UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 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)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 31, 2000, there
were 1,000 shares of Common Stock outstanding.
Registrant meets the conditions set forth in General Instruction (H)(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<PAGE> 2
WASHINGTON MUTUAL FINANCE CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements ................................................2
Consolidated Statements of Financial Condition -
September 30, 2000 and December 31, 1999 ............................2
Consolidated Statements of Operations, Comprehensive Income and
Retained Earnings -
Three and Nine Months Ended September 30, 2000 and 1999 .............3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999 .......................4
Notes to Consolidated Financial Statements...........................5
Item 2. Management's Discussion and Analysis of Results of Operations........7
Overview ............................................................7
Consolidated Results of Operations...................................8
Lines of Business...................................................11
Asset Quality ......................................................12
Liquidity ..........................................................14
Capital Management..................................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........14
PART II
Item 6. Exhibits and Reports on Form 8-K....................................15
Signature ...................................................................16
<PAGE> 3
Item 1. Financial Statements
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
(Dollars in thousands, except par value) September 30, December 31,
2000 1999
------------- ------------
ASSETS
<S> <C> <C>
Consumer finance receivables, net $ 3,547,688 $ 2,961,449
Investment securities 181,664 128,964
Cash and cash equivalents 17,638 40,008
Property, equipment and leasehold improvements, net 24,525 22,112
Goodwill, net 47,918 51,340
Other assets 31,274 23,684
------------ -----------
TOTAL ASSETS $ 3,850,707 $ 3,227,557
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Short-term debt $ 481,194 $ 284,175
Long-term debt 2,420,037 2,069,788
------------ -----------
Total debt 2,901,231 2,353,963
Customer deposits 185,778 189,934
Accounts payable and other liabilities 230,149 208,502
------------ -----------
Total liabilities 3,317,158 2,752,399
------------ -----------
Stockholder's equity
Common stock: $1.00 par value;
10,000 shares authorized; 1,000
shares issued and outstanding 1 1
Paid-in capital 57,710 48,960
Retained earnings 477,107 427,635
Accumulated other comprehensive loss (1,269) (1,438)
------------ -----------
Total stockholder's equity 533,549 475,158
------------ -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 3,850,707 $ 3,227,557
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 4
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Operations, Comprehensive Income and Retained
Earnings
(Unaudited)
<TABLE>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
(Dollars in thousands) 2000 1999 2000 1999
--------- --------- ---------- ---------
Interest income
<S> <C> <C> <C> <C>
Loan interest and fee income $ 142,423 $ 117,068 $ 405,296 $ 340,441
Investment securities income 2,935 2,614 8,885 7,721
--------- --------- ---------- ---------
Total interest income 145,358 119,682 414,181 348,162
Interest and debt expense 53,415 38,253 146,148 107,851
--------- --------- ---------- ---------
Net interest income before
provision for credit losses 91,943 81,429 268,033 240,311
Provision for credit losses 26,149 25,100 75,989 76,740
--------- --------- ---------- ---------
Net interest income 65,794 56,329 192,044 163,571
--------- --------- ---------- ---------
Noninterest income 7,482 7,415 22,760 20,938
Noninterest expense
Personnel 23,527 18,987 69,182 57,105
Occupancy 3,813 2,839 10,590 8,229
Advertising 1,897 2,350 5,628 7,054
Goodwill amortization 1,141 970 3,422 2,876
Other 8,380 8,442 25,780 26,007
Total noninterest expense 38,758 33,588 114,602 101,271
--------- --------- ---------- ---------
Income before income taxes 34,518 30,156 100,202 83,238
Provision for federal and state income taxes 12,770 11,760 37,730 32,460
--------- --------- ---------- ---------
Net income 21,748 18,396 62,472 50,778
Net unrealized gains (losses) on securities
arising during period, net of tax 1,673 (903) 169 (2,501)
--------- --------- ---------- ---------
Comprehensive income $ 23,421 $ 17,493 $ 62,641 $ 48,277
--------- --------- ---------- ---------
Retained earnings
Beginning of period $ 465,359 $ 395,025 $ 427,635 $ 369,143
Net income 21,748 18,396 62,472 50,778
Dividends paid (10,000) (2,500) (13,000) (9,000)
--------- --------- ---------- ---------
End of period $ 477,107 $ 410,921 $ 477,107 $ 410,921
========= ========= ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
For the Nine Months
Ended September 30,
------------------------------
(Dollars in thousands) 2000 1999
----------- ----------
Operating activities
<S> <C> <C>
Net income $ 62,472 $ 50,778
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 75,989 76,740
Depreciation and amortization 14,276 8,547
Increase in accounts payable and other liabilities 21,551 40,806
Increase in other assets (7,590) (7,629)
----------- ----------
Net cash provided by operating activities 166,698 169,242
----------- ----------
Investing activities
Investment securities purchased (75,619) (23,070)
Investment securities matured or sold 23,237 22,825
Net increase in consumer finance receivables (668,458) (379,381)
Net increase in property, equipment and
leasehold improvements (6,188) (6,041)
----------- ----------
Net cash used in investing activities (727,028) (385,667)
----------- ----------
Financing activities
Net (decrease) increase in customer deposits (4,156) 10,422
Net increase (decrease) in short-term debt 197,019 (414,376)
Proceeds from issuance of long-term debt 449,347 1,019,742
Repayments of long-term debt (100,000) (378,000)
Capital contributed by parent 8,750 -
Dividends paid (13,000) (9,000)
----------- ----------
Net cash provided by financing activities 537,960 228,778
----------- ----------
Net (decrease) increase in cash and
cash equivalents (22,370) 12,353
Cash and cash equivalents
Beginning of period 40,008 24,180
----------- ----------
End of period $ 17,638 $ 36,533
=========== ==========
Supplemental disclosures of cash flow information
Interest paid $ 128,384 $ 96,258
Intercompany payment (net of refunds)
in lieu of federal and state income taxes $ 36,785 $ 1,661
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 6
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 Basis of Presentation
The accompanying consolidated financial statements of Washington Mutual Finance
Corporation and subsidiaries have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. These statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1999 Annual Report on Form 10-K to the Securities and Exchange Commission.
Interim results are not necessarily indicative of results for a full year. When
we refer to "we" or "our" or the "Company" in this Form 10-Q, we mean Washington
Mutual Finance Corporation and its consolidated subsidiaries.
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.
The Company is an indirect, wholly owned subsidiary of Washington Mutual, Inc.
("Washington Mutual").
Note 2 Lines of Business
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.
Financial highlights by line of business were as follows:
<TABLE>
(Dollars in thousands) Three Months Ended September 30,
--------------------------------------------------------
2000 1999
-------------------------- ---------------------------
Consumer Consumer Consumer Consumer
Finance Banking Total Finance Banking Total
-------- -------- ------- -------- -------- --------
Condensed income statement:
Net interest income after
<S> <C> <C> <C> <C> <C> <C>
provision for credit losses $61,089 $4,705 $65,794 $51,932 $4,397 $56,329
Noninterest income 7,461 21 7,482 7,316 99 7,415
Noninterest expense 36,881 1,877 38,758 31,616 1,972 33,588
------- ------ ------- ------- ------ -------
Income before income
taxes 31,669 2,849 34,518 27,632 2,524 30,156
Income taxes 11,681 1,089 12,770 10,795 965 11,760
------- ------ ------- ------- ------ -------
Net income $19,988 $1,760 $21,748 $16,837 $1,559 $18,396
======= ====== ======= ======= ====== =======
</TABLE>
<PAGE> 7
<TABLE>
(Dollars in thousands) Nine Months Ended September 30,
----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
Consumer Consumer Consumer Consumer
Finance Banking Total Finance Banking Total
Condensed income statement: --------- -------- --------- --------- -------- ----------
Net interest income after
<S> <C> <C> <C> <C> <C> <C>
provision for credit losses $ 177,544 $ 14,500 $ 192,044 $ 150,875 $ 12,696 $ 163,571
Noninterest income 22,503 257 22,760 20,558 380 20,938
Noninterest expense 108,853 5,749 114,602 95,811 5,460 $ 101,271
--------- -------- --------- --------- -------- ---------
Income before income
taxes 91,194 9,008 100,202 75,622 7,616 83,238
Income taxes 34,285 3,445 37,730 29,547 2,913 32,460
--------- -------- --------- --------- -------- ---------
Net income $ 56,909 $ 5,563 $ 62,472 $ 46,075 $ 4,703 $ 50,778
========= ======== ========= ========= ======== =========
</TABLE>
<TABLE>
Other disclosures:
September 30, 2000 December 31, 1999
------------------------------------ ------------------------------------
Consumer Consumer Consumer Consumer
Finance Banking Total Finance Banking Total
----------- --------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 3,426,348 $ 424,359 $ 3,850,707 $ 2,821,116 $ 406,441 $ 3,227,557
Total equity $ 475,373 $ 58,176 $ 533,549 $ 422,650 $ 52,508 $ 475,158
</TABLE>
Note 3: Recently Issued Accounting Standards Not Yet Adopted
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," was issued in
June 2000 and amends the accounting and reporting standards of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for certain
derivative instruments and hedging activities. These amendments include the
application of the normal purchases and sales exception in SFAS No. 133, and
redefinition of hedged risk. SFAS No. 138 also amends SFAS No. 133 for decisions
made by the Financial Accounting Standards Board relating to the Derivatives
Implementation Group process. SFAS No. 138 will be adopted concurrently with
SFAS No. 133 on January 1, 2001. The adoption of these statements by the Company
is not expected to materially affect the results of operations or financial
condition of the Company.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," was issued in September 2000 and replaces SFAS
No. 125 of the same title. This statement revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of SFAS No. 125's provisions
without reconsideration. This statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001 and is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of this statement by the
Company is not expected to materially affect the results of operations or
financial condition of the Company.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Results of Operations
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes presented elsewhere in this report.
This report contains forward-looking statements, which are not historical facts
and pertain to our future operating results of the Company. 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," "anticipates," "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 our 1999 Annual
Report on Form 10-K filed with the Securities and Exchange Commission, which is
incorporated herein by reference.
Overview
Net income of $21.7 million and $62.5 million for the three- and nine-month
periods ended September 30, 2000 represents an 18.2% and 23.0% increase over the
same periods in 1999. The following are key highlights of our performance:
o Return on average assets during the three- and nine-month periods ended
September 30, 2000 was 2.29% and 2.33% as compared to 2.47% and 2.35% in
the same periods of 1999.
o Consumer finance receivables (excluding unearned finance charges and
deferred loan fees) increased 19.3%, or $589.7 million for the nine months
ended September 30, 2000 as compared to 12.3%, or $317.6 million in the
same period of 1999. This growth in receivables is a combination of
continued strong growth in the branch offices and the addition of two
portfolio acquisitions, which totaled approximately $198 million. In the
absence of these acquisitions, the year-to-date increase would have been
12.8%.
o Yields earned on consumer finance receivables declined from 16.64% and
16.80% in the three- and nine-month periods ended September 30, 1999 to
15.86% and 15.99% in the same periods of 2000 due primarily to a shift in
product mix towards lower yielding real estate secured loans and increased
amortization of deferred loan origination costs.
o Both quarter-to-date and year-to-date net interest spread and net interest
margin were down compared to the prior year. These decreases are a result
of the decline in yields earned discussed above, coupled with an increase
in the weighted average cost of funds of 50 and 48 basis points, which is a
reflection of the increasing interest rate environment associated with our
borrowings. See "Consolidated Results of Operations."
o Operating efficiency, defined as the ratio of non-interest operating
expenses, excluding the amortization of goodwill, to total revenue, eroded
slightly from 36.71% and 37.66% for the three- and nine-month periods ended
September 30, 1999 to 37.84% and 38.23% in the same periods of 2000.
o Delinquencies (accounts contractually past-due greater than 60 days) as a
percentage of gross consumer finance receivables increased from 2.31% at
December 31, 1999 to 2.54% at September 30, 2000. The primary source of
this deterioration is a portfolio acquired earlier in the year that has
experienced higher than expected delinquency rates. See "Asset Quality."
o Net charge-offs totaled $25.8 million and $72.5 million for the three- and
nine-month periods ended September 30, 2000, as compared to $19.8 million
and $58.2 million during the same periods in 1999, due primarily to
increased charge-offs in the personal loan portfolio. Annualized net
charge-offs as a percentage of average consumer finance receivables
(excluding unearned finance charges and deferred loan fees) were 2.86% in
the nine months ending September 30, 2000, as compared to 2.87% in the same
period of 1999.
<PAGE> 9
Consolidated Results of Operations
Net Interest Income before Provision for Credit Losses
Net interest income before provision for credit losses for the nine months ended
September 30, 2000 increased 11.5% to $268.0 million, compared to $240.3 million
in the same period of 1999. For the third quarter of 2000, this amount increased
12.9% to $91.9 million, compared to $81.4 million in the same period of 1999.
Net interest margin for the three and nine month periods ended September 30,
2000 was 9.76% and 10.07%, compared to 11.01% and 11.26% during the same periods
in 1999.
The increase in net interest income before provision for credit losses during
the nine months ended September 30, 2000 reflects growth in average net consumer
finance receivables to $3.38 billion, which was $678.6 million, or 25.1%,
greater than the average balance during the same period in 1999. This is
primarily a result of management's continued implementation of the internal
growth initiative through the branch network, as well as an ongoing pursuit of
strategic acquisitions. Partially offsetting this portfolio growth is an 81
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 the amortization of deferred loan origination
costs. Another 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 consumer finance receivables, average debt
outstanding increased $587.9 million, or 26.0%, to $2.8 billion during the nine
months ended September 30, 2000, as compared to the same period in 1999. During
the latter half of 1999, the mix of debt was shifted to longer term, senior debt
in order to lessen the impact of higher short-term borrowing rates caused by the
Year 2000 liquidity risk. Also, in June 2000, the Company issued a $450.0
million senior note with a coupon rate of 8.25%, maturing on June 15, 2005. In
addition, the rates paid on commercial paper and Federal Home Loan Bank ("FHLB")
advances during the nine months ended September 30, 2000 were 78 and 130 basis
points higher, respectively, than in the same period of 1999, due to the recent
rising interest rate environment associated with short-term borrowings. As a
result of these factors, the overall cost of debt increased 48 basis points, as
compared to the nine months ended September 30, 1999.
The following chart reflects the average balances and related effective yields
during the three- and nine-month periods ended September 30, 2000 and 1999, as
described above:
<TABLE>
(Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------- ------------------------------------------
2000 1999 2000 1999
------------------ ------------------- ------------------ --------------------
Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
---------- ------ ----------- ----- ----------- ----- ----------- -----
Interest-earning assets:
Consumer finance receivables:
Real estate secured
<S> <C> <C> <C> <C> <C> <C> <C> <C>
loans $1,896,214 12.62% $ 1,321,632 12.59% $ 1,719,578 12.54% $ 1,234,459 12.51%
Other installment
loans 1,385,332 21.44 1,215,891 22.10 1,359,215 21.49 1,189,330 22.37
Retail installment
contracts 311,426 10.71 277,085 11.98 301,115 10.83 277,532 12.03
Total consumer ----------- ----- ----------- ----- ---------- ----- ---------- -----
finance receivables 3,592,972 15.86 2,814,608 16.64 3,379,908 15.99 2,701,321 16.80
Investment securities 176,838 6.64 142,641 7.33 168,737 7.02 145,415 7.08
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total interest-earning
assets $ 3,769,810 15.42% $ 2,957,249 16.19% $ 3,548,645 15.56% $ 2,846,736 16.31%
=========== ===== =========== ===== =========== ===== =========== =====
Interest-bearing liabilities:
Senior debt $ 2,370,978 7.12% $ 1,796,313 6.66% $ 2,146,068 7.03% $ 1,622,384 6.68%
Commercial paper 348,746 6.93 254,553 6.96 382,914 6.48 358,248 5.70
Customer deposits 178,410 6.07 202,398 5.44 179,047 5.67 197,893 5.50
FHLB advances 146,777 6.73 92,276 5.10 140,678 6.37 82,301 5.07
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total interest-bearing
liabilities $ 3,044,911 7.02% $ 2,345,540 6.52% $ 2,848,707 6.84% $ 2,260,826 6.36%
=========== ===== =========== ===== =========== ===== =========== =====
Net interest spread 8.40% 9.67% 8.72% 9.95%
Net interest margin 9.76% 11.01% 10.07% 11.26%
</TABLE>
<PAGE> 10
The dollar amounts of interest income and interest expense fluctuate depending
upon changes in amounts (volume) and upon changes in interest rates of our
interest-earning assets and interest-bearing liabilities. The following table
details changes attributable to (i) changes in volume (changes in average
outstanding balances multiplied by the prior period's rate) and (ii) changes in
rate (changes in average interest rate multiplied by the prior period's volume).
Changes in rate/volume (changes in rate times the change in volume) were
allocated proportionately to the changes in volume and the changes in rate.
<TABLE>
(Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30,
2000 vs. 1999 2000 vs. 1999
------------------------------- ---------------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
------------------------------- ---------------------------------
Volume Rate Total Change Volume Rate Total Change
-------- -------- ------------ -------- -------- ------------
Interest income:
Consumer finance
<S> <C> <C> <C> <C> <C> <C>
receivables $ 34,206 $ (8,851) $ 25,355 $ 90,663 $(25,808) $ 64,855
Investment securities 724 (403) 321 1,249 (85) 1,164
Total interest income 34,930 (9,254) 25,676 91,912 (25,893) 66,019
-------- -------- -------- -------- -------- --------
Interest expense:
Interest-bearing
liabilities 12,094 3,068 15,162 29,684 8,612 38,296
-------- -------- -------- -------- -------- --------
Net interest income $ 22,836 $(12,322) $ 10,514 $ 62,228 $(34,505) $ 27,723
======== ======== ======== ======== ======== ========
</TABLE>
Provision for Credit Losses
The provision for credit losses for the three- and nine-month periods ended
September 30, 2000 was $26.1 million and $76.0 million, compared to $25.1
million and $76.7 million in the same periods of 1999. For the nine months ended
September 30, 2000, the annualized provision for credit losses was 3.00% of
average consumer finance receivables (excluding unearned finance charges and
deferred loan fees), as compared to 3.79% during the same period of 1999. See
further discussion in "Allowance for Credit Losses."
Noninterest Income
Noninterest income increased 0.9% and 8.7% for the three- and nine-month periods
ended September 30, 2000 to $7.5 million and $22.8 million, compared to $7.4
million and $20.9 million during the same periods of 1999. Noninterest 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 2000 is related to the increase in the number of loans originated
during the nine months ended September 30, partially offset by the shift in
originations to loans which tend to have a lower insurance penetration.
Noninterest Expense
Noninterest expense for the three- and nine-month periods ended September 30,
2000 increased 15.4% and 13.2%, to $38.8 million and $114.6 million, as compared
to $33.6 million and $101.3 million during the same periods in 1999. This
increase is primarily a result of higher personnel and occupancy expenses
associated with an increase in both headcount and number of office locations as
compared to the same period in 1999. In addition, we have renovated our branch
locations, resulting in increased amortization of capitalized leasehold
improvements. Nonetheless, the efficiency ratio remained controlled, increasing
only 57 basis points as compared to the nine-month period ended September 30,
1999.
Provision for Income Taxes
The provision for income taxes during the three- and nine-month periods ended
September 30, 2000 was $12.8 million and $37.7 million, which represents an
effective tax rate of 37.0% and 37.7%. This compares to $11.8 million and $32.5
million, or 39.0% in the same periods of 1999.
<PAGE> 11
Lines of Business
The Company is managed along two major lines of business: consumer finance and
consumer banking. Following is an overview of the performance of each line of
business in the nine months ended September 30, 2000:
Consumer Finance
o Net income increased 18.7% and 23.5% to $20.0 million and $56.9 million for
the three- and nine-month periods ended September 30, 2000 from $16.8
million and $46.1 million in the same periods of 1999.
o The consumer finance receivables portfolio experienced significant growth
during the nine months ended September 30, 2000 totaling $577.5 million, or
21.5% over the prior year-end. Included in this growth were two portfolio
acquisitions. See "Overview."
o Net interest margin decreased as a result of yield erosion on receivables
caused by the shift in product mix toward lower-yielding real estate
secured loans, coupled with the full-year impact of increased amortization
of deferred loan origination costs. In addition, there was an increase in
the cost of funds as discussed in "Consolidated Results of Operations."
Consumer Banking
o Net income increased 12.9% and 18.3% to $1.8 million and $5.6 million for
the three- and nine-month periods ended September 30, 2000, from $1.6
million and $4.7 million during the same periods of 1999.
o The consumer banking receivables portfolio increased $12.2 million, or 3.2%
over the prior year ended December 31, 1999.
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.
<PAGE> 12
Asset Quality
Consumer Finance Receivables
Consumer finance receivables consisted of the following:
<TABLE>
September 30, December 31,
(Dollars in thousands) 2000 1999
------------- ------------
Consumer finance receivables:
<S> <C> <C>
Real estate secured loans $ 2,212,005 $ 1,630,496
Other installment loans 1,613,528 1,566,682
Retail installment contracts 359,675 327,914
------------ -----------
Gross consumer finance receivables 4,185,208 3,525,092
Less: Unearned finance charges and
deferred loan fees (533,761) (463,335)
Allowance for credit losses (103,759) (100,308)
------------ ------------
Consumer finance receivables, net $ 3,547,688 $ 2,961,449
============ =============
</TABLE>
Allowance for Credit Losses
<TABLE>
Activity in the Company's allowance for credit losses was as follows:
Nine Months Ended September 30,
--------------------------------
(Dollars in thousands) 2000 1999
----------- ----------
<S> <C> <C>
Balance, beginning of period $ 100,308 $ 80,493
Provision for credit losses 75,989 76,740
Amounts charged-off:
Real estate secured loans (1,524) (1,331)
Other installment loans (74,700) (59,532)
Retail installment contracts (9,503) (9,389)
---------- ----------
(85,727) (70,252)
Recoveries:
Real estate secured loans 187 307
Other installment loans 10,951 9,440
Retail installment contracts 2,051 2,314
----------- -----------
13,189 12,061
----------- -----------
Net charge-offs (72,538) (58,191)
----------- -----------
Balance, end of period $ 103,759 $ 99,042
=========== ==========
</TABLE>
In order to establish our allowance for credit losses, the consumer finance
receivables portfolio is segmented into two categories: real estate secured and
non-real estate secured (other installment loans and retail installment
contracts). The determination of the level of the allowance for credit losses
and, correspondingly, the provision for credit 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 our 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 our credit administration
management to assess collectibility and determine a future course of action, at
times resulting in the Company foreclosing on the property.
<PAGE> 13
Management establishes the allowance for credit losses based on estimated losses
inherent in the portfolio. Using the analysis techniques described above to
measure the adequacy of the allowance for credit losses, the results of those
analyses are compared to the historical trends of the loss coverage ratio, which
represents the ratio of the allowance for credit losses to annualized net
charge-offs. During the first nine months of 2000, the loss coverage ratio
declined from 124% at December 31, 1999 to 105% at September 30, 2000, due to
several factors. During the first half of 2000, the Company purchased a
portfolio that has experienced higher than expected delinquency rates.
Additionally, the Company has been remixing its loan product portfolio, which
has resulted in a reduction in the level of unsecured loans and an increase in
the amount of real estate secured loans. Accordingly, the loss coverage ratio at
September 30, 2000 appears to be at a level that is consistent with the credit
quality characteristics of the loan portfolio.
As a result of the analyses performed as described above, the allowance for
credit losses as of September 30, 2000 was $103.8 million, which is an increase
of $3.5 million, or 3.4% as compared to December 31, 1999. Management considers
the allowance for credit losses adequate to cover losses inherent in the loan
portfolio at September 30, 2000. No assurance can be given that we 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
examination 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:
<TABLE>
September 30, 2000 December 31, 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Real estate secured loans $ 26,290 1.19% $ 9,259 0.57%
Other installment loans 71,108 4.41 62,875 4.01
Retail installment contracts 9,061 2.52 9,137 2.79
--------- ---- --------- ----
$ 106,459 2.54% $ 81,271 2.31%
========= ==== ========= ====
</TABLE>
<PAGE> 14
Liquidity
We fund our operations through a variety of corporate borrowings. The primary
source of these borrowings is corporate debt securities issued by the Company.
At September 30, 2000, twelve different fixed-rate senior debt issues totaling
$2.35 billion were outstanding, with a weighted average rate of 6.98%. To meet
our 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 September 30, 2000, thirty
commercial paper borrowings totaling $408.3 million were outstanding, with a
weighted average rate of 6.90%. Our targeted funding strategy is to maintain a
mix between long and short-term borrowings of 75% to 25%. As a result of
increased long-term borrowings during the nine months ended September 30, 2000,
the split between long and short-term at September 30, 2000 was approximately
80% to 20%. See "Consolidated Results of Operations."
Our banking subsidiary raises funds through both customer deposits and advances
with the Federal Home Loan Bank of Topeka. At September 30, 2000, the banking
subsidiary's outstanding debt totaled $332.6 million, with a weighted average
rate of 6.35%.
We also maintain 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 no less 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 September 30, 2000.
Capital Management
We establish equity leverage targets based upon the ratio of debt (including
customer deposits) to tangible equity. The debt to tangible equity ratio at
September 30, 2000 of 6.36:1 was increased from 6.00:1 at December 31, 1999. The
determination of our dividend payments and resulting capital leverage is managed
in a manner consistent with our desire to maintain strong and improving credit
ratings. In addition, provisions of certain of our debt agreements restrict the
payment of dividends to a maximum prescribed proportion of cumulative earnings
and contributed capital. At September 30, 2000, approximately $161.7 million was
available under the debt agreement restriction for future dividends. We paid
dividends in the amount of $10 million in the quarter ended September 30, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is primarily related to changes in interest rates.
Quantitative and qualitative disclosures about our market risk resulting from
changes in interest rates are included in Item 7A. in our 1999 Annual Report on
Form 10-K. There have been no material changes in such risks or our
asset/liability management program during the nine months ended September 30,
2000.
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1. Certificate of Incorporation of Washington Mutual Finance
Corporation as presently in effect. (i)
3.2. By Laws of Washington Mutual Finance Corporation as presently
in effect. (i)
4.1. Indenture dated as of July 1, 1992 between Aristar, Inc. and
The Chase Manhattan Bank, N.A., as trustee. (ii)
4.2. Indenture dated as of July 1, 1995 between Aristar, Inc.
and the Bank of New York, as trustee. (iii)
4.3. Indenture dated as of October 1, 1997 between Aristar, Inc.
and First Union National Bank, as trustee. (iv)
4.4. Indenture dated as of June 23, 1999 between Washington Mutual
Finance Corporation and Harris Trust and Savings Bank, as
trustee. (v)
4.5. 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.
10.1. 364-Day Credit Agreement by and among the Registrant and
Washington Mutual Finance Corporation and The Chase Manhattan
Bank, as Administrative Agent, (Incorporated by reference to
Washington Mutual Inc.'s Form 10-Q for the quarter ended
September 30, 2000. File No. 1-14667.)
10.2. Four-Year Credit Agreement by and among the Registrant and
Washington Mutual Finance Corporation and The Chase Manhattan
Bank, as Administrative Agent, (Incorporated by reference
to Washington Mutual Inc.'s Form 10-Q for the quarter ended
September 30, 1999. File No. 1-14667.)
27. Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this
Report.
(i) Incorporated by reference to Registrant's Quarterly Report
on Form 10-K for the year ended December 31, 1987, Commission
file number 1-3521.
(ii) Incorporated by reference to Registrant's Current Report
on Form 8-K dated June 24, 1992,Commission file number 1-3521.
(iii) Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995,
Commission file number 1-3521.
(iv) Incorporated by reference to Registrant's Current Report on
Form 8-K dated October 6, 1997, Commission file number 1-3521.
(v) Incorporated by reference to the Registration Statement
on Form S-3, Registration number 333-80147.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASHINGTON MUTUAL FINANCE CORPORATION
Date: November 13, 2000 By: /s/ James R. Garner
------------------------------
James R. Garner
Senior Vice President and
General Counsel
By: /s/ Craig A. Stein
------------------------------
Craig A. Stein
Vice President and Controller
(Principal Accounting Officer)
