UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 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 JUNE 30, 2000
TABLE OF CONTENTS
Page
PART I
Item 1. Financial Statements.................................................2
Consolidated Statements of Financial Condition -
June 30, 2000 and December 31, 1999..................................2
Consolidated Statements of Operations, Comprehensive Income and Retained
Earnings -
Three and Six Months Ended June 30, 2000 and 1999....................3
Consolidated Statements of Cash Flows -
Three and Six Months Ended June 30, 2000 and 1999....................4
Notes to Consolidated Financial Statements...............................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................7
Overview.................................................................7
Consolidated Results of Operations.......................................8
Lines of Business.......................................................10
Asset Quality...........................................................11
Liquidity...............................................................13
Capital Management......................................................13
PART II
Item 5. Other Information..................................................15
Item 6. Exhibits and Reports on Form 8-K....................................16
Signature....................................................................17
<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) June 30, December 31,
2000 1999
----------- --------------
ASSETS
<S> <C> <C>
Consumer finance receivables, net $ 3,415,679 $ 2,961,449
Investment securities 172,232 128,964
Cash and cash equivalents 9,409 40,008
Short-term note receivable from affiliate 40,000 -
Property, equipment and leasehold improvements, net 24,358 22,112
Goodwill, net 49,058 51,340
Other assets 29,263 23,684
------------ -------------
TOTAL ASSETS $ 3,739,999 $ 3,227,557
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Short-term debt $ 329,728 $ 284,175
Long-term debt 2,519,718 2,069,788
------------ -------------
Total debt 2,849,446 2,353,963
Customer deposits 162,766 189,934
Accounts payable and other liabilities 207,659 208,502
----------- ---------
Total liabilities 3,219,871 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 465,359 427,635
Accumulated other comprehensive loss (2,942) (1,438)
---------- --------
Total stockholder's equity 520,128 475,158
---------- --------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 3,739,999 $ 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 Six Months
Ended June 30, Ended June 30,
----------------------- ---------------------
(Dollars in thousands) 2000 1999 2000 1999
---------- ---------- --------- ----------
Interest income
<S> <C> <C> <C> <C>
Loan interest and fee income $ 136,021 $ 112,679 $ 262,873 $ 223,373
Investment securities income 3,166 2,609 5,950 5,107
---------- ---------- --------- ---------
Total interest income 139,187 115,288 268,823 228,480
Interest and debt expense 49,192 34,794 92,733 69,598
---------- ---------- --------- --------
Net interest income before
provision for credit losses 89,995 80,494 176,090 158,882
Provision for credit losses 25,363 26,040 49,840 51,640
---------- --------- --------- --------
Net interest income 64,632 54,454 126,250 107,242
---------- ---------- ---------- --------
Noninterest income 7,406 6,868 15,278 13,523
Noninterest expenses:
Personnel 22,670 18,962 45,655 38,118
Occupancy 3,504 2,726 6,777 5,390
Advertising 1,855 2,356 3,731 4,704
Goodwill amortization 1,140 971 2,281 1,906
Other 8,379 8,021 17,400 17,565
---------- --------- --------- --------
Total noninterest expense 37,548 33,036 75,844 67,683
---------- --------- --------- --------
Income before income taxes 34,490 28,286 65,684 53,082
Provision for federal and state income taxes 13,110 11,030 24,960 20,700
---------- --------- -------- -------
Net income 21,380 17,256 40,724 32,382
Net unrealized losses on securities arising
during period, net of tax (412) (724) (1,504) (1,598)
---------- --------- ------- -------
Comprehensive income $ 20,968 $ 16,532 $ 39,220 $ 30,784
---------- ---------- --------- ---------
Retained earnings
Beginning of period $ 446,979 $ 380,269 $ 427,635 $ 369,143
Net income 21,380 17,256 40,724 32,382
Dividends paid (3,000) (2,500) (3,000) (6,500)
---------- ---------- --------- ---------
End of period $ 465,359 $ 395,025 $ 465,359 $ 395,025
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 5
WASHINGTON MUTUAL FINANCE CORPORATION and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
(Dollars in thousands) 2000 1999 2000 1999
----------- ----------- ----------- -----------
Operating activities
<S> <C> <C> <C> <C>
Net income $ 21,380 $ 17,256 $ 40,724 $ 32,382
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 25,363 26,040 49,840 51,640
Depreciation and amortization 4,952 4,741 9,289 7,126
Increase (decrease) in accounts payable
and other liabilities 16,993 18,433 (136) 29,613
Increase in other assets (4,645) (666) (5,579) (3,062)
----------- ---------- ----------- ----------
Net cash provided by operating activities 64,043 65,804 94,138 117,699
----------- ---------- ----------- ----------
Investing activities
Investment securities purchased (9,350) (4,138) (61,828) (13,625)
Investment securities matured or sold 2,024 9,849 16,366 21,296
Net increase in consumer finance receivables (248,004) (136,823) (508,111) (208,235)
Net increase in short-term note receivable (40,000) - (40,000) -
Net increase in property, equipment and
leasehold improvements (2,690) (3,488) (4,646) (4,789)
----------- ---------- ----------- ---------
Net cash used in investing activities (298,020) (134,600) (598,219) (205,353)
----------- --------- ----------- ---------
Financing activities
Net (decrease) increase in customer deposits (14,118) 7,200 (27,168) 17,703
Net (decrease) increase in short-term debt (191,192) (227,359) 45,553 (359,630)
Proceeds from issuance of long-term debt 449,347 408,668 449,347 668,368
Repayments of long-term debt - (100,000) - (215,000)
Capital contributed by parent - - 8,750 -
Dividends paid (3,000) (2,500) (3,000) (6,500)
----------- --------- ----------- ----------
Net cash provided by financing activities 241,037 86,009 473,482 104,941
----------- --------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 7,060 17,213 (30,599) 17,287
Cash and cash equivalents
Beginning of period 2,349 24,254 40,008 24,180
----------- ----------- ----------- -----------
End of period $ 9,409 $ 41,467 $ 9,409 $ 41,467
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information
Interest paid $ 49,630 $ 36,320 $ 88,059 $ 66,205
Intercompany payment (net of refunds)
in lieu of federal and state income taxes $ 2,426 $ 1,671 $ 2,313 $ 1,667
</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 June 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 $ 59,817 $ 4,815 $ 64,632 $ 50,104 $ 4,350 $ 54,454
Noninterest income 7,265 141 7,406 6,728 140 6,868
Noninterest expenses 35,605 1,943 37,548 31,263 1,773 33,036
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes 31,477 3,013 34,490 25,569 2,717 28,286
Income taxes 11,957 1,153 13,110 9,993 1,037 11,030
----------- ----------- ----------- ----------- ----------- -----------
Net income $ 19,520 $ 1,860 $ 21,380 $ 15,576 $ 1,680 $ 17,256
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<PAGE> 7
<TABLE>
(Dollars in thousands) Six Months Ended June 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 $ 116,455 $ 9,795 $ 126,250 $ 98,943 $ 8,299 $ 107,242
Noninterest income 15,042 236 15,278 13,242 281 13,523
Noninterest expenses 71,972 3,872 75,844 64,195 3,488 67,683
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes 59,525 6,159 65,684 47,990 5,092 53,082
Income taxes 22,604 2,356 24,960 18,752 1,948 20,700
----------- ------------ ----------- ----------- ----------- -----------
Net income $ 36,921 $ 3,803 $ 40,724 $ 29,238 $ 3,144 $ 32,382
----------- ------------ ----------- ----------- ----------- -----------
----------- ------------ ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
Other disclosures:
June 30, 2000 December 31, 1999
-------------------------------------- -------------------------------------
Consumer Consumer Consumer Consumer
Finance Banking Total Finance Banking Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 3,317,415 $ 422,584 $ 3,739,999 $ 2,821,116 $ 406,441 $ 3,227,557
Total equity $ 463,834 $ 56,294 $ 520,128 $ 422,650 $ 52,508 $ 475,158
</TABLE>
Note 3 Related Party Transaction
On June 30, 2000, the Company extended a short-term loan in the amount of $40.0
million to Long Beach Mortgage Company, a wholly owned subsidiary of Washington
Mutual. This note, with a stated interest rate of 7.30%, was repaid in full on
July 6, 2000.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and 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," "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 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 $21.4 million and $40.7 million for the three and six-month
periods ended June 30, 2000 represents a 23.9% and 25.8% increase over the same
periods in 1999. The following are key highlights of our performance:
o Return on average assets during the three and six-month periods ended June 30,
2000 were 2.37% and 2.36% as compared to 2.43% and 2.30% in the same periods
of 1999.
o Consumer finance receivables (excluding unearned finance charges and deferred
loan fees) increased 14.9%, or $457.3 million for the six months ended
June 30, 2000 as compared to 6.5%, or $167.6 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 8.5%.
o Yields earned on consumer finance receivables declined from 16.82% and 16.91%
in the three and six-month periods ended June 30, 1999 to 15.93% and 16.04%
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 58 and 44 basis points, which is a
reflection of the increasing interest rate environment associated with our
borrowings. See "Consolidated Results of Operations."
<PAGE> 9
o Operating efficiency, defined as the ratio of non-interest operating expenses,
excluding the amortization of goodwill, to total revenue, eroded slightly
from 36.70% and 38.15% for the three and six-month periods ended June 30,
1999 to 37.38% and 38.44% 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 2.59% at June 30, 2000. The primary source of
this deterioration is the portfolio acquired from Long Beach Mortgage
Company in March 2000, which as of June 30, 2000, included delinquent
consumer finance receivables totaling approximately $14.7 million. Absent
this portfolio, delinquencies at June 30, 2000 would have totaled 2.29%.
o Net charge-offs totaled $24.0 million and $46.7 million for the three and
six-month periods ended June 30, 2000, as compared to $18.7 million and $38.4
million during the same periods in 1999, due primarily to growth in the
personal loan portfolio. Net charge-offs as a percentage of average consumer
finance receivables (excluding unearned finance charges and deferred loan
fees) were 2.85% in the six months ending June 30, 2000, as compared to 2.91%
in the same period of 1999.
Consolidated Results of Operations
Net Interest Income before Provision for Credit Losses
Net interest income before provision for credit losses for the six months ended
June 30, 2000 increased 10.8% to $176.1 million, compared to $158.9 million in
the same period of 1999. For the second quarter of 2000 this amount increased
11.8% to $90.0 million, compared to $80.5 million in the same period of 1999.
Net interest margin for the three and six month periods ended June 30, 2000 was
10.02% and 10.22%, compared to 11.40% and 11.39% during the same periods in
1999.
The increase in net interest income before provision for credit losses during
the six months ended June 30, 2000 reflects growth in average net consumer
finance receivables to $3.28 billion, which was $635.7 million, or 24.1%,
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 87
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 $543.8 million, or 24.5%, to $2.76 billion during the six
months ended June 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.
<PAGE> 10
Proceeds from this issuance were used to pay down commercial paper borrowings.
In addition, the rates paid on commercial paper and Federal Home Loan Bank
("FHLB") advances during the six months ended June 30, 2000 were 103 and 108
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 44 basis
points, as compared to the six months ended June 30, 1999.
The following chart reflects the average balances and related effective yields
during the three and six month periods ended June 30, 2000 and 1999, as
described above:
<TABLE>
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 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 $ 1,753,249 12.42% $ 1,227,412 12.57% $ 1,634,140 12.47% $ 1,190,308 12.47%
Personal loans 1,363,132 21.51 1,182,106 22.15 1,347,959 21.49 1,175,337 22.53
Retail sales
contracts 299,715 11.01 270,631 12.78 295,942 10.90 276,749 12.10
Total consumer ----------- ---------- ---------- ----------
finance
receivables 3,416,096 15.93 2,680,149 16.82 3,278,041 16.04 2,642,394 16.91
Investment securities
176,613 7.17 143,511 7.27 167,500 7.10 146,304 6.98
----------- ----------- ----------- -----------
Total interest-earning
assets $ 3,592,709 15.50% $ 2,823,660 16.33% $ 3,445,541 15.60% $ 2,788,698 16.39%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Interest-bearing liabilities:
Senior debt $ 2,108,658 6.97% $ 1,585,176 6.52% $ 2,060,369 6.89% $ 1,547,867 6.64%
Commercial paper 468,112 6.66 68,517 5.67 384,433 6.54 395,066 5.51
Customer deposits 170,485 5.65 200,579 5.46 177,085 5.54 196,365 5.51
FHLB advances 144,253 6.29 79,150 5.10 138,060 6.16 76,900 5.08
Total interest-bearing
liabilities $2,891,508 6.81% $ 2,233,422 6.23% $ 2,759,947 6.72% $ 2,216,198 6.28%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net interest spread 8.69% 10.10% 8.88% 10.11%
Net interest margin 10.02% 11.40% 10.22% 11.39%
</TABLE>
Provision for Credit Losses
The provision for credit losses for the three and six-month periods ended June
30, 2000 was $25.4 million and $49.8 million, compared to $26.0 million and
$51.6 million in the same periods of 1999. For the six months ended June 30,
2000, the annualized provision for credit losses was 3.04% of average consumer
finance receivables (excluding unearned finance charges and deferred loan fees),
as compared to 3.91% during the same period of 1999. See further discussion in
"Allowance for Credit Losses."
Noninterest Income
Noninterest income increased 7.8% and 13.0% for the three and six-month periods
ended June 30, 2000 to $7.4 million and $15.3 million, compared to $6.9 million
and $13.5 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
<PAGE> 11
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 six months ended June 30, partially offset by the shift in
originations to loans which tend to have a lower insurance penetration.
Noninterest Expenses
Noninterest expenses for the three and six-month periods ended June 30, 2000
increased 13.7% and 12.1%, to $37.5 million and $75.8 million, as compared to
$33.0 million and $67.7 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. Nonetheless, the efficiency ratio remained relatively flat,
increasing only 29 basis points as compared to the six-month period ended June
30, 1999.
Provision for Income Taxes
The provision for income taxes during the three and six-month periods ended June
30, 2000 was $13.1 million and $25.0 million, which represents an effective rate
of 38.0%. This compares to $ 11.0 million and $20.7 million, or 39.0% in the
same periods of 1999.
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 six months ended June 30, 2000:
Consumer Finance
o Net income increased 25.3% and 26.3% to $19.5 million and $36.9 million for
the three and six-month periods ended June 30, 2000 from $15.6 million and
$29.2 million in the same periods of 1999.
o The consumer finance receivables portfolio experienced significant growth
during the six months ended June 30, totaling $448.2 million, or 16.7% 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 10.7% and 21.0% to $1.9 million and $3.8 million for the
three and six-month periods ended June 30, 2000, from $1.7 million and $3.1
million during the same periods of 1999.
<PAGE> 12
o The consumer banking receivables portfolio increased $9.2 million, or 2.4%
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.
Asset Quality
Consumer Finance Receivables
<TABLE>
Consumer finance receivables consisted of the following:
June 30, December 31,
(Dollars in thousands) 2000 1999
--------------- ----------------
Consumer finance receivables:
<S> <C> <C>
Real estate secured loans $ 2,067,869 $ 1,630,496
Other installment loans 1,617,291 1,566,682
Retail installment contracts 346,004 327,914
--------------- ----------------
Gross consumer finance receivables 4,031,164 3,525,092
Less: Unearned finance charges and
deferred loan fees (512,067) (463,335)
Allowance for credit losses (103,418) (100,308)
--------------- ----------------
Consumer finance receivables, net $ 3,415,679 $ 2,961,449
--------------- ----------------
--------------- ----------------
</TABLE>
Allowance for Credit Losses
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 (personal loans and retail sales 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
Activity in the Company's allowance for credit losses was as follows:
<TABLE>
Six Months Ended June 30,
(Dollars in thousands) 2000 1999
--------- ----------
<S> <C> <C>
Balance, beginning of period $ 100,308 $ 80,493
Provision for credit losses 49,840 51,640
Amounts charged-off:
Real estate secured loans (874) (958)
Other installment loans (48,310) (39,356)
Retail installment contracts (6,255) (6,311)
--------- ----------
(55,439) (46,625)
Recoveries:
Real estate secured loans 112 245
Other installment loans 7,179 6,400
Retail installment contracts 1,418 1,589
--------- ----------
8,709 8,234
--------- ----------
Net charge-offs (46,730) (38,391)
--------- ----------
Balance, end of period $ 103,418 $ 93,742
--------- ----------
--------- ----------
</TABLE>
While charge-offs as a percentage of average consumer finance receivables have
decreased in recent quarters, 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 June 30, 2000 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 some
underlying delinquency trends which are beginning to impact the performance of
our 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 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.
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 port-
folio for some time. Thus, the charge-off rate in a rapidly growing portfolio
will tend to overstate 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 cannot be relied upon solely as an indicator of portfolio credit
quality.
Due to the significant growth in the portfolio during the quarter, coupled with
the presence of the above factors at June 30, 2000, the allowance for credit
losses increased $3.1 million, or 3.1% as compared to December 31, 1999.
Management considers the allowance for credit losses adequate to cover losses
inherent in the loan portfolio at June 30, 2000. No assurance can be given that
<PAGE> 14
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>
June 30, 2000 December 31, 1999
------------------- ---------------------
<S> <C> <C> <C> <C>
Real estate secured loans $ 25,675 1.25% $ 9,259 0.57%
Other installment loans 69,368 4.29 62,875 4.01
Retail installment contracts 9,140 2.64 9,137 2.79
--------- ----- --------- -----
$ 104,183 2.59% $ 81,271 2.31%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
The increased delinquencies in the real estate secured portfolio is directly
attributable to the portfolio acquisition from Long Beach Mortgage Company and
is not indicative of the quality of the portfolio as a whole. See "Overview."
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 June 30, 2000, thirteen different fixed-rate senior debt issues totaling
$2.45 billion were outstanding, with a weighted average rate of 6.96%. 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 June 30, 2000, twenty commercial
paper borrowings totaling $256.9 million were outstanding, with a weighted
average rate of 6.98%. 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 six months ended June 30, 2000, the split
between long and short-term at June 30, 2000 was approximately 88% to 12%. 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 June 30, 2000, the banking
subsidiary's outstanding debt totaled $309.5 million, with a weighted average
rate of 6.08%.
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 June 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 June
30, 2000 of 6.39:1 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
<PAGE> 15
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 June 30, 2000, approximately $157.8 million was
available under the debt agreement restriction for future dividends. Due to the
rapid growth in our consumer finance receivables portfolio, Washington Mutual
contributed capital totaling $8.75 million in the first quarter of 2000. We paid
dividends in the amount of $3.0 million in the quarter ended June 30, 2000.
<PAGE> 16
PART II. OTHER INFORMATION
Item 5. Other Information
The calculation of the Company's ratio of earnings to fixed charges as of the
dates indicated is shown below:
<TABLE>
For the Six Months
Ended June 30,
-------------------------
(Dollars in thousands) 2000 1999
<S> <C> <C>
Income before income taxes $ 65,684 $ 53,082
--------- ---------
Fixed charges:
Interest and debt expense on
all indebtedness 92,733 69,598
Appropriate portion of
rentals (33%) 2,002 1,893
--------- ---------
Total fixed charges 94,735 71,491
--------- ---------
Earnings available for
fixed charges $ 160,419 $ 124,573
--------- ---------
--------- ---------
Ratio of earnings
to fixed charges 1.69 1.74
--------- --------
--------- ---------
</TABLE>
<PAGE> 17
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, 1999. 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
On June 8, 2000, the Company filed a Current Report on Form 8-K, dated
June 8, 2000, disclosing, under item (7) thereof, the terms of the
issuance of $450 million aggregate principal amount of its 8.25%
Senior Notes maturing June 15, 2005.
(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 June 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> 18
SIGNATURE
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: August 14, 2000 By:
H. Philip Goodeve
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
