwest and
California. These offices generally operate under the names Blazer Financial
Services, City Finance Company and First Community Financial Services. Beginning
in November 1999 and continuing throughout the first half of 2000, the office
names are being changed to Washington Mutual Finance. The Company's branch
offices are generally located in small to medium-sized communities in suburban
or rural areas and are managed by individuals who generally have considerable
consumer lending experience. The primary market for the Company's consumer loans
consists of households with an annual income of up to $70,000.
The Company makes consumer loans, secured and unsecured, and purchases retail
sales contracts from retail establishments. These consumer credit transactions
are primarily for household purposes. The Company also provides consumer
financial services through its industrial banking subsidiary, First Community
Industrial Bank ("FCIB"), which has branches in Colorado and Utah. In addition
to making consumer loans and purchasing retail sales contracts, FCIB also takes
customers' savings deposits insured by the Federal Deposit Insurance Corporation
("FDIC").
4
The Company is managed along two major lines of business: consumer finance and
consumer banking. The financial performance of these business lines is measured
by the Company's profitability reporting processes.
Portfolio Composition
The following table provides an analysis by type of the Company's consumer
finance receivables (excluding unearned finance charges and deferred loan fees)
at the dates shown:
(Dollars in thousands) December 31,
-------------------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
Notes and contracts receivable:
Amount $ 3,061,757 $ 2,574,396 $ 2,328,715
Number of accounts 1,001,302 966,048 1,029,532
Type:
Real estate secured loans $ 1,432,841 $ 1,122,872 $ 977,929
Personal loans 1,334,350 1,159,852 1,025,235
Retail sales contracts 294,566 291,672 325,551
Type as a percent of total receivables:
Real estate secured loans 46.8% 43.6% 42.0%
Personal loans 43.6 45.1 44.0
Retail sales contracts 9.6 11.3 14.0
--------------- -------------- --------------
100.0% 100.0% 100.0%
=============== ============== ==============
Consumer loans are typically fixed-rate and are originated by customer
application and periodic purchases of receivable portfolios. Loan originations
are a result of business development efforts consisting of direct mail,
telemarketing and branch office sales personnel.
Consumer loans written in 1999 had original terms ranging from 3 to 360 months
and averaged 71 months. As of December 31, 1999, 53% of the Company's total
portfolio was either unsecured or secured by automobiles or other personal
property ("personal loans") and 47% of the Company's total portfolio was secured
by real estate. In 1998, these loan types comprised 56% and 44% of the
portfolio.
For the year ended December 31, 1999, real estate secured loans outstanding
(excluding unearned finance charges and deferred loan fees) increased $310
million, or 28%, as compared to $145 million, or 15%, the prior year. Real
estate loans are typically secured by first or second mortgages and are
primarily used by the customer for purchases, refinances or debt consolidation.
The Company has focused on growing the real estate portfolio due to the better
quality inherent in the customer base. This better than average quality is a
result of the fact that the primary source of these loans is existing personal
and sales contract customers that have maintained a high level of payment
performance over an extended period of time. In addition, the underlying
security in real estate secured loans reduces the risk of loss to the Company.
Also, the larger average balance makes this loan type more cost effective to
originate and service. As of December 31, 1999 and 1998, the average balance of
a real estate secured loan was approximately $27,700 and $26,600.
5
During 1999, personal loans outstanding (excluding unearned finance charges and
deferred loan fees) increased $175 million, or 15%, as compared to $135 million,
or 13%, in 1998. Personal loans are either secured or unsecured and are
primarily used by the customer to make specific purchases of consumer goods or
undertake personal debt consolidation. As of December 31, 1999 and 1998, the
average balance of a personal loan was approximately $2,250 and $2,100.
During 1999, retail sales contracts outstanding (excluding unearned finance
charges and deferred loan fees) grew $3 million, or 1%. Retail sales contracts
are generally acquired without recourse to the originating merchant and
establish a customer relationship for developing future loan business. Where
these contracts result from the sale of consumer goods, payment is generally
secured by such goods. Retail sales contracts are generally acquired through the
originating merchant; the Company had such arrangements with over 3,000
merchants at December 31, 1999. The number of such arrangements has been
purposely reduced over the past two years, as the Company has attempted to
eliminate unprofitable relationships. This reduction was substantially completed
in 1999, thus the portfolio runoff experienced in 1998 has leveled off in 1999.
At December 31, 1999 and 1998, the average balance of a retail sales contract
was approximately $825 and $800.
As part of its consumer finance line of business, the Company makes available,
at the option of its customers, credit life, credit accident and health, and
credit casualty insurance products. The Company does not sell insurance to
non-customers. Credit insurance sold by the Company is written by unaffiliated
insurance companies and is substantially all reinsured by the Company, which
earns reinsurance premiums thereon.
Yield Written
At December 31, 1999, 1998 and 1997 the average portfolio yield written by loan
type was as follows:
1999 1998 1997
---- ---- ----
Real estate secured loans 12.5% 12.7% 12.7%
Personal loans 24.8% 25.1% 25.2%
Retail sales contracts 18.9% 19.0% 19.0%
See discussion on yields in Management's Discussion and Analysis of Financial
Condition and Results of Operations in Item 7.
6
Geographic Distribution
Geographic diversification of consumer finance receivables reduces the
concentration of credit risk associated with a recession in any one region. The
largest concentrations of consumer finance receivables, net (excluding unearned
finance charges, deferred loan fees and allowance for credit losses), by state
were as follows:
(Dollars in thousands) December 31,
---------------------------------------------------------------------------------
1999 1998 1997
--------------------------- -------------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------ ------- -------- ------- ------ -------
Colorado $ 309,384 10% $ 228,999 9% $ 192,046 9%
Tennessee 306,499 10 263,923 11 244,716 11
Texas 293,836 10 341,159 14 241,843 11
North Carolina 257,719 9 223,935 9 206,796 9
California 232,493 8 149,316 6 192,081 9
Florida 229,132 8 104,372 4 120,685 5
Louisiana 134,303 5 121,239 5 110,135 5
South Carolina 162,595 5 142,950 6 127,732 6
Virginia 140,870 5 126,182 5 110,307 5
Mississippi 121,507 4 106,889 4 98,289 4
Other 773,111 26 684,939 27 609,759 26
------------- --------- ------------- -------- ------------- -------
Total $ 2,961,449 100% $ 2,493,903 100% $ 2,254,389 100%
============= ========= ============= ======== ========== =======
The relatively high proportion of the business in Colorado reflects the presence
of the Company's banking subsidiary, FCIB, in that state.
Credit Loss Experience
The Company closely monitors portfolio delinquency and loss rates in measuring
the quality of the portfolio and the potential for ultimate credit losses. An
account is considered delinquent for financial reporting purposes when a payment
is 60 days or more past due, based on the original terms of the contract. Under
the Company's policy, non-real estate secured, delinquent accounts generally are
charged off when they become 180 days contractually delinquent. Real estate
secured, delinquent accounts are handled on a case-by-case basis, with
foreclosure proceedings typically beginning when they are between 60 and 90 days
contractually delinquent. Collection efforts continue after an account has been
charged off until the customer obligation is satisfied or until it is determined
that the obligation is not collectible or that the cost of continuing collection
efforts will not be offset by the potential recovery.
Management of the Company attempts to control customer delinquency through
careful evaluation of each borrower's application and credit history at the time
the loan is made or acquired, and appropriate collection activity. The Company
also seeks to reduce its risk by focusing on consumer lending, making a greater
number of smaller loans than would be practical in commercial markets, and
maintaining disciplined control over the underwriting process.
7
The Company maintains an allowance for credit losses inherent in the consumer
finance receivables portfolio. The allowance is based on an ongoing assessment
of the probable estimated losses inherent in the portfolio. This analysis
provides a mechanism for ensuring that estimated losses reasonably approximate
actual observed losses. See discussion in "Allowance for Credit Losses" in Item
7.
Funding Composition
A relatively high ratio of borrowings to invested capital is customary in
consumer finance activities due to the quality and term of the assets employed
by the business. As a result, the spread between the revenues received from
loans and interest expense is a significant factor in determining the net income
of the Company.
The Company funds its consumer finance operations principally through net cash
flows from operating activities, short-term borrowings in the commercial paper
market, and issuances of long-term debt and customer deposits. The Company had
commercial paper outstanding at December 31, 1999 of $242.2 million at a 6.2%
weighted average interest rate.
As of December 31, 1999, the Company had two revolving credit facilities with a
group of lenders permitting aggregate borrowing of up to $1.2 billion. Of the
$1.2 billion available credit, Washington Mutual has the ability to borrow up to
$500 million. There were no borrowings under these facilities at year-end 1999.
The Company also obtains funding by issuing debt securities. Notes outstanding
totaled approximately $2.0 billion at December 31, 1999 and $1.4 billion at
December 31, 1998. As of December 31, 1999, the amount available to the Company
under its current shelf registration statement totaled $450 million.
The Company also, through its industrial banking subsidiary, borrows from the
Federal Home Loan Bank of Topeka ("FHLB") and accepts customer deposits. FHLB
borrowings totaled $115.9 million at December 31, 1999 and $73.9 million at
December 31, 1998. Customer deposits totaled $189.9 million at December 31, 1999
and $187.5 million at December 31, 1998. Interest rate spread and cost of
borrowed funds is presented in "Results of Operations" in Item 7.
Employee Relations
The Company employs approximately 2,700 full-time employees. The Company also
employs part-time employees. None of these employees are represented by a union.
Management considers relations with its employees to be satisfactory.
8
Risk Factors
In addition to the other information in this Annual Report on Form 10-K, the
following factors should be considered carefully:
Decline of Collateral Value May Adversely Affect Portfolio Credit Quality
Approximately 47% of the Company's consumer finance receivables outstanding were
secured by real estate at December 31, 1999. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the loan-to-values of loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of a borrower default. Further, delinquencies, foreclosures and
losses generally increase during economic slowdowns or recessions. Any sustained
period of such increased delinquencies, foreclosures and losses could adversely
affect the Company's results of operations and financial condition.
Change in Delinquency Rate
While the Company employs underwriting criteria and collection methods to
mitigate the risks inherent in loans made to its customers, no assurance can be
given that such criteria or methods will afford adequate protection against such
risks. In the event the Company's portfolio of consumer finance receivables
experiences higher delinquencies, foreclosures or losses than anticipated, the
Company's results of operations or financial condition could be adversely
affected.
Impact of Regulation and Legislation; Regulatory Enforcement
The Company's operations are, for the most part, regulated by federal and state
consumer finance laws or similar legislation. All of the states in which finance
subsidiaries of the Company are licensed to do business have laws, which vary
from state to state, regulating the consumer finance business. These laws, among
other things, typically limit the size of loans, set maximum interest rates and
maximum maturities and regulate certain lending and collection activities.
Although consumer finance laws have been in effect for many years, amending and
new legislation is frequently proposed. The Company is unable to predict whether
or when any such proposals might ultimately be enacted into law or to assess the
impact any such enactment might have on the Company. In addition, as it accepts
customers' deposits, the industrial banking subsidiary is subject to regulation
by the FDIC and the relevant state banking authorities.
9
The Company's lending activities are subject to the Truth-in-Lending Act
(including the Home Ownership and Equity Protection Act of 1994), the Fair
Housing Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act and
the Fair Debt Collection Practices Act and regulations promulgated thereunder,
as well as other federal, state and local statutes and regulations affecting the
Company's activities. The Company is also subject to the rules and regulations
of, and examinations by, state regulatory authorities with respect to
originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, (i) impose licensing obligations on the
Company, (ii) establish eligibility criteria for mortgage loans, (iii) prohibit
discrimination, (iv) provide for inspections and appraisals of properties, (v)
require credit reports on loan applicants, (vi) regulate assessment, collection,
foreclosure and claims handling, (vii) mandate certain disclosures and notices
to borrowers and (viii) in some cases, fix maximum interest rates, fees and loan
amounts. Failure to comply with these requirements can lead to termination or
suspension of the Company's ability to make and collect loans, certain rights of
rescission for mortgage loans, class action lawsuits and Administrative
enforcement actions. Recent Federal legislation, the Riegle Community
Development and Regulatory Improvement Act, has focused additional regulation on
mortgage loans having relatively higher origination fees and interest rates,
such as those made by the Company, and the Company expects its business to be
the focus of additional United States federal and state legislation, regulation
and possible enforcement in the future.
Additionally, the Company's sale of credit life, credit accident and health, and
credit casualty insurance to its customers is subject to state and federal
statutes and regulations. Failure to comply with any of the foregoing state and
federal requirements could lead to imposition of civil penalties on the Company,
class action lawsuits and administrative enforcement actions.
The laws and regulations described above are subject to legislative,
administrative and judicial interpretation, and certain of these laws and
regulations have been infrequently interpreted or only recently enacted.
Infrequent interpretations of these laws and regulations or an insignificant
number of interpretations of recently enacted regulations can result in
ambiguity with respect to permitted conduct under these laws and regulations.
Any ambiguity under the regulations to which the Company is subject may lead to
regulatory investigations or enforcement actions and private causes of action,
such as class action lawsuits, with respect to the Company's compliance with the
applicable laws and regulations. As a consumer lender, the Company has been, and
expects to continue to be, subject to regulatory enforcement actions and private
causes of action from time to time with respect to its compliance with
applicable laws and regulations. The Company's lending practices have in the
past been and currently are under regulatory review by various state
authorities. Although the Company utilizes systems and procedures to facilitate
compliance with these legal requirements and believes that it is in compliance
in all material respects with applicable laws, rules and regulations, there can
be no assurance that more restrictive laws, rules and regulations will not be
adopted in the future, or that existing laws and regulations will not be
interpreted in a more restrictive manner, which could make compliance more
difficult or expensive. See "Governmental Regulation."
10
Risk of Litigation
In the ordinary course of its business, the Company is subject to claims made
against it by borrowers arising from, among other things, losses that are
claimed to have been incurred as a result of alleged breaches of fiduciary
obligations, misrepresentations, errors and omissions of employees, officers and
agents of the Company, incomplete documentation and failures by the Company to
comply with various laws and regulations applicable to its business. The Company
believes that liability with respect to any currently asserted claims or legal
actions is not likely to be material to the Company's consolidated results of
operations or financial condition. However, any claims asserted in the future
may result in legal expenses or liabilities that could have a material adverse
effect on the Company's results of operations and financial condition and could
distract members of management from the general operations of the Company.
Fluctuations in Interest Rates May Adversely Affect Profitability
The profitability of the Company may be adversely affected during any period of
rapid changes in interest rates, as substantially all consumer loans outstanding
are written at a fixed rate. A substantial and sustained increase in interest
rates could adversely affect the spread between the rate of interest received by
the Company on its loans and the interest rates payable under its debt
agreements. Such interest rate increases could also affect the ability of the
Company to originate loans. A significant decline in interest rates could
decrease the balance of the consumer finance receivables portfolio by increasing
the level of loan prepayments. See "Quantitative and Qualitative Disclosures
About Market Risk" in Item 7A. for sensitivity analysis.
Competition Could Adversely Affect Results of Operations
Competition in the consumer finance business is intense. The consumer lending
market is highly fragmented and has been serviced by commercial banks, credit
unions and savings institutions, as well as by other consumer finance companies.
Many of these competitors have greater financial resources and may have
significantly lower costs of funds than the Company. Even after the Company has
made a loan to a borrower, the Company's competitors may seek to refinance the
Company's loan in order to offer additional loan amounts or reduce payments. In
addition, if the Company expands into new geographic markets, it will face
competition from lenders with established positions in these locations. There
can be no assurance that the Company will be able to continue to compete
successfully in these markets.
11
Item 2. Properties
The Company owns its 71,000 square foot headquarters building, which it built in
1994 on 6 acres of land in Tampa, Florida.
The Company's branch offices, located in 25 states, are leased typically for
terms of three to five years with options to renew. Typical locations include
shopping centers, office buildings and storefronts, and are generally of
relatively small size sufficient to accommodate a staff of four to eight
employees.
Commencing October, 1999, the Company leases 50,000 square feet of space in
Pensacola, Florida, which is used for centralized underwriting, servicing and
collections activities.
See Note 12 to the Consolidated Financial Statements for additional information
on rental expense and lease commitments.
Item 3. Legal Proceedings
The Company and certain of its subsidiaries are parties to various lawsuits and
proceedings arising in the ordinary course of business. The Company has also
been named as a defendant in a number of class action suits, in which various
industry-wide practices arising from routine business activities are being
challenged and various damages are being sought. Certain of these lawsuits and
proceedings arise in jurisdictions, such as Alabama and Mississippi, that permit
damage awards disproportionate to the actual economic damages incurred. Based
upon information presently available, the Company believes that the total
amounts that will ultimately be paid arising from these lawsuits and proceedings
will not have a material adverse effect on the Company's consolidated results of
operations and financial condition. However, it should be noted that the
frequency of large damage awards, including large punitive damage awards, that
bear little or no relation to actual economic damages incurred by plaintiffs in
jurisdictions like Alabama and Mississippi continues to increase and creates the
potential for an unpredictable judgment in any given suit.
12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company is an indirect wholly-owned subsidiary of Washington Mutual and the
Company's common stock is not traded on any national exchange or in any other
established market.
Payment of dividends is within the discretion of the Company's Board of
Directors. Provisions of certain of the Company's debt agreements restrict the
payment of dividends to a maximum prescribed portion of cumulative earnings and
contributed capital and otherwise provide for the maintenance of minimum levels
of equity and maximum leverage ratios. Dividends will be paid when capital
exceeds the amount of debt to tangible capital (leverage ratio) deemed
appropriate by management. This leverage ratio will be managed with the
intention of maintaining the existing credit ratings on the Company's
outstanding obligations. The Company declared and paid dividends totaling $14.5
million during 1999 and $36.5 million during 1998.
Item 6. Selected Financial Data
The following selected financial data are taken from the Company's consolidated
financial statements. The data should be read in conjunction with the
accompanying consolidated financial statements and related notes in Item 8.,
Management's Discussion and Analysis in Item 7. and other financial information
included in this Form 10-K. Per share information is not included because all of
the Company's stock is owned by Washington Mutual.
As of, or For the Years Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- -------------- ------------- --------------
(Dollars in thousands)
Net interest income $ 224,805 $ 203,432 $ 180,605 $ 196,375 $ 204,985
Net income $ 72,992 $ 52,887 $ 46,287 $ 62,518 $ 65,297
Consumer finance
receivables, net $ 2,961,449 $ 2,493,903 $ 2,254,389 $ 2,123,103 $ 2,082,944
Total assets $ 3,227,557 $ 2,744,710 $ 2,509,606 $ 2,371,376 $ 2,328,747
Total debt $ 2,353,963 $ 1,987,990 $ 1,830,404 $ 1,750,776 $ 1,316,685
Total equity $ 475,158 $ 419,330 $ 398,184 $ 369,240 $ 473,684
13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements and related notes in Item 8. and other financial information in Item
1.
Overview
The Company produced record results in 1999, achieving net income of $73.0
million, which represents a 38% increase over the $52.9 million reported in 1998
and a 58% increase over 1997's reported net income of $46.3 million. The
following are key highlights of the Company's performance:
o Return on assets improved to 2.48% from 2.05% in 1998 and 1.94% in 1997.
o Net consumer finance receivables increased 18.7% during 1999, demonstrating
very strong growth compared to 10.6% in 1998.
o Yields earned on consumer finance receivables declined from 17.0% in 1998
to 16.7% in 1999, however, this was due to a shift in product mix towards
lower yielding real estate secured loans and increased amortization of
deferred loan origination costs.
o Both net interest spread and net interest margin were consistent with the
prior year, in spite of the decline in yields earned discussed above. This
is primarily due to a reduction in cost of funds as discussed in
"Consolidated Results of Operations." Net interest spread represents the
difference between the yield on the Company's interest-earning assets and
the interest rate paid on its borrowings. Net interest margin represents
the ratio of net interest income to average earning assets.
o Operating efficiency, defined as the ratio of non-interest operating
expenses, excluding the amortization of goodwill, to total revenue,
improved from 45.3% and 44.9% in 1997 and 1998 to 37.1% in 1999, due
largely to the effect of increasing loan volume while maintaining control
over fixed costs, coupled with the impact of increased deferral of loan
origination costs.
o Delinquencies (accounts contractually past-due greater than 60 days) as a
percentage of net consumer finance receivables decreased from 2.5% at
December 31, 1998 to 2.3% at December 31, 1999, as a result of improved
underwriting and collection efforts, coupled with the increased growth in
the portfolio.
o Net credit losses totaled $80.8 million in 1999, as compared to $73.9
million in 1998 and $65.1 million in 1997. Net credit losses as a
percentage of average consumer finance receivables (excluding unearned
finance charges and deferred loan fees), however, were 2.9%, 3.1% and 3.0%
in 1999, 1998 and 1997.
14
Segment Results
The Company is managed along two major segments: consumer finance and consumer
banking. Following is an overview of the performance of each segment in 1999:
Consumer Finance
o Net income increased 41% to $66.5 million in 1999, from $47.1 million in
1998. Net income totaled $40.9 million in 1997.
o Return on assets in 1999 improved to 2.58% from 2.06% and 1.93% in 1998 and
1997.
o The consumer finance receivables portfolio experienced significant growth
during 1999, totaling $407.5 million, or 18%.
o Net interest margin decreased as a result of slight yield erosion on
receivables caused by the shift in product mix toward real estate secured
loans, coupled with the impact of increased amortization of deferred loan
origination costs, which were significantly higher in 1999. These factors
were partially offset by a reduction in the cost of funds, as discussed in
"Consolidated Results of Operations."
o The improved efficiency ratio of 36.8% in 1999, as compared to 45.1% and
45.6% in 1998 and 1997 was largely a result of tight cost control and
strong volume growth, coupled with the impact of increased deferral of loan
origination costs.
o Net credit losses were controlled during a time of high receivables growth,
totaling $80.1 million in 1999, as compared to $73.0 million in 1998 and
$64.4 million in 1997. Net credit losses as a percentage of average
consumer finance receivables (excluding unearned finance charges and
deferred loan fees), were 3.3%, 3.4% and 3.3% in 1999, 1998 and 1997.
Consumer Banking
o Net income increased 12% to $6.5 million in 1999, from $5.8 million in
1998. Net income totaled $5.4 million in 1997.
o Return on assets in 1999 decreased to 1.78% from 2.01% and 2.02% in 1998
and 1997.
o The consumer banking receivables portfolio experienced strong growth during
1999, totaling $79.9 million, or 27%.
o Net interest margin decreased as a result of slight yield erosion on
receivables, coupled with an increased cost of funds due to a reduction in
customer deposits and higher rates paid on FHLB borrowings.
o Cost control remains strong, as evidenced by the operating expenses to
assets ratio of 1.9% in 1999, 2.0% in 1998 and 2.4% in 1997. This indicates
that expenses have increased at a slower rate than the segment's growth,
signifying leverage of its existing infrastructure.
o Net credit losses remain low, decreasing to $680 thousand in 1999 from $850
thousand in 1998 and $685 thousand in 1997. Net credit losses as a
percentage of average consumer finance receivables (excluding unearned
finance charges and deferred loan fees), were 0.2%, 0.3% and 0.3% in 1999,
1998 and 1997.
15
Consolidated Results of Operations
Net Interest Income before Provision for Credit Losses
Net interest income before provision for credit losses for 1999 increased 15% to
$325.4 million, compared to $283.2 million in 1998 and $247.2 million in 1997.
Net interest margin for 1999 was 11.0%, compared to 11.1% in 1998 and 10.4% in
1997.
The increase in net interest income before provision for credit losses in 1999
reflects growth in average net consumer finance receivables to $2.8 billion,
which was $397 million, or 17%, greater than the average balance for 1998. This
is primarily a result of management's implementation of an internal growth
initiative through the branch network, as well as an ongoing pursuit of
strategic acquisitions. Partially offsetting this portfolio growth is a 30 basis
point decrease in portfolio yield. This yield compression is a result of
remixing the portfolio to a larger percentage of lower-yielding real estate
secured loans and the increase in deferred loan origination costs as discussed
in "Overview." The other factor adversely impacting the portfolio yield was the
lower average permissible rate, due to rising average loan size, given the
structure of various state interest rate regulation thresholds.
In order to finance the growth in receivables, average debt outstanding
increased $311.9 million, or 15.5%, to $2.3 billion for 1999, as compared to
1998. The overall cost of debt decreased 20 basis points, as compared to the
prior year. The mix of debt was shifted to longer term, senior debt due to
management's strategy to better match the behavioral duration of its assets, and
to secure funding in advance of the Year 2000 year-end liquidity concerns.
However, offsetting this shift in funding mix was a decrease in rate paid,
primarily for the longer term senior debt. This improvement in rate was due to
lower credit spreads which were partially the result of the removal of a
"Negative Watch" by Moody's rating agency. Further, the senior debt rate
benefited from replacing maturing higher rate debt (issued when the general rate
environment was higher) with lower rate debt in the environment experienced in
1999.
16
The following chart reflects the average outstanding balances and related
effective yields in 1999, 1998 and 1997, as described above:
(Dollars in thousands) Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- -----------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ----------- ------------ ----------- ------------ ------------
Earning Assets:
Real estate secured
loans $ 1,275,932 12.6% $ 1,045,671 12.6% $ 929,688 12.5%
Personal loans 1,217,663 22.2 1,044,251 22.7 935,590 22.4
Retail sales contracts 280,458 11.9 286,982 12.6 338,405 12.0
----------- ----------- ------------ ----------- ------------ ------------
2,774,053 16.7 2,376,904 17.0 2,203,683 16.6
Investment securities 180,005 6.0 172,251 6.6 162,624 6.4
----------- ----------- ------------ ----------- ------------ ------------
Total earning assets $ 2,954,058 16.1% $ 2,549,155 16.3% $ 2,366,307 15.9%
=========== ============ ============ =========== ============ ============
Borrowings:
Senior debt $ 1,708,555 6.8% $ 1,432,743 7.1% $ 1,314,009 7.3%
Commercial paper 323,475 5.7 368,855 5.6 406,992 6.1
Customer deposits 196,583 5.5 172,850 5.8 150,837 5.6
FHLB borrowings 90,055 5.3 32,362 5.2 18,431 5.9
----------- ----------- ------------ ----------- ------------ ------------
Total borrowings $ 2,318,668 6.5% $ 2,006,810 6.7% $ 1,890,269 6.8%
=========== ============ ============ =========== ============ ============
Net interest spread 9.6% 9.6% 9.1%
============ =========== ============
Net interest margin 11.0% 11.1% 10.4%
============ =========== ============
Provision for Credit Losses
The provision for credit losses during 1999 was $100.6 million, compared to
$79.8 million in 1998 and $66.6 million in 1997. In 1999, the provision for
credit losses was 3.6% of average consumer finance receivables (excluding
unearned finance charges and deferred loan fees), as compared to 3.4% for 1998
and 3.0% in 1997. See further discussion in "Allowance for Credit Losses."
Other Operating Income
Other operating income increased 9% in 1999 to $29.5 million, compared to $27.1
million in 1998 and $26.6 million in 1997. Other operating income is comprised
of revenue earned from the sale of various ancillary products to borrowers at
the branch locations including life insurance, accident and health insurance,
property and casualty insurance, accidental death and dismemberment insurance,
involuntary unemployment insurance and auto club memberships. The increase in
1999 is related to the increase in the number of loans originated during the
year, offset by the shift in originations to loans which tend to have a lower
insurance penetration.
17
Operating Expenses
Operating expenses in 1999 were 5% lower, or $135.6 million, compared to $143.0
million in 1998 and $131.1 million in 1997. However, included in the 1998 total
was $4.5 million for the settlement of class action litigation in which the
Company was a defendant and various non-recurring charges totaling $3.1 million.
Without the effect of these non-recurring items, operating expenses in 1998
would have been $135.4 million. The company's ability to maintain consistent
operating expenses during a period of high growth reflects both strong cost
control and the effect of higher deferred loan origination costs.
Provision for Income Taxes
The provision for income taxes in 1999 was $45.7 million, which represents an
effective rate of 38.5%. This compares to $34.7 million, or 39.6% in 1998 and
$29.7 million, or 39.1% in 1997.
Financial Condition
Allowance for Credit Losses
In order to establish the Company's allowance for credit losses, the consumer
finance receivables portfolio is segmented into two categories: real estate
secured and non-real estate secured (personal loans and retail sales contracts).
The determination of the level of the allowance for credit losses and,
correspondingly, the provision for loan losses for these homogeneous loan pools
rests upon various judgments and assumptions used to determine the risk
characteristics of each portfolio. These judgments are supported by analyses
that fall into three general categories: (i) economic conditions as they relate
to the Company's current customer base and geographic distribution; (ii) a
predictive analysis of the outcome of the current portfolio (a migration
analysis); and (iii) prior loan loss experience. Additionally, every real estate
secured loan that reaches 60 days delinquency is reviewed by the Company's
credit administration management to assess collectibility and determine a future
course of action, at times resulting in the Company foreclosing on the property.
18
Activity in the Company's allowance for credit losses is as follows:
Year Ended December 31,
----------------------------------------------------
(Dollars in thousands) 1999 1998 1997
------------- ------------- -------------
Balance, January 1 $ 80,493 $ 74,323 $ 70,045
Provision for credit losses 100,590 79,760 66,600
Amounts charged off:
Real estate secured loans (1,807) (2,125) (1,292)
Personal loans (82,438) (73,210) (64,460)
Retail sales contracts (12,558) (14,417) (13,946)
-------------- -------------- --------------
(96,803) (89,752) (79,698)
Recoveries:
Real estate secured loans 398 521 556
Personal loans 12,629 12,593 11,538
Retail sales contracts 3,001 2,774 2,553
------------- ------------- -------------
16,028 15,888 14,647
------------- ------------- -------------
Net charge-offs (80,775) (73,864) (65,051)
Allowances on notes purchased - 274 2,729
------------- ------------- -------------
Balance, December 31 $ 100,308 $ 80,493 $ 74,323
============= ============= =============
Allowance for credit losses as a
percentage of December 31 consumer
finance receivables (excluding unearned
finance charges and deferred loan fees) 3.3% 3.1% 3.2%
Net charge-offs as a percentage of average
consumer finance receivables (excluding
unearned finance charges and deferred
loan fees) 2.9% 3.1% 3.0%
Provision for credit losses as a percentage
of average consumer finance receivables
(excluding unearned finance charges and
deferred loan fees) 3.6% 3.4% 3.0%
While charge-offs as a percentage of average consumer finance receivables have
decreased in recent years, a number of underlying factors have prompted
management to increase the allowance for credit losses. Included in the
assessment to determine the allowance for credit losses at December 31, 1999 are
the following qualitative factors:
o Changing economic conditions - although the Company's economic forecast
indicates that overall, the U.S. economy should remain strong, there are
several underlying trends which are beginning to impact the performance of
the Company's portfolio. Current rising interest rates may have the effect
of overextending some customers, many of whom maintain variable-rate credit
cards and first mortgages from other lenders.
o There has recently been a slight deterioration in late stage (60 days or
more) delinquency and increasing bankruptcy in the personal loan
portfolios. These trends are being closely monitored and appropriate action
is being taken. Nonetheless, these factors are considered in the
establishment of the allowance.
19
o Recent rapid growth in the portfolio - there is some potential risk in
strong growth via the extension of additional credit to existing customers.
In addition, there is a natural lag effect in charge-offs as a portfolio
grows. Loans tend not to become delinquent until after they have been in
the portfolio for some time. Thus, the charge-off rate in a rapidly growing
portfolio will tend to over-state the credit quality of the portfolio.
Management analyzes the portfolio on a vintage basis (by period of
origination) and has not detected any areas of significant concern.
Nonetheless, the charge-off ratio can not be relied upon solely as an
indicator of portfolio credit quality.
o Recent expansion into new markets - the Company has recently opened new
branches in Illinois and acquired several branches in new markets in
Kentucky. While due diligence and care was taken with assessing the
creditworthiness of these geographic areas and acquired portfolios,
management expects higher losses initially upon entry into new markets and
from the recent acquisition, and accordingly has established higher
allowance for credit losses
Due to the significant growth in the portfolio during the year, coupled with the
presence of the above factors at December 31, 1999, the allowance for credit
losses increased 24.6% as compared to December 31, 1998. Management considers
the allowance for credit losses adequate to cover losses inherent in the loan
portfolio at December 31, 1999. No assurance can be given that the Company will
not, in any particular period, sustain credit losses that are sizable in
relation to the amount reserved, or that subsequent evaluation of the portfolio,
in light of the factors then prevailing, including economic conditions and our
ongoing examinations process and that of our regulators, will not require
significant increases in the allowance for credit losses.
The following table sets forth, by loan type, the amount of receivables
delinquent for 60 days or more, on a contractual basis, and the ratio of that
amount to gross consumer finance receivables outstanding:
(Dollars in thousands) December 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- --------------------- -------------------
Real estate secured loans $ 9,259 0.6% $ 8,093 0.6% $ 8,473 0.8%
Personal loans 62,875 4.0 56,449 4.1 51,613 4.3
Retail sales contracts 9,137 2.8 10,171 3.1 11,498 3.2
----------- -------- --------- -------- -------- ------
Total $ 81,271 2.3% $ 74,713 2.5% $ 71,584 2.7%
=========== ======= ========== ======= ========= ======
20
At December 31, 1999 and 1998, the Company held foreclosed single-family
dwellings with a carrying value of approximately $3.6 million and $2.6 million.
These balances total 0.3% and 0.2% of the real estate secured loans outstanding
as of these dates.
Asset / Liability Management
The Company's long-range profitability depends not only on the success of the
services offered to its customers and the credit quality of its portfolio, but
also the extent to which earnings are not negatively affected by changes in
interest rates. Accordingly, the Company's philosophy is to maintain an
approximate match of the interest rate sensitivity between its interest-bearing
assets and liabilities. The Company's consumer finance receivables are primarily
fixed rate and have initial terms ranging from 3 to 360 months. However, loans
are generally paid off or refinanced prior to their stated maturity. Therefore,
the Company's asset/liability management requires a high degree of analysis and
estimation. The Company funds its interest-bearing assets through both
internally generated equity and external debt financing. See Item 7a. for
further discussion.
Liquidity
The Company funds its operations through a variety of corporate borrowings. The
primary source of these borrowings is corporate debt securities issued by the
Company. At December 31, 1999, twelve different fixed-rate senior debt issues
totaling $2.0 billion were outstanding, with a weighted average cost of 6.7%. To
meet the Company's short-term funding needs, daily trades of commercial paper
are executed. The Company has a commercial paper program with several investment
banks which provides $700 million in borrowing capacity. At December 31, 1999,
twenty-two different commercial paper borrowings totaling $242.2 million were
outstanding, with a weighted average cost of 6.2%. The Company's targeted
funding strategy is to maintain a mix between long and short-term borrowings of
75% to 25%. At December 31, 1999, the split between long and short-term was
approximately 84% to 16%.This mix arose because, towards the end of 1999, the
Company intentionally shifted to long-term debt, in part to mitigate the Year
2000 funding risk.
FCIB raises funds through both customer deposits and borrowings with the Federal
Home Loan Bank of Topeka ("FHLB"). At December 31, 1999, the banking
subsidiary's outstanding debt totaled $305.8 million, with a weighted average
cost of 5.7%.
The Company also maintains two revolving credit agreements with twenty-one
syndicate lenders which provide a credit line of up to $1.2 billion primarily to
support the commercial paper borrowings, thus providing greater than 1:1
coverage of the outstanding borrowings at any given time. Of this amount,
Washington Mutual has the ability to borrow up to $500 million. There were no
borrowings under these revolving credit agreements at December 31, 1999.
21
The following table shows selected sources (uses) of cash:
(Dollars in thousands) Year Ended December 31,
----------------------------------------------------
1999 1998 1997
------------ -------------- ----------
Operations $ 230,737 $ 170,668 $ 143,193
Net issuances and repayments of debt $ 367,500 $ 181,277 $ 96,117
Net originations and purchases
of consumer finance receivables $ (573,333) $ (321,992) $ (199,898)
Dividends paid $ (14,500) $ (36,500) $ (17,500)
Capital Management
The Company establishes equity leverage targets based upon the ratio of debt
(including customer deposits) to tangible equity. The debt to tangible equity
ratio at December 31, 1999 of 6.00:1 was intentionally increased from 5.86:1 at
December 31, 1998. The determination of the Company's dividend payments and
resulting capital leverage is managed in a manner consistent with the Company's
desire to maintain strong and improving credit ratings. In addition, provisions
of certain of the Company's debt agreements restrict the payment of dividends to
a maximum prescribed proportion of cumulative earnings and contributed capital.
At December 31, 1999, approximately $126 million was available under the debt
agreement restriction for future dividends.
In addition, FCIB met all FDIC requirements to be categorized as well
capitalized at December 31, 1999.
Year 2000
This section contains forward-looking statements that have been prepared on the
basis of management's best judgments and currently available information and
constitutes a Year 2000 Readiness Disclosure within the meaning of the Year 2000
Readiness Disclosure Act of 1998. These forward-looking statements are
inherently subject to significant business, third-party and regulatory
uncertainties and contingencies, many of which are beyond the control of the
Company. In addition, these forward-looking statements are based on current
assessments and remediation plans that are subject to representations of third
party service providers and are subject to change. Accordingly, there can be no
assurance that the Company's results of operations will not be adversely
affected by damages resulting from the Year 2000 issue.
The Company implemented a company-wide program to renovate, test and document
the readiness of its electronic systems, programs and processes ("Computer
Systems") and facilities to properly recognize dates to and through the year
2000. To date, neither the Company nor any of its service providers have
experienced any significant Computer Systems failures as a result of the Year
2000 issue. To date, the Company has not had any claims from customers with
respect to any damages resulting from Year 2000 issues.
22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The tables below represent in tabular form contractual balances of the Company's
financial instruments at their expected maturity dates as well as the fair value
of those financial instruments at December 31, 1999 and 1998. The expected
maturity categories take into consideration historical prepayment speeds as well
as actual amortization of principal and do not take into consideration
reinvestment of cash. Principal prepayments are the amounts of principal
reduction over and above normal amortization. The weighted average interest
rates for the various assets and liabilities presented are actual as of December
31, 1999 and 1998. The principal / notional amounts and fair values presented in
the table do not include the reserve for loan losses or recourse liability. See
"Notes to Consolidated Financial Statements - Note 16: Approximate Fair Values
of Financial Instruments."
Principal/Notional Amount Maturing in:
------------------------------------------------------------------- Fair Value
December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
---------- --------- -------- --------- -------- ---------- --------- ----------
Rate sensitive assets:
Adjustable rate loans $ 69,063 $ 38,136 $ 22,462 $ 13,573 $ 8,426 $ 5,370 $ 157,030 $ 150,957
Average interest rate 11.98% 11.68% 11.36% 11.02% 10.67% 10.37% 11.61%
Fixed rate loans 1,392,480 845,722 398,112 136,991 61,554 69,868 2,904,727 2,902,628
Average interest rate 19.64 19.30 17.75 14.50 13.10 11.70 18.71
Adjustable rate securities 5,984 - - - - - 5,984 5,984
Average interest rate 7.00 - - - - - 7.00
Fixed rate securities 24,160 22,586 17,399 26,591 18,315 13,929 122,980 122,980
Average interest rate 8.05 5.91 5.28 6.25 7.11 6.14 6.52
Cash and cash equivalents 40,008 - - - - - 40,008 40,008
Average interest rate 5.90 - - - - - 5.90
---------- --------- -------- --------- ------- --------- -- -------
$1,531,695 $ 906,444 $437,973 $ 177,155$ 88,295 $ 89,167 $3,230,729$ 3,222,557
========== ========= ======== ========= ======= ========= ========== ==========
18.70% 18.65% 16.93% 13.00% 11.63% 10.75% 17.72%
===== ===== ===== ===== ===== ===== =====
Rate sensitive liabilities:
Savings and money
market accounts $ 10,076 $ 4,216 $ 144 $ 143 $ 143 $ 287 $ 15,009 $ 15,009
Average interest rate 3.86% 3.86% 3.62% 3.62% 3.62% 3.62% 3.85%
Time deposit accounts 129,229 11,519 11,519 8,914 6,309 7,435 174,925 172,490
Average interest rate 4.71 5.74 5.71 5.65 5.57 5.59 4.96
Short-term and adjustable-
rate borrowings 284,175 63,900 - 10,000 - - 358,075 358,099
Average interest rate 6.20 5.40 - 5.30 - - 6.03
Fixed-rate borrowings 245,888 550,000 300,000 150,000 500,000 250,000 1,995,888 1,969,769
Average interest rate 6.33 6.76 6.15 6.50 6.77 7.25 6.66
---------- --------- -------- --------- ------- --------- ------
$ 669,368 $ 629,635 $311,663 $ 169,057 $506,452 $ 257,722 $2,543,897 $2,515,367
========== ========= ======== ========= ======== ========= ========== ==========
5.92% 6.58% 6.13% 6.38% 6.75% 7.20% 6.44%
==== ==== ==== ==== ==== ==== ====
23
Principal/Notional Amount Maturing in:
---------------------------------------------------------------- Fair Value
December 31,
1999 2000 2001 2002 2003 Thereafter Total 1998
-------- --------- -------- --------- --------- ---------- --------- -----------
Rate sensitive assets:
Adjustable rate loans $ 82,224 $ 44,119 $ 28,094 $ 17,836 $ 11,211 $ 7,029 $ 190,513 $ 160,531
Average interest rate 11.66% 10.77% 10.68% 10.62% 10.56% 10.65% 11.11%
Fixed rate loans 1,148,636 700,615 326,380 106,794 46,347 55,111 2,383,883 2,369,955
Average interest rate 19.94 19.61 18.17 14.67 13.08 10.37 19.01
Adjustable rate securities 3,723 - - - - - 3,723 3,723
Average interest rate 7.00 - - - - - 7.00
Fixed rate securities 14,807 14,151 16,203 17,574 31,116 53,246 147,097 147,097
Average interest rate 4.03 6.11 6.75 7.04 6.79 6.76 6.46
Cash and cash equivalents 24,180 - - - - - 24,180 24,180
Average interest rate - - - - - - -
---------- -------- -------- --------- --------- --------- ----------
$1,273,570 $758,885 $370,677 $ 142,204 $ 88,674 $ 115,386 $2,749,396 $2,705,486
========== ======== ======== ========= ======== ========= ========== ==========
18.80% 18.84% 17.10% 13.22% 10.55% 8.72% 17.61%
===== ===== ===== ===== ===== ==== =====
Rate sensitive liabilities:
Savings and money
market accounts $ 11,303 $ 4,749 $ 134 $ 134 $ 134 $ 268 $ 16,722 $ 16,722
Average interest rate 3.84% 3.84% 3.66% 3.66% 3.66% 3.66% 3.83%
Time deposit accounts 118,518 12,461 12,461 12,461 12,461 2,434 170,796 172,995
Average interest rate 5.80 5.94 5.99 5.99 5.99 6.01 5.85
Short-term and adjustable-
rate borrowings 560,823 - 18,900 - 10,000 - 589,723 589,723
Average interest rate 5.67 - 4.91 - 5.30 - 5.64
Fixed-rate borrowings 299,430 249,497 549,669 149,790 149,881 - 1,398,267 1,422,804
Average interest rate 7.02 6.40 6.81 6.37 6.59 - 6.71
-------- --------- -------- --------- --------- --------- ---------
$990,074 $ 266,707 $581,164 $ 162,385 $ 172,476 $ 2,702 $2,175,508 $ 2,202,244
======== ========= ======== ========= ========= ========= ========== ===========
6.07% 6.33% 6.73% 6.34% 6.47% 5.78% 6.33%
==== ==== ==== ==== ==== ==== ====
The differences in the asset balances between December 31, 1998 and December 31,
1999 relate primarily to the $481.3 million increase in interest-rate sensitive
assets due to growth in the loan portfolio. The asset maturity profile has
remained consistent with prior years.
The differences in the maturities of liabilities were primarily related to the
increase of longer-term maturities, with a relative decrease of short-term
maturities. This difference is a result of the intentional decision to lengthen
maturities in advance of the 1999 year-end to offset Year 2000 liquidity
concerns.
24
Item 8. Financial Statements and Supplementary Data
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholder of Washington Mutual Finance
Corporation:
We have audited the accompanying consolidated statements of financial condition
of Washington Mutual Finance Corporation (formerly known as Aristar, Inc.) and
subsidiaries (the "Corporation") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, comprehensive income and retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated 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, such consolidated financial statements present fairly, in all
material respects, the financial condition of Washington Mutual Finance
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Tampa, Florida
January 18, 2000
25
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Financial Condition
(Dollars in thousands, except par value) December 31,
--------------------------------------
1999 1998
------------------ ----------------
ASSETS
Consumer finance receivables, net $ 2,961,449 $ 2,493,903
Investment securities 128,964 150,820
Cash and cash equivalents 40,008 24,180
Property, equipment and leasehold improvements, net 22,112 12,411
Goodwill, net 51,340 48,166
Other assets 23,684 15,230
-------------- --------------
TOTAL ASSETS $ 3,227,557 $ 2,744,710
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Short-term debt $ 284,175 $ 560,823
Long-term debt 2,069,788 1,427,167
-------------- --------------
Total debt 2,353,963 1,987,990
Customer deposits 189,934 187,518
Accounts payable and other liabilities 208,502 149,872
-------------- --------------
Total liabilities 2,752,399 2,325,380
-------------- --------------
Commitments and contingencies
(Notes 12 and 13)
Stockholder's equity
Common stock: $1.00 par value;
10,000 shares authorized; 1,000
shares issued and outstanding 1 1
Paid-in capital 48,960 48,960
Retained earnings 427,635 369,143
Accumulated other comprehensive (loss) income (1,438) 1,226
--------------- --------------
Total stockholder's equity 475,158 419,330
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 3,227,557 $ 2,744,710
============== ==============
See Notes to Consolidated Financial Statements.
26
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Operations, Comprehensive Income
and Retained Earnings
Year Ended December 31,
-------------------------------------------
(Dollars in thousands) 1999 1998 1997
----------- ----------- -----------
Loan interest and fee income $ 464,179 $ 404,954 $ 365,719
Investment securities income 10,825 11,449 10,373
----------- ----------- -----------
Total interest income 475,004 416,403 376,092
Interest and debt expense 149,609 133,211 128,887
----------- ----------- -----------
Net interest income before
provision for credit losses 325,395 283,192 247,205
Provision for credit losses 100,590 79,760 66,600
----------- ----------- -----------
Net interest income 224,805 203,432 180,605
----------- ----------- -----------
Other operating income 29,501 27,147 26,555
----------- ----------- -----------
Operating expenses:
Personnel 78,259 76,664 69,468
Occupancy 11,414 10,434 10,068
Advertising 8,072 6,516 5,807
Goodwill amortization 3,960 3,617 7,064
Other 33,889 45,761 38,722
----------- ----------- -----------
135,594 142,992 131,129
----------- ----------- -----------
Income before income taxes 118,712 87,587 76,031
Provision for federal and state income taxes 45,720 34,700 29,744
----------- ----------- -----------
Net income 72,992 52,887 46,287
Net unrealized holding (losses) gains on
securities arising during period, net of tax (2,664) 693 157
----------- ----------- -----------
Comprehensive income $ 70,328 $ 53,580 $ 46,444
=========== =========== ===========
Retained earnings
Beginning of year $ 369,143 $ 352,756 $ 323,969
Net income 72,992 52,887 46,287
Dividends (14,500) (36,500) (17,500)
----------- ----------- -----------
End of year $ 427,635 $ 369,143 $ 352,756
=========== =========== ===========
See Notes to Consolidated Financial Statements.
27
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
---------------------------------------------------
(Dollars in thousands) 1999 1998 1997
-------------- ------------ ------------
Operating activities
Net income $ 72,992 $ 52,887 $ 46,287
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 100,590 79,760 66,600
Depreciation and amortization 12,577 8,611 11,282
Increase in accounts payable
and other liabilities 60,165 31,622 12,491
(Increase) decrease in other assets (15,587) (2,212) 6,533
-------------- ------------ ------------
Net cash provided by operating activities 230,737 170,668 143,193
-------------- ------------ ------------
Investing activities
Investment securities purchased (46,460) (91,477) (62,582)
Investment securities matured and sold 64,131 96,275 45,454
Net (increase) in consumer finance receivables (573,333) (321,992) (199,898)
Net (increase) in property, equipment and leasehold
improvements (12,247) (4,583) (998)
-------------- ------------ -------------
Net cash used in investing activities (567,909) (321,777) (218,024)
--------------- ------------ -------------
Financing activities
Net increase in customer deposits 2,416 24,333 17,047
Net (decrease) increase in short-term debt (276,648) 203,291 (40,474)
Proceeds from issuance of long-term debt 941,732 209,653 326,344
Repayments of long-term debt (300,000) (256,000) (206,800)
Dividends paid (14,500) (36,500) (17,500)
Proceeds from affiliate transfer - 4,066 -
-------------- ------------ -------------
Net cash provided by financing activities 353,000 148,843 78,617
-------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 15,828 (2,266) 3,786
Cash and cash equivalents
Beginning of year 24,180 26,446 22,660
-------------- ------------ ------------
End of year $ 40,008 $ 24,180 $ 26,446
============== ============ ============
Supplemental disclosures of cash flow information
Interest paid $ 140,127 $ 133,160 $ 125,841
Intercompany payments in lieu of federal and state
income taxes, net of refunds $ 38,794 $ 30,881 $ 23,011
See Notes to Consolidated Financial Statements.
28
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Ownership and Operations
At June 30, 1997, Washington Mutual Finance Corporation was an indirect,
wholly-owned subsidiary of Great Western Financial Corporation ("GWFC"). On July
1, 1997, GWFC merged with and into a wholly-owned subsidiary of Washington
Mutual, Inc. ("Washington Mutual") (the "Great Western Merger"). As a result of
this merger, the Company became an indirect, wholly-owned subsidiary of
Washington Mutual. The Great Western Merger was accounted for as a pooling of
interests. Accordingly, these financial statements reflect historical cost.
Washington Mutual Finance Corporation and its subsidiaries, all of which are
wholly-owned, are referred to hereinafter as the "Company." Effective March 1,
2000, the Company changed it's name from Aristar, Inc.
The Company is engaged primarily in the consumer financial services business and
its operations consist principally of a network of approximately 540 branch
offices located in 25 states, primarily in the Southeast and Southwest. These
offices generally operate under the names Blazer Financial Services, City
Finance Company and First Community Financial Services. Beginning in November
1999 and continuing throughout the first half of 2000, the office names are
being changed to Washington Mutual Finance. The Company makes secured and
unsecured consumer installment loans and purchases retail installment contracts
from local retail establishments. These consumer credit transactions are
primarily for personal, family or household purposes. The Company also engages
in the industrial banking business through its subsidiary, First Community
Industrial Bank ("FCIB"), which has branches in Colorado and Utah. In addition
to making consumer installment loans and purchasing retail installment
contracts, FCIB also takes customers' savings deposits.
Note 2 Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of Washington Mutual Finance Corporation and its subsidiaries, all of
which are wholly-owned, after elimination of all intercompany balances and
transactions. Certain amounts in prior years have been reclassified to conform
to the current year's presentation.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income Recognition from Finance Operations. Unearned finance charges on all
types of consumer finance receivables are recognized on an accrual basis, using
the interest method. Accrual generally is suspended when payments are more than
three months contractually overdue. Loan fees and directly related lending costs
are deferred and amortized using the interest method over the contractual life
of the related receivables.
29
Provision and Allowance for Credit Losses. The allowance for credit losses is
maintained at a level sufficient to provide for estimated credit losses based on
evaluating known and inherent risks in the consumer finance receivables
portfolio. The Company provides, through charges to income, an allowance for
credit losses which, based upon management's evaluation of numerous factors,
including economic conditions, a predictive analysis of the outcome of the
current portfolio and prior credit loss experience, is deemed adequate to cover
reasonably expected losses inherent in outstanding receivables. The Company's
consumer finance receivables are a large group of small-balance homogenous loans
that are collectively evaluated for impairment. Additionally, every real estate
secured loan that reaches 60 days delinquency is reviewed by the Company's
credit administration management to assess collectibility and future course of
action.
Losses on receivables are charged to the allowance for credit losses based upon
the number of days delinquent or when collectibility becomes doubtful and the
underlying collateral, if any, is considered insufficient to liquidate the
receivable balance. Non-real estate secured, delinquent receivables are
generally charged off when they are 180 days contractually delinquent.
Recoveries on previously written-off receivables are credited to the allowance.
Investment Securities. Debt and equity securities are classified as available
for sale and are reported at fair value, with unrealized gains and losses
excluded from earnings and reported, net of taxes, as a separate component of
stockholder's equity and comprehensive income. Gains and losses on investment
securities are recorded when realized on a specific identity basis. Investment
security transactions are recorded using trade date accounting.
Property, Equipment and Leasehold Improvements. Property, equipment and
leasehold improvements are stated at cost, net of accumulated depreciation.
Depreciation is provided for principally on the straight-line method over the
estimated useful life, ranging from three to thirty years, or, if less, the term
of the lease. At December 31, 1999 and 1998, accumulated depreciation and
amortization totaled $26.3 million and $24.1 million.
Goodwill. The excess of cost over the fair value of net assets of companies
acquired is amortized on a straight-line basis, generally over periods of 6 to
25 years. The carrying value of goodwill is regularly reviewed for indicators of
impairment in value, which in management's view are other than temporary,
including unexpected or adverse changes in the following: 1) the economic or
competitive environments in which the Company operates; 2) profitability
analyses; and 3) cash flow analyses. If facts and circumstances suggest that
goodwill is impaired, the Company assesses the fair value of the underlying
business based on expected undiscounted net cash flows and reduces goodwill to
the estimated fair value. At December 31, 1999 and 1998, accumulated
amortization totaled $69.3 million and $65.3 million.
Income Taxes. The Company is included in the consolidated Federal income tax
return filed by Washington Mutual. Federal income taxes are paid to Washington
Mutual. Federal income taxes are allocated between Washington Mutual and its
subsidiaries in proportion to the respective contribution to consolidated income
or loss. State income tax expense represents the amount of taxes either owed by
the Company or that the Company would have paid on a separate entity basis, when
the Company is included in Washington Mutual's consolidated state income tax
returns. Deferred income taxes are provided on elements of income or expense
that are recognized in different periods for financial and tax reporting
purposes.
Taxes on income are determined by using the asset and liability method. This
approach requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company considers expected future events other than enactments
of changes in the tax law or rates.
30
Statements of Cash Flows. For purposes of reporting cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.
Fair Value Disclosures. Quoted market prices are used, where available, to
estimate the fair value of the Company's financial instruments. Because no
quoted market prices exist for a significant portion of the Company's financial
instruments, fair value is estimated using comparable market prices for similar
instruments or using management's estimates of appropriate discount rates and
cash flows for the underlying asset or liability. A change in management's
assumptions could significantly affect these estimates. Accordingly, the
Company's fair value estimates are not necessarily indicative of the value which
would be realized upon disposition of the financial instruments.
Recently Issued Accounting Standard Not Yet Adopted. SFAS No.133, "Accounting
for Derivative Instruments and Hedging Activities," was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Financial Accounting Standards Board has issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133," which delays the implementation date of
SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. The
Company will implement this statement on January 1, 2001. The impact of the
adoption of the provisions of this statement on the Company's results of
operations or financial condition has not yet been determined.
Note 3 Transfers from Related Parties
In May 1999, Washington Mutual transferred to the Company a portion of its
consumer finance business, hereinafter referred to as Home Consumer Finance of
America ("HCFA"). HCFA was a division of H.F. Ahmanson & Company, which was
acquired by Washington Mutual in October, 1998. HCFA was comprised primarily of
approximately $48.5 million in net consumer finance receivables, and 6 branch
locations. The Company paid an amount which approximated the book value of the
assets acquired.
31
Note 4 Business Combinations
On October 29, 1999, the Company acquired substantially all of the assets of
Peoples Security Finance Company, Inc., a subsidiary of CNB Bancshares, Inc. As
a result, the Company added twenty-one new branches in Kentucky and Tennessee
with net consumer finance receivables of approximately $45 million. This
acquisition also provided the Company with an opportunity to gain market share
in geographical areas in which the Company had little presence and strengthen
its share of other markets. The acquisition was accounted for as a purchase.
Accordingly, the assets acquired were recorded on the Company's books at their
respective fair values at the time of acquisition. Goodwill of approximately
$6.8 million was recorded, which is being amortized over 10 years.
Note 5 Consumer Finance Receivables
Consumer finance receivables at December 31, 1999 and 1998 are summarized as
follows:
(Dollars in thousands) 1999 1998
------------- -------------
Consumer finance receivables:
Real estate secured loans $ 1,630,496 $ 1,269,439
Personal loans 1,566,682 1,361,820
Retail sales contracts 327,914 328,254
------------- -------------
Gross consumer finance receivables 3,525,092 2,959,513
Less: Unearned finance charges and
deferred loan fees (463,335) (385,117)
Allowance for credit losses (100,308) (80,493)
------------- -------------
Consumer finance receivables, net $ 2,961,449 $ 2,493,903
============= =============
The amount of gross nonaccruing consumer finance receivables was approximately
$59.4 million and $53.4 million at December 31, 1999 and 1998. The amount of
interest that would have been accrued on these consumer finance receivables was
approximately $9.5 million and $8.9 million.
32
Activity in the Company's allowance for credit losses is as follows:
Year Ended December 31,
----------------------------------------------
(Dollars in thousands) 1999 1998 1997
------------- ------------- -------------
Balance, January 1 $ 80,493 $ 74,323 $ 70,045
Provision for credit losses 100,590 79,760 66,600
Amounts charged off:
Real estate secured loans (1,807) (2,125) (1,292)
Personal loans (82,438) (73,210) (64,460)
Retail sales contracts (12,558) (14,417) (13,946)
-------------- ------------- -------------
(96,803) (89,752) (79,698)
Recoveries:
Real estate secured loans 398 521 556
Personal loans 12,629 12,593 11,538
Retail sales contracts 3,001 2,774 2,553
------------- ------------- -------------
16,028 15,888 14,647
------------- ------------- -------------
Net charge-offs (80,775) (73,864) 65,051)
Allowances on notes purchased - 274 2,729
------------- ------------- -------------
Balance, December 31 $ 100,308 $ 80,493 $ 74,323
============= ============= =============
Contractual maturities, excluding unearned finance charges and deferred loan
fees, at December 31, 1999 are as follows:
Over 1 But
Within Within Over
(Dollars in thousands) 1 year 5 years 5 years Total
----------- ------------- ------------- --------------
Real estate secured loans $ 168,498 $ 395,885 $ 868,458 $ 1,432,841
Personal loans 78,598 1,247,134 8,618 1,334,350
Retail sales contracts 33,679 256,235 4,652 294,566
----------- ------------- ------------- --------------
$ 280,775 $ 1,899,254 $ 881,728 $ 3,061,757
=========== ============= ============= ==============
Consumer loans have maximum terms of 360 months, while retail sales contracts
have maximum terms of 60 months. The weighted average contractual term of all
consumer finance receivables written during the years ended December 31, 1999
and 1998 was 71 months and 56 months with the majority of loans providing for a
fixed rate of interest over the contractual life of the loan. Experience has
shown that a substantial portion of the consumer finance receivables will be
renewed or repaid prior to contractual maturity. Therefore, the preceding
information as to contractual maturities should not be regarded as a forecast of
future cash collections.
33
Because the Company primarily lends to consumers, it did not have receivables
from any industry group that comprised 10 percent or more of total consumer
finance receivables at December 31, 1999. Geographic diversification of consumer
finance receivables reduces the concentration of credit risk associated with a
recession in any one region.
The largest concentrations of net consumer finance receivables, by state were as
follows:
(Dollars in thousands) December 31,
-------------------------------------------------
1999 1998
---------------------- -------------------
Amount Percent Amount Percent
----------- -------- ------------ ---------
Colorado $ 309,384 10% $ 228,999 9%
Tennessee 306,499 10 263,923 11
Texas 293,836 10 341,159 14
North Carolina 257,719 9 223,935 9
California 232,493 8 149,316 6
Florida 229,132 8 104,372 4
Louisiana 134,303 5 121,239 5
South Carolina 162,595 5 142,950 6
Virginia 140,870 5 126,182 5
Mississippi 121,507 4 106,889 4
Other 773,111 26 684,939 27
---------- -------- ---------- --------
Total $ 2,961,449 100% $ 2,493,903 100%
=========== ======== ============ ========
34
Note 6 Investment Securities
At December 31, 1999 and 1998, all investment securities were classified as
available-for-sale and reported at fair value. Investment securities as of
December 31, 1999 and 1998 are as follows:
(Dollars in thousands) December 31, 1999
------------------------------------------------------------
Gross Unrealized Approximate
Original Amortized ---------------- Fair
Cost Cost Gains Losses Value
----------- ----------- --------- -------- ----------
Government obligations $ 37,875 $ 37,887 $ 28 $ 629 $ 37,286
Corporate obligations 80,392 80,756 96 1,420 79,432
Certificates of deposit
and other 12,789 12,452 114 320 12,246
----------- ----------- --------- -------- ----------
$ 131,056 $ 131,095 $ 238 $ 2,369 $ 128,964
=========== =========== ========= ======== ==========
(Dollars in thousands) December 31, 1998
------------------------------------------------------------
Gross Unrealized Approximate
Original Amortized ---------------- Fair
Cost Cost Gains Losses Value
----------- ----------- --------- -------- ----------
Government obligations $ 18,637 $ 18,649 $ 183 $ 42 $ 18,790
Corporate obligations 95,813 96,075 1,739 93 97,721
Certificates of deposit
and other 34,489 34,028 443 162 34,309
----------- ----------- --------- -------- ----------
$ 148,939 $ 148,752 $ 2,365 $ 297 $ 150,820
=========== =========== ========= ======== ==========
There were no significant realized gains or losses during 1999, 1998 or 1997.
The following table presents the maturity of the investment securities at
December 31, 1999:
(Dollars in thousands) Approximate
Amortized Fair
Cost Value
------------ --------------
Due in one year or less $ 23,257 $ 23,210
Due after one year through five years 75,104 73,271
Due after five years through ten years 29,784 29,533
Due after ten years 2,950 2,950
------------ -------------
$ 131,095 $ 128,964
============ =============
35
Note 7 Short-term Debt
Short-term debt at December 31, 1999 and 1998 consisted primarily of commercial
paper. Interest expense in 1999 and 1998 related to commercial paper was $18.5
million and $20.6 million.
In addition, during the year, the Company maintained short-term borrowings from
the Federal Home Loan Bank of Topeka ("FHLB"). As of December 31, 1999, two
short-term fixed advances were outstanding, one in the amount of $31.5 million,
maturing January 24, 2000, with an interest rate of 5.89%. The other borrowing
was $10.5 million, maturing March 2, 2000, with a fixed interest rate of 5.96%.
Interest expense in 1999, 1998 and 1997 related to short-term FHLB borrowings
was $1.4 million, $26 thousand, and $0. FHLB borrowings (both short and
long-term) are secured by residential mortgage loans with a carrying value at
December 31, 1999 of $178.3 million.
Additional information concerning total short-term borrowings is as follows:
Year Ended December 31,
----------------------------------------------------
(Dollars in thousands) 1999 1998 1997
------------- --------------- --------------
Outstanding during the year
Maximum amount at any month end $ 472,945 $ 560,823 $ 471,980
Average amount $ 346,785 $ 372,317 $ 406,992
Weighted average interest rate 5.3% 5.5% 5.8%
Balance at end of year
Amount $ 284,175 $ 560,823 $ 357,532
Weighted average interest rate 6.2% 5.7% 6.1%
Weighted average interest rates include the effect of commitment fees.
Short-term notes totaling $116 million and $74 million were issued in December,
1999 and 1998. The proceeds of these notes were used to purchase investment
securities and were repaid through liquidation of these securities in the month
following issuance. This short-term debt has been reflected net of the
securities balances in the accompanying Consolidated Statements of Financial
Condition.
In August 1999, the Company and Washington Mutual entered into two revolving
credit agreements with the Chase Manhattan Bank as administrative agent: a $600
million 364-day facility and a $600 million four-year facility, each to be used
for general corporate purposes, including back-up for the Company's and
Washington Mutual's commercial paper programs. The Company may borrow a total of
$1.2 billion under these facilities, and Washington Mutual may borrow a total of
$500 million under these facilities. These credit agreements replace a $550
million revolving credit line which was previously available. There were no
borrowings under these revolving credit agreements in 1999 or 1998. These
revolving credit agreements have restrictive covenants which include: a minimum
consolidated net worth test; a limit on senior debt to the borrowing base (up to
10:1); and subsidiary debt (excluding bank deposits and intercompany debt) may
not exceed 15% of total debt. As of December 31, 1999, the Company was in
compliance with all restrictive covenants.
36
Note 8 Long-term Debt
Long-term debt at December 31, 1999 and 1998 was comprised of the following:
(Dollars in thousands) 1999 1998
------------ -----------
Senior notes and debentures (unsecured)
7.875%, due February 15, 1999 $ - $ 99,995
6.75%, due May 15, 1999 - 99,998
6.3%, due July 15, 2000 99,988 99,968
6.125%, due December 1, 2000 149,901 149,800
7.75%, due June 15, 2001 149,975 149,959
7.25%, due June 15, 2001 99,949 99,916
6.0%, due August 1, 2001 199,812 199,697
6.75%, due August 15, 2001 99,968 99,950
6.0%, due May 15, 2002 149,744 -
6.30%, due October 1, 2002 149,733 149,644
6.50%, due November 15, 2003 149,526 149,415
5.85%, due January 27, 2004 199,754 -
7.375%, due September 1, 2004 298,935 -
7.25%, due June 15, 2006 248,603 -
------------ ------------
Total senior debt 1,995,888 1,298,342
------------ ------------
Senior subordinated notes and debentures (unsecured)
7.5%, due July 1, 1999 - 99,925
------------ ------------
Federal Home Loan Bank notes (secured)
6.08%, due March 29, 2001 60,000 -
5.50%, due May 1, 2001 3,900 18,900
5.92%, due March 20, 2003 10,000 10,000
------------ ------------
Total Federal Home Loan Bank notes 73,900 28,900
------------ ------------
Total long-term debt $ 2,069,788 $ 1,427,167
============ ============
37
Aggregate maturities of long-term debt at December 31, 1999 are as follows:
(Dollars in thousands) Federal
Senior Home Loan
Debt Bank Notes Total
------------ ------------ ------------
2000 $ 249,889 $ - $ 249,889
2001 549,704 63,900 613,604
2002 299,477 - 299,477
2003 149,526 10,000 159,526
2004 498,689 - 498,689
2005 and thereafter 248,603 - 248,603
------------ ------------ ------------
$ 1,995,888 $ 73,900 $ 2,069,788
============ ============ ============
Interest expense related to senior notes outstanding in 1999, 1998 and 1997 was
$115.5 million, $100.9 million, and $95.6 million.
On May 1, 1997, the Company obtained an adjustable rate advance from the FHLB in
the amount of $21.5 million. Under the credit agreement, which matures May 1,
2001, interest is payable monthly and adjusts every seven days to a rate equal
to the FHLB's One Week Repo rate plus 10 basis points (5.50% at December 31,
1999). As a result of prepayments made in 1998 and 1999, the outstanding balance
as of December 31, 1999 was $3.9 million.
On March 20, 1998, the Company obtained an adjustable advance from the FHLB in
the amount of $10 million. On a specified day each quarter, the FHLB has the
option to call the advance at par. Under the credit agreement, which matures
March 20, 2003, interest is payable monthly and adjusts monthly to a rate equal
to the FHLB's One-Month Short-Term Advance Rate (5.68% at December 31, 1999).
On March 26, 1999, the Company obtained an adjustable rate advance from the FHLB
in the amount of $60 million. Under the credit agreement, which matures March
29, 2001, interest is payable monthly and adjusts every quarter to a rate equal
to the 3 month LIBOR rate less 10 basis points (6.08% at December 31, 1999).
Interest expense related to long-term FHLB debt in 1999, 1998 and 1997 was $3.4
million, $1.7 million, and $1.1 million.
38
Note 9 Customer Deposits
The book value of the Company's customer deposits as of December 31, 1999 and
1998 are as follows:
(Dollars in thousands) 1999 1998
--------- ----------
Money market accounts $ 13,576 $ 15,382
Savings accounts 1,434 1,340
Certificates of deposit
under $100,000 153,524 155,287
Certificates of deposit
$100,000 and over 21,400 15,509
---------- ----------
$ 189,934 $ 187,518
========== ==========
Maturities of time deposits are $129.2 million in 2000, $35.1 million in 2001,
$3.6 million in 2002 and $7.0 million thereafter.
Note 10 Income Taxes
The components of income tax expense (benefit) are as follows:
Year Ended December 31,
------------------------------------------------
(Dollars in thousands) 1999 1998 1997
------------ ------------ ----------
Current
Federal $ 35,896 $ 38,808 $ 28,567
State 8,032 6,900 5,237
Deferred 1,792 (11,008) (4,060)
------------- ------------- ----------
$ 45,720 $ 34,700 $ 29,744
============= ============= ==========
The provisions for income taxes differ from the amounts determined by
multiplying pre-tax income by the statutory Federal income tax rate of 35% for
1999, 1998 and 1997. A reconciliation between these amounts is as follows:
Year Ended December 31,
---------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
---------------------- ---------------------- ----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- --------- --------- --------- --------- --------
Income taxes at statutory rates $ 41,549 35.00% $ 30,655 35.00% $ 26,611 35.00%
Increase (reduction) in taxes
resulting from:
State income taxes, net of
Federal benefit 4,172 3.52 4,025 4.60 2,972 3.91
Other (1) (.01) 20 .01 161 .21
--------- ---------- --------- --------- -------- --------
$ 45,720 38.51% $ 34,700 39.61% $ 29,744 39.12%
========= ========== ========= ========= ========= ========
39
Deferred taxes result from temporary differences in the recognition of certain
items for tax and financial reporting purposes. The significant components of
the Company's net deferred tax asset (liability) were as follows:
December 31,
----------------------------
(Dollars in thousands) 1999 1998
----------- ------------
Deferred tax assets:
Credit loss reserves $ 40,970 $ 31,564
Employee benefits accruals 5,892 577
Unearned insurance commissions 4,678 7,466
Basis differences on premises and equipment 170 81
State taxes - 2,543
Other 2,616 8,669
----------- ------------
Total deferred tax assets 54,326 50,900
----------- ------------
Deferred tax liabilities:
Amortization of intangibles $ (10,877) $ (11,614)
State taxes (2,439) -
Loan interest and fee income (3,471) (511)
Other (674) (1,652)
----------- ------------
Total deferred tax liabilities (17,461) (13,777)
----------- ------------
Net deferred tax asset $ 36,865 $ 37,123
=========== ============
40
Note 11 Retirement and Savings Plans
Substantially all of the Company's employees participate in a noncontributory
defined contribution pension plan maintained by Washington Mutual ("the Plan").
Accumulated plan benefits and annual pension cost are derived from an allocation
formula based on the Company's total participants and the Plan's total
participants.
Pension cost (benefit) for the Company's participants for the years ended
December 31, 1999, 1998, and 1997 was $1,074,000, $(150,000) and $(150,000). Due
to the Company's participation in a multi-employer defined benefit plan,
information as to separate Company participant assets and vested benefits is not
presented.
The Company's employees also participate in an employee savings plan maintained
by Washington Mutual, which allows employees to defer part of their pre-tax
compensation until retirement. Company contributions equal 50% of the
contributions made by employees up to 6% of salary plus annual discretionary
amounts, if any, as determined by management. The Company's cost is based on the
actual contribution related to its participating employees. Total expense was
approximately $3.0 million, $2.5 million and $1.0 million for the years ended
December 31, 1999, 1998 and 1997.
The Company's employees who retired prior to July 1, 1997 also participate in
GWFC's defined benefit postretirement plan ("the Benefit Plan") which covers a
portion of the costs of medical and life insurance coverage to eligible
employees and dependents based on age and length of service. Medical coverage
options are the same as available to active employees. The accumulated
postretirement benefit obligation and related expense are derived from an
allocation formula based on the Company's total participants and the Benefit
Plan's total participants.
The net postretirement medical and life insurance expense allocated to the
Company for the years ended December 31, 1999, 1998 and 1997 was approximately
$245,000, $344,000 and $358,000.
Note 12 Leases
The Company leases office space, computers, office equipment and automobiles,
generally for terms of five or fewer years.
The Company has no material capital leases. Under operating leases that have
initial or remaining noncancelable lease terms in excess of one year,
approximate aggregate annual minimum rentals are $8.8 million in 2000; $6.8
million in 2001; $5.2 million in 2002; $3.3 million in 2003; and $1.7 million in
2004. Rent expense for the years ended December 31, 1999, 1998 and 1997 was
$11.9
Note 13 Contingencies
The Company and certain of its subsidiaries are parties to various lawsuits and
proceedings arising in the ordinary course of business. The Company has also
been named as a defendant in a number of class action suits, in which various
industry-wide practices arising from routine business activities are being
challenged and various damages are being sought. Certain of these lawsuits and
proceedings arise in jurisdictions, such as Alabama and Mississippi, that permit
damage awards disproportionate to the actual economic damages incurred. Based
upon information presently available, the Company believes that the total
amounts that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Company's
consolidated results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama and Mississippi continues to increase
and creates the potential for an unpredictable judgment in any given suit.
41
Note 14 Transactions with Related Parties
Significant transactions with Washington Mutual or its subsidiaries in addition
to those described in Note 3 are identified as follows:
o Washington Mutual Bank FA, another subsidiary of Washington Mutual,
provided the Company with certain administrative services, including human
resources and cash management, for which the Company paid management fees
of $1.7 million in 1999, $1.1 million in 1998 and $1.9 million in 1997.
o The Company made payments to Washington Mutual pursuant to a tax allocation
policy and in connection with the retirement and savings plans.
o Included in accounts payable and other liabilities are amounts due to
Washington Mutual. At December 31, 1999 and 1998, these amounts totaled
$35.8 million and $6.7 million.
Note 15 Lines of Business
The Company is managed along two major lines of business: consumer finance and
consumer banking. The Company provides information on the performance of these
business segments which are strategic lines of business managed by the Executive
Committee under the direction of the Chief Executive Officer. The financial
performance of these business lines is measured by the Company's profitability
reporting processes.
The Company's business segments are managed through its Executive Committee,
which is the senior decision making group of the Company. The Executive
Committee is comprised of eleven members including the Chairman and Chief
Executive Officer, the President and Vice Presidents who manage key business and
operational areas within the Company.
Both segments are managed by an executive team that is responsible for sales,
marketing, sales support, operations and certain administrative functions. Back
office support is provided to each segment through executives responsible for
lending administration, information systems, finance, legal, marketing and human
resources.
Operating revenues and expenses are directly assigned to business segments in
determining their operating income. The financial results of each segment are
derived from the Company's general ledger systems. Certain adjustments have been
made to recorded general ledger accounts to appropriately reflect results of
operations and financial position transfers among segments.
The organizational structure of the institution and the allocation methodologies
it employs result in business line financial results that are not necessarily
comparable across companies. As such, the Company's business line performance
may not be directly comparable with similar information from other consumer
finance companies.
42
Financial highlights by lines of business were as follows:
(Dollars in thousands) Year Ended December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ----------------------------- -----------------------------
Consumer Consumer Consumer Consumer Consumer Consumer
Finance Banking Total Finance Banking Total Finance Banking Total
---------- -------- ---------- --------- -------- -------- --------- -------- ---------
Condensed income statement:
Net interest income after
provision for loan losses $ 207,160 $ 17,645 $ 224,805 $ 188,051 $ 15,381 $ 203,432 $ 165,702 $ 14,903 $ 180,605
Other operating income 29,032 469 29,501 26,380 767 27,147 26,063 492 26,555
Operating expenses 128,049 7,545 135,594 136,275 6,717 142,992 124,554 6,575 131,129
---------- -------- ---------- --------- -------- --------- --------- -------- ---------
Income before income
taxes 108,143 10,569 118,712 78,156 9,431 87,587 67,211 8,820 76,031
Income taxes 41,678 4,042 45,720 31,092 3,608 34,700 26,370 3,374 29,744
---------- -------- ---------- --------- -------- --------- --------- -------- ---------
Net income $ 66,465 $ 6,527 $ 72,992 $ 47,064 $ 5,823 $ 52,887 $ 40,841 $ 5,446 $ 46,287
========== ======== ========== ========= ======== ========= ========= ======== =========
Other disclosures:
December 31,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Consumer Consumer Consumer Consumer
Finance Banking Total Finance Banking Total
---------- --------- ---------- ---------- --------- ----------
Total assets $2,821,116 $ 406,441 $3,227,557 $2,415,476 $ 329,234 $2,744,710
Total equity $ 422,650 $ 52,508 $ 475,158 $ 373,190 $ 46,140 $ 419,330
Note 16 Approximate Fair Values of Financial Instruments
A summary of the approximate fair values of the Company's financial instruments,
as compared to their carrying values, is set forth in the following table:
(Dollars in thousands)
December 31, 1999 December 31, 1998
-------------------------- ------------------------
Carrying Approximate Carrying Approximate
Value Fair Value Value Fair Value
------------ ------------ ----------- -----------
Consumer finance receivables $ 3,061,757 $ 3,053,585 $ 2,574,396 $ 2,530,486
Investment securities 128,964 128,964 150,820 150,820
Short-term debt 284,175 284,175 560,823 560,823
Long-term debt 2,069,788 2,043,693 1,427,167 1,451,704
Customer deposits 189,934 187,499 187,518 189,717
43
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Consumer finance receivables. The approximate fair value of consumer
finance receivables is estimated by discounting the future cash flows
using current rates at which similar loans would be made with similar
maturities to borrowers with similar credit ratings. The fair value is
not adjusted for the value of potential loan renewals from existing
borrowers.
Investment 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.
Cash and cash equivalents. The carrying amount reported in the
statement of financial condition for cash and cash equivalents
approximates its fair value given its highly liquid nature.
Debt. The carrying amount reported in the statement of financial
condition for short-term debt approximates its fair value given its
brief maximum term. The approximate fair value for long-term debt is
estimated using rates currently available to the Company for debt with
similar terms and remaining maturities.
Customer deposits. The fair values disclosed for fixed-rate savings
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregate expected maturities on time
deposits. The fair values disclosed for savings and money market
accounts are, by definition, equal to the amount payable on demand at
the reporting date.
Accounts payable and other liabilities. The carrying amount reported in
the statement of financial condition for accounts payable and other
liabilities approximates its fair value given its settlement on demand
nature.
44
Note 17 Selected Quarterly Financial Data (Unaudited)
A summary of the quarterly results of operations for the years ended December
31, 1999 and 1998 is set forth below:
As of and for the Quarter Ended
----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- ---------------------- ---------------------- ----------------------
(Dollars in thousands) 1999 1998 1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income before
Provision for credit losses $ 78,388 $ 66,907 $ 80,494 $ 67,957 $ 81,429 $ 71,791 $ 85,084 $ 76,537
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Provision for credit losses 25,600 18,000 26,040 18,300 25,100 21,800 23,850 21,660
Other operating income 6,655 6,489 6,868 5,777 7,415 7,844 8,563 7,037
Other operating expenses 33,712 32,941 32,065 32,026 32,618 32,456 33,239 41,952
Goodwill amortization
Expense 935 1,019 971 866 970 866 1,084 866
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Income before income taxes 24,796 21,436 28,286 22,542 30,156 24,513 35,474 19,096
Income tax provision 9,670 8,500 11,030 8,900 11,760 9,700 13,260 7,600
---------- ---------- ---------- --------- ---------- --------- ---------- ---------
Net income $ 15,126 $ 12,936 $ 17,256 $ 13,642 $ 18,396 $ 14,813 $ 22,214 $ 11,496
========== ========== ========== ========== ========== ========== ========== ==========
Consumer finance
Receivables, net $2,539,015 $2,215,439 $2,648,241 $2,242,928 $2,792,908 $2,353,441 $2,961,449 $2,493,903
========== ========== ========== ========== ========== ========== ========== ==========
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Index of Documents filed as a part of this Report:
1. Financial Statements
Included in Part II of this Report:
PAGE
Report of Independent Certified Public Accountants...................24
Washington Mutual Finance Corporation and Subsidiaries:
Consolidated Statements of Financial Condition
at December 31, 1999 and 1998.....................................25
Consolidated Statements of Operations, Comprehensive Income
and Retained Earnings for the Years Ended December 31, 1999,
1998 and 1997.....................................................26
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997..............27
Notes to Consolidated Financial Statements.........................28
2. Financial Statement Schedules
All schedules are omitted because of the absence of the conditions
under which they are required or because the required information
is set forth in the financial statements or related notes.
3. Exhibits
Included in Part IV of this Report:
Exhibit Number
(2) (a) Agreement dated as of April 30, 1996, between Great
Western Bank and First Community Financial Services, Inc. (i)
(b) Amendment to Exhibit (2) (a) dated as of August 31, 1996. (ii)
(c) Agreement dated as of April 30, 1996, between Great Western
Bank and Blazer Financial Services, Inc. (i)
(d) Amendment to Exhibit (2) (c) dated as of August 31, 1996. (ii)
(e) Agreement dated as of April 30, 1996, between Great
Western Bank and Blazer Financial Services, Inc. of
Florida. (i)
46
(f) Amendment to Exhibit (2) (e) dated as of August 31, 1996. (ii)
(g) Agreement dated as of December 31, 1996, between Great
Western Financial Corporation and Aristar, Inc. (iii)
(3) (a) Certificate of Incorporation of Washington Mutual Finance
Corporation as presently in effect. (iv)
(b) By-Laws of Washington Mutual Finance Corporation as presently
in effect. (iv)
(4) (a) Indenture dated as of July 1, 1992 between Aristar, Inc. and
The Chase Manhattan Bank, N.A., as trustee. (v)
(b) Indenture dated as of July 1, 1995 between Aristar, Inc. and
The Bank of New York, as trustee. (vi)
(c) Indenture dated as of October 1, 1997 between Aristar, Inc.
and First Union National Bank, as trustee. (vii)
(d) Indenture dated as of November 15, 1997 between Aristar, Inc.
and First Union National Bank, as trustee. (vii)
(e) Indenture dated as of June 23, 1999 between Aristar, Inc. and
Harris Trust and Savings Bank, as trustee.(viii)
(f) The registrant hereby agrees to furnish the Securities and
Exchange Commission upon request with copies of all
instruments defining rights of holders of long-term debt of
Washington Mutual Finance Corporation and its consolidated
subsidiaries.
(10) (a) Income Tax Allocation Agreement between Aristar, Inc. and
Washington Mutual, as successor to Great Western Financial
Corporation (as amended effective August 31, 1999). (ix)
(b) 364-Day Credit Agreement by and among Washington Mutual and
Aristar, Inc. and The Chase Manhattan Bank, as Administrative
Agent. (x)
(c) Four-Year Credit Agreement by and among Washington Mutual
and Aristar, Inc. and The Chase Manhattan Bank, as
Administrative Agent. (x)
(12) Statement Re: Computation of Ratios.
(23) Consent of Deloitte & Touche LLP.
(24) Power of Attorney included on Page 48 of the Form 10-K.
(27) Financial Data Schedule.
47
(i) Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996,
Commission file number 1-3521.
(ii) Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996,
Commission file number 1-3521.
(iii) Incorporated by reference to Registrant's Current Report
on Form 8-K dated December 31, 1996, Commission file
number 1-3521.
(iv) Incorporated by reference to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1987, Commission
file number 1-3521.
(v) Incorporated by reference to Registrant's Current Report
on Form 8-K dated June 24, 1992, Commission file number
1-3521.
(vi) Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995,
Commission file number 1-3521.
(vii) Incorporated by reference to Registrant's Current Report
on Form 8-K dated October 6, 1997, Commission file number
1-3521.
(viii)Incorporated by reference to Registrant's Report on Form
424B2 dated November 6, 1997, Commission file number
1-3521.
(ix) Incorporated by reference to Washington Mutual, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1999, Commission file number 1-14667.
(x) Incorporated by reference to Washington Mutual, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, Commission File No. 1-14667.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered
by this Report.
48
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.
WASHINGTON MUTUAL FINANCE CORPORATION
By /s/ H. Philip Goodeve March 30, 2000
- ---------------------------------------- ----------------------
H. Philip Goodeve, Senior Vice President Date
and Chief Financial Officer
(Principal Accounting Officer)
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes H. Philip Goodeve as
attorney-in-fact to sign on his behalf as an individual and in every capacity
stated below, and to file all amendments to the registrant's Form 10-K, and the
registrant hereby confers like authority to sign and file in its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 30, 2000.
/s/ Craig J. Chapman
- ----------------------------------------
Craig J. Chapman, President and Director
(Principal Executive Officer)
/s/ Craig E. Tall
- ----------------------------------------
Craig E. Tall, Director
/s/ Fay L. Chapman
- ----------------------------------------
Fay L. Chapman, Director
/s/ James B. Fitzgerald
- ----------------------------------------
James B. Fitzgerald, Director
/s/ William A. Longbrake
- ----------------------------------------
William A. Longbrake, Director