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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 33-13646
WESTCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
CALIFORNIA 51-0308535
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (714) 727-1002
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock $1 par value New York Stock Exchange
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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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2000:
COMMON STOCK, $1.00 PAR VALUE -- $110,174,012
The number of shares outstanding of the issuer's class of common stock as of
March 15, 2000:
COMMON STOCK, $1.00 PAR VALUE -- 26,597,344
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held May 23, 2000 are incorporated by reference into Part
III.
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WESTCORP AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 38
Item 3. Legal Proceedings........................................... 38
Item 4. Submission of Matters to a Vote of Security Holders......... 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 39
Item 6. Selected Financial Data..................................... 40
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 42
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 67
Item 8. Financial Statements and Supplementary Data................. 70
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 70
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 71
Item 11. Executive Compensation...................................... 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 71
Item 13. Certain Relationships and Related Transactions.............. 71
PART IV
Item 14. Financial Statement Schedules, Exhibits and Reports on Form
8-K......................................................... 72
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PART I
ITEM 1. BUSINESS
GENERAL
Westcorp is a diversified financial services holding company that provides
automobile lending services through its second tier subsidiary, WFS Financial
Inc ("WFS") and provides retail and commercial banking services through its
wholly owned subsidiary, Western Financial Bank (the "Bank"). The Bank currently
owns 82% of the capital stock of WFS.
AUTOMOBILE LENDING OPERATIONS
We are one of the nation's largest independent automobile finance companies
with 27 years of experience in the automobile finance industry. We originate,
service and securitize new and used automobile installment contracts, which are
generated through our relationships with over 8,500 franchised and independent
automobile dealers in 43 states. We originated $3.3 billion of automobile
contracts during 1999 and serviced a portfolio of $5.4 billion at December 31,
1999.
We provide service to dealers through our nationwide network of business
development representatives. Our business development representatives provide
dealers with a single contact to whom they can sell most of their automobile
contracts. Unlike many of our competitors, we offer programs for both prime and
non-prime borrowers. Approximately 70% of our contract originations are with
borrowers who have strong credit histories, otherwise know as prime borrowers,
and approximately 30% or our contracts are with borrowers who have overcome past
credit difficulties, otherwise know as non-prime borrowers. We do not offer
programs for borrowers who are currently experiencing or recently have
experienced credit difficulties, otherwise know as sub-prime borrowers.
We underwrite contracts through a credit approval process that is supported
and controlled by a centralized, automated front-end system. This system
incorporates proprietary credit scoring models and industry credit scoring
models and tools, which enhance our credit analysts' ability to tailor each
contract's pricing and structure to maximize risk-adjusted returns. Our
underwriters earn incentives based on the profitability rather than the volume
of the contracts that they purchase.
We structure our business to minimize operating costs while providing high
quality service to our dealers. Those aspects of our business that require a
local market presence are performed on a decentralized basis in our 45 offices.
All other operations are centralized.
We fund our purchases of contracts with deposits raised at the Bank which
are insured by the Federal Deposit Insurance Corporation ("FDIC"). We securitize
the contracts we have purchased on a regular basis. Since 1985, we have
securitized over $15 billion of automobile contracts in 47 public offerings of
asset-backed securities, making us the fourth largest issuer of such securities
in the nation. We anticipate that we will continue to securitize contracts in
transactions recorded as either secured financings or as sales.
The following table presents a summary of our automobile contracts
purchased:
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FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
New vehicles................................... $ 796,339 $ 547,898 $ 417,075
Used vehicles.................................. 2,543,807 2,122,798 1,868,204
---------- ---------- ----------
Total volume......................... $3,340,146 $2,670,696 $2,285,279
========== ========== ==========
Prime contracts................................ $2,313,573 $1,808,013 $1,245,027
Non-prime contracts............................ 1,026,573 862,683 1,040,252
---------- ---------- ----------
Total volume......................... $3,340,146 $2,670,696 $2,285,279
========== ========== ==========
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To improve our long-term profitability, we restructured our automobile
lending operations in 1998. As a result, we incurred a net loss of $14.7 million
in 1998 due to higher credit losses and a $15.0 million charge related to the
restructuring. The higher credit losses were due to purchasing a higher
percentage of non-prime contracts during 1996 and 1997, as well as servicing
disruptions created by our restructuring. As part of this restructuring, we
merged our prime and non-prime operations and offices, changed our purchasing
strategy to emphasize prime contracts, eliminated unprofitable dealer
relationships, implemented new underwriting and servicing technology, closed 96
underperforming offices and reduced our number of employees ("associates") by
approximately 20%.
As a result of this restructuring, we have:
- returned to profitability, realizing record net income of $52.6 million
in 1999;
- increased operating cash flows from automobile lending operations from
$13.6 million in 1997, to $16.4 million in 1998 and to $110 million in
1999;
- increased automobile contract originations from $2.3 billion in 1997, to
$2.7 billion in 1998 and to $3.3 billion in 1999;
- increased prime contract originations from 54% in 1997, to 68% in 1998
and to 69% in 1999;
- improved the percentage of applications funded to applications received
from 13% for first quarter of 1998 to 19% for the fourth quarter of 1999;
- lowered automobile lending operating expenses as a percentage of average
serviced contracts from 5.0% in 1997, to 4.1% in 1998 and to 3.6% in
1999; and
- reduced automobile net chargeoffs as a percentage of average serviced
contracts from 3.0% in 1997 and 3.4% in 1998 to 2.1% in 1999.
BANK OPERATIONS
The Bank's primary focus is to generate diverse, low-cost funds to provide
the liquidity needed to fund automobile contracts. We have the ability to raise
significant amounts of liquidity by attracting both short-term and long-term
deposits from the general public, commercial enterprises and institutions by
offering a variety of accounts and rates. These funds are generated through our
retail and commercial banking divisions. We may also raise funds by issuing
commercial paper, obtaining advances from the Federal Home Loan Bank ("FHLB"),
selling securities under agreements to repurchase and utilizing other
borrowings. We believe that the relationship maintained between WFS and the Bank
provides us a competitive advantage relative to other independent automobile
finance companies by providing a significant source of liquidity at a low cost
and by allowing us the ability to enter the automobile asset-backed securities
market on an opportunistic basis.
Our retail banking division serves the needs of individuals and small
businesses by offering a broad range of products, such as demand deposit
accounts, money market accounts, certificates of deposits and other investment
services through 25 retail branches located throughout California. Our
commercial banking division focuses on small and medium-sized businesses in
southern California, offering loans, lines of credit and trade finance services,
as well as account analysis, cash management and other commercial depository
services in order to attract low-cost commercial deposits. We also employ the
liquidity generated by the retail and commercial banking divisions by investing
in mortgage-backed securities ("MBS") to generate additional net interest
margin, to manage interest rate risk, to provide another source of liquidity
through repurchase agreements, to support community reinvestment and housing
finance and to meet regulatory requirements. See "Supervision and Regulation".
During 1998 and into 1999, we determined that our mortgage banking
activities no longer met our long-term profit goals and strategic objectives. As
a result, we closed our prime mortgage lending operations and sold $28.9 million
in mortgage servicing rights in the fourth quarter of 1998 and incurred a $3.0
million restructuring charge. During the third quarter of 1999, we completed the
sale our sub-prime mortgage lending operations and sold the remaining $1.0
billion of mortgage servicing rights that we held. During the fourth
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quarter of 1999, we closed our loan servicing department and entered into an
agreement to sell the rights to service our remaining owned portfolio, thereby
completing our mortgage banking exit strategy. At December 31, 1999, we owned
$598 million in single-family and multi-family mortgage loans that were
originated through previous mortgage lending activities.
The following table sets forth our loan origination, purchase and sale
activity over the past five years:
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FOR THE YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans originated:
Consumer loans:
Automobile contracts............ $3,340,146 $2,670,696 $2,285,279 $2,121,689 $1,527,649
Other........................... 15,586 9,645 52,080 35,867 28,647
---------- ---------- ---------- ---------- ----------
Total consumer loans....... 3,355,732 2,680,341 2,337,359 2,157,556 1,556,296
Mortgage loans:
Existing property............... 263,019 2,725,415 2,306,251 1,240,652 481,441
Construction.................... 11,969 18,721 17,078 10,207 5,697
Equity.......................... 1,948 10,262 8,177 8,857 4,136
---------- ---------- ---------- ---------- ----------
Total mortgage loans....... 276,936 2,754,398 2,331,506 1,259,716 491,274
Commercial......................... 237,316 124,259 71,399 8,632
---------- ---------- ---------- ---------- ----------
Total loans originated..... 3,869,984 5,558,998 4,740,264 3,425,904 2,047,570
Loans purchased:
Mortgage loans on existing
property........................ 412 450 6,166 213 252
---------- ---------- ---------- ---------- ----------
Total loans purchased...... 412 450 6,166 213 252
Loans sold or securitized:
Automobile contracts............... 2,500,000 1,885,000 2,190,000 2,090,000 1,480,000
Mortgage loans..................... 502,157 2,884,073 1,974,423 992,582 304,242
---------- ---------- ---------- ---------- ----------
Total loans sold or
securitized.............. 3,002,157 4,769,073 4,164,423 3,082,582 1,784,242
Principal reductions(1).............. 679,448 670,252 440,714 359,334 273,244
---------- ---------- ---------- ---------- ----------
Increase (decrease) in total loans... $ 188,791 $ 120,123 $ 141,293 $ (15,799) $ (9,664)
========== ========== ========== ========== ==========
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(1) Includes scheduled payments, prepayments and chargeoffs.
At December 31, 1999, our loan portfolio totaled $2.2 billion, of which 67%
were automobile contracts net of unearned interest, 28% were loans secured by
real property used primarily for residential purposes, 3% were commercial loans
and 2% were other consumer loans. Our loan portfolio totaled $2.0 billion at
December 31, 1998, of which 44% were automobile contracts, net of unearned
interest, 51% were loans secured by real property used primarily for residential
purposes, 3% were commercial loans and 2% were other consumer loans. Consumer
loans serviced for the benefit of others increased to $3.9 billion at December
31, 1999 compared with $3.5 billion at December 31, 1998.
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The following table sets forth the composition of our loan portfolio by
type of loan, including loans held for sale and loans serviced for the benefit
of others, as of the dates indicated:
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DECEMBER 31,
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1999 1998 1997 1996
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AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
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Consumer loans:
Automobile
contracts........ $1,518,433 69.6% $ 923,953 46.4% $ 253,455 13.5% $ 267,716
Other.............. 52,210 2.4 57,024 2.8 62,871 3.4 56,553
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1,570,643 72.0 980,977 49.2 316,326 16.9 324,269
Less: unearned
interest........... 54,248 2.5 48,015 2.4 22,225 1.2 33,768
---------- ----- ---------- ----- ---------- ----- ----------
Total consumer
loans.......... 1,516,395 69.5 932,962 46.8 294,101 15.7 290,501
Mortgage loans:
Existing
property......... 589,072 27.0 993,649 49.9 1,529,764 81.9 1,435,750
Construction....... 23,190 1.1 18,345 0.9 15,835 0.9 5,501
---------- ----- ---------- ----- ---------- ----- ----------
612,262 28.1 1,011,994 50.8 1,545,599 82.8 1,441,251
Less: undisbursed
loan proceeds...... 14,174 0.7 5,057 0.3 8,657 0.5 8,201
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Total mortgage
loans.......... 598,088 27.4 1,006,937 50.5 1,536,942 82.3 1,433,050
Commercial loans..... 67,141 3.1 52,934 2.7 37,325 2.0 7,661
---------- ----- ---------- ----- ---------- ----- ----------
Total loans...... $2,181,624 100.0% $1,992,833 100.0% $1,868,368 100.0% $1,731,212
========== ===== ========== ===== ========== ===== ==========
Loan serviced for the
benefit of others:
Automobile
contracts........ $3,890,683 97.0% $3,491,457 68.4% $3,459,272 41.3% $2,812,637
Mortgage loans..... 120,832 3.0 1,612,103 31.6 4,917,712 58.7 4,436,789
---------- ----- ---------- ----- ---------- ----- ----------
Total loans
serviced for
the benefit of
others......... $4,011,515 100.0% $5,103,560 100.0% $8,376,984 100.0% $7,249,426
========== ===== ========== ===== ========== ===== ==========
<CAPTION>
DECEMBER 31,
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1996 1995
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PERCENT AMOUNT PERCENT
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(DOLLARS IN THOUSANDS)
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Consumer loans:
Automobile
contracts........ 15.5% $ 320,870 18.4%
Other.............. 3.3 26,597 1.5
----- ---------- -----
18.8 347,467 19.9
Less: unearned
interest........... 2.0 4,440 0.3
----- ---------- -----
Total consumer
loans.......... 16.8 343,027 19.6
Mortgage loans:
Existing
property......... 83.0 1,406,552 80.5
Construction....... 0.3 8,469 0.5
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83.3 1,415,021 81.0
Less: undisbursed
loan proceeds...... 0.5 10,831 0.6
----- ---------- -----
Total mortgage
loans.......... 82.8 1,404,190 80.4
Commercial loans..... 0.4
----- ---------- -----
Total loans...... 100.0% $1,747,217 100.0%
===== ========== =====
Loan serviced for the
benefit of others:
Automobile
contracts........ 38.8% $1,894,944 33.9%
Mortgage loans..... 61.2 3,688,730 66.1
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Total loans
serviced for
the benefit of
others......... 100.0% $5,583,674 100.0%
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THE HISTORY OF WESTCORP
Western Thrift & Loan Association, a California-licensed thrift and loan
association was founded in 1972. In 1973, Western Thrift Financial Corporation
was formed as the holding company for Western Thrift & Loan Association. Western
Thrift Financial Corporation later changed its name to Westcorp. In 1982,
Westcorp acquired Evergreen Savings and Loan Association, a California-licensed
savings and loan association, which became a wholly owned subsidiary of
Westcorp. The activities of Western Thrift & Loan Association and Evergreen
Savings and Loan Association were merged together in 1982, and Evergreen Savings
and Loan Association's name was changed ultimately to Western Financial Bank.
Western Thrift & Loan Association was involved in automobile finance
activities from its incorporation until its merger with Evergreen Savings and
Loan Association. At such time, the automobile finance activities of Western
Thrift & Loan Association were continued by the Bank. In 1988, Westcorp
Financial Services, Inc. was incorporated as a wholly owned consumer finance
subsidiary of the Bank to provide non-prime automobile finance services, a
market not serviced by the Bank's automobile finance division.
In 1995, the Bank transferred its automobile finance division to Westcorp
Financial Services and changed its name to WFS Financial Inc ("WFS"). In
connection with that acquisition, the Bank transferred to WFS all assets
relating to its automobile finance division, including the contracts held on
balance sheet and all interests of the Bank in the excess spread payable from
outstanding securitization transactions. The Bank also transferred all of the
outstanding stock of WFS Financial Auto Loans, Inc., ("WFAL"), and WFS Financial
Auto Loans 2, Inc., ("WFAL2"), the securitization entities of the Bank, thereby
making these companies subsidiaries of WFS. In 1995, WFS sold approximately 20%
of its shares in a public offering.
On February 10, 2000, WFS completed a follow-on offering of 2,350,000
shares of common stock at a price of $15.00 per share. On March 10, 2000,
underwriters for the follow-on offering exercised their over allotment option to
purchase 300,000 additional shares bringing total net proceeds raised by WFS to
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approximately $37.9 million. The Bank purchased 1,000,000 shares of the total
2,650,000 shares issued by WFS. The primary purpose of the offering was to
provide WFS with additional capital to fund growth, to increase the amount of
contracts which can be acquired and held prior to sale in the asset-backed
securities market, and to provide working capital for general corporate
purposes. After the follow-on offering, the Bank owns approximately 82% of WFS'
shares.
The Bank is subject to examination and comprehensive regulation by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"). It is further subject to certain regulations of the Board
of Governors of the Federal Reserve System ("FRS") which governs reserves
required to be maintained against deposits and other matters. The Bank is also a
member of the FHLB of San Francisco, one of twelve regional banks for federally
insured savings and loan associations and banks comprising the FHLB System. The
FHLB System is under the supervision of the Federal Housing Finance Board. WFS
and certain other subsidiaries of the Bank are further regulated in part by
various departments or commissions of the states in which they do business.
Federal statutes and regulations primarily define the types of loans that the
Bank and its subsidiary may originate.
MARKET AND COMPETITION
We believe that the automobile finance industry is the second largest
consumer finance industry in the United States with over $635 billion of loan
and lease originations during 1999. The industry is generally segmented
according to the type of car sold, new versus used, and the credit
characteristics of the borrower, prime, non-prime or sub-prime. Based upon
industry data, we believe that during 1999, prime, non-prime and sub-prime loan
originations in the United States were $341 billion, $105 billion and $86
billion, respectively. The U.S. captive automobile finance companies, General
Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit
Corporation account for up to 30% of the automobile finance market. We believe
that the balance of the market is highly fragmented and that no other market
participant has greater than a 1% market share. Other market participants
include the captive automobile finance companies of other manufacturers, banks,
credit unions, independent automobile finance companies and other financial
institutions.
Our dealer servicing and underwriting capabilities enable us to compete
effectively in the automobile finance market. Our ability to compete
successfully depends largely upon our strong personal relationships with dealers
and their willingness to offer to us those contracts that meet our underwriting
criteria. Our relationship is fostered by the promptness with which we process
and fund contracts as well as the flexibility and scope of the programs we
offer. We purchase the full spectrum of prime and non-prime contracts secured by
both new and used vehicles.
The competition for contracts available within the prime and non-prime
credit quality contract spectrum is more intense when the rate of automobile
sales declines. Although we have experienced consistent growth for many years,
we can give no assurance that we will continue to do so. Several of our
competitors have greater financial resources than we have and may have a
significantly lower cost of funds. Many of these competitors also have
longstanding relationships with automobile dealers and may offer dealers or
their customers other forms of financing or services not provided by us. The
finance company that provides floor planning for the dealer's inventory is also
ordinarily one of the dealer's primary sources of financings for automobile
sales. We do not currently provide financing on dealers' inventories. We must
also compete with dealer interest rate subsidy programs offered by the captive
automobile finance companies. However, frequently those programs are limited to
certain models or to certain loan terms which may not be attractive to many new
automobile purchasers. Also, these programs are rarely offered on used vehicles.
Competition in the retail banking business comes primarily from commercial
banks, credit unions, savings and loan associations, mutual funds, and corporate
and government securities. Many of the nation's largest savings and loan
associations and other depository institutions are headquartered or have
branches in California. We compete for deposits primarily on the basis of
interest rates paid and the quality of service provided to our customers. We do
not rely on any individual, group or entity for a material portion of our
deposits.
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Competition in the commercial banking business comes primarily from other
commercial banks that maintain a presence in southern California. In general,
many commercial banks are more sizable institutions with larger lending
capacities and depository services. We have differentiated ourselves by
providing high quality service, local relationship management, prompt credit
decisions, and competitive rates on both loans and depository products.
OUR BUSINESS STRATEGY
Our business objective is to maximize long-term profitability by
efficiently purchasing and servicing prime and non-prime credit quality
automobile contracts that generate strong and consistent risk-adjusted returns.
We believe we will be able to achieve this objective by employing our business
strategies:
- produce measured growth in automobile contract originations;
- leverage technology to improve our business;
- effectively price automobile contracts relative to risk; and
- utilize the diverse funding sources of the Bank.
PRODUCE MEASURED GROWTH IN AUTOMOBILE CONTRACT ORIGINATIONS
Over the past five years, we have experienced a compounded annual growth
rate in automobile contract purchases in excess of 26%.
ANNUAL GROWTH RATE CHART
We provide a high degree of personalized service to our dealership base by
marketing, underwriting and purchasing contracts on a local level. Our focus is
to provide each dealer superior service by providing a single source of contact
to meet the dealer's prime and non-prime financing needs. We believe that the
level of our service surpasses that of our competitors by making our business
development representatives available any time a dealer is open, making prompt
credit decisions, negotiating credit decisions within available programs by
providing structural alternatives and funding promptly.
Growth of originations will be primarily through increased dealer
penetration. We intend to increase contract purchases from our current dealer
base as well as develop new dealer relationships. Prior to 1995, we originated
contracts in seven, primarily western states. Subsequently, we increased our
geographic penetration to 36 additional states. Although our presence is well
established throughout the country, we believe that we still have opportunities
to build market share, especially in those states which we entered since 1994.
In addition, we have improved our dealer education and delivery systems in order
to increase the ratio of contracts purchased to the amount of applications
reviewed from a dealer, thereby improving the efficiency of our dealer
relationships. We are also seeking to increase contract purchases through new
dealer programs
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targeting high volume, multiple location dealers. These programs focus on
creating relationships with dealers to achieve higher contract originations and
improved efficiencies. We also originate loans directly from consumers on a
limited basis. Additionally, we continue to explore other distribution channels
including the Internet and are piloting different dealer-centric approaches to
determine the most effective Internet strategies.
LEVERAGE TECHNOLOGY TO IMPROVE OUR BUSINESS
We are focused on leveraging technology to improve all aspects of our
business. Over the past three years, we have implemented technology and
streamlined operations to improve credit quality, enhance and manage growth and
improve operating efficiency. We plan to realize additional benefits with
ongoing investments in the future.
Key technological initiatives implemented to date include our:
- new automated front-end origination system which calculates borrower
ratios, maintains lending parameters and approval limits, accepts
electronic applications and directs applications to the appropriate
credit analyst, all of which have reduced the cost of receiving,
underwriting and funding automobile contracts;
- custom designed proprietary scoring models that rank order the risk of
loss occurring on a particular automobile contract;
- new collection system platform utilizing new hardware and software to
improve our ability to queue according to the level of risk, monitor
collector performance and track delinquent automobile accounts;
- centralized and upgraded borrower services department which includes
remittance processing, interactive voice response technology and direct
debit services; and
- centralized imaging system that provides for the electronic retention and
retrieval of account records.
We are currently developing behavioral scoring models to enhance both the
efficiency and effectiveness of our collection processes. We are also developing
a second generation data warehouse to enhance our ability to maximize our
profitability by dealer, and we are developing an on-line, Internet-based credit
application to further enhance our growth.
EFFECTIVELY PRICE AUTOMOBILE CONTRACTS RELATIVE TO RISK
Quality underwriting and servicing are essential to effectively assess and
price for risk and to maximize risk-adjusted returns. We rely on a combination
of credit scoring models, system controlled underwriting policies and the
judgment of our trained credit analysts to make risk-based credit decisions. We
use credit scoring to differentiate applicants and to rank order credit risk in
terms of expected default probability. Based upon this statistical assessment of
credit risk, the underwriter is able to appropriately tailor contract pricing
and structure.
To achieve the return anticipated at origination, we have developed a
disciplined servicing process for the early identification and cure of
delinquent contracts and for loss mitigation. In addition, we provide credit and
profitability incentives to our associates to make decisions consistent with our
underwriting policies by offering bonuses based both on individual and
office-wide performance.
UTILIZE THE DIVERSE FUNDING SOURCES OF THE BANK
The Bank provides diverse, low-cost funds through its retail and commercial
banking divisions as well as its ability to issue commercial paper, obtain
advances from the FHLB, sell securities under agreements to repurchase and to
utilize other borrowing sources. These significant and diverse sources of funds
provide liquidity at a low cost to fund our automobile contract purchases and
allow us to opportunistically enter the automobile asset-backed securities
market.
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OPERATIONS
AUTOMOBILE LENDING
Locations
We currently originate automobile contracts in 43 states through 45
offices. Each office manager is accountable for the performance of contracts
originated in that office throughout the life of the contracts, including
acquisition, underwriting, funding and collection. We have two regional
production and servicing centers located in California and Texas with functions
including data entry and verification, records management, remittance
processing, customer service call centers and automated dialers. We maintain
three regional bankruptcy and remarketing centers and have a centralized asset
recovery center located in California. Our corporate offices are located in
Irvine, California.
Business Development
Our marketing research staff locate geographic areas which exhibit
demographic characteristics that we believe will allow us to achieve the level
of originations necessary to provide us the maximum return given the costs
associated with establishing an office. These characteristics include population
size, number of dealers, the regulatory environment and competition. Within the
geographic area, we locate our offices in sections of high dealer concentration
to facilitate personal service in the local markets, including consistent buying
practices, quick credit decisions, operations open seven days a week,
competitive rates, a dedicated customer service staff and prompt funding. This
personal service is provided by a team of experienced business development
representatives with an established reputation for responsiveness and integrity
that call on dealers in a consistent and professional manner. We believe that
our local presence and service provide the opportunity to build strong and
lasting relationships with dealers.
The business development representatives' responsibilities include
improving our relationship with existing dealers and enrolling and educating new
dealers to increase the number of contracts originated. Our business development
representatives target selected dealers within their territory based upon
volume, potential for business, financing needs of the dealers, and competitors
that are doing business with such dealers. If we decide to do business with a
new dealer, we perform a review process. This process includes verifying that
the dealer holds a current business license and determining the length of time
the dealer has been in business. Additionally, we may review current financial
statements, inventory on hand and floor planning or other financing arrangements
that the dealer maintains.
We will then enter into a non-exclusive dealership agreement with the
dealer. This agreement contains certain representations regarding the contracts
the dealer will sell to us. Due to the non-exclusive nature of our relationship
with dealers, they retain discretion to determine whether to sell contracts to
us or another financial institution. The business development representative is
responsible for educating the finance managers about the types of contracts that
meet our underwriting standards. This education process ensures that we minimize
the number of applications we receive that are outside our underwriting
guidelines, thereby increasing our efficiency and lowering our overall cost to
originate contracts.
After this relationship is established, the business development
representative continues to actively monitor the relationship with the objective
of maximizing the overall profitability of each dealer relationship within their
territory. This includes ensuring that a significant number of approved
applications received from a particular dealer are actually funded by us,
ensuring that the type of contract received meets our underwriting standards,
monitoring the risk-based pricing of contracts acquired and reviewing the actual
performance of the contracts purchased. To the extent that a dealer does not
meet minimum conversion ratio or lending volume standards, the dealer may be
precluded from sending us applications in the future. During the past twelve
months, our dealer base has declined from 11,323 to 8,722, primarily as a result
of us eliminating dealers that did not meet our standards. Our increase in
volume is a result of funding more contracts per those dealers that met our
standards. Business development managers within each regional business center
provide direct management oversight to each business development representative.
In addition, the director of sales and marketing provides oversight management
to ensure that all business development managers and representatives are
following overall corporate guidelines.
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Underwriting and Purchasing of Contracts
The underwriting process begins when an application is faxed to our
centralized data entry center. Our data entry group enters the applicant
information into our front-end underwriting computer system. Once the
application has been entered, the computer system automatically pulls credit
bureau information on the applicant, which is then routed through one of our
multiple proprietary credit scorecards.
We use credit scoring to differentiate credit applicants and to rank order
credit risk in terms of expected default probabilities, which enables us to
tailor contract pricing and structure according to this statistical assessment
of credit risk. For example, a consumer with a lower score would indicate a
higher probability of default; therefore, we would structure and price the
transaction to compensate for this higher default risk. Multiple scorecards are
used to accommodate the full spectrum of contracts we purchase. In addition to a
credit score, the system highlights certain aspects of the credit application
which have historically impacted the credit worthiness of the borrowers.
Credit analysts are responsible for properly structuring and pricing deals
to meet our risked-based criteria. Credit analysts review the information,
structure and price of an application and make a determination whether to
approve, decline or make a counteroffer to the dealer. Each credit analyst's
lending levels and approval authorities are established based on the
individual's credit experience and portfolio performance, credit manager audit
results and quality control review results. Higher levels of approvals are
required for higher credit risk and are controlled by system driven parameters
and limits. System driven controls include limits on interest rates, contract
terms, contract advances, payment to income ratios, debt to income ratios,
collateral values and low side overrides.
Once adequate approval has been received, the computer system automatically
sends a fax back to the dealer with our credit decision, specifying approval,
denial or conditional approval based upon modification to the structure such as
increase in down payment, reduction of term, or the addition of a co-signer. As
part of the approval process, the system or the credit analyst may require that
some of the information be verified, such as income, employment, residence or
credit history of the applicant. The system increases efficiency by
automatically denying approval in certain circumstances without additional
underwriting being performed. These automated notices are controlled by
parameters set by us consistent with our credit policy.
If the dealer accepts the terms of the approval, the dealer is required to
deliver the necessary documentation for each contract to the appropriate office.
The operations group audits such documents for completeness and consistency with
the application, providing final approval and funding of the contract. A direct
deposit is made or a check is prepared and is promptly sent to the dealer for
payment. The dealer's proceeds include an up-front dealer participation paid to
the dealer for consideration of the acquisition of the contract. The completed
contract file is then forwarded to the appropriate records center for imaging.
Under the direction of the Credit Pricing Committee, the Chief Credit
Officer oversees credit risk management, sets underwriting policy, monitors
contract pricing and tracks compliance to underwriting policies and
re-underwrites select contracts. If re-underwriting statistics are unacceptable,
all monthly and quarterly incentives are forfeited by the office that originated
the contracts. Our internal quality control group reviews contracts on a
statistical sampling basis to ensure adherence to established lending guidelines
and proper documentation requirements. Credit managers within each regional
business center provide direct management oversight to each credit analyst. In
addition, the Chief Credit Officer provides oversight management to ensure that
all credit managers and analysts are following overall corporate guidelines.
Servicing of Contracts
We service all of the automobile contracts we purchase, both those held by
us and those sold in securitization transactions. The servicing process includes
the routine collection and processing of payments, responding to borrower
inquiries, maintaining the security interest in the vehicle, maintaining
physical damage insurance coverage and repossessing and selling collateral when
necessary. During the fourth quarter of 1999, we implemented a new collection
system to further improve our collection processes and reduce operating
expenses.
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<PAGE> 12
We use monthly billing statements to serve as a reminder to borrowers as
well as an early warning mechanism in the event a borrower has failed to notify
us of an address change. Approximately 15 days before a borrower's payment is
due, we mail the borrower a billing statement directing the borrower to mail
payments to our lockbox address. Payments received in the mail or through our
offices are processed by our remittance processing center using state of the art
lockbox equipment. To expedite the collection process, we accept payments from
borrowers through automated payment programs including PC banking, direct debits
and third party payment processing services. Our customer service center uses
interactive voice response technology to answer routine account questions and
route calls to the appropriate service counselor.
Our fully integrated servicing and collections system automatically
forwards accounts based on estimated likelihood of default and delinquency
status to our automated dialers or to our collection centers throughout the
country. Borrowers who are past due initially receive a call from a collector
queued by our automated telephone dialing system. If the system is unable to
reach a borrower within a specified number of days or if the account is beyond
21 days delinquent, the account is forwarded to a collection specialist within
the office that originated the contract. This process balances the efficiency of
centralized collection efforts with the effectiveness of decentralized personal
collection efforts. Our systems also track delinquencies and chargeoffs, monitor
the performance of our collection associates and forecast potential future
delinquency. To assist in the collection process, we can access original
documents through our imaging system, which stores all the documents related to
each contract. We limit deferments to a maximum of three over the life of the
contract and rarely rewrite contracts.
If satisfactory payment arrangements are not made, the automobile is
generally repossessed within 60 to 90 days of the date of delinquency, subject
to compliance with applicable law. We use independent contractors to perform
repossessions. The automobile remains in our custody generally for 15 days, or
longer if required by local law, to provide the obligor the opportunity to
redeem the contract. If after the redemption period the delinquency is not
cured, we write down the vehicle to fair value and reclassify the contract as a
repossessed asset. After the redemption period expires, we prepare the
automobile for sale. We sell substantially all repossessed automobiles through
wholesale automobile auctions, subject to applicable law. We do not provide the
financing on repossessions sold. We use regional remarketing departments to sell
our repossessed vehicles. Once vehicles are sold, any remaining deficiency
balances are then charged off. At December 31, 1999, the total amount of
repossessed automobiles managed by us was $3.4 million or 0.06% of the total
serviced contracts compared with $7.8 million or 0.18% of total serviced
contracts at December 31, 1998 and $9.7 million or 0.26% of total serviced
contracts at December 31, 1997.
It is our policy to charge off an account when it becomes contractually
delinquent by 120 days, even if we have not yet repossessed the vehicle. At the
time that the contract is charged off, all accrued interest is also reversed.
After chargeoff, we collect deficiency balances through our centralized asset
recovery center. These efforts include contacting the borrower directly, seeking
a deficiency judgment through a small claims court, or instituting other
judicial action where necessary. In some cases, particularly where recovery is
believed to be less likely, the account may be assigned to a collection agency
for final resolution. We also monitor payment plans on those obligors who have
filed for bankruptcy.
RETAIL BANKING
Our retail banking operations are conducted through 25 branch offices
located throughout California. At December 31, 1999 and 1998, the total deposits
gathered by the retail banking division were $2.1 billion. Due to the limited
number of branch offices, we have historically focused on certificates of
deposit accounts as the primary product offered by the retail banking division.
During 1997, we determined to lower the overall cost of funds generated in
our retail banking division by introducing demand deposit and money market
accounts to our existing customer base. Additionally, we installed automated
teller machines to provide our customers with 24-hour access to their depository
accounts. Based upon the success of our initial introduction of these products,
we determined to aggressively market our products to a new customer base. During
1998, we also added small business deposit accounts and business money market
accounts to our line of products. We target small and middle market businesses
generally with
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<PAGE> 13
annual gross sales under $10 million for our business deposit products. We also
aggressively pursue personal banking relationships with the principals and
associates of such businesses.
As a result of the change in our deposit gathering strategy, we have been
able to increase the amount of retail demand deposit and money market accounts
to $477 million at December 31, 1999 compared with $341 million and $131 million
at December 31, 1998 and 1997, respectively. At December 31, 1999, demand
deposit and money market accounts represented 24% of our total retail deposits.
This change has reduced our retail banking all-in cost of funds (interest cost
of deposits plus operating costs to gather such deposits) compared with the 11th
district cost of funds by 132 basis points from 1998 to 1999.
COMMERCIAL BANKING
We focus our commercial banking operations in the Orange, Los Angeles and
San Diego County metropolitan areas, operating through our Irvine headquarters
office. We target commercial clients with sales between $10 and $100 million. We
offer our commercial clients a full array of deposit and loan products that are
priced competitively and designed specifically for the commercial clients we
serve. The commercial banking division's strategy is to generate deposits in
excess of the loans it funds to provide another source of liquidity for the
Bank. Deposit products include money market, business checking and certificate
of deposit accounts delivered either through direct contact or through cash
management services. Loan products include term loans, lines of credit,
asset-based loans, construction and real estate loans. We also offer consumer
deposit and money market accounts as well as consumer loans and lines of credit
to the company owners, management and their associates. Loan products are
generally priced on a floating rate basis, based on the prime rate or LIBOR
rate. Fixed rates are generally limited to a one-year term or less.
Credit quality is managed by having each loan reviewed for approval by a
credit committee comprised of the Bank's President, Chairman of the Board, Board
members and other executives of the company. In addition, account officers are
directly assigned to specific accounts to maintain close contact with the
customer. Such contact allows for greater opportunity to cross sell products, as
well as for observing and continually evaluating the customer for potential
credit problems.
At December 31, 1999, the commercial banking division had generated $216
million in deposits compared with $80 million and $67.5 million at December 31,
1998 and 1997, respectively. Commercial loans outstanding totaled $67.1 million,
$52.9 million and $41.7 million at December 31, 1999, 1998, and 1997,
respectively.
MORTGAGE PORTFOLIOS
We have from time to time originated mortgage products that were held on
our balance sheet rather than selling such products into the secondary markets.
Other than mortgage loans originated on a limited basis through the commercial
banking division, we do not expect to add mortgage loans to our balance sheet.
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<PAGE> 14
Our total mortgage loan portfolio (including those held for sale) consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
----------------- -------------------
AMOUNT % AMOUNT %
-------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds................................. $281,419 47.1% $ 617,914 61.4%
Second trust deeds................................ 6,885 1.1 27,052 2.7
-------- ----- ---------- -----
288,304 48.2 644,966 64.1
Multifamily residential loans....................... 272,132 45.5 331,652 32.9
Construction loans.................................. 23,190 3.9 18,345 1.8
Other............................................... 28,636 4.8 17,031 1.7
-------- ----- ---------- -----
612,262 102.4 1,011,994 100.5
Less: undisbursed loan proceeds..................... 14,174 2.4 5,057 0.5
-------- ----- ---------- -----
Total mortgage loans...................... $598,088 100.0% $1,006,937 100.0%
======== ===== ========== =====
</TABLE>
The following table sets forth information on the amount of fixed rate
mortgage loans and adjustable rate mortgages ("ARMs"), net of undisbursed loan
proceeds, in our portfolio:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
----------------- -------------------
AMOUNT % AMOUNT %
-------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans.................................... $ 54,319 9.1% $ 280,589 27.9%
Adjustable rate loans:
With negative amortization........................ 392,410 65.6 514,819 51.1
Without negative amortization..................... 151,359 25.3 211,529 21.0
-------- ----- ---------- -----
Total mortgage loans...................... $598,088 100.0% $1,006,937 100.0%
======== ===== ========== =====
</TABLE>
CONSTRUCTION LOANS
On a limited basis, we originate construction loans primarily for single
family owner-occupied residences and commercial real estate. These include loans
for the acquisition and development of unimproved property to be used for
residential and commercial purposes. The construction loan portfolio generally
consists of loans with terms ranging from 12 to 18 months with fully indexed
adjustable interest rates that range between 7.50% and 8.75%. Advances are
generally made to cover actual construction costs and include a reserve for
paying the stated interest due on the loan.
TRANSACTIONS WITH RELATED PARTIES
In our opinion, the transactions described herein under the caption
"Transactions with Related Parties" have been on terms no less favorable to us
than could be obtained from unaffiliated parties, notwithstanding that the
transactions were not negotiated at arm's length. However, the transactions were
approved by our entire Board of Directors and the Boards of Directors of the
Bank and WFS, including their respective independent directors.
INTERCOMPANY BORROWINGS
WFS has three separate borrowing arrangements with the Bank. The senior
note and the promissory note are long-term, unsecured debt, while the line of
credit is designed to provide short-term financing for the purchase of
contracts. These borrowings are the only source of liquidity for WFS outside of
the asset-backed securities market. These transactions eliminate upon
consolidation of WFS with the Bank.
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<PAGE> 15
The principal amount outstanding under the senior note payable to the Bank
was $43.9 million at December 31, 1999. The original principal amount under the
senior note payable was $125 million. The senior note provides for principal
payments of $25.0 million per year, commencing on April 30, 1999 and continuing
through its final maturity, April 30, 2003. During 1999, WFS made paydowns of
$66.1 million without prepayment penalties. Interest payments on the senior note
are due quarterly, in arrears, calculated at the rate of 7.25% per annum.
Interest expense totaled $5.4 million for the year ended December 31, 1999 and
$9.0 million and $9.1 million for the years ended December 31, 1998 and 1997,
respectively.
WFS has $135 million outstanding under the terms of the promissory note
payable to the Bank. The promissory note provides for principal payments of
$67.5 million per year, commencing July 31, 2001 and continuing through its
final maturity, July 31, 2002. Interest payments on the senior note are due
quarterly, in arrears, calculated at the rate of 9.42% per annum. Interest
expense totaled $9.3 million for the year ended December 31, 1999 and $4.7
million and $2.0 million for the years ended December 31, 1998 and 1997,
respectively.
Pursuant to the terms of the senior note and the promissory note, WFS has
agreed that until the senior note and the promissory note are paid in full, it
will not incur any other indebtedness which is senior to the obligations
evidenced by the senior note and the promissory note except for indebtedness
collateralized or secured under the line of credit described below and
indebtedness for similar types of warehouse lines of credit.
The line of credit extended to WFS by the Bank permits it to draw up to
$1.3 billion. WFS does not pay a commitment fee for the line of credit. The line
of credit terminates on December 31, 2004, although WFS may extend the line of
credit for additional periods up to 60 months. When secured, the line of credit
carries an interest rate equal to one-month LIBOR plus 62.5 basis points. When
unsecured, the line of credit carries an interest rate equal to one-month LIBOR
plus 112.5 basis points. Throughout 1999, the line of credit was secured.
Interest on the amount outstanding under the line of credit is paid monthly, in
arrears, and is calculated on the daily average amount outstanding that month.
At December 31, 1999, $551 million was outstanding on the line of credit.
Interest expense was $17.2 million for the year ended December 31, 1999 and
$16.8 million and $6.1 million for the years ended December 31, 1998 and 1997,
respectively.
SHORT-TERM INVESTMENTS
WFS invests its cash at the Bank under an investment agreement. The Bank
pays WFS an interest rate equal to the Federal composite commercial paper rate
on this cash. At December 31, 1999 and December 31, 1998, WFS held no excess
cash with the Bank under the investment agreement. Interest earned totaled $0.1
million for the year ended December 31, 1999, $0.5 million for the year ended
December 31, 1998 and $1.7 million for the year ended December 31, 1997. This
short-term investment eliminates upon consolidation.
WFS REINVESTMENT CONTRACT
Through a series of agreements which WFS, the Bank, WFAL2 and other parties
have entered into, WFS has access to the cash flows of each of the outstanding
securitization transactions, including the cash held in each spread account. WFS
is permitted to use that cash as it determines, including in the ordinary
business activities of originating contracts.
The securitization agreements for all securitization transactions require,
provided certain conditions are met, that all cash flows of the relevant trusts
and the associated spread accounts be invested in eligible investments. The Bank
and WFAL2 have entered into a reinvestment contract in connection with each
securitization transaction, which is deemed to be an eligible investment under
the relevant securitization agreements.
A limited portion of the invested funds may be used by WFAL2 and the
balance may be used by the Bank. The Bank makes its portion available to WFS
through the terms of a reinvestment contract with WFS. Under this reinvestment
contract, WFS receives access to all of the cash available to the Bank under
each trust reinvestment contract. WFS is obligated to repay the Bank an amount
equal to the cash it used, when
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<PAGE> 16
needed by the Bank, to meet its obligations under the individual trust
reinvestment contracts. With the portion of the cash available to it under the
individual trust reinvestment contracts, WFAL2 purchases contracts from WFS
through the terms of sale and servicing agreements.
TAX SHARING AGREEMENT
We and our subsidiaries are parties to a tax sharing agreement with WFS,
the Bank and their subsidiaries, pursuant to which a consolidated federal tax
return is filed for all parties to the agreement. Under the agreement, the tax
due by the group is allocated to each member based upon the relative percentage
of each member's taxable income to that of all members. Each member pays us its
estimated share of that tax liability when otherwise due, but in no event may
the amount paid exceed the amount of tax which would have been due if a member
were to file a separate return. A similar process is used with respect to state
income taxes for those states which permit the filing of a consolidated or
combined return. Tax liabilities to states which require the filing of separate
tax returns for each company are paid by each company. The term of the tax
sharing agreement commenced on the first day of the consolidated return year
beginning January 1, 1994 and continues in effect until the parties to the tax
sharing agreement agree in writing to terminate it.
MANAGEMENT AGREEMENTS
We have entered into certain management agreements with the Bank and WFS
pursuant to which we pay our allocated portion of certain costs incurred by the
Bank and WFS. Such costs include the cost of services or facilities of the Bank
and WFS used by us or our subsidiaries, including our principal office
facilities and certain field offices, and overhead and associate benefits
pertaining to Bank and WFS associates who also provide services to us or our
subsidiaries. Additionally, as part of these management agreements, the Bank and
WFS have agreed to reimburse us for similar costs incurred. The management
agreements may be terminated by any party upon five days prior written notice
without cause, or immediately in the event of the other party's breach of any
covenant, obligation, or duty contained in the applicable management agreement
or for violation of law, ordinance, statue, rule or regulation governing either
party to the applicable management agreement. Such payments eliminate upon
consolidation.
SUPERVISION AND REGULATION
GENERAL
In 1989, Congress adopted the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA"). Congress' adoption of FIRREA substantially changed
the laws under which Westcorp and the Bank operate. In 1991, Congress enacted
the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"). FDICIA
requires specified regulatory agencies to adopt regulations which have broad
application to insured financial institutions such as the Bank. In 1994 and
1996, Congress adopted the Riegle Community Development and Regulatory
Improvement Act ("RCDA") and the Deposit Insurance Fund Act (the "Fund Act"),
respectively. The adoptions of RCDA and the Fund Act modified some of FDICIA's
requirements.
Set forth below is a discussion of how Congress' adoption of FIRREA,
FDICIA, RCDA, and the Fund Act changed the laws under which Westcorp and the
Bank operate. In addition, in 1999, Congress adopted the Gramm-Leach-Bliley Act
which modified a portion of the Bank Holding Company Act, among other changes.
The changes applicable to Westcorp and the Bank are discussed below.
To the extent, however, that any of the following discussion describes
statutory or regulatory provisions, the exact language of the statute or
regulatory provision qualifies any such discussion. Furthermore, any future
changes in the applicable law or regulation or in the policies of various
regulatory authorities may have a material effect on our business. Accordingly,
Westcorp cannot assure you that we will not be affected by any such further
changes.
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<PAGE> 17
WESTCORP
The Savings and Loan Holding Company Act
Westcorp, by virtue of its ownership of the Bank, is a savings and loan
holding company within the meaning of the Home Owners' Loan Act ("HOLA"), which
was amended by FIRREA and most recently by the Gramm-Leach-Bliley Act. Savings
and loan holding companies and their savings association subsidiaries, such as
Westcorp and the Bank, are extensively regulated by Federal laws.
Westcorp is a savings and loan holding company registered with the Office
of Thrift Supervision. Therefore, Westcorp is subject to the OTS' regulations,
examination and reporting requirements. Westcorp is a "unitary" savings and loan
holding company within the meaning of regulations promulgated by the OTS. As a
result, Westcorp is virtually unrestricted in the types of business activities
in which it may engage, provided the Bank continues to meet the Qualified Thrift
Lender test under HOLA. Westcorp intends to remain a unitary savings and loan
holding company. However, if Westcorp acquires one or more insured institutions
and operates them as separate subsidiaries rather than merging them with the
Bank, or if certain other circumstances not currently applicable to Westcorp
arise, Westcorp would be treated as a "multiple" savings and loan holding
company. As a "multiple" savings and loan holding company, additional regulatory
restrictions would be imposed on Westcorp. Westcorp does not anticipate that
those circumstances will arise unless Westcorp acquires one or more insured
institution as a result of a supervisory acquisition and the insured institution
meets the Qualified Thrift Lender test.
HOLA prohibits a savings and loan holding company, without prior approval
of the OTS, from controlling any other savings association or savings and loan
holding company.
Additionally, FIRREA empowers the OTS to take substantive action when it
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness, or stability of that holding
company's subsidiary savings association. Thus, FIRREA confers on the OTS
oversight authority for all holding company affiliates, not just the Bank.
Specifically, the OTS may, as necessary:
- limit the payment of dividends by the Bank;
- limit transactions between the Bank, the holding company and the
subsidiaries or affiliates of either; and
- limit any activities of the holding company that might create a serious
risk that the liabilities of the holding company and its affiliates may
be imposed on the Bank.
Any of these limits may be issued in the form of regulations or a directive
having the effect of a cease and desist order.
HOLA also limits the type of activities and investments in which the
savings association subsidiaries of a savings and loan holding company may
participate if the investment and/or activity involves an affiliate of that
savings association's subsidiary. In general, savings association subsidiaries
of a savings and loan holding company are subject to Sections 23A and 23B of the
Federal Reserve Act ("FRA") in the same manner and to the same extent as if the
savings association were a member bank of the FRS, as well as regulations
adopted by the OTS. Section 23A of the FRA places certain quantitative
limitations on certain transactions between a bank, including its subsidiaries,
and affiliates. The quantitative limitations are based upon a percentage of the
savings association's capital stock and surplus. Transactions covered by Section
23A of the FRA, include transactions involving:
- loans or extensions of credit to the affiliate;
- the purchase of or investment in securities issued by an affiliate;
- the purchase of certain assets from an affiliate;
- the acceptance of securities issued by an affiliate as security for a
loan or extension of credit to any person; or
- the issuance of a guarantee, acceptance or letter of credit on behalf of
an affiliate.
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<PAGE> 18
The Board of Governors of the FRS revised the definition of capital stock
and surplus for purposes of Section 23A so that it is more consistent with the
definitions used by the Board in calculating the limits in Regulation O for
insider lending, and by the Office of the Comptroller of the Currency ("OCC") in
calculating the limit on loans by a national bank to a single borrower. The
revised definition of capital stock and surplus permits the Bank to include
subordinated debt that it issues in the calculation of capital stock and
surplus, as long as the debt qualifies for inclusion in Tier 2 capital.
In addition, Section 23B requires that transactions between a savings
association subsidiary or its subsidiary and an affiliate must meet certain
qualitative limitations. Section 23B requires that such transactions be on terms
that are at least as favorable to the bank or its subsidiary as are the terms of
the transactions with unaffiliated companies.
Section 11 of the HOLA, as amended by FIRREA, also specifically prohibits a
savings association subsidiary of the savings and loan holding company from:
- making a loan or extension of credit to an affiliate, unless that
affiliate is engaged only in activities permitted to bank holding
companies under Section 4(c) of the Bank Holding Company Act, or
- purchasing or investing in the securities of an affiliate, other than a
subsidiary of the savings association.
Under most circumstances, the above prohibitions include a purchase of
assets from an affiliate of the savings association subsidiary that is made
subject to the affiliate's agreement to repurchase the assets. The OTS
regulations exclude transactions between a savings association subsidiary and
its subsidiaries from the limitations of those sections. This exclusion is
consistent with the provisions of Sections 23A and 23B of the Federal Reserve
Act. However, the OTS regulations also define certain subsidiaries to be
affiliates of the savings association subsidiary. Therefore, such certain
subsidiaries are subject to the requirements of those sections of the OTS
regulation. At the present time, none of the Bank's subsidiaries are within the
definition of an affiliate for purposes of the OTS regulations.
Amendments to FIRREA and FDICIA require that savings association
subsidiaries comply with the requirements of Federal Reserve Act Sections 22(g)
and 22(h), and Regulation O of the Federal Reserve System, with respect to loans
to executive officers, directors and principal shareholders, in the same manner
as member banks. The RCDA permits loans secured by a first lien on an executive
officer's residence to be made without prior approval of the board of directors
of the financial institution. As a matter of policy, the Bank does not make
loans to executive officers, directors or principal shareholders.
The Gramm-Leach-Bliley Act
In 1999, Congress adopted the Gramm-Leach-Bliley Act ("GLBA"). GLBA
substantially modernizes how financial services are provided to the American
public. Significantly, GLBA permits insurance, banking and securities firms to
be owned by a single owner. GLBA also prohibits unitary savings and loan holding
companies, like us, from being acquired by commercial companies. We are
permitted under GLBA, however, to continue to engage in any business
opportunities in which we had a right to engage prior to the enactment of GLBA.
In short, GLBA does not have any effect on our business, and we do not expect
that any of its provisions will have an adverse effect on our operations or our
financial condition.
However, because GLBA liberalizes the activities permitted to a bank
holding company from those closely related to banking to those which are
financial activities, entities which are well capitalized but previously could
not own banks can now acquire a bank and become a bank holding company. Thus,
GLBA creates the potential for well capitalized entities to enter into the
banking business. As any such entity could have become a unitary savings and
loan holding company prior to enactment of GLBA, Westcorp does not anticipate
that this change in the laws applicable to bank holding companies will have a
significant affect upon Westcorp or the Bank.
Under GLBA, savings associations have gained the same treatment long
applicable to banks and are now exempt from registering as an "investment
company" when using common or collective trust funds to offer trust and other
fiduciary services to their customers. GLBA expanded the exemption by amending
Section 2(a)(5)(A) of the Investment Company Act to include "depository
institutions" within the meaning of "bank." That term encompasses savings
associations insured by the FDIC. GLBA also amended Sec-
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tion 3(a)(2) of the Securities Act of 1933 to exempt the interests in common or
collective trust funds from registration as securities.
GLBA also creates additional obligations on financial institutions
regarding the safeguarding of nonpublic personal information of their customers
and creates affirmative duties to advise customers as to what the financial
institutions do with their customers' nonpublic personal information. Westcorp
and the Bank do not believe that these privacy requirements will have a
significant impact on the Bank or any of its subsidiaries, because the Bank and
its subsidiaries have historically safeguarded the personal confidential
information of their customers as required by other federal statutes.
THE BANK
California Savings Association Law
As a federally chartered institution, the Bank's investments and
borrowings, loans, issuance of securities, payments of interest and dividends,
establishment of branch offices and all other aspects of its operations are
subject to the exclusive jurisdiction of the OTS. In other words, the OTS
jurisdiction preempts the jurisdiction of the California Financial Code or
regulations of the California Commissioner of Financial Institutions. The OTS
adopted regulations preempting state laws pertaining to the operations of
federal savings associations and their operating subsidiaries.
Federal Home Loan Bank System
The Bank, as a member of the Federal Home Loan Bank System ("FHLB System"),
is required to own capital stock in the FHLB System. The amount of capital stock
must be at least equal to the greater of 1% of the aggregate outstanding balance
of its loans secured by residential real property or 5% of the sum of advances
outstanding plus committed FHLB System commercial paper lines. The Bank is in
compliance with this requirement.
However, the GLBA establishes a new capital structure for the FHLB System
with new leverage and risk-based capital requirements based on permanence of
capital. Capital will include retained earnings and two forms of stock: Class A
stock redeemable with six months' written notice and Class B stock redeemable
with five years' written notice. A transition period for movement to the new
capital regime is provided. The Federal Home Finance Board shall issue capital
regulations not later than one year after the date of GLBA's enactment (November
12, 1999.) The current capital regime shall remain in effect until the new
regulations are in place.
Since the adoption of FIRREA, the requirements imposed by FIRREA on the
FHLB System have significantly reduced the dividends which the Bank has received
on its FHLB System stock. Each savings association in the FHLB System is
required to transfer a percentage of its annual net earnings to the Affordable
Housing Program, as defined in FIRREA. This amount is a minimum of 10% of the
annual net income of each bank in the FHLB System.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds for financial
institutions:
- the Savings Association Insurance Fund ("SAIF"), which insures the
deposits of savings associations that were insured by the Federal Savings
and Loan Insurance Corporation ("FSLIC") prior to the enactment of
FIRREA; and
- the Bank Insurance Fund ("BIF"), which insures the deposits of banking
institutions that were insured by the FDIC prior to FIRREA.
Commencing in 1989, the deposits of the Bank became insured through the
SAIF to the maximum amount permitted by law, which is currently $100,000.
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During 1999, the Bank was required to pay insurance premiums of $1.9
million. FDICIA required the FDIC to implement a risk-based assessment system
under which a banking institution's premiums are based on the FDIC's
determination of the relative risk that the condition of the banking institution
poses to its insurance fund. In response, the FDIC adopted a final rule,
effective January 1, 1994. Under this rule, each insured banking institution is
classified as "well capitalized," "adequately capitalized" or
"undercapitalized." These three classifications use definitions substantially
the same as the definitions adopted with respect to the "prompt corrective
action" rules adopted by the regulatory agencies under FDICIA. See "Prompt
Corrective Regulatory Action." Within each of these three classifications, the
FDIC has created three risk categories into which an institution may be placed,
based upon the supervisory evaluations of the institution's primary federal
financial institution regulatory agency and the FDIC. These three risk
categories consist of:
- those institutions deemed financially sound;
- those with demonstrated weakness that could result in significant
deterioration of the institution and risk of loss to the FDIC; and
- those which pose a substantial probability of loss to the FDIC.
Each of these nine assessment categories for SAIF insured banking
institutions, such as the Bank, is assigned an assessment rate. Under the
regulations, a banking institution may not disclose the risk-based assessment
category to which it has been assigned.
Pursuant to the provisions of FIRREA, the FDIC adopted a significant
reduction in the insurance premiums to be paid by those financial institutions,
primarily commercial banks, whose deposits are insured under the BIF. For BIF
insured institutions, the assessment rate ranged from 0 to 27 basis points per
annum of the institution's deposit assessment base, with a minimum premium of
$2,000 per year. However, for SAIF insured institutions the assessment rate
ranged from 23 to 31 basis points per annum. The Fund Act provides for
elimination of the differential in premiums. In addition, the Fund Act
authorized a one-time special assessment of 65.7 basis points of SAIF-assessable
deposits as of March 31, 1995, to be paid by SAIF insured institutions to
recapitalize the SAIF. On November 27, 1996, the FDIC collected from the Bank a
special assessment of $11.6 million. As a result of the special assessment
required by the Fund Act, the SAIF was capitalized at the target Designated
Reserve Ratio ("DRR") of 1.25% of estimated insured deposits on October 1, 1996.
Therefore, the FDIC lowered the rates on assessments paid to the SAIF, while
simultaneously widening the spread between the lowest and highest rates, to
avoid collecting more than needed to maintain the DRR, and to improve the
effectiveness of the risk-based system. Effective October 1, 1996, for all SAIF
insured institutions other than SAIF-member savings associations, the assessment
rate ranged from 0 to 27 basis points per annum. On January 1, 1997, the
adjusted rates became effective for all institutions including the Bank.
FIRREA established a five year moratorium on conversions from the SAIF to
the BIF. The Resolution Trust Corporation Completion Act ("RTCCA"), enacted on
December 17, 1993, extended this moratorium until the date on which the SAIF
first meets the reserve ratio designed for it. The Fund Act provides that the
moratorium will now terminate on the earlier of January 1, 2000 or when the bank
and savings association charters are united and the BIF and SAIF are merged.
There are several exceptions to this moratorium. Most importantly, a SAIF member
may convert to a bank charter if the resulting bank remains a SAIF member during
the term of the moratorium. Additionally, conversions to a bank charter can take
place during the moratorium if:
- it affects only an "insubstantial" portion of an institution's total
deposits and is approved by the FDIC;
- it results from the acquisition of a troubled institution that is in
default or in danger of default and is approved by the FDIC; or
- it results from a merger or consolidation of a bank and a savings
association and is approved by the FDIC or the OCC, as well as by the
FRS.
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The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution:
- either has engaged or is engaging in unsafe or unsound practices;
- is in an unsafe or unsound condition to continue operations; or
- has violated any applicable law, regulation, order or any condition
imposed by an agreement with the FDIC.
The FDIC also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which could result in
termination of the Bank's deposit insurance.
Liquidity Requirements
Under OTS regulations, the Bank must maintain an average daily balance of
liquid assets equal to at least 4% of the Bank's average daily balance of net
withdrawal accounts and borrowings payable on demand or in one year or less. The
balance of liquid assets includes cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations and certain corporate debt obligations and commercial paper. If at
any time the Bank's liquid assets do not at least equal, on an average daily
basis for any quarter, the amount required by these regulations, the Bank would
be subject to various OTS enforcement procedures, including monetary penalties.
At December 31, 1999, the Bank's percentage was 8.9%. Thus, the Bank was in
compliance with these requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources and
Liquidity."
Brokered Deposits
In June 1992, the FDIC issued regulations under FDICIA that provide for
differential regulation relating to brokered deposits based on capital adequacy.
Institutions are divided into categories of "well capitalized," "adequately
capitalized" and "undercapitalized." Only "well capitalized" institutions may
continue to accept brokered deposits without restriction. The RCDA affirmatively
excludes well capitalized institutions from the definition of deposit brokers,
thereby eliminating the need for well capitalized institutions to register as
deposit brokers.
At December 31, 1999, the Bank met the capital requirements of a well
capitalized association as defined by the regulation. At that date, the Bank
held $28.6 million of brokered deposits.
Regulatory Capital Requirements
The HOLA, as amended by FIRREA, mandates that the OTS promulgate capital
regulations that include capital standards no less stringent than the capital
standards applicable to national banks.
The HOLA and the OTS regulations require savings associations to maintain
"core capital" in an amount not less than 3% of adjusted total assets. However,
effective April 1, 1999, all savings associations that do not have a Capital,
Asset Quality, Management, Earnings, Liquidity, Sensitivity toward market risk
("CAMELS") rating system composite rating of 1 must maintain core capital in an
amount of not less than 4% of adjusted total assets. The OTS capital regulations
already permit the OTS to impose a higher individual minimum capital requirement
on a case-by-case basis. The Bank is not currently subject to this requirement.
The Bank's core capital ratio at December 31, 1999 was 8.85%. Core capital is
defined in the OTS capital regulations as including, among other things:
- common shareholder's equity (including retained earnings);
- a certain portion of the association's qualifying supervisory goodwill;
- noncumulative perpetual preferred stock and related surplus; and
- capitalized servicing rights ("CSRs") and purchased credit card
relationships ("PCCRs") meeting certain valuation requirements.
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All CSRs and PCCRs that are includable in capital are each subject to a 90%
fair value limitation. The maximum amount of CSRs and PCCRs which can be
included in core capital and tangible capital may not exceed, in the aggregate,
an amount equal to 100% of the institution's core capital, with nonmortgage
servicing assets and PCCRs limited to 25% of core capital. All other intangible
assets, other than qualifying PCCRs, must be deducted from core capital. At
December 31, 1999, the Bank held no CSRs or PCCRs.
A savings association must maintain "Tangible Capital" in an amount not
less than 1.5% of adjusted total assets. "Tangible Capital" means core capital
less any intangible assets, including supervisory goodwill, plus CSRs and PCCRs
to the extent includable in core capital as described above. At December 31,
1999, the Bank's tangible capital was 8.85%.
A savings institution's investments in, and extensions of credit to, a
subsidiary engaged in any activities not permissible for national banks
("nonincludable subsidiaries") generally are deducted from the institution's
core capital and tangible capital in determining compliance with capital
standards. This deduction is not required for investments in, and extensions of
credit to, a subsidiary engaged solely in mortgage banking, to certain
subsidiaries which are themselves insured depository institutions or, unless the
FDIC determines otherwise in the interests of safety and soundness, to a
subsidiary which engages in these impermissible activities solely as agent for
its customers. Since July 1, 1996, the Bank has been required to deduct from its
core and tangible capital its entire investments in Western Consumer Services,
Inc. ("WCS"), both equity and extensions of credit, because WCS is engaged in
residential real estate activities not permitted by national banks. At December
31, 1999, the amount excluded from the Bank's core and tangible capital was $0.3
million.
As of December 31, 1999, the Bank's core capital was $400 million,
exceeding the Bank's regulatory requirement by $265 million. The Bank's tangible
capital at December 31, 1999 was $400 million, exceeding the applicable
regulatory requirement by $333 million.
The risk-based component of the capital standards requires that a savings
association have total capital equal to 8.0% of risk-weighted assets. The OTS
risk-based capital regulation provides that for assets sold as to which any
recourse liability is retained, including on balance sheet assets related to the
assets sold which are at risk, a savings association must hold capital as a part
of its risk-based capital requirement equal to the lesser of:
- the amount of that recourse liability; or
- the risk-weighted capital requirement for assets sold off balance sheet
as though the assets had not been sold.
In addition, in the former instance, when calculating the Bank's risk-based
capital ratio (a) the value of those on balance sheet assets which are subject
to recourse, to the extent of that recourse liability ("fully capitalized
assets"), is deducted from the Bank's total capital and (b) neither the
risk-weighted value of the assets sold off balance sheet nor the amount of the
fully capitalized assets is included in the Bank's total risk-weighted assets.
The Bank's risk-based capital requirement at December 31, 1999 included $365
million due to its recourse liability relating to grantor and owner trust
financings, including fully capitalized assets.
The RCDA requires the federal banking agencies, including the OTS, to
review their risk-based capital recourse rules and to adopt new rules for assets
sold with low levels of recourse. This review and adoption of new rules is to
ensure that the risk-based capital held for these assets does not exceed the
contractual maximum recourse liability retained by the institution upon the sale
of those assets. The federal banking agencies, including the OTS, have adopted
these regulations. As the existing OTS low level recourse regulations were
already consistent with those called for by the RCDA, the OTS regulations
discussed in the preceding paragraph were not modified
Also in response to the RCDA, the federal banking agencies, including the
OTS, have adopted regulations pertaining to the amount of risk-based capital
which must be held upon the sale, with recourse, of qualifying small business
loans. Under these regulations, a well capitalized institution, such as the
Bank, upon the sale of loans which meet the criteria for loans to small
business, as defined by the Small Business
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Administration, needs to maintain capital only against the amount of recourse
retained, provided a reserve is established, under GAAP, for that recourse
liability. In addition, the maximum amount of recourse retained under this
regulation may not exceed 15% of the Bank's total capital. The effect of this
regulation is to substantially reduce the amount of risk-based capital which
must be maintained upon the sale of qualifying small business loans.
The Bank's total risk-weighted assets are determined by taking the sum of
the products obtained by multiplying each of the Bank's assets and certain off
balance sheet items by a designated risk-weight. Before an off balance sheet
item can be assigned a risk-weight, it must be converted to an on balance sheet
credit equivalent amount.
Four risk-weight categories exist for on balance sheet assets. The four
risk-weighted categories are:
- zero percent, which are generally cash and securities issued by or backed
by the full faith and credit of the United States;
- twenty percent, which are generally United States government-backed
mortgage securities;
- fifty percent, which are generally qualifying mortgage loans and
mortgage-backed securities not within lower categories; and
- one hundred percent, which are all other assets.
Before a risk-weight category can be applied to a consolidated off balance
sheet item, the item must be converted into a credit-equivalent amount by
multiplying its face amount by whichever of four credit conversion factors is
appropriate. Consider the following:
- there is a one hundred percent conversion of direct credit substitutes
and net assets sold under an agreement to repurchase;
- a fifty percent conversion factor for transaction-related contingencies
and the unused portions of nonexempt loan commitments;
- a twenty percent conversion for trade-related contingencies, such as
commercial letters of credit; and
- a zero percent conversion for the unused portion of exempt loan
commitments and unused, unconditionally cancelable retail credit card
lines.
Interest rate contracts have special credit equivalent amounts equal to the
sum of their current credit exposure plus their potential credit exposure. The
risk-weight category to be applied to these amounts in determining the credit
risk component would depend on the obligor, but in no event would be higher than
fifty percent risk-weight. As of December 31, 1999, the Bank's total
risk-weighted assets equaled $6.2 billion.
In addition to regulations pertaining to risk-based capital for interest
rate risk, FDICIA also requires the adoption of risk-based capital regulations
regarding excessive exposure to concentration of credit risk and the risks
associated with nontraditional activities. The OTS individual minimum capital
regulations include these factors as additional grounds upon which the OTS could
impose these requirements. The regulations do not set specific standards, but
leave it to the discretion of the OTS to impose additional capital requirements
on a case-by-case basis. The RCDA requires the federal banking agencies to add
the size and activities of an institution to that list of factors which may
justify the need for additional risk-based capital. Under the RCDA the federal
banking agencies are not to cause undue reporting burdens in connection with
these regulations. The OTS has not yet proposed new regulations in response to
this law.
Total capital, as defined by OTS regulations, is core capital plus
supplementary capital, with supplementary capital not to exceed 100% of core
capital, less:
- direct equity investments not permissible to national banks, subject to a
phase-in schedule;
- reciprocal holdings of depository institution capital investments; and
- that portion of land loans and nonresidential construction loans in
excess of 80% loan-to-value ratio.
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Supplementary capital is comprised of three elements:
- permanent capital instruments not included in core capital;
- maturing capital instruments; and
- general valuation loan and lease loss allowance.
The Bank currently has $52.4 million of its 8.5% Subordinated Capital
Debentures and $146 million of its 8.875% Subordinated Capital Debentures
outstanding, excluding discounts and issuance costs. Pursuant to the approval
from the OTS to treat those debentures as supplementary capital, the amount of
those debentures which may be included as supplementary capital may not exceed
one-third of the Bank's total capital. At December 31, 1999, the debentures then
outstanding represented 30.9% of the Bank's total capital. Consistent with the
OTS capital regulations, the amount of the 8.5% debentures which may be included
as supplementary capital decreases at the rate of 20% of the amount originally
outstanding per year, net of redemptions, commencing on July 1, 1998. The amount
of the 8.875% debentures which may be included as supplementary capital will
decrease at the rate of 20% of the amount originally outstanding per year, net
of redemptions, commencing on August 1, 2002.
The OTS regulations also permit the Bank to include up to 45% of the
pre-tax net unrealized holding gains on certain available-for-sale equity
securities as supplementary capital. The Bank's total capital at December 31,
1999 was $641 million and its risk-based capital ratio was 10.39%
As required by the provisions of FDICIA, the OTS has adopted an interest
rate risk component to its capital rules. The new rule establishes a method for
determining an appropriate level of capital to be held by savings associations
subject to the supervision of the OTS, such as the Bank, against interest rate
risk ("IRR"). The new rule generally provides that if a savings association's
IRR, calculated in accordance with the rule, exceeds a specified percentage, the
savings association must deduct from its total capital an IRR component when
calculating its compliance with the risk-based capital requirement.
Specifically, the rule provides that a savings association's IRR is to be
determined by the decline in that savings association's Net Portfolio Value
("NPV"), or the value of the association's assets as determined in accordance
with the provisions of the rule, resulting from a 200 basis point change in
market interest rates, divided by the NPV prior to that change. If that result
is a decrease of greater than 2%, the association must deduct from its total
capital an amount equal to one-half of the decline in its NPV in excess of 2% of
its NPV prior to the interest rate change (the "IRR component"). The reduction
of an association's total risk-based capital is effective on the first day of
the third quarter following the reporting date of the information used to make
the required calculations.
The rule also contains provisions which:
- reduce the IRR component if the association reduces its IRR by the end of
the quarter following the reporting date; and
- permit the OTS to waive or defer the IRR component on a showing that the
association has made meaningful steps to reduce or control its IRR.
The OTS has postponed the effective date as of which an IRR component will
be required to be deducted from a savings association's capital to permit the
OTS to review the interest rate risk regulations currently being promulgated by
the other federal banking agencies for their respective institutions. Even were
the rule currently being applied, the Bank would not be required to reduce its
total capital by an IRR component. The Bank does not anticipate being required
to do so during 2000.
Any savings association that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. These actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on an association's operations and
the appointment of a conservator or receiver. The OTS's capital regulation
provides that these actions, through enforcement proceedings or otherwise, could
require one or more of a variety of corrective actions. The OTS must prohibit
asset growth by any institution that is in violation of the foregoing minimum
capital requirements, and must
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require any such institution to comply with a capital directive issued by the
OTS. See "Prompt Corrective Regulatory Action."
In summary, the Bank exceeded the current minimum requirements for core
capital, tangible capital and risk-weighted capital as of December 31, 1999.
Prompt Corrective Regulatory Action
FDICIA requires each applicable agency and the FDIC to take prompt
corrective action to resolve the problems of insured depository institutions
that fall below certain capital ratios. This action must be accomplished at the
least possible long-term cost to the appropriate deposit insurance fund.
In connection with this action, each agency must promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the adequacy of its regulatory capital
level:
- well capitalized;
- adequately capitalized;
- undercapitalized;
- significantly undercapitalized; and
- critically undercapitalized.
The critically undercapitalized level cannot be set lower than 2% of total
assets or higher than 65% of the required minimum leverage capital level. In
addition to the various capital levels, FDICIA allows an institution's primary
federal regulatory agency to treat an institution as if it were in the next
lower category if that agency determines, after notice and an opportunity for
hearing, that the institution is in an unsafe or unsound condition, or that the
institution is engaged in an unsafe or unsound practice.
At each successive downward level of capital, institutions are subject to
more restrictions and regulators are given less flexibility in deciding how to
deal with the bank or thrift. For example, undercapitalized institutions will be
subject to asset growth restrictions and will be required to obtain prior
approval for acquisitions, branching and engaging in new lines of business. For
significantly undercapitalized institutions, the appropriate agency must:
- require the institution to sell shares in order to raise capital;
- restrict interest rates offered by the institution; and
- must restrict transactions with affiliates.
However, in each case, if the agency determines that these actions would
not further the purposes of the prompt corrective action system, then the agency
need not take the action. In addition, for critically undercapitalized
institutions, the agency must require prior agency approval for any transaction
outside the ordinary course of business and the institution must be placed in
receivership or conservatorship, unless the appropriate agency and FDIC make
certain affirmative findings regarding the viability of the institution, which
must be reviewed every 90 days.
FDICIA prohibits any insured institution, regardless of its capitalization
category, from making capital distributions to anyone or paying management fees
to any persons having control of the institution if, after the transaction, the
institution would be undercapitalized. Any undercapitalized institution must
submit an acceptable capital restoration plan to the appropriate agency within
45 days of becoming undercapitalized.
A capital restoration plan will be acceptable only if each company having
control over an undercapitalized institution guarantees that the institution
will comply with the capital restoration plan until the institution
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has been adequately capitalized on an average during each of four consecutive
calendar quarters and provides adequate assurances of performance. The aggregate
liability of the guarantee is limited to the lesser of either:
- an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized; or
- the amount which is necessary to bring the institution into compliance
with all capital standards applicable with respect to the institution as
of the time the institution fails to comply with its capital restoration
plan.
The OTS, in conjunction with the other federal financial institution
regulatory agencies, adopted regulations defining the five categories of
capitalization and implementing a framework of supervisory actions, including
those described above, applicable to savings associations in each category. The
regulations provide that a savings association will be deemed to be:
- "well capitalized" if it has a total risk-based capital ratio of 10% or
greater, a Tier 1, or core, risk-based capital ratio of 6% or greater, a
leverage ratio of 5% or greater and is not subject to any OTS order or
directive to meet and maintain a specific capital level for any capital
measure;
- "adequately capitalized" if it has a total risk-based capital ratio of 8%
or greater, has a Tier 1 risk-based capital ratio of 4% or greater and
has either:
(a) a leverage ratio of 4% or greater; or
(b) a leverage ratio of 3% or greater and is rated composite 1 under the
CAMELS rating system in the most recent examination of the institution;
- "undercapitalized" if it has a total risk-based capital ratio that is
less than 8%, has a Tier 1 risk-based capital ratio that is less than 4%,
has a leverage ratio that is less than 4% or, if rated composite 1 under
the CAMELS rating system in the most recent examination of the
institution, has a leverage ratio less than 3%;
- "significantly undercapitalized" if it has a total risk-based capital
ratio that is less than 6%, a Tier 1 risk-based capital ratio that is
less than 3% or a leverage ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible equity to
total assets that is equal to or less than 2%.
At December 31, 1999, the Bank met the capital requirements of a "well
capitalized" institution, as its total risk-based capital ratio was 10.39%, its
Tier 1 risk-based capital ratio was 6.49% and its leverage ratio was 8.85%.
Loans to One Borrower
Under the HOLA, as amended by FIRREA, the loans to one borrower limitations
for national banks apply to all savings associations in the same manner and to
the same extent as they do to national banks. Thus, savings associations
generally are not permitted to make loans to a single borrower in excess of 15%
to 25% of the savings associations' unimpaired capital and unimpaired surplus,
depending upon the type of loan and the collateral provided therefore. However,
a savings association may make loans to one borrower in excess of these limits
under one of the following circumstances:
- for any purpose, in any amount not to exceed $500,000;
- to develop domestic residential housing units, in an amount not to exceed
the lesser of $30.0 million or 30% of the savings association's
unimpaired capital and unimpaired surplus, provided that the association
receives the written approval of the OTS to do so, which approval the
Bank has not sought, and certain other conditions are satisfied; or
- to finance the sale of real property which it owns as a result of
foreclosure, providing that no new funds are advanced.
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In addition, further restrictions on a savings association's loans to one
borrower authority may be imposed by the OTS if necessary to protect the safety
and soundness of the savings association. At December 31, 1999, 15% of the
Bank's unimpaired capital and unimpaired surplus for loans to one borrower
purposes was $94.0 million. The largest amount outstanding at December 31, 1999
to one borrower, and related entities, was $15.9 million.
Equity Risk Investment Limitations
The Bank generally is not authorized to make equity investments other than
investments in subsidiaries. A savings association may not acquire a new
subsidiary or engage in a new activity through an existing subsidiary without
giving 30 days prior notice to the OTS and the FDIC. In addition, a savings
association must conduct the activities of the subsidiary in accordance with the
regulations and orders of the OTS. Under certain circumstances, the OTS also may
order a savings association to divest its interest in, terminate the activities
of, or take other corrective measures with respect to, an existing subsidiary.
The Bank's aggregate investment in service corporation subsidiaries was
$0.3 million and its equity investments in operating subsidiaries was $309
million as of December 31, 1999.
Qualified Thrift Lender Test
A Qualified Thrift Lender ("QTL") test was enacted as a part of FIRREA, and
was modified by FDICIA and the Economic Growth and Regulatory Paperwork
Reduction Act ("EGRPRA"). An association that fails to become or remain a QTL
must either:
- convert to a bank subject to the banking regulations; or
- be subject to severe restrictions, including being forbidden to invest in
or conduct any activity that is not permissible to both a savings
association and a national bank, and certain other restrictions on
branching, advances from its FHLB, and dividends.
For a three year period after an association fails to meet its QTL
requirements, the association is forbidden from retaining any investment or
continuing any activity not permitted for a national bank and must repay
promptly all FHLB advances. In addition, companies that control savings
associations that fail the QTL test must, within one year of the failure, become
a bank holding company subject to the Bank Holding Company Act.
Under the existing QTL requirements, a savings association's "qualified
thrift investments" must equal not less than 65% of the association's "portfolio
assets" measured on a monthly basis, in nine of every twelve consecutive months.
Savings associations have the option of substituting compliance with the IRC
"domestic building and loan association" ("DBLA") test for compliance with the
amended QTL requirements. Qualified thrift investments include:
- all loans or mortgage-backed securities held by an association which are
secured or relate to domestic residential or manufactured housing;
- investments in educational, small business, credit card, and credit card
account loans; and
- FHLB stock and certain obligations of the FDIC and related entities.
Certain other investments are included as qualified thrift investments, but
are limited to 20% of an association's portfolio assets, including:
- 50% of residential mortgage loans sold by an association within 90 days
of their origination;
- investments in subsidiaries which derive at least 80% of their revenue
from domestic residential or manufactured housing;
- subject to certain limitations, 200% of investments relating to "starter
homes" or housing and community facilities in "credit-needy areas";
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- consumer loans in the aggregate of not more than 20% of portfolio assets;
and
- FHLMC and FNMA stock.
Portfolio assets are total assets less goodwill and other intangible
assets, the value of the association's facilities and the association's liquid
assets maintained to meet its liquidity requirements, but not over 20% of its
total assets.
At December 31, 1999 the Bank's percentage of qualified thrift investments
to portfolio assets was 75%. We anticipate that the Bank will continue to remain
a QTL.
Dividend Regulations
The OTS has adopted regulations limiting the amount of capital
distributions a savings association may make. The regulation divides savings
associations into three tiers:
- those which meet all of the fully phased-in capital requirements of the
OTS both before and after the proposed distribution, classified as Tier 1
Associations;
- those which meet all of the current capital requirements both before and
after the proposed distribution, classified as Tier 2 Associations; and
- those which fail to meet one or more of the current capital requirements,
classified as Tier 3 Associations.
A Tier 1 Association may make capital distributions in an amount equal to
the greater of either:
- 100% of its net income for the current calendar year to the date of
capital distribution, plus the amount that would reduce by one-half the
amount by which the association's total capital-to-risk-weighted assets
ratio exceeds its fully phased-in requirement of 8%, as measured at the
beginning of the current calendar year; or
- 75% of its net income over the most recent four-quarter period preceding
the quarter in which the capital distribution is to be made.
A Tier 2 Association may make capital distributions of up to 75% of its net
income over the past four-quarter period. A Tier 3 Association may not make any
capital distribution without the prior authorization of the OTS.
The OTS has the authority, under the regulation, to preclude a savings
association from making capital distributions, even if the association is
qualified to do so under the above tests, if the OTS determines that:
- the savings association is in need of more than normal supervision; or
- the proposed distribution will constitute an unsafe or unsound practice
given the condition of the savings association.
In addition, a Tier 1 Association that the OTS deems to be in need of more
than normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
Association. A savings association may also apply to the OTS for approval to
make a capital distribution even though it does not meet the above tests, or for
an amount which exceeds the amount permitted by the express terms of the
regulation.
Effective April 1999, the OTS adopted a new rule which will allow savings
associations that are not subsidiaries of a savings and loan holding company to
qualify for a capital distribution without a notice or application to OTS, if
they meet certain conditions. As a subsidiary of a savings and loan holding
company, the Bank will continue to be required to file a notice or application.
In addition, another OTS regulation pertaining to holding companies requires
that the OTS be given a 30 day advance notice before a savings association
subsidiary pays a dividend to its holding company. The notice described above
can also constitute the notice for this purpose, as long as it is designated for
that purpose.
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The Bank is a Tier 1 Association. As of the date hereof, under the
limitations of the OTS capital distribution regulations, the Bank may pay
dividends up to the greater of 100% of its net income since January 1, 1999,
plus either:
- 50% of its surplus capital; or
- 75% of its net income over the four-quarter period ending December 31,
1999.
However, the Bank is also subject to certain limitations on the payment of
dividends by the terms of the indenture for its 8.5% and 8.875% Debentures.
Those limitations are more severe than the OTS capital distribution regulations.
Under the most restrictive of those limitations, the greatest capital
distribution which the Bank could currently make is $103 million. Westcorp
received dividends from the Bank during 1999 in the aggregate amount of $12.0
million.
Community Reinvestment Act
Congress passed the Community Reinvestment Act ("CRA") in 1977 to encourage
each financial institution to help meet the credit needs of the communities it
served, including low- to moderate-income neighborhoods. Depository institutions
were required to:
- Delineate their community by describing their primary lending area;
- List the types of credit available;
- Maintain a CRA statement and lobby poster ("CRA Notice"); and
- Complete an annual review of the CRA statement by the Board of Directors.
In 1989, Congress passed additional regulations which amended or expanded
the CRA requirements improving public awareness of the activities of financial
institutions and making it possible to better quantify the performance of
individual banks. These changes included:
- The power of regulatory institutions to deny branch applications on CRA
grounds;
- Increased compliance requirements including documenting affirmative steps
to develop and maintain an effective CRA program; and
- FIRREA which required the regulators to prepare a written CRA evaluation,
which after July 1, 1990, must be made public within 30 business days
after the institution receives its final examination report, including a
public rating of the financial institution's CRA performance.
The CRA regulation was changed again effective July 1, 1995, when the
regulatory agencies consisting of the OCC, the Board, FDIC and OTS passed a
joint final rule. This amended regulation established a uniform framework and
criteria by which the agencies could assess an institution's record of:
- helping to meet the credit needs of its community, including low and
moderate income neighborhoods;
- provided assistance that was consistent with safe and sound operations;
and
- provided for consideration of the agencies assessment when reviewing
certain applications.
Commonly referred to as the New CRA, the regulation establishes certain
performance standards under which we are to be examined. Periodically, the OTS
will review our performance and publish a "Community Reinvestment Act
Performance Evaluation". The revised examination procedures provide for an
evaluation under the lending, investment and service tests.
As required by the new CRA regulation, we have identified eleven Primary
Metropolitan Statistical Areas ("PMSAs") and Metropolitan Statistical Areas
("MSAs") in the state of California as our assessment area(s). These geographic
markets contain our retail banking offices and are representative of where we
accept deposits from our customer base. The revised examination procedures will
focus on performance rather
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than process. We received a "satisfactory" rating in our most recent CRA
evaluation. The new system will evaluate the degree to which the institution is
providing:
- loans;
- branches and other services; and
- investments to low and moderate income areas.
Under the new regulation, we could seek to be assessed on our CRA
performance under a strategic plan prepared by the association and approved by
the OTS. This would take the place of the three tests mentioned above. The new
regulation also emphasized the importance of an institution's CRA performance in
the corporate application process, and seeks to make the regulation more
enforceable.
We have elected to be audited under the Lending Test, Investment Test and
Service Test and do not believe that our performance under the new CRA
regulation will differ materially from our performance under the previously
existing CRA regulations. Following the scheduled audit we will receive an
updated performance evaluation which will be made public in each branch office.
Classification of Assets
The OTS has adopted a classification system for problem assets of insured
institutions. Problem assets are classified as "special mention," "substandard,"
"doubtful" or "loss," depending on the presence of certain characteristics.
- Assets are considered "special mention" when they do not currently expose
a savings association to a sufficient degree of risk to warrant
classification, but possess credit deficiencies or potential weaknesses
deserving management's close attention.
- An asset is considered "substandard" if it is inadequately protected by
the current capital and paying capacity of the obligor or by the
collateral pledged, if there is any.
- Assets classified as "doubtful" have all of the weaknesses inherent in
those classified "substandard," with the added characteristic that the
weaknesses make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable."
- Assets classified as "loss" are those considered "uncollectible" and of
such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset Quality -- Allowance for Loan Losses."
Insured institutions are required to classify their own assets and to
establish general valuation allowances (reserves) where appropriate. Assets
classified as substandard or doubtful may be reviewed by the OTS examiner and
valuation allowances may be required to be increased subject to review by the
OTS Regional Director. For the portion of assets classified as loss, the OTS
permits 100% of the amount classified to be charged off or the establishment of
a specific valuation allowance.
The OTS has revised its asset classification system. The OTS removed the
specific description of assets classified as "substandard," "doubtful" and
"loss" from the regulatory text, and is now providing such descriptions in
guidance. That is the practice of the federal banking regulatory agencies as
well. As of December 31, 1999, the Bank had established allowances for loan and
real estate losses of $65.0 million.
Insurance Operations
The insurance subsidiaries of the Bank are subject to regulation and
supervision in the jurisdictions in which they do business. The method and
extent of the regulation varies, but the insurance laws of most states
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establish agencies with broad regulatory and supervisory powers. These powers
relate primarily to the establishment of the following:
- solvency standards which must be met and maintained;
- the licensing of insurers and their agents;
- the nature and amount of investments;
- approval of policy forms and rates; and
- the form and content of required financial statements.
The Bank, through its insurance subsidiaries, is also subject to various
state laws and regulations covering extraordinary dividends, transactions with
insurance subsidiaries and other matters. The Bank is in compliance with these
state laws and regulations.
Investment and Lending Powers
Pursuant to the Interagency Guidelines for Real Estate Lending Policies,
the Bank is required to have lending policies consistent with the guidelines.
The lending policies must be consistent with the guidelines as to:
- loan portfolio management considerations;
- underwriting standards; and
- loan administration.
In particular, the regulation establishes supervisory loan-to-value ("LTV")
limits for real property secured loans. Each insured institution is to set its
own policy with respect to LTV, but those LTV limits are not to exceed the LTV
limits of the guidelines, except as specifically permitted by the guidelines.
Generally, the LTV limits are as follows:
- for raw land, 65%;
- for land development, 75%;
- for construction of 1 to 4 family residential housing, 85%, and 80% for
other construction loans; and
- for improved property, 85%.
Loans secured by owner occupied 1 to 4 family residences are not subject to
a supervisory LTV limit. However, any of these loans with a LTV ratio of greater
than 90% at origination requires either private mortgage insurance or other
readily marketable collateral.
The Bank's LTV standards are consistent with these supervisory limitations.
In addition, the OTS and the other federal banking agencies have adopted uniform
real estate appraisal guidelines. Those guidelines require the board of
directors of financial institutions to adopt appraisal and evaluation programs.
The programs will cover:
- the selection of appraisers;
- monitoring appraisers' activities;
- ensuring appraisers' required independence from the real estate
transaction at issue; and
- establishing criteria for reports, formats and the use those reports and
formats.
The EGRPRA expanded the small business and agricultural lending authority
of federal savings associations. Federal savings associations can make total
loans secured by business or agricultural real estate in amounts up to 400% of
capital. They can also make additional secured and unsecured loans to businesses
and farms in total amounts up to 20% of total assets. However, amounts in excess
of 10% of assets may only be used for "small business loans." The OTS also no
longer aggregates commercial loans made by a savings association's service
corporation with commercial loans made by the savings association and its
operating subsidiaries for purposes of the statutory 10% of assets limitation.
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In addition, the EGRPRA amended section 5 of the HOLA to clarify that
Federal savings associations may engage in credit card lending without a
percentage of assets investment limitation. The EGRPRA also amended HOLA section
5 to permit Federal savings associations to make education loans without
investment restriction, as opposed to the previous limit of 5% of total assets.
Effective October 1999, the OTS amended it regulations to clarify that a
Federal savings association may act as guarantor under Section 5(b)(2) of HOLA.
In addition, the OTS modified its restriction on suretyship and guaranty
agreements under Section 5(b)(2). Under Section 5(b)(2) of HOLA, a Federal
savings association may enter into a repayable suretyship or guaranty agreement,
subject to certain conditions, including:
- The Federal savings association must limit its obligations under the
agreement to a fixed dollar amount and a specified duration;
- The Federal savings association must take and maintain a perfected
security interest in collateral sufficient to cover its total obligation
under the agreement;
- The Federal savings association's performance under the agreement must
create an authorized loan or other investment; and
- The Federal savings association must treat its obligation under the
agreement as a loan to principal for certain statutory purposes.
The OTS also clarified that a Federal savings association may issue letters
of credit and may issue other independent undertakings as are approved by the
OTS subject to certain statutory restrictions. The Bank has not engaged in any
such agreements.
Pass-Through Investments
A Federal savings association may invest in entities, such as limited
partnerships and mutual funds, that hold only assets, and engage only in
activities, permissible for Federal savings associations. A savings association
does not have to give advance notice to the OTS if the pass-through investment
satisfies the following:
- the savings association does not invest more than 15% of its total
capital in one company;
- the book value of the association's aggregate pass-through investment
does not exceed 50% of its total capital after making the investment;
- its investment would not give it direct or indirect control of the
company;
- its liability is limited to the amount of its investment; and
- the company falls into one of the following categories:
(a) a limited partnership;
(b) an open-end mutual fund;
(c) a closed-end investment trust;
(d) a limited liability company; or
(e) an entity which is invested in primarily to use the company's
services, as for example data processing.
A savings association must provide 30 day's advance written notice to OTS
before making any pass-through investment that does not meet these standards.
Loans that a savings association makes to an entity in which it has made a
pass-through equity investment will be subject to the loans to one borrower
rule, as are loans by a savings association to any third party. A thrift's
investment in its operating subsidiaries is not subject to these restrictions.
The Bank does not currently have any pass-through investments.
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Accounting Requirements
The OTS has a statement of policy which provides guidance regarding the
proper classification of, and accounting for, securities held for investment,
sale and trading. Securities held for investment, sale or trading may be
differentiated based upon an institution's desire:
- to earn an interest yield, indicating that they are held for investment;
- to realize a holding gain from assets held for indefinite periods of
time, indicating that they are held for sale; or
- to earn a dealer's spread between the bid and asked prices, indicating
that they are held for trading.
Critical to the proper classification of accounting for securities as
investments is the intent and ability of an institution to hold the securities
until maturity. A positive intent to hold to maturity, not just a current lack
of intent to dispose, is necessary for securities acquired to be considered to
be held for investment purposes. Securities held for investment purposes may be
accounted for at amortized cost. Securities held for sale are to be accounted
for at the lower of cost or market, and securities held for trading are to be
accounted for at market. The Bank believes that its investment activities have
been and will continue to be conducted in accordance with the requirements of
OTS policies and generally accepted accounting principles.
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement provides
guidance for the way public enterprises report information about derivatives and
hedging in annual financial statements and in interim financial reports.
Initially, the derivatives and hedging disclosure was to be required for
financial statements for fiscal years beginning after June 15, 1999. However,
FASB issued Statement No. 137 which extended the date until June 15, 2000.
Implementation of Statement No. 133 will require Westcorp to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in fair value of derivatives will
either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Westcorp is in the process of evaluating the effect SFAS
133 will have, if any, upon the earnings and financial position of Westcorp.
Annual Examinations
FDICIA significantly reduces regulatory discretion by requiring the
appropriate federal financial institution regulatory agency to conduct a full
scope, on-site examination of each insured depository institution every twelve
months. The Bank's last annual examination ended in April, 1999.
FDIC Back-Up Enforcement Authority
The FDIC has the statutory authority under FDICIA to direct an insured
institution's principal regulator to take enforcement action. The FDIC can also
take that action itself either if the principal regulator fails to act timely,
or in an emergency situation.
Financial Reporting
FDICIA requires insured institutions to submit independently audited annual
reports to the FDIC and the other appropriate regulated agencies. These publicly
available reports must include:
- annual financial statements prepared in accordance with generally
accepted accounting principles and other disclosure requirements, as
required by the FDIC or the appropriate agencies; and
- a report, signed by the chief executive officer and the chief financial
officer or chief accounting officer of the institution which contains
statements, attested to by independent auditors, about the adequacy of
internal controls and procedures for financial reporting.
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Insured institutions such as the Bank are required to monitor these
activities through an independent audit committee.
FDICIA also directs the FDIC to develop, along with other appropriate
agencies, a method for insured depository institutions to provide supplemental
disclosure of the estimated fair market value of assets and liabilities, to the
extent that it is feasible and practicable. They must provide this supplemental
disclosure in any balance sheet, financial statement, report of condition or any
other report of any insured depository institution.
Standards for Safety and Soundness
FDICIA, as amended by the RCDA, requires the federal banking regulatory
agencies to provide, either by regulation or guidelines, standards for all
insured depository institutions and depository institution holding companies
relating to:
- internal controls, information systems and audit systems;
- loan documentation;
- credit underwriting;
- interest rate risk exposure;
- asset growth; and
- compensation, fees and benefits.
In addition, the federal banking regulatory agencies are required to
prescribe standards relating to asset quality, earnings and stock valuation as
they determine to be appropriate.
The OTS, in conjunction with the federal banking regulatory agencies, has
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness to meet the amended FDICIA requirements. In general, the
guidelines are designed to identify emerging safety and soundness problems and
ensure that action is taken to address those concerns before they pose a risk to
the deposit insurance fund. The guidelines call for each insured institution to
have policies, procedures and systems appropriate to its size and the nature of
its assets and liabilities. These policies must address the specific criteria
identified in the guidelines for each of the six items identified above. The
guidelines do not set any specific numerical targets or minimum requirements.
If the OTS determines that a savings association has failed to satisfy the
safety and soundness standards called for by the guidelines, the OTS may, upon
requisite notice, require the association to submit a compliance plan that sets
forth the steps it will take and the time frame required to correct the
deficiency. If the association fails to comply with the OTS request, the OTS may
then issue a notice of intent to issue an order requiring that association to
correct a safety and soundness deficiency or to take or refrain from other
actions. In an appropriate case, the OTS may issue an immediate order, subject
to appeal by the association.
OTS Prohibitions
The OTS prohibits directors, officers, and natural persons who have the
power to control the management or policies of savings associations from
receiving, either directly or indirectly, any commission, fee or other
compensation in connection with the procurement of any loan by the savings
association or a subsidiary of the savings association. This regulation does not
apply to holding companies and holding company affiliates of savings
associations. Therefore, this regulation does not apply to us, but does apply to
the Bank.
Furthermore, the OTS prohibits directors, officers, associates, persons
having the power to control management or policies of savings associations, and
other persons who perform fiduciary duties for savings associations, from
advancing their own personal or business interests, or those of others with whom
they have a personal business relationship, at the expense of the institutions
they serve. Generally, a person will not be deemed to be advancing his, her or
its interests at the expense of the institution if the transaction complies
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with sections 23A and 23B of the FRA, Regulation O, or the OTS' safe harbor
provision. Likewise, the rule does not prohibit an executive officer, director
or principal shareholder from receiving a loan from the association which they
serve under certain circumstances.
The OTS also prohibits directors or officers of savings associations,
persons who have the power to control the management or policies of savings
associations and other persons who owe a fiduciary duty to savings associations,
from taking advantage of corporate opportunities belonging to their savings
association or its subsidiaries. A corporate opportunity will be deemed to
belong to the savings association if:
- it is within the corporate powers of the savings association or its
subsidiary; and
- the opportunity is of present or potential practical advantage to the
savings association, directly or through its subsidiary.
The OTS will deem a person not to have taken advantage of a corporate
opportunity belonging to the savings association if a disinterested and
independent majority of the savings association's board of directors, after
receiving a full and fair presentation of the matter, rejected the opportunity
as a matter of sound business judgment.
Interagency Guidance Statement Regarding Asset-Backed Securitization
The OTS, in conjunction with the other Federal banking regulatory agencies,
recently issued a guidance statement regarding asset securitization activities
of banks and savings associations which apply to the Bank and its subsidiary,
WFS. The guidance states that reported values for retained interest assets
should be reasonable, conservative and supported by objective and verifiable
documentation. Furthermore, institutions engaged in asset securitization
activities should ensure that sufficient capital is held to support the risks
associated with those activities and that appropriate management oversight and
reporting is accomplished with respect to the institution's asset securitization
activities. The agencies noted that on a case-by-case basis additional capital
may be required to be held by those institutions whose asset securitization
activities are not in compliance with the guidance provisions, or the retained
interest assets may be classified as loss and not permitted to be included in
calculating the institution's regulatory capital. The Bank and WFS believe that
WFS' valuation of its retained interest assets and its securitization activities
as an operating subsidiary of the Bank are in compliance with the guidance
provisions. As WFS is consolidated with the Bank for regulatory purposes, WFS'
compliance with the guidance provisions should satisfy the Bank's obligations as
well. While the Bank and WFS can give no assurance as to any regulatory action
the OTS may take, the Bank and WFS do not believe that the OTS will require the
Bank to hold additional capital as a result of WFS' asset securitization
activities.
In the guidance, the OTS and the other Federal banking regulatory agencies
noted that regulations may be proposed to remedy the problems discussed in the
guidance. Among the items which the agencies may consider implementing is the
establishment of regulatory restrictions that would limit or eliminate the
amount of certain retained interest assets that may be included in determining
that bank's or savings association's regulatory capital. Until the agencies
actually propose any such regulations, the Bank and WFS cannot determine whether
those regulations would have any adverse affect upon their business or financial
conditions.
TAXATION
FEDERAL INCOME TAXES
We file a calendar year consolidated federal income tax return. All
entities included in the consolidated financial statements are included in the
consolidated tax return.
The Bank is a savings and loan association for federal tax purposes. Prior
to 1996, savings and loan associations satisfying certain conditions were
permitted under the Internal Revenue Code ("IRC") to establish reserves for bad
debts and to make annual additions to these reserves which qualified as
deductions from income. However, in 1996 new legislation was enacted which
eliminated the reserve method of accounting for bad debts for tax purposes for
savings and loan associations. The repeal of the reserve method is
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effective for tax years beginning after December 31, 1995. Savings and loan
associations are now subject to the same tax laws regarding bad debt reserves as
banks. The Bank is considered a "large bank" for federal income tax purposes and
is required to use the specific chargeoff method for deducting bad debts for
federal income tax purposes.
The tax reserves for bad debt which were added after 1987 and which still
exist as of the date of this change, are required to be recaptured into income
ratably over a period of six years starting with the first taxable year after
1995. However, savings and loan associations that meet the "residential loan
requirement" will be allowed to defer the recapture of their reserves for up to
two years. The Bank met the residential loan requirement and, therefore,
deferred recapture of its reserves in 1996 and 1997. The tax reserves related to
pre-1988 additions to the reserve are not required to be recaptured into income
as a result of this legislation. The total amount of the Bank's post-1987
reserve that will be required to be recaptured into income is estimated at $17
million. The remaining estimated balances required to be recaptured at December
31, 1998, and 1999, are $14.2 million and $11.4 million, respectively. The Bank
was required to recapture approximately $2.8 million into taxable income for
1999 and each of the next four years. However, as a result of the IRS
examination of the 1993 and 1994 tax years, the bad debt reserve was increased
by $18.5 million. The proper amount and timing of the recapture of this
additional reserve remains an open topic of discussion in the IRS examination of
the 1995 and 1996 tax years.
Prior to the new legislation discussed above, the Bank, if it met certain
criteria, was permitted to compute its addition to its bad debt reserve on loans
using one of the following two methods: (i) the percentage of taxable income
method; or (ii) the experience method. The Bank has used whichever method has
provided the maximum tax deduction in the past. A savings and loan association
that utilized the percentage of taxable income method is subject to recapture
taxes on such reserves if it makes certain distributions to its stockholders.
Dividends may be paid without the imposition of any tax on the Bank if the
amounts paid as dividends do not exceed the Bank's current or accumulated
earnings and profits as calculated for federal income tax purposes. Dividends
paid in excess of current and accumulated earnings and profits, stock
redemptions and other distributions with respect to stock, are deemed to be made
from the bad debt reserve for qualifying real property loans, to the extent that
this reserve exceeds the amount that could have been accumulated under the
experience method. The amount of tax that would be payable upon any distribution
which is treated as having been made from the bad debt reserve for qualifying
real property loans is also deemed to have been paid from the reserve to the
extent thereof. Management does not contemplate making distributions that will
create taxable income, but assuming a 35% tax rate, distributions to
stockholders which are treated as having been made from the bad debt reserve for
qualifying real property loans could result in a federal recapture tax which is
approximately equal to one-half of the amount of such distributions. Despite the
new laws regarding tax bad debt reserves, to the extent that the Bank has not
recaptured its reserves into income as discussed above, and makes distributions
deemed to have been made from their remaining reserves, the Bank would still be
subject to the recapture tax discussed above.
We will be subject to the alternative minimum tax if such tax is larger
than the regular federal tax otherwise payable. Generally, alternative minimum
taxable income is a taxpayer's regular taxable income, increased by the
taxpayer's tax preference items for the year and adjusted by computing certain
deductions in a special manner which negates the acceleration of such deductions
under the regular federal tax. This amount is then reduced by an exemption
amount and is subject to tax at a 20% rate. In the past, we have not generally
paid alternative minimum tax and do not expect that we will in the current year.
During 1999, we completed an Internal Revenue Service audit of the tax
years ended December 31, 1993 and 1994. The net result to the financial
statements was less than $10,000. We and our subsidiaries are under examination
by the Internal Revenue Service for the tax years ended December 31, 1995 and
1996. We do not anticipate any significant changes based upon these
examinations.
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CALIFORNIA FRANCHISE TAX AND OTHER STATE PROVISIONS
At the end of 1999, we had a tax presence in approximately 38 states.
However, the majority of the activity of the group and the resulting income
should be taxed as California source income, with minor amounts apportioned or
allocated outside California.
The California franchise tax applicable to the Bank is higher than the rate
of tax applicable to non-financial corporations because it includes an amount
"in lieu" of local personal property and business license taxes paid by
non-financial corporations, but not generally paid by financial institutions
such as the Bank. For taxable years ending on or after December 31, 1995, the
tax rate for a financial corporation is equal to the tax rate on a regular
corporation plus 2%. The regular corporate tax rate for 1996 was 9.3% resulting
in a financial corporation tax rate of 11.3%. For income years beginning after
January 1, 1997, the California regular corporate tax rate was reduced to 8.84%
resulting in a financial corporation tax rate of 10.84%.
Under California law, a savings and loan association may determine its bad
debt deduction using one of two methods. The first method allows a deduction for
debts that become wholly or partially worthless during the tax year (i.e., the
specific chargeoff method). The second method allows a reasonable addition to a
reserve to be deducted. A reasonable addition can be calculated using an
experience ratio, or may be determined by management to be greater than the
experience ratio, but not greater than the amount deducted for regulatory and
financial statement purposes, and not greater than 1% of outstanding loans at
year end. California has not yet conformed to the federal repeal of the reserve
method of accounting for bad debts for a savings and loan association.
We compute our taxable income for California purposes on a unitary basis,
or as if they were one business unit, and file one combined California franchise
tax return (excluding Westhrift Life Insurance Company).
SUBSIDIARIES
WESTRAN SERVICES CORP.
Westran Services Corp. ("Westran") is our wholly owned California based
subsidiary, which provides travel-related services for us and all of our
subsidiaries. Westran does not provide a significant source of revenues or
expenses.
WESTCORP INVESTMENTS, INC.
Westcorp Investments, Inc. ("WII") is our wholly owned, limited purpose
subsidiary. WII was incorporated for the purpose of purchasing a limited
ownership interest in an owner trust created for a WFS automobile loan
securitization transaction. WII is limited by its Articles of Incorporation from
engaging in any business activities not incidental or necessary to its stated
purpose. WII does not provide a significant source of revenues or expenses.
WESTERN FINANCIAL BANK
The Bank is our wholly owned, federally chartered and federally insured
savings bank. The Bank provides diversified financial services through its
community banking operations, which include a retail banking division and a
commercial banking division. Substantially all of Westcorp's operations are
conducted through the Bank and its subsidiary, WFS. The Bank's subsidiaries are
WFS, which in turn owns all of the stock of WFS WFAL, WFAL2, WFS Investments,
Inc. ("WFSII"), WFS Funding, Inc. ("WFSFI") and WFS Receivables Corporation
("WFSRC"). Other subsidiaries of the Bank include Westfin Insurance Agency
("WFIA"), Westhrift Life Insurance Company ("Westhrift"), WestFin Securities
Corporation ("WestFin"), Western Reconveyance Company, Inc. ("RECON"), Western
Consumer Services, Inc. ("WCS") and The Hammond Company, The Mortgage Bankers
("THCMB"). Each of these entities are described in further detail below.
35
<PAGE> 38
WFS FINANCIAL INC
WFS is an 82% owned subsidiary of the Bank that is in the business of
financing automobile contracts purchased from new and used car dealers. The
remaining interest is traded on the Nasdaq Stock Market(R) under the ticker
symbol WFSI. Each of its offices is licensed to the extent required by law to
conduct business in each respective state. The contracts that WFS originates are
generally securitized through the auto-backed securities market by its
subsidiaries, WFAL or WFSRC. See "Automobile Operations". During 1999, WFS
originated $3.3 billion of automobile contracts.
WFS FINANCIAL AUTO LOANS, INC.
WFAL is a wholly owned, limited purpose operating subsidiary of WFS. WFAL
was organized primarily for the purpose of purchasing contracts from WFS and
securitizing them in automobile asset-backed securities through the secondary
market. All sales to securitization trusts directly from WFAL are treated as
sales for accounting purposes.
WFS FINANCIAL AUTO LOANS 2, INC.
WFAL2 is a wholly owned, limited purpose operating subsidiary of WFS. WFAL2
purchases contracts from WFS that are then used as collateral for its
reinvestment contract activities (See "WFS Reinvestment Contract").
WFS INVESTMENTS, INC.
WFSII is a wholly owned, limited purpose operating subsidiary of WFS. WFSII
was incorporated for the purpose of purchasing limited ownership interests in
owner trusts in connection with securitization transactions. WFSII is limited by
its Articles of Incorporation from engaging in any business activities not
incidental or necessary to its stated purpose.
WFS FUNDING, INC.
WFSFI is a wholly owned, limited purpose service corporation subsidiary of
WFS. WFSFI was incorporated for the purpose of providing conduit financings.
WFSFI completed a $500 million conduit financing during the third quarter of
1999. The conduit facility was paid off on March 15, 2000.
WFS RECEIVABLES CORPORATION
WFSRC is a wholly owned, limited purpose service corporation subsidiary of
WFS. WFSRC was organized for the purpose of purchasing contracts from WFS and
securitizing those contracts in the asset-based securities market. Automobile
contracts securitized through WFSRC will be treated as secured financings for
accounting purposes .
WESTFIN INSURANCE AGENCY
WFIA is a wholly owned, California based, insurance agency of the Bank.
WFIA acts as an agent for independent insurers in providing property and
casualty insurance, collateral protection insurance and other non-credit related
life and disability coverage on automobile contracts purchased by WFS. WFIA is
also a licensed broker-dealer which sells fixed annuities to the general public.
WFIA's revenues consist primarily of commissions received on policies sold to
customers.
WESTHRIFT LIFE INSURANCE COMPANY
Westhrift, is a wholly owned, Arizona based, insurance agency of the Bank.
Westhrift is engaged in the business of reinsuring credit life and credit
disability insurance offered to borrowers of the Bank. An independent insurer
underwrites these policies. The credit life insurance policies provide us with
full payment of the insured's financial obligation in the event of the insured's
death. The credit disability insurance policies provide us with payment of an
insured's financial obligation during a period of disability resulting from
illness
36
<PAGE> 39
or physical injury. Westhrift has a Certificate of Authority from the California
Insurance Commissioner authorizing it to conduct insurance business in
California. At December 31, 1999, credit life and disability insurance in force
was $3.8 million.
For Arizona statutory purposes, Westhrift is required to maintain reserves
for losses on credit life and credit disability policies. Westhrift's aggregate
reserves for credit life and credit disability policies at December 31, 1999
were $23.1 thousand.
The aggregate reserves are computed in accordance with commonly accepted
actuarial standards consistently applied, and are based on actuarial assumptions
which are in accordance with or stronger than those called for in policy
provisions. The policies reinsured are underwritten by the independent insurer
for no more than the amount that the insured owes us, not to exceed $25 thousand
per loan. Westhrift also maintains a $0.4 million deposit account in accordance
with California statutory deposit requirements. Westhrift does not engage in any
business except with respect to our customers.
WESTFIN SECURITIES CORPORATION
WestFin is a wholly owned, NASD licensed securities broker-dealer of the
Bank. WestFin sells mutual funds and variable annuities to the general public.
WestFin's revenues consist primarily of commissions received on securities sold
to customers.
WESTERN RECONVEYANCE COMPANY, INC.
RECON is a wholly owned, California based, subsidiary of the Bank. RECON
acted primarily as the trustee under trust deed loans made by the Bank. After
the elimination of all mortgage banking activities, RECON discontinued its
operations. RECON did not provide a significant source of revenues or expenses.
WESTERN CONSUMER SERVICES, INC.
WCS is a wholly owned, California based, subsidiary of the Bank. WCS
historically conducted real estate development activities through two California
limited liability companies ("LLCs"). The purpose of the LLCs was to acquire,
develop and ultimately sell single family residences. WCS has also held
properties that were prohibited to be held by the Bank due to regulatory
guidelines. The Bank is required to hold dollar for dollar risk-based capital
for its investment in WCS. WCS does not currently hold any real estate
investments or conduct any real estate development activities.
THE HAMMOND COMPANY, THE MORTGAGE BANKERS
THCMB is a wholly owned, California based, subsidiary of the Bank. THCMB
was acquired in 1995 for the purpose of providing retail mortgage banking
services. In 1996, THCMB activities were moved into the Bank. THCMB does not
currently conduct any business.
ASSOCIATES
At December 31, 1999, we had 1,962 full-time and 134 part-time associates.
None of our associates are represented by a collective bargaining unit or union.
We believe we have good relations with our respective personnel.
FORWARD-LOOKING STATEMENTS
Included in our preceding Business section of this Form 10-K are several
"forward-looking statements." Forward-looking statements are those which use
words such as "believe", "expect", "anticipate", "intend", "plan", "may",
"will", "should", "estimate", "continue" or other comparable expressions. These
words indicate future events and trends. Forward-looking statements are our
current views with respect to future events and financial performance. These
forward-looking statements are subject to many risks and uncertain-
37
<PAGE> 40
ties that could cause actual results to differ significantly from historical
results or from those anticipated by us. The most significant risks and
uncertainties we face are:
- the level of chargeoffs, as an increase in the level of chargeoffs will
decrease our earnings;
- the ability to originate new contracts in a sufficient amount to reach
our needs, as a decrease in the amount of contracts we originate will
decrease our earnings;
- a decrease in the difference between the average interest rate we receive
on the contracts we originate and the rate of interest we must pay to
fund our cost of originating those contracts, as a decrease will reduce
our earnings;
- the continued availability of sources of funding for our operations, as a
reduction in the availability of funding will reduce our ability to
originate contracts;
- the level of operating costs, as an increase in those costs will reduce
our net earnings;
- the effect of new laws, regulations and court decisions; and
- a change in general economic conditions.
You are cautioned not to place undue reliance on our forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 2. PROPERTIES
At December 31, 1999, we owned thirteen properties in California and one
property in Texas and leased 91 properties at various locations in other states.
Our executive offices are located at 23 Pasteur Road, Irvine, California.
The remaining owned and leased properties are used as retail branch offices,
automobile lending regional business centers and satellites, and other
operational centers. At December 31, 1999, the net book value of property and
leasehold improvements was approximately $53.0 million. We lease space at a
location from a company controlled by a major shareholder.
ITEM 3. LEGAL PROCEEDINGS
We are involved as a party to certain legal proceedings incidental to our
business. We believe that the outcome of such proceedings will not have a
material effect upon our business or financial condition, results of operations
and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
38
<PAGE> 41
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE BY QUARTER
Our common stock has been publicly traded since 1986 and is currently
traded on the New York Stock Exchange ("NYSE"), identified by the symbol, WES.
The following table illustrates the high and low prices by quarter in 1999 and
1998, as reported by the NYSE, which prices are believed to represent actual
transactions:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter................................... $ 9.06 $ 6.44 $20.31 $15.63
Second Quarter.................................. 11.69 7.88 16.88 11.50
Third Quarter................................... 16.13 11.13 15.75 8.63
Fourth Quarter.................................. 16.13 14.44 9.19 5.81
</TABLE>
We had approximately 1,431 shareholders of our common stock at March 15,
2000. The number of shareholders was determined by the number of record holders,
including the number of individual participants, in security position listings.
DIVIDENDS
We paid cash dividends of $0.20, $0.25 and $0.40 per share for the years
ended December 31, 1999, 1998 and 1997, respectively. On December 17, 1999, we
declared a quarterly cash dividend of $0.05 per share for shareholders of record
as of January 14, 2000. This dividend was paid on January 28, 2000. On February
15, 2000, we declared a cash dividend of $0.05 per share for shareholders of
record as of April 27, 2000, with a payable date of May 11, 2000.
39
<PAGE> 42
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary audited financial data for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995. Since the information in
this table is only a summary and does not provide all of the information
contained in our financial statements, including the related notes, you should
read "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements contained elsewhere
herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF
OPERATIONS
Interest income................. $ 297,616 $ 272,142 $ 270,532 $ 242,388 $ 222,093
Interest expense................ 152,285 161,331 161,070 139,194 139,279
----------- ----------- ----------- ----------- -----------
Net interest income........ 145,331 110,811 109,462 103,194 82,814
Provision for credit losses..... 38,400 18,960 12,851 13,571 11,470
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for credit
losses................... 106,931 91,851 96,611 89,623 71,344
Noninterest income.............. 210,006 133,438 222,853 187,964 107,951
Noninterest expense(1).......... 218,461 253,532 246,269 210,346 117,724
----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary
item.......................... 98,476 (28,243) 73,195 67,241 61,571
Income tax (benefit)............ 41,460 (11,330) 31,287 28,095 25,235
----------- ----------- ----------- ----------- -----------
Income (loss) before minority
interest...................... 57,016 (16,913) 41,908 39,146 36,336
Minority interest in earnings
(loss) of subsidiaries........ 6,522 (2,216) 5,120 7,349 2,908
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item............ 50,494 (14,697) 36,788 31,797 33,428
Extraordinary gain from early
extinguishment of debt (net of
income tax of $1,546)......... 2,132
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 52,626 $ (14,697) $ 36,788 $ 31,797 $ 33,428
=========== =========== =========== =========== ===========
OTHER SELECTED FINANCIAL DATA
Book value per share(2)......... $ 13.26 $ 12.43 $ 13.27 $ 12.23 $ 11.54
Weighted average number of
shares and common share
equivalents -- diluted........ 26,505,128 26,305,117 26,351,144 26,199,537 25,917,018
Income (loss) before
extraordinary item............ $ 1.91 $ (0.56) $ 1.40 $ 1.21 $ 1.29
Extraordinary item.............. 0.08
----------- ----------- ----------- ----------- -----------
Net income (loss) per share --
diluted(2).................... $ 1.99 $ (0.56) $ 1.40 $ 1.21 $ 1.29
=========== =========== =========== =========== ===========
Dividends per share(2).......... $ 0.20 $ 0.25 $ 0.40 $ 0.39 $ 0.34
Dividend payout ratio........... 12.6% N/A 28.6% 32.2% 26.4%
</TABLE>
- ---------------
(1) Includes $18.0 million in restructuring charges in 1998.
(2) Reflects 5% stock dividends in 1995 and 1996.
40
<PAGE> 43
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF FINANCIAL
CONDITION
Assets:
Cash and other assets.......... $ 722,496 $ 734,213 $ 707,362 $ 515,161 $ 331,604
Loans:
Consumer(1)................. 1,516,395 932,962 294,101 290,501 343,027
Mortgage(2)................. 598,088 1,006,937 1,536,942 1,433,050 1,404,190
Commercial(2)............... 67,141 52,934 37,375 7,661
Mortgage-backed securities..... 1,431,376 980,044 941,448 849,548 852,552
Investments and time
deposits.................... 163,278 125,730 248,815 239,124 291,564
---------- ---------- ---------- ---------- ----------
Total assets........... $4,498,774 $3,832,820 $3,766,043 $3,335,045 $3,222,937
========== ========== ========== ========== ==========
Liabilities:
Deposits....................... $2,212,309 $2,178,735 $2,000,896 $1,873,942 $1,753,475
FHLB advances and other
borrowings.................. 960,005 440,924 563,922 569,357 655,100
Amounts held on behalf of
trustee..................... 687,274 528,092 488,653 393,449 341,693
Other liabilities.............. 59,140 94,311 95,088 47,058 48,605
---------- ---------- ---------- ---------- ----------
Total liabilities...... 3,918,728 3,242,062 3,148,559 2,883,806 2,798,873
Subordinated debentures........ 199,298 239,856 239,195 104,917 104,360
Minority interest in equity of
subsidiaries................ 28,030 21,857 29,538 28,392 21,965
Shareholders' equity........... 352,718 329,045 348,751 317,930 297,739
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders'
equity............... $4,498,774 $3,832,820 $3,766,043 $3,335,045 $3,222,937
========== ========== ========== ========== ==========
OTHER SELECTED FINANCIAL DATA
Average assets................... $3,952,360 $3,859,202 $3,682,781 $3,233,713 $2,837,292
Return on average assets......... 1.33% (0.38)% 1.00% 0.98% 1.18%
Average shareholders' equity..... $ 341,179 $ 329,250 $ 329,250 $ 308,305 $ 213,311
Return on average shareholders'
equity......................... 15.42% (4.46)% 11.17% 10.31% 13.51%
Equity to assets ratio........... 7.84% 8.58% 9.26% 9.53% 9.24%
Originations:
Consumer loans................. $3,355,732 $2,680,341 $2,337,359 $2,157,556 $1,556,296
Mortgage loans................. 276,936 2,754,398 2,331,506 1,259,716 491,274
Commercial loans............... 237,316 124,259 71,399 8,632
---------- ---------- ---------- ---------- ----------
Total originations..... $3,869,984 $5,558,998 $4,740,264 $3,425,904 $2,047,570
========== ========== ========== ========== ==========
Interest rate spread............. 3.61% 2.89% 2.65% 2.86% 2.44%
</TABLE>
- ---------------
(1) Net of unearned discounts.
(2) Net of undisbursed loan proceeds.
41
<PAGE> 44
ITEM 7. 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 thereto and other information
included or incorporated by reference herein.
OVERVIEW
Our primary sources of revenue are net interest income and noninterest
income. Net interest income is the difference between the income earned on
interest earning assets and the interest paid on interest bearing liabilities.
Noninterest income is primarily made up of revenues generated from the sale and
servicing of loans. The primary components of noninterest income include gain on
sale of automobile contracts and mortgage loans, retained interest income on
automobile contracts sold, contractually specified servicing fees for the
servicing of loans, late charges and other miscellaneous servicing fee income.
Other components of noninterest income include gains and losses from the sale of
investment and mortgage-backed securities, insurance income, fees related to the
sales of investment products such as mutual funds and annuities and fee income
from depository accounts.
The following chart represents selected key events in the purchase and
servicing of automobile contracts and their respective financial statement
impact:
<TABLE>
<CAPTION>
EVENT FINANCIAL STATEMENT IMPACT
----- --------------------------
<S> <C>
Purchase and fund contract from dealer - Pay principal amount of contract to dealer
and record contract receivable
- Pay dealer participation to dealer and
record dealer participation as part of
contract receivable
- Establish allowance for credit losses
- Fund purchase using line of credit and
operating cash flows
Sell contract to a securitization trust - Pay down line of credit with securitization
proceeds
- Remove contract receivable from balance
sheet
- Capitalize retained interest in securitized
asset, ("RISA"), which represents the present
value of the estimated future retained
interest earnings net of credit losses and
adjusted for prepayments
- Record gain on sale which is equal to the
RISA less dealer participation, issuance
costs and the effect of hedging activities
- Reduce the allowance for credit losses
Collect payment for on balance sheet contract - Recognize net interest income
- Reduce line of credit
- Collect late charges and other fees
Collect payment for off balance sheet - Amortize the RISA asset (Actual cash flows
contract in excess of the amortization of the RISA are
shown in our income statement as retained
interest income.)
- Reduce the outstanding amount of the
respective securitization transaction by the
amount of principal received which is paid
through to the asset-backed securities
investor
- Receive contractual servicing fees, late
charges and other fees
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EVENT FINANCIAL STATEMENT IMPACT
----- --------------------------
<S> <C>
Chargeoff on balance sheet contract - Reduce the allowance for credit losses
Chargeoff off balance sheet contract - Reduce the actual cash flows recognized
from securitization trusts thereby increasing
the amortization of the RISA
</TABLE>
RESTRUCTURINGS
To improve our long-term profitability, we restructured our automobile
operations in 1998. Our restructuring had three objectives:
- to reduce operating costs;
- to increase contract production volume; and
- to strengthen credit quality.
As part of this restructuring, we merged our prime and non-prime operations
and offices, providing each dealer with a single point of contact for most of
its prime and non-prime financing needs while retaining separate prime and
non-prime underwriters. We also centralized collection efforts into our regional
business centers and standardized our operating practices. As a result of the
restructuring, we closed 96 underperforming offices and reduced our number of
associates by approximately 20%.
The total pre-tax restructuring charge in 1998 for the completed plan was
$15.0 million. Restructuring related costs included $1.8 million for associate
severance and $13.2 million of lease termination fees and the write off of
disposed assets. The restructuring charge was substantially used during 1998.
As a result of this restructuring we:
- returned to profitability, realizing net income of $52.6 million in 1999;
- increased operating cash flows from our automobile lending operations
from $13.6 million in 1997, to $16.4 million in 1998 and to $110 million
in 1999;
- increased automobile contract originations from $2.3 billion in 1997, to
$2.7 billion in 1998 and to $3.3 billion in 1999;
- increased prime automobile contract purchases from 54% in 1997 to 68% in
1998 and to 69% in 1999;
- improved the percentage of automobile applications funded to applications
received from 13% for the first quarter of 1998 to 19% for the fourth
quarter of 1999;
- lowered operating expenses in our automobile lending operations as a
percentage of average automobile contracts serviced from 5.0% in 1997 to
4.7% in 1998 and to 3.6% in 1999; and
- reduced automobile net chargeoffs as a percentage of average serviced
contracts from 3.0% in 1997 and 3.4% in 1998 to 2.1% in 1999.
During the fourth quarter of 1998, we incurred a $3.0 million restructuring
charge relating to the consolidation of our 14 mortgage banking offices into
three Regional Operating Centers and the elimination of 200 positions, or 55% of
the work force of the mortgage banking operations. This restructuring was the
result of our decision to focus primarily on sub-prime mortgage products rather
than prime and non-agency originations at that time. Restructuring related costs
included $0.6 million for associate severance and $2.4 million for lease
termination fees and the write off of disposed assets. The restructuring program
was designed to save up to $19 million annually in expenses.
During 1999, we made the decision to sell our remaining mortgage banking
operations, sell our mortgage servicing rights and close our mortgage loan
servicing department. We made the decision in order to meet our long-term profit
goals and strategic objectives.
43
<PAGE> 46
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is affected by the difference between the rate earned
on our interest earning assets and the rate paid on our interest bearing
liabilities (interest rate spread) and the relative amounts of our interest
earning assets and interest bearing liabilities. Net interest income totaled
$145 million in 1999 compared with $111 million and $109 million in 1998 and
1997, respectively. The increase in net interest income for the year ended
December 31, 1999 compared to 1998 and 1997 was due primarily to the increase in
automobile contracts held on balance sheet and the decrease in interest paid on
deposits due to an increase in demand deposit and money market accounts.
The following table presents information relative to the average balances
and interest rates for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Total investments:
Other investments.......... $ 263,342 $ 12,962 4.92% $ 172,694 $ 9,252 5.36% $ 133,416 $ 7,612 5.71%
Investment securities...... 21,487 1,650 7.68 103,026 6,070 5.89 132,197 7,376 5.58
Mortgage-backed
securities............... 1,398,502 87,631 6.27 981,772 65,039 6.62 936,026 68,055 7.27
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total investments...... 1,683,331 102,243 6.07% 1,257,492 80,361 6.39% 1,201,639 83,043 6.91%
Total loans:
Consumer loans............. 893,294 138,798 15.54 581,911 90,560 15.56 415,226 65,985 15.89
Mortgage loans(1).......... 701,924 51,665 7.36 1,266,628 96,491 7.62 1,552,392 119,859 7.72
Commercial loans........... 57,587 4,910 8.53 54,439 4,730 8.69 19,090 1,645 8.62
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total loans............ 1,652,805 195,373 11.82 1,902,978 191,781 10.08 1,986,708 187,489 9.44
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest earning
assets............... 3,336,136 297,616 8.92 3,160,470 272,142 8.61 3,188,347 270,532 8.49
Noninterest earning assets:
Amounts due from trusts...... 384,152 316,419 233,241
Retained interest in
securitized assets......... 180,538 167,640 141,008
Capitalized servicing
rights..................... 5,676 36,704 33,591
Premises and equipment and
real estate owned.......... 93,013 93,496 97,371
Other assets................. 1,248 119,585 26,632
Less: allowance for credit
losses..................... 48,403 35,112 37,409
---------- ---------- ----------
Total.................. $3,952,360 $3,859,202 $3,682,781
========== ========== ==========
Interest bearing liabilities:
Deposits..................... $2,165,493 106,068 4.90 $2,086,972 109,005 5.22 $1,945,520 107,078 5.50
Securities sold under
agreements to repurchase... 369,999 19,102 5.16 321,367 18,639 5.80 308,573 17,376 5.63
FHLB advances and other
borrowings................. 115,120 7,570 6.58 171,464 12,233 7.13 339,110 21,809 6.43
Subordinated debentures...... 218,164 19,545 8.96 239,584 21,454 8.95 166,924 14,807 8.87
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest bearing
liabilities.......... 2,868,776 152,285 5.31 2,819,387 161,331 5.72 2,760,127 161,070 5.84
Noninterest bearing
liabilities:
Amounts held on behalf of
trustee...................... 443,072 389,276 318,621
Other liabilities.............. 300,266 315,032 274,783
Shareholders' equity........... 340,246 335,507 329,250
---------- ---------- ----------
Total.................. $3,952,360 $3,859,202 $3,682,781
========== -------- ----- ========== -------- ----- ========== -------- -----
Net interest income and
interest rate spread......... $145,331 3.61% $110,811 2.89% $109,462 2.65%
======== ===== ======== ===== ======== =====
Net yield on average interest
earning assets............... 4.36% 3.51% 3.43%
===== ===== =====
</TABLE>
- ---------------
(1) For the purpose of these computations, nonaccruing loans are included in the
average loan amounts outstanding.
44
<PAGE> 47
The total interest rate spread increased 72 basis points for 1999 compared
with 1998 due to an increase of 31 basis points in the yield on interest earning
assets while the cost of funds decreased by 41 basis points. The increase in
income on interest earning assets for 1999 compared with 1998 was due primarily
to a higher percentage of automobile contracts held on the balance sheet. The
decline in the cost of funds is primarily the result of an increase in the
relative amount of demand deposit and money market accounts.
The following table sets forth the changes in net interest income
attributable to (i) changes in volume (change in average portfolio volume
multiplied by prior period average rate), (ii) changes in rates (change in
weighted average interest rate multiplied by prior period average portfolio
balance), and (iii) the combined effect of changes in rates and volume (change
in weighted average interest rate multiplied by change in average portfolio
balance):
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
--------------------------------------- ---------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- ------- ------- -------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Other investments..................... $ 4,859 $ (760) $ (389) $ 3,710 $ 2,242 $ (466) $ (136) $ 1,640
Investment securities................. (4,803) 1,844 (1,461) (4,420) (1,627) 409 (88) (1,306)
Mortgage-backed securities............ 27,588 (3,436) (1,560) 22,592 3,325 (6,084) (257) (3,016)
Total loans:
Consumer loans........................ 48,451 (116) (97) 48,238 26,486 (1,370) (541) 24,575
Mortgage loans........................ (43,030) (3,293) 1,497 (44,826) (22,060) (1,552) 244 (23,368)
Commercial loans...................... 274 (87) (7) 180 3,047 13 25 3,085
-------- ------- ------- -------- -------- ------- ------- --------
Total interest earning assets..... $ 33,339 $(5,848) $(2,017) 25,474 $ 11,413 $(9,050) $ (753) 1,610
======== ======= ======= ======== ======= =======
Interest expense:
Deposits................................ $ 4,099 $(6,678) $ (358) (2,937) $ 7,779 $(5,447) $ (405) 1,927
Securities sold under agreements to
repurchase............................ 2,821 (2,057) (301) 463 720 523 20 1,263
FHLB advances and other borrowings...... (4,017) (943) 297 (4,663) (10,779) 2,372 (1,169) (9,576)
Subordinated debentures................. (1,917) 24 (16) (1,909) 6,444 134 69 6,647
-------- ------- ------- -------- -------- ------- ------- --------
Total interest bearing
liabilities..................... $ 986 $(9,654) $ (378) (9,046) $ 4,164 $(2,418) $(1,485) 261
======== ======= ======= -------- ======== ======= ======= --------
Net change in net interest income......... $ 34,520 $ 1,349
======== ========
</TABLE>
PROVISION FOR CREDIT LOSSES
We maintain an allowance for credit losses on the loans held on the balance
sheet to cover probable losses which can be reasonably estimated. The allowance
for credit losses is increased by charging the provision for credit losses and
decreased by actual losses on the loans held on balance sheet or as a result of
the reduction of loans held on the balance sheet through loan sales. The level
of allowance is based principally on the outstanding balance of loans held on
balance sheet, pending sales of contracts and historical loss trends. When we
sell automobile loans in a securitization transaction, we reduce the allowance
for credit losses held on the balance sheet and factor estimated future losses
into our gain on sale calculation. We believe that the allowance for credit
losses is currently adequate to absorb probable losses in our owned loan
portfolio which we can reasonably estimated. See "Note 1 -- Summary of
Significant Accounting Policies" to our Consolidated Financial Statements.
During 1999, the provision for credit losses totaled $38.4 million compared
with $19.0 million and $12.9 million in 1998 and 1997, respectively. The
increase in the provision for credit losses in 1999 was due primarily to an
increase in automobile contracts held on the balance sheet. See "Asset Quality".
NONINTEREST INCOME
Automobile Lending Income
On a regular basis, we securitize automobile contracts and retain the
servicing rights. We securitized $2.5 billion, $1.9 billion and $2.2 billion in
contracts for the years ended December 31, 1999, 1998 and 1997, respectively.
Such transactions are either treated as sales or financings for accounting
purposes. We record a
45
<PAGE> 48
gain equal to the present value of the estimated future earnings from the
portfolio of contracts sold. Net interest earned on such contracts and fees
earned for servicing the contract portfolios are recognized over the life of the
securitization transactions as contractual servicing and retained interest
income and other fee income.
The components of automobile lending income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain on sale of automobile contracts................ $ 51,345 $25,622 $ 39,945
Retained interest income............................ 47,812 1,961 69,844
Contractual servicing income........................ 46,847 37,180 30,803
Other fee income.................................... 42,663 34,384 35,600
-------- ------- --------
Total automobile lending income........... $188,667 $99,147 $176,192
======== ======= ========
</TABLE>
We recorded gain on sale of contracts of $51.3 million in 1999, $25.6
million in 1998 and $39.9 million in 1997. The amount of gain on sale recorded
in each period is dependent upon the amount of contracts sold, the structure of
the securitization, as well as other factors including the gross interest rate
spread on contracts sold, the amount of dealer participation paid, changes in
credit loss assumptions, and the effect of hedging activities. Gross interest
rate spread is affected by product mix, general market conditions and overall
market interest rates. The risks inherent in interest rate fluctuations are
reduced through hedging activities.
Retained interest income was $47.8 million in 1999, $2.0 million in 1998
and $69.8 million in 1997. The increase is primarily the result of lower
amortization of the RISA due to lower credit losses. Conversely, the decline in
retained interest income in 1998 compared with 1997 is due primarily to higher
amortization due to higher credit losses. Retained interest income is dependent
upon the average excess spread on the contracts sold, credit losses and the size
of the sold portfolio.
According to the terms of each securitization transaction, contractual
servicing income is earned at rates ranging from 1.0% to 1.25% per annum on the
outstanding balance of contracts securitized. Other fee income consists
primarily of documentation fees, late charges and deferment fees and has
increased as a direct result of the increase in the number of contracts
originated and outstanding. During the past three years, our average serviced
portfolio increased to $4.8 billion for 1999 from $4.0 billion for 1998 and $3.4
billion for 1997.
The following table lists each of our securitization transactions. The
first issue in 1985 was rated AA by Standard & Poor's Rating Services ("S&P"), a
division of McGraw-Hill, Inc. and Aa by Moody's Investor Service Inc.
("Moody's"). All issues since that time were rated AAA by S&P and Aaa by
Moody's, their respective highest long-term ratings. The money market securities
for each applicable transaction were rated A-1+ by S&P and P-1 by Moody's, their
respective highest short-term ratings. All securitization transactions prior to
1995-4 were paid in full on or before their contractual maturity dates.
46
<PAGE> 49
<TABLE>
<CAPTION>
REMAINING ORIGINAL
REMAINING BALANCE AS A WEIGHTED
BALANCE AT PERCENT OF ORIGINAL AVERAGE
ISSUE ORIGINAL DECEMBER 31, ORIGINAL WEIGHTED SECURITIZATION GROSS INTEREST
NUMBER CLOSE DATE BALANCE 1999 BALANCE AVERAGE APR RATE RATE SPREAD(1)
- ------ --------------- ----------- ------------- ------------ ----------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1985-A December, 1985 $ 110,000 Paid in full 0% 18.50% 8.38% 10.12%
1986-A November, 1986 191,930 Paid in full 0 14.20 6.63 7.57
1987-A March, 1987 125,000 Paid in full 0 12.42 6.75 5.67
1987-B July, 1987 110,000 Paid in full 0 12.68 7.80 4.88
1988-A February, 1988 155,000 Paid in full 0 13.67 7.75 5.92
1988-B May, 1988 100,000 Paid in full 0 14.01 8.50 5.51
1988-C July, 1988 100,000 Paid in full 0 15.41 8.50 6.91
1988-D October, 1988 105,000 Paid in full 0 14.95 8.85 6.10
1989-A March, 1989 75,000 Paid in full 0 15.88 10.45 5.43
1989-B June, 1989 100,000 Paid in full 0 15.96 9.15 6.81
1990-A August, 1990 150,000 Paid in full 0 16.05 8.35 7.70
1990-1 November, 1990 150,000 Paid in full 0 15.56 8.50 7.06
1991-1 April, 1991 200,000 Paid in full 0 16.06 7.70 8.36
1991-2 May, 1991 200,000 Paid in full 0 15.75 7.30 8.45
1991-3 August, 1991 175,000 Paid in full 0 15.69 6.75 8.94
1991-4 December, 1991 150,000 Paid in full 0 15.53 5.63 9.90
1992-1 March, 1992 150,000 Paid in full 0 14.49 5.85 8.64
1992-2 June, 1992 165,000 Paid in full 0 14.94 5.50 9.44
1992-3 September, 1992 135,000 Paid in full 0 14.45 4.70 9.75
1993-1 March, 1993 250,000 Paid in full 0 13.90 4.45 9.45
1993-2 June, 1993 175,000 Paid in full 0 13.90 4.70 9.20
1993-3 September, 1993 187,500 Paid in full 0 13.77 4.25 9.52
1993-4 December, 1993 165,000 Paid in full 0 13.97 4.60 9.37
1994-1 March, 1994 200,000 Paid in full 0 12.90 5.10 7.80
1994-2 May, 1994 230,000 Paid in full 0 13.67 6.38 7.29
1994-3 August, 1994 200,000 Paid in full 0 14.04 6.65 7.39
1994-4 October, 1994 212,000 Paid in full 0 14.59 7.10 7.49
1995-1 January, 1995 190,000 Paid in full 0 15.58 8.05 7.53
1995-2 March, 1995 190,000 Paid in full 0 15.71 7.10 8.61
1995-3 June, 1995 300,000 Paid in full 0 16.36 6.05 10.31
1995-4 September, 1995(2) 375,000 $ 15,682 4.18 15.05 6.20 8.85
1995-5 December, 1995 425,000 26,369 6.20 15.04 5.88 9.16
1996-A March, 1996 485,000 39,665 8.18 15.35 6.13 9.22
1996-B June, 1996 525,000 58,399 11.12 15.46 6.75 8.71
1996-C September, 1996 535,000 76,201 14.24 15.74 6.66 9.08
1996-D December, 1996 545,000 93,390 17.14 15.83 6.17 9.66
1997-A March, 1997 500,000 106,378 21.28 15.43 6.60 8.83
1997-B June, 1997 590,000 151,208 25.63 15.33 6.37 8.96
1997-C September, 1997 600,000 189,116 31.52 15.36 6.17 9.19
1997-D December, 1997 500,000 177,777 35.56 15.43 6.34 9.09
1998-A March, 1998 525,000 213,970 40.76 15.19 6.01 9.18
1998-B June, 1998 660,000 322,421 48.85 14.72 6.06 8.66
1998-C November, 1998 700,000 431,469 61.64 14.68 5.81 8.87
1999-A January, 1999 1,000,000 686,738 68.67 14.42 5.70 8.72
1999-B July, 1999 1,000,000 839,092 83.91 14.62 6.36 8.26
1999-C November, 1999 500,000 462,810 92.56 14.77 7.01 7.76
----------- -------------
Total $14,411,430 $ 3,890,685
=========== =============
</TABLE>
47
<PAGE> 50
- ---------------
(1) Represents the difference between the original weighted average annual
percentage rate ("APR"), and the estimated weighted average securitization
rate on the closing date of the securitization transaction.
(2) The 1995-4 securitization transaction was paid in full on February 1, 2000.
Pro-Forma Portfolio Basis Statements of Operations
The following pro-forma statements of operations present our results under
the assumption that all of our securitization transactions are treated as
financings rather than as sales. We believe that such a presentation is an
important performance measure of our operations. If treated as financings, no
gain on sale or subsequent contractual servicing and retained interest income is
recognized. Instead, the earnings of the contracts in the trusts and the related
financing costs are reflected over the life of the underlying pool of loans. We
refer to these pro-forma results as "portfolio basis" statements of operations
since the contracts would have remained in our contract portfolio on balance
sheet if we accounted for the transactions as financings. We monitor the
periodic portfolio basis earnings of our serviced contract portfolio and believe
these portfolio basis statements assist in better understanding our business.
The following tables presents the portfolio basis statements of operations
and a reconciliation to net income (loss) as reflected in our consolidated
statements of operations.
PORTFOLIO BASIS STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Interest income............................................. $799,587 $715,605
Interest expense............................................ 411,379 397,595
-------- --------
Net interest income....................................... 388,208 318,010
Net chargeoffs(1)........................................... 103,638 141,639
Provision for growth(2)..................................... 20,310 16,621
-------- --------
Provision for credit losses............................... 123,948 158,260
-------- --------
Net interest income after provision for credit losses..... 264,260 159,750
Noninterest income.......................................... 64,001 68,675
Noninterest expense......................................... 224,960 259,223
-------- --------
Income (loss) before income tax (benefit)................. 103,301 (30,798)
Income tax (benefit)(3)..................................... 43,491 (12,355)
-------- --------
Income (loss) before minority interest.................... 59,810 (18,443)
Minority interest in earnings (losses)...................... 6,614 (2,385)
-------- --------
Income (loss) before extraordinary item................... 53,196 (16,058)
Extraordinary gain from early extinguishment of debt........ 2,132
-------- --------
Portfolio basis net income (loss)........................... $ 55,328 $(16,058)
======== ========
Portfolio basis net income (loss) per common share --
diluted................................................... $ 2.09 $ (0.61)
======== ========
</TABLE>
- ---------------
(1) Represents actual chargeoffs incurred during the period, net of recoveries.
(2) Represents additional allowance for credit losses we would set aside due to
an increase in the serviced contract portfolio.
(3) Such tax effect is based upon our tax rate for the respective period.
48
<PAGE> 51
RECONCILIATION OF GAAP BASIS NET INCOME TO PORTFOLIO BASIS NET INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1999 1998
--------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GAAP net income (loss)...................................... $ 52,626 $ (14,697)
Portfolio basis adjustments:
Gain on sales of contracts................................ (51,345) (25,622)
Retained interest income.................................. (47,812) (1,961)
Contractual servicing income.............................. (46,847) (37,180)
Net interest income....................................... 242,878 207,200
Provision for credit losses............................... (85,549) (139,299)
Operating expenses........................................ (6,500) (5,690)
Minority interest......................................... (92) 166
-------- ---------
Total portfolio basis adjustments................. 4,733 (2,386)
Net tax effect(1)........................................... 2,031 (1,025)
-------- ---------
Portfolio basis net income (loss)........................... $ 55,328 $ (16,058)
======== =========
</TABLE>
- ---------------
(1) Such tax effect is based upon our tax rate for the respective period.
Mortgage Banking Income
Mortgage banking operations included gains and losses on the sale of loans,
loan servicing income net of amortization of capitalized servicing rights and
other income (primarily late charges). During 1999, mortgage banking income
totaled $6.0 million compared with $14.2 million and $24.5 million in 1998 and
1997, respectively. The 58% decline in mortgage banking income is due to our
decision to exit the mortgage banking business. This decision resulted in the
sale of our remaining mortgage banking operations effective September 16, 1999.
The components of mortgage banking income were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net gains from sale of mortgage loans.................. $3,184 $14,769 $18,945
Mortgage loan servicing income (loss).................. 2,001 (2,949) 3,284
Other fee income....................................... 862 2,410 2,311
------ ------- -------
Total mortgage banking income................ $6,047 $14,230 $24,540
====== ======= =======
</TABLE>
Other Noninterest Income
Other noninterest income consists primarily of investment and
mortgage-backed securities gains and losses and insurance income. We recorded
investment and mortgage-backed securities gains of $1.3 million for the year
ended December 31, 1999 compared with gains of $7.6 million and $8.0 million in
1998 and 1997, respectively. The gain on sale recorded in 1999 was the result of
the sale of $110 million of mortgage-backed securities compared with the sale of
$366 million and $394 million during 1998 and 1997, respectively. Insurance
income, which totaled $6.1 million, $5.7 million and $6.5 million for the years
ended December 31, 1999, 1998 and 1997, respectively, includes premiums and
commissions earned on insurance and insurance-related products, including
collateral protection and credit life insurance. Sales of mutual funds and
annuities totaled $2.1 million in 1999, $2.0 million in 1998 and $1.8 million in
1997.
49
<PAGE> 52
NONINTEREST EXPENSE
Total noninterest expense was $218 million, $254 million and $246 million
for the years ended December 31, 1999, 1998 and 1997, respectively. The 14%
decline in noninterest expense from 1998 to 1999 is primarily the result of the
completion of the restructuring programs for the automobile lending and mortgage
banking operations as well as other operating efficiencies achieved during the
past three years. These efficiencies include increasing the conversion ratios on
contracts purchased, the automation of the loan application and underwriting
system, the centralization of data entry and verification processes,
implementation of proprietary credit scorecards and electronic funds transfers
for our dealers. Operating efficiencies also include the implementation of
automated dialers, the centralization and upgrade of payment processing and
asset recovery processes, the upgrading of toll free lines for customer service
and interactive voice response technology, direct debit for our borrowers,
imaging for record retention and retrieval, and the implementation of a new
collection system.
INCOME TAXES
We file federal and certain state tax returns on a consolidated basis.
Other state tax returns are filed for each subsidiary separately. Our effective
tax rate was 42% for the year ended December 31, 1999 compared with effective
tax rates of 40% and 43% for the years ended December 31, 1998 and 1997,
respectively.
FINANCIAL CONDITION
OVERVIEW
During 1999, our strategy was to focus on and expand our principal lines of
business -- automobile lending and community banking. We originated $3.3 billion
of automobile loans in 1999 compared with $2.7 billion during 1998. The 25%
increase in automobile contract purchases was the result of the successful
implementation of our full spectrum single point of contact marketing approach
initiated as part of our restructuring program.
During 1999, our retail banking division increased total demand deposit and
money market accounts by $136 million or 40% to $477 million at December 31,
1999. Total demand deposit and money market accounts represented 24% of total
retail banking deposits. The commercial banking division had deposits of $216
million, $80.0 million, and $67.5 million outstanding at December 31, 1999, 1998
and 1997, respectively.
INVESTMENT SECURITIES
Our investment securities portfolio consists primarily of United States
Agency and Treasury securities and is classified as available for sale.
Accordingly, the portfolio is reported at fair value with unrealized gains and
losses being reflected as a separate component of shareholders' equity. This
portfolio is maintained primarily for liquidity purposes in accordance with
regulatory requirements. We also hold FHLB stock, which is carried at cost as
required by our affiliation with the FHLB System. All of our investment
securities held to maturity were reclassified to available for sale in 1998. In
1998, we held other investments, which included investment securities. At
December 31, 1999, the weighted average interest rate of our investment
securities portfolio was 6.26% for securities with maturities of up to one year,
4.72% for securities with maturities greater than one year up to five years, and
5.00% for securities with maturities greater than five years up to ten years.
50
<PAGE> 53
The following table summarizes our investment securities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest bearing deposits with other
financial institutions.................... $ 720 $ 515 $ 15,510 $ 510 $ 689
Other short-term investments................ 137,000 22,864 84,136 62,798 126,227
Investment securities:
U.S. Treasury securities and obligations
of other U.S. government agencies and
corporations -- available for sale..... 75,592 121,714 140,806 130,052
U.S. Treasury securities and obligations
of other U.S. government agencies and
corporations -- held to maturity....... 1,504 1,506
Obligations of states and political
subdivisions........................... 1,506 1,572 1,532 1,513 3,441
FHLB stock................................ 23,312 24,555 25,762 31,967 29,624
Other..................................... 739 632 163 25 25
-------- -------- -------- -------- --------
$163,277 $125,730 $248,817 $239,123 $291,564
======== ======== ======== ======== ========
</TABLE>
The following table sets forth the stated maturities of our investment
securities at December 31, 1999:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS
UP TO ONE TO FIVE TO TEN TEN YEARS NO STATED
YEAR YEARS YEARS OR MORE MATURITY
--------- -------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest bearing deposits with other financial
institutions................................ $ 720
Other short-term investments.................. 137,000
Investment securities:
Obligations of states and political
subdivisions............................. $487 $1,019
FHLB stock.................................. $23,312
Other....................................... 739
-------- ---- ------ -------- -------
$137,720 $487 $1,019 $24,051
======== ==== ====== ======== =======
Weighted average interest rate................ 6.26% 4.72% 5.00% 5.73%
</TABLE>
MORTGAGE-BACKED SECURITIES
We invest in MBS to generate net interest margin, to manage interest rate
risk, to provide another source of liquidity through repurchase agreements and
to meet regulatory requirements. See "Business -- Supervision and Regulation".
In 1998, we reclassified our portfolio as available for sale and accounted for
it at fair value with unrealized gains or losses being reported as a separate
component of shareholders' equity. The following table summarizes our MBS
portfolio by issuer:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Available for sale securities:
GNMA certificates......................................... $1,344,450 $859,627
FNMA participation certificates........................... 81,955 113,842
FHLMC participation certificates.......................... 2,084 3,658
Other..................................................... 2,887 2,917
---------- --------
$1,431,376 $980,044
========== ========
</TABLE>
51
<PAGE> 54
The carrying value of the MBS portfolio available for sale was $1.5 billion
compared with an estimated market value of $1.4 billion at December 31, 1999.
The portfolio had a weighted average interest rate of 6.27% at December 31,
1999. Our MBS portfolio had maturities of ten years or greater at December 31,
1999, although payments are generally received monthly throughout the life of
these securities.
LOAN PORTFOLIOS
Mortgage Loan Portfolio
From time to time, we have originated mortgage products that we have held
on our balance sheet rather than selling such products into the secondary
markets. Other than mortgage loans originated through the commercial banking
division on a limited basis, we are not adding newly originated mortgage loans
to our balance sheet.
Our total mortgage loan portfolio (including those held for sale) consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
----------------- -------------------
AMOUNT % AMOUNT %
-------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Single family residential loans:
First trust deeds................................. $281,419 47.1% $ 617,914 61.4%
Second trust deeds................................ 6,885 1.1 27,052 2.7
-------- ----- ---------- -----
288,304 48.2 644,966 64.1
Multifamily residential loans....................... 272,132 45.5 331,652 32.9
Construction loans.................................. 23,190 3.9 18,345 1.9
Other............................................... 28,636 4.8 17,031 1.7
-------- ----- ---------- -----
612,262 102.4 1,011,994 100.6
Less: undisbursed loan proceeds..................... 14,174 2.4 5,057 0.6
-------- ----- ---------- -----
Total mortgage loans...................... $598,088 100.0% $1,006,937 100.0%
======== ===== ========== =====
</TABLE>
Consumer Loan Portfolio
Our consumer loan portfolio (including those held for sale) consisted of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
------------------- -----------------
AMOUNT % AMOUNT %
---------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile contracts................................ $1,518,433 96.7% $923,953 94.2%
Other............................................... 52,210 3.3 57,024 5.8
---------- ----- -------- -----
$1,570,643 100.0% $980,977 100.0%
========== ===== ======== =====
</TABLE>
The balance of automobile contracts held on the balance sheet is largely
dependent upon the timing of origination and securitization of contracts. We
expect to continue to increase the amount of automobile contracts held on the
balance sheet.
Commercial Loan Portfolio
We had outstanding commercial loan commitments of $215 million at December
31, 1999 compared with $154 million at December 31, 1998. During 1999, we
originated $237 million of commercial loans compared with $124 million during
1998. Though we continue to focus on expanding our commercial banking operation,
it was not a significant source of revenues for the year ended December 31,
1999.
52
<PAGE> 55
AMOUNTS DUE FROM TRUSTS
The excess cash flow generated by contracts sold to trusts is deposited
into spread accounts by the trustee under the terms of the securitization
transactions. In addition, at the time a securitization transaction closes, WFS
advances additional monies to WFAL to initially fund these spread accounts. WFS
establishes a liability associated with its use of the spread account funds
which is reduced as such funds reach predetermined funding levels. WFS is
released from its obligation after the spread account reaches a predetermined
funding level. Amounts due from trusts represent amounts due to WFS that are
still under obligation to be held in the spread accounts. The amounts due from
trusts at December 31, 1999 were $439 million compared with $333 million at
December 31, 1998. The increase is a result of the increase in the total
contracts sold and outstanding.
RETAINED INTEREST AND CAPITALIZED SERVICING RIGHTS ASSETS
Following a transfer of financial assets, we recognize the assets we
control and the liabilities we incurred and derecognize assets for which control
has been surrendered and liabilities that have been extinguished.
Retained Interest in Securitized Assets
RISA is capitalized upon the sale of contracts to securitization trusts.
RISA represents the present value of the estimated future earnings to be
received by us from the excess spread created in securitization transactions.
Excess spread is calculated by taking the coupon rate of the contracts sold less
the interest rate paid to the investors less contractually specified servicing,
guarantor fees, credit losses and prepayments.
Prepayment and credit loss assumptions are also utilized to estimate future
excess spread. We currently use a prepayment rate of 1.6% Absolute Prepayment
Model ("ABS"). Credit losses are estimated using a cumulative loss rate
estimated by management to reduce the likelihood of impairment to the value of
the RISA. We determine the cumulative loss rate based upon our review of
historical cumulative loss experience, collection and repossession data,
estimates of the value of the underlying collateral, economic conditions and
trends, the mix of prime and non-prime contracts and other information.
Cumulative net credit loss assumptions utilized during 1999 and 1998 ranged from
6% to 7%. Future earnings are discounted at a rate management believes to be
representative of the market at the time of securitization. Currently, we use a
discount rate of 425 basis points over the two-year Treasury rate. All
assumptions used are evaluated each quarter and adjusted, if appropriate, to
reflect actual performance of the contracts.
The balance of the RISA is amortized on a monthly basis over the expected
repayment life of the underlying contracts. Actual cash flows in excess of the
amortization of the RISA are shown in our income statement as retained interest
income. RISA is classified in a manner similar to available for sale securities
and as such is marked to market each quarter. Market value changes are
calculated by discounting the excess spread using a current market discount
rate. Any changes in the market value of the RISA are reported as a separate
component of shareholders' equity on our consolidated statements of financial
condition as accumulated other comprehensive income (loss), net of applicable
taxes.
The following table presents the activity of the RISA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................ $ 171,230 $ 181,177 $121,597
Additions........................................ 111,767 91,914 112,230
Amortization..................................... (111,752) (103,610) (53,421)
Change in unrealized gains (losses) on RISA(1)... (3,968) 1,749 771
--------- --------- --------
Ending balance................................... $ 167,277 $ 171,230 $181,177
========= ========= ========
</TABLE>
53
<PAGE> 56
- ---------------
(1) Change in unrealized gains (losses) on RISA represents the effect that
current changes in interest rates have on the valuation of the RISA. Such
amount will not be realized unless the RISA is sold.
Estimated future undiscounted RISA earnings are calculated by taking the
difference between the coupon rate of the contracts sold and the interest rate
paid to the investors, less the contractually specified servicing fees and
guarantor fees, after giving effect to estimated prepayments and assuming no
losses. To arrive at the RISA, this amount is reduced by the off balance sheet
allowance established for probable future losses that can be reasonably
estimated and by discounting to present value.
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings.................... $ 410,066 $ 361,209
Off balance sheet allowance for credit losses............... (220,838) (170,664)
Discount to present value................................... (21,951) (19,315)
---------- ----------
Retained interest in securitized assets..................... $ 167,277 $ 171,230
========== ==========
Outstanding balance of automobile contracts sold through
securitizations........................................... $3,890,685 $3,491,452
Off balance sheet allowance for credit losses as a percent
of automobile contracts sold through securitizations...... 5.68% 4.89%
</TABLE>
We believe that the off balance sheet allowance for credit losses is currently
adequate to absorb probable future losses in the sold portfolio that can be
reasonably estimated.
Capitalized Servicing Rights ("CSR")
Capitalized servicing rights consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Purchased mortgage servicing rights......................... $ $ 6,360
Originated mortgage servicing rights........................ 6,136
Impairment allowance for mortgage servicing rights.......... (3,723)
------- -------
$ $ 8,773
======= =======
</TABLE>
CSR assets represent an allocation of the cost basis of loans sold between
the CSR and the loans based upon their relative fair value at the date the loans
are originated or purchased. The fair value of CSR is calculated by estimating
future servicing revenues, including servicing fees, late charges, other
ancillary income, and float benefit, less the actual cost to service loans.
As part of our strategy to exit the mortgage banking business, we sold our
entire remaining mortgage servicing rights portfolio during 1999. Amortization
of capitalized servicing rights is reflected as a component of mortgage banking
income in noninterest income. Amortization expense for the year ended December
31, 1999 was $2.3 million, compared with $15.5 million for the year ended
December 31, 1998.
ASSET QUALITY
Overview
Nonperforming assets, repossessions, loan delinquency and credit losses are
considered by us as key measures of asset quality. Asset quality, in turn,
affects our determination of the allowance for credit losses. We also take into
consideration general economic conditions in the markets we serve, individual
loan reviews, and the level of assets relative to reserves in determining the
adequacy of the allowance for credit losses.
54
<PAGE> 57
Automobile Loan Quality
We provide automobile financing in a market where there is a risk of
default by borrowers. Chargeoffs directly impact our earnings and cash flows. To
minimize the amount of losses we incur, we monitor delinquent accounts, promptly
repossess and remarket vehicles and seek to collect on deficiency balances.
At December 31, 1999, the percentage of accounts delinquent 30 days or
greater was 2.84% compared with 3.64% at December 31, 1998 and 2.20% at December
31, 1997. Delinquency is calculated by us based on the contractual due date. Net
chargeoffs on average contracts outstanding for the year ended December 31, 1999
were 2.13% compared with 3.42% and 3.02% at December 31, 1998 and 1997,
respectively. Historically, chargeoffs and delinquencies tend to be higher in
the first and fourth quarters of the year.
The improvement in credit loss experience and delinquency is the result of
improved underwriting and servicing. Stricter underwriting guidelines, the
successful implementation of our multiple credit scoring models, and a greater
concentration of prime automobile contracts in our portfolio have all
contributed to better asset quality. Collection and recovery efforts have also
improved as the effects of the disruption created by the restructuring program
completed in 1998 have dissipated. See "Business -- Operations -- Automobile
Lending".
The following table sets forth information with respect to the delinquency
of our portfolio of automobile contracts serviced which includes delinquency
information relating to automobile contracts which are owned by us and
automobile contracts which have been sold and securitized but are serviced by
us:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of delinquency(1)
31 - 59 days.............................. $107,416 2.01% $112,208 2.57% $54,450 1.48%
60 days or more........................... 44,610 0.83 46,541 1.07 26,414 0.72
-------- ---- -------- ---- ------- ----
Total automobile contracts and
delinquencies as a percentage of
contracts serviced............... $152,026 2.84% $158,749 3.64% $80,864 2.20%
======== ==== ======== ==== ======= ====
</TABLE>
- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
The following table sets forth information with respect to delinquencies in
our portfolio of automobile contracts owned:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------- ---------- ------- ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Period of delinquency(1)
31 - 59 days................................. $17,114 1.17% $12,743 1.45% $3,053 1.32%
60 days or more.............................. 7,246 0.49 5,490 0.63 2,182 0.94
------- ---- ------- ---- ------ ----
Total automobile contracts and
delinquencies as a percentage of
contracts serviced.................. $24,360 1.66% $18,233 2.08% $5,235 2.26%
======= ==== ======= ==== ====== ====
</TABLE>
- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.
55
<PAGE> 58
The following table sets forth information with respect to repossessions in
our portfolio of serviced contracts:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Automobile contracts serviced(1)...... 524,709 $5,354,385 464,257 $4,367,099 408,958 $3,680,817
======= ========== ======= ========== ======= ==========
Repossessed vehicles.................. 559 $ 3,374 1,232 $ 7,790 1,554 $ 9,672
======= ========== ======= ========== ======= ==========
Repossessed vehicles as a percentage
of number and amount of contracts
outstanding......................... 0.11% 0.06% 0.27% 0.18% 0.38% 0.26%
</TABLE>
- ---------------
(1) Includes automobile contracts which are owned by us and automobile contracts
which have been sold and securitized but are serviced by us.
The following table sets forth information with respect to actual credit
loss experience on our portfolio of automobile contracts serviced:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Automobile contracts serviced at end of period(1)...... $5,354,385 $4,637,099 $3,680,817
========== ========== ==========
Average automobile contracts serviced during
period(1)............................................ $4,839,514 $4,006,185 $3,383,570
========== ========== ==========
Gross chargeoffs of automobile contracts serviced
during period........................................ $ 150,518 $ 173,422 $ 136,773
Recoveries of automobile contracts charged off in
current and prior periods............................ 47,581 36,230 34,634
---------- ---------- ----------
Net chargeoffs......................................... $ 102,937 $ 137,192 $ 102,139
========== ========== ==========
Net chargeoffs as a percent of average automobile
contracts serviced during period..................... 2.13% 3.42% 3.02%
</TABLE>
- ---------------
(1) Includes contracts which are owned by us and automobile contracts which have
been sold and securitized but are serviced by us.
56
<PAGE> 59
The following table sets forth the cumulative static pool losses by month
for all outstanding securitized pools:
CUMULATIVE STATIC POOL LOSS CURVES(1)
AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
MONTH(2) 1995-4 1995-5 1996-A 1996-B 1996-C 1996-D 1997-A 1997-B 1997-C 1997-D
-------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.................................. 0.00% 0.01% 0.00% 0.01% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00%
2.................................. 0.06% 0.09% 0.06% 0.09% 0.09% 0.10% 0.08% 0.06% 0.05% 0.05%
3.................................. 0.16% 0.16% 0.17% 0.20% 0.22% 0.24% 0.20% 0.15% 0.12% 0.14%
4.................................. 0.31% 0.32% 0.29% 0.35% 0.52% 0.44% 0.36% 0.33% 0.29% 0.31%
5.................................. 0.52% 0.48% 0.48% 0.61% 0.74% 0.71% 0.62% 0.56% 0.46% 0.56%
6.................................. 0.70% 0.62% 0.63% 0.88% 0.98% 0.93% 0.85% 0.77% 0.67% 0.75%
7.................................. 0.86% 0.78% 0.81% 1.14% 1.27% 1.16% 1.12% 1.10% 0.93% 0.99%
8.................................. 1.02% 0.98% 1.08% 1.42% 1.52% 1.43% 1.45% 1.40% 1.16% 1.24%
9.................................. 1.13% 1.16% 1.35% 1.67% 1.77% 1.72% 1.70% 1.70% 1.37% 1.47%
10................................. 1.26% 1.32% 1.63% 1.91% 1.98% 2.03% 2.02% 2.00% 1.66% 1.75%
11................................. 1.41% 1.54% 1.87% 2.18% 2.21% 2.34% 2.32% 2.22% 1.94% 2.06%
12................................. 1.52% 2.01% 2.06% 2.38% 2.49% 2.62% 2.61% 2.43% 2.16% 2.35%
13................................. 1.66% 2.03% 2.28% 2.58% 2.73% 2.97% 2.92% 2.66% 2.40% 2.63%
14................................. 1.86% 2.25% 2.47% 2.79% 2.99% 3.27% 3.14% 2.91% 2.65% 2.86%
15................................. 2.07% 2.41% 2.63% 2.95% 3.21% 3.53% 3.30% 3.15% 2.90% 3.05%
16................................. 2.26% 2.59% 2.79% 3.14% 3.47% 3.79% 3.55% 3.47% 3.15% 3.19%
17................................. 2.47% 2.77% 2.97% 3.38% 3.70% 4.02% 3.77% 3.77% 3.36% 3.32%
18................................. 2.59% 2.88% 3.12% 3.55% 3.94% 4.19% 3.94% 3.97% 3.55% 3.42%
19................................. 2.72% 3.00% 3.31% 3.80% 4.18% 4.43% 4.21% 4.20% 3.70% 3.50%
20................................. 2.88% 3.12% 3.49% 3.98% 4.36% 4.65% 4.40% 4.39% 3.81% 3.60%
21................................. 2.95% 3.24% 3.63% 4.14% 4.53% 4.80% 4.59% 4.53% 3.91% 3.69%
22................................. 3.04% 3.39% 3.80% 4.31% 4.67% 5.07% 4.81% 4.67% 4.00% 3.81%
23................................. 3.13% 3.53% 3.95% 4.46% 4.84% 5.27% 5.00% 4.75% 4.11% 3.96%
24................................. 3.22% 3.64% 4.10% 4.58% 5.01% 5.47% 5.14% 4.81% 4.21% 4.10%
25................................. 3.30% 3.72% 4.22% 4.74% 5.17% 5.65% 5.24% 4.88% 4.30% 4.23%
26................................. 3.37% 3.83% 4.33% 4.87% 5.34% 5.80% 5.33% 4.94% 4.44%
27................................. 3.47% 3.95% 4.41% 4.98% 5.50% 5.91% 5.39% 5.04% 4.56%
28................................. 3.50% 4.08% 4.51% 5.11% 5.67% 5.98% 5.44% 5.11% 4.66%
29................................. 3.58% 4.16% 4.60% 5.21% 5.78% 6.06% 5.50% 5.21%
30................................. 3.65% 4.25% 4.70% 5.31% 5.89% 6.12% 5.56% 5.31%
31................................. 3.75% 4.31% 4.79% 5.42% 5.98% 6.17% 5.65% 5.40%
32................................. 3.80% 4.35% 4.85% 5.50% 6.02% 6.24% 5.71%
33................................. 3.83% 4.40% 4.91% 5.55% 6.06% 6.29% 5.79%
34................................. 3.87% 4.46% 4.99% 5.58% 6.11% 6.34% 5.85%
35................................. 3.91% 4.54% 5.03% 5.60% 6.14% 6.39%
36................................. 3.94% 4.58% 5.07% 5.62% 6.16% 6.44%
37................................. 3.96% 4.61% 5.11% 5.65% 6.17% 6.47%
38................................. 3.99% 4.64% 5.11% 5.68% 6.22%
39................................. 4.01% 4.66% 5.12% 5.70% 6.27%
40................................. 4.04% 4.69% 5.12% 5.71% 6.30%
41................................. 4.06% 4.69% 5.13% 5.74%
42................................. 4.07% 4.69% 5.13% 5.76%
43................................. 4.07% 4.68% 5.13% 5.77%
44................................. 4.07% 4.68% 5.13%
45................................. 4.06% 4.68% 5.14%
46................................. 4.05% 4.68% 5.14%
47................................. 4.05% 4.66%
48................................. 4.05% 4.68%
49................................. 4.03% 4.67%
50................................. 4.03%
51................................. 4.03%
52................................. 4.04%
Prime Mix(3)....................... 65% 64% 59% 58% 55% 51% 54% 55% 53% 49%
<CAPTION>
MONTH(2) 1998-A 1998-B 1998-C 1999-A 1999-B 1999-C
-------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1.................................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2.................................. 0.04% 0.02% 0.04% 0.04% 0.04% 0.02%
3.................................. 0.11% 0.08% 0.11% 0.11% 0.11% 0.10%
4.................................. 0.25% 0.18% 0.23% 0.20% 0.26%
5.................................. 0.44% 0.38% 0.39% 0.33% 0.47%
6.................................. 0.66% 0.59% 0.50% 0.46% 0.66%
7.................................. 0.95% 0.83% 0.61% 0.62%
8.................................. 1.23% 1.03% 0.75% 0.76%
9.................................. 1.50% 1.21% 0.86% 0.92%
10................................. 1.79% 1.40% 1.00% 1.11%
11................................. 2.03% 1.53% 1.17% 1.30%
12................................. 2.21% 1.62% 1.32%
13................................. 2.39% 1.74% 1.48%
14................................. 2.49% 1.84% 1.66%
15................................. 2.60% 1.96%
16................................. 2.72% 2.10%
17................................. 2.85% 2.22%
18................................. 2.98% 2.40%
19................................. 3.11% 2.55%
20................................. 3.25%
21................................. 3.35%
22................................. 3.48%
23.................................
24.................................
25.................................
26.................................
27.................................
28.................................
29.................................
30.................................
31.................................
32.................................
33.................................
34.................................
35.................................
36.................................
37.................................
38.................................
39.................................
40.................................
41.................................
42.................................
43.................................
44.................................
45.................................
46.................................
47.................................
48.................................
49.................................
50.................................
51.................................
52.................................
Prime Mix(3)....................... 57% 67% 70% 70% 70% 67%
</TABLE>
- ---------------
(1) Cumulative static pool losses are equal to the cumulative amount of losses
actually recognized up to and including a given month divided by the
original principal balance of the securitization transaction.
(2) Represents the number of months since the inception of the securitization
transaction.
(3) Represents the original percentage of prime contracts sold within each pool.
57
<PAGE> 60
Real Estate Loan Quality
The following table of mortgage delinquencies over 60 days by loan type
highlights the fact that real estate loan related delinquencies have stabilized
over the past three years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AMOUNT AMOUNT AMOUNT
PAST DUE PAST DUE PAST DUE
OVER % OF OVER % OF OVER % OF
60 DAYS CATEGORY 60 DAYS CATEGORY 60 DAYS CATEGORY
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Single family............................. $8,508 2.64% $7,588 1.19% $12,993 1.17%
Multifamily............................... 1,005 0.54 669 0.30 938 0.22
Construction.............................. 964 6.92 220 2.79
------ ---- ------ ---- ------- ----
$9,513 1.58% $9,221 0.91% $14,151 0.90%
====== ==== ====== ==== ======= ====
</TABLE>
Nonperforming Assets
Our total nonperforming assets ("NPAs") decreased $3.6 million to $13.5
million at December 31, 1999 compared with $17.1 million at December 31, 1998
and $26.1 million at December 31, 1997. At December 31, 1999, NPAs represented
0.3% compared with 0.4% and 0.7% of total assets at December 31, 1998 and 1997,
respectively. The real estate market has become much stronger throughout
California, thereby improving overall loan performance.
NPAs consist of nonperforming loans ("NPLs") and real estate owned ("REO").
REO is carried at lower of cost or fair value less estimated disposition costs.
NPLs are defined as all nonaccrual loans, which include mortgage loans 90 days
or more past due and impaired loans where full collection of principal and
interest is not reasonably assured. When a loan is designated as nonaccrual, all
previously accrued but unpaid interest is reversed. At December 31, 1999, 1998
and 1997, interest on nonperforming loans excluded from interest income was $0.6
million, $0.4 million, and $0.8 million, respectively.
A loan is considered impaired when, based on current information and
events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement. We measure impairment
based on, among other factors, the fair value of the loan's collateral. Changes
in the fair value of loans are recorded through the allowance for credit losses.
At December 31, 1999 and 1998, impaired loans totaled $3.9 million and $4.0
million, respectively.
The following table classifies NPLs into significant categories:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans placed on nonaccrual.................................. $ 7,362 $ 8,181
Impaired loans.............................................. 3,917 4,046
------- -------
$11,279 $12,227
======= =======
</TABLE>
Single family loans accounted for 68% of total NPAs at December 31, 1999 while
multifamily loans accounted for only 30%, although no single loan or series of
such loans predominate. The decrease in total NPAs is the result of improving
asset quality and stabilization of market values.
Allowance For Credit Losses
Our allowance for credit losses was $64.2 million at December 31, 1999
compared to $37.7 million at December 31, 1998 and $33.8 million at December 31,
1997. The allowance for credit losses and related provisions are determined by
considering loan volumes, loan sales, prepayments, loss trends, levels of NPLs,
management's analysis of market conditions, individual loan reviews, levels of
assets to reserves and other relevant factors. The allowance for credit losses
is reduced by net chargeoffs and increased by the provision for
58
<PAGE> 61
credit losses. For the year ended December 31, 1999, the provision for credit
losses was $38.4 million compared with $19.0 million and $12.9 million for the
years ended December 31, 1998 and 1997, respectively. Net chargeoffs for the
years ended December 31, 1999, 1998 and 1997 were $11.8 million, $15.1 million
and $18.4 million, respectively. The increase in the allowance for credit losses
is the result of a greater percentage of automobile contracts held on balance
sheet.
We believe that the allowance for credit losses is currently adequate to
cover probable losses in the portfolio that can be reasonably estimated. No
single loan, borrower or series of such loans comprise a significant portion of
the total portfolio. The provision and allowance for credit losses are
indicative of loan volumes, loss trends and management's analysis of market
conditions.
The following table sets forth the activity in the allowance for credit
losses:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ 37,660 $ 33,834 $ 40,211
Chargeoffs:
Mortgage loans................................... (2,495) (4,761) (6,850)
Consumer loans................................... (18,787) (14,944) (15,956)
-------- -------- --------
(21,282) (19,705) (22,806)
Recoveries:
Mortgage loans................................... 1,883 427 66
Consumer loans................................... 7,556 4,144 4,303
-------- -------- --------
9,439 4,571 4,369
-------- -------- --------
Net chargeoffs..................................... (11,843) (15,134) (18,437)
Business acquisition adjustment(1)................. (791)
Provision for credit losses........................ 38,400 18,960 12,851
-------- -------- --------
Balance at end of period........................... $ 64,217 $ 37,660 $ 33,834
======== ======== ========
Ratio of net chargeoffs during the period to
average loans outstanding during the period...... 0.72% 0.79% 0.93%
</TABLE>
- ---------------
(1) Adjustment related to the acquisition of The Hammond Company and its
subsidiaries.
The allowance for credit losses by loan category was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
LOANS IN EACH LOANS IN EACH
CATEGORY AS A % CATEGORY AS A %
ALLOWANCE OF TOTAL LOANS ALLOWANCE OF TOTAL LOANS
--------- --------------- --------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Consumer................................. $40,339 69.5% $13,971 46.8%
Single family residential................ 7,265 13.6 5,881 33.0
Multifamily residential.................. 13,760 13.8 15,467 17.5
Commercial............................... 2,853 3.1 2,341 2.7
------- ----- ------- -----
$64,217 100.0% $37,660 100.0%
======= ===== ======= =====
</TABLE>
The allowance for real estate owned losses remained constant at $0.8
million at December 31, 1999 and December 31, 1998. The allowance for real
estate owned losses is charged with writedowns of foreclosed assets or changes
in estimated fair value occurring subsequent to foreclosure. No later than at
the time of foreclosure, individual properties are written down to estimated
fair value and the allowance for credit losses is charged. We believe that the
allowance for real estate owned losses is currently adequate to absorb probable
losses in the foreclosed portfolio that can be reasonably estimated.
59
<PAGE> 62
The following table presents summarized data relative to the allowances for
loan and real estate losses at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total loans(1).............................................. $2,181,624 $1,992,833
Allowance for credit losses................................. 64,217 37,660
Allowance for real estate owned losses...................... 784 784
Loans past due 60 days or more.............................. 17,514 16,365
Nonperforming loans......................................... 11,279 12,227
Nonperforming assets(2)..................................... 13,535 17,088
Allowance for credit losses as a percent of:
Total loans(2)............................................ 2.9% 1.9%
Loans past due 60 days or more............................ 366.7% 230.1%
Nonperforming loans....................................... 569.4% 308.0%
Total allowance for credit losses and REO losses as a
percent of nonperforming assets........................ 480.2% 225.0%
Nonperforming loans as a percent of total loans............. 0.5% 0.6%
Nonperforming assets as a percent of total assets........... 0.3% 0.4%
</TABLE>
- ---------------
(1) Loans net of unearned interest and undisbursed loan proceeds.
(2) Nonperforming loans and real estate owned.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
We require substantial capital resources and cash to support our business.
In addition, as a member of the FHLB, the Bank is required to maintain a
specified ratio of cash, short-term United States government and other
qualifying securities to net withdrawable accounts and borrowings payable in a
year or less. The required liquidity ratio is currently 4%. The Bank has
maintained liquidity in excess of the required amount during 1999. Our ability
to maintain positive cash flows from automobile operations is the result of
consistent managed growth, favorable loss experience and efficient operations.
In addition to our indirect statement of cash flows as presented under
generally accepted accounting principles, we also analyze the key cash flows
from our automobile lending operations on a direct basis excluding certain items
such as the purchase or sale of loans. The following table shows operating cash
flows for our automobile lending operations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from trusts............................. $159,564 $ 97,730 $108,717
Contractual servicing income....................... 46,847 37,180 30,803
Net interest margin -- owned loans................. 114,092 81,798 67,021
Other fee income................................... 46,121 36,969 37,106
Less:
Dealer participation............................... 83,435 72,255 62,662
Operating costs.................................... 173,600 165,042 167,418
-------- -------- --------
Operating cash flows............................... $109,589 $ 16,380 $ 13,567
======== ======== ========
</TABLE>
60
<PAGE> 63
Operating cash flows from automobile lending operations have improved
dramatically for 1999 compared with 1998 as a result of the improving credit
quality of our portfolio as well as improved operating efficiency and declining
dealer participation rates on automobile contracts.
PRINCIPAL SOURCES OF CASH
We employ various sources to fund our operations, including collections of
principal and interest from loans, deposits, securitizations, commercial paper,
advances from the FHLB, repurchase agreements, subordinated debentures and other
borrowings. The sources used vary depending on such factors as rates paid,
maturities, and the impact on capital.
Collections of Principal and Interest from Loans
Our primary source of funds is the collection of principal and interest
from loans originated. For automobile contracts, these monies are deposited into
collection accounts established in connection with each securitization
transaction, or into our accounts for contracts not in a securitization.
Pursuant to reinvestment contracts entered into in connection with each
securitization transaction, the Bank or WFAL2 receive access to the amounts
deposited into each collection account and the amounts held in the spread
accounts for each securitization transaction. The Bank and WFAL2 then make those
funds available to WFS, in the case of the Bank pursuant to a reinvestment
contract with the Bank and in the case of WFAL2 through its purchase of
contracts from WFS. WFS is then permitted to use those amounts so received in
its daily operations to fund the purchase of automobile contracts or to cover
the day to day costs of its operations. For real estate loans and MBS, principal
and interest are deposited into our own accounts and such amounts are also used
in our daily operations. Total loan and MBS principal and interest collections
totaled $3.3 billion for the year ended December 31, 1999, $2.7 billion for the
year ended December 31, 1998 and $2.8 billion for the year ended December 31,
1997.
Deposits
We attract both short-term and long-term deposits from the general public,
commercial enterprises and institutions by offering a variety of accounts and
rates. We offer regular passbook accounts, demand deposit accounts, money market
accounts, certificate of deposit accounts and individual retirement accounts.
Our retail banking division gathers deposits from 25 retail branch locations
throughout California. Our commercial banking division gathers deposits by
establishing commercial relationships with businesses located throughout
southern California.
The following table sets forth the amount of our deposits by type at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
No minimum term:
Demand deposit accounts.... $ 60,365 $ 38,511 $ 14,179 $ 28,734
Passbook accounts.......... 13,789 15,412 21,883 42,482 $ 65,293
Money market accounts...... 574,589 320,160 126,956 438 602
Noninterest bearing
deposits................ 47,770 75,240 94,910 40,418
Certificate accounts:
Certificates (30 days to
five years)............. 1,311,916 1,461,539 1,488,352 1,481,847 1,462,649
IRAs....................... 175,286 192,473 214,640 231,535 224,931
Brokered deposits.......... 28,594 75,400 39,976 48,489
---------- ---------- ---------- ---------- ----------
$2,212,309 $2,178,735 $2,000,896 $1,873,943 $1,753,475
========== ========== ========== ========== ==========
</TABLE>
The variety of deposits we offer has allowed us to remain competitive in
obtaining funds and provided us the flexibility to respond to changes in
customer demand and competitive pressures. Generally, as other
61
<PAGE> 64
financial institutions, we have become more subject to short-term fluctuations
in deposit flows as customers have become more interest rate conscious. Our
ability to attract and maintain deposits and control our cost of funds has been,
and will continue to be, significantly affected by market conditions.
The following table summarizes our average certificate accounts
outstanding:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average certificate accounts outstanding............ $1,568,514 $1,745,179
Average interest rate paid.......................... 5.2% 5.6%
</TABLE>
Deposit accounts, subject to certain FDIC attribution rules, are insured by
the FDIC up to $100,000 per customer. Our maturities of certificate accounts
greater than or equal to $100,000 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less................................... $ 1,731 $ 3,214
Over three months through six months................... 5,673 18,328
Over six months through one year....................... 368,824 313,117
Over one year through three years...................... 45,406 85,396
Over three years....................................... 19,536 20,831
-------- --------
$441,170 $440,886
======== ========
</TABLE>
Contract Securitizations and Loan Sales
Since 1985, we have securitized over $15 billion of automobile receivables
in 47 public offerings making us the fourth largest issuer of such securities in
the nation. For the year ended December 31, 1999, we securitized $2.5 billion,
as compared to $1.9 billion securitized for the year ended December 31, 1998 and
$2.2 billion securitized for the year ended December 31, 1997. We expect to
continue to use securitization transactions as part of our liquidity strategy
when appropriate market conditions exist.
The primary source of funds used for real estate loans was the sale of such
products. Historically, we have been active in the secondary market. We have
sold FHA and VA loans, as well as other conforming and non conforming loans to
FNMA, FHLMC, and other established conduits. During 1999, we sold $502 million
of mortgage loans through the secondary markets compared with $2.9 billion and
$2.0 billion during 1998 and 1997, respectively.
Borrowings and Other Sources of Funds
Our other sources of funds include commercial paper, advances from the
FHLB, sales of securities under agreements to repurchase, other borrowings and
cash generated from operations. We select from among these funding alternatives
based on the timing and duration of our cash needs, as well as the costs,
maturities and other requirements of each funding source.
The FHLB system functions in a reserve capacity for savings institutions.
As a member, we are required to own capital stock in the FHLB and are authorized
to apply for advances from the FHLB on security of such stock and on certain
residential mortgage loans. The Bank has been pre-approved for advances up to
25% of its assets, based on remaining availability under credit facilities
established by the Bank with the FHLB, with 24 hours notice. Such borrowings may
be made pursuant to several different programs offered from time to time by the
FHLB. Additional funds are available subject to additional collateral and other
requirements. Each credit program has its own interest rate, which may be fixed
or variable, and range of maturities. The FHLB prescribes the acceptable uses to
which advances pursuant to each program may be put, as well as limitations on
the sizes of advances and repayment provisions.
62
<PAGE> 65
We had a letter of credit with the FHLB, which was collateralized by
eligible real estate loans and mortgage backed securities. The maximum amount
approved on the letter of credit was $400 million in 1999, 1998 and 1997. The
maximum amount outstanding at any month end was $200 million during 1999, $388
million during 1998, and $399 million during 1997. The average amount of the
letter of credit outstanding and the weighted average interest rate during 1999,
1998 and 1997 was $18.4 million and 4.9%, $175 million and 5.7%, and $178
million and 5.7% respectively. Our letter of credit generally matured within 30
days from the issuance date. We discontinued the use of the letter of credit on
July 9, 1999. There was no amount outstanding on the letter of credit at
December 31, 1999.
Savings associations such as the Bank also have authority to borrow from
the FRS "discount window". FRS regulations require these institutions to exhaust
all reasonable alternative sources of funds, including FHLB sources, before
borrowing from the FRS. Federal regulations have been promulgated which connect
CRA performance with access to long-term advances from the FHLB to member
institutions. The Bank received a "satisfactory" rating in its most recent CRA
evaluation.
Subordinated Capital Debentures
In 1993 and 1998, we through the Bank, issued $125 million of 8.5% and $150
million of 8.875% Subordinated Capital Debentures due 2003 and 2007,
respectively, of which $199 million was outstanding at December 31, 1999. In
addition to providing additional liquidity, the Bank is permitted to include
these Debentures in supplementary capital for purposes of determining compliance
with risk-based capital requirements. See "Business -- Supervision and
Regulation -- Regulatory Capital Requirements".
Conduit Financing
On September 30, 1999, we securitized $500 million of contracts with notes
through a conduit facility in a private placement through our wholly owned
subsidiary, WFS Funding. This structure was accounted for as a secured financing
and provided us with another source of liquidity. The conduit facility was paid
off on March 15, 2000.
PRINCIPAL USES OF CASH
Acquisition of Loans or Investment Securities
Our most significant use of cash is for the acquisition of loans, MBS or
other investment securities. During 1999, total loan originations were $3.9
billion compared with $5.6 billion and $4.7 billion in 1998 and 1997,
respectively. We purchased $845 million of MBS and other investment securities
during 1999 compared with $665 million and $612 million during 1998 and 1997,
respectively.
Payments of Principal and Interest on Securitized Borrowings
Under the terms of our reinvestment contract and the conduit financing
transactions, we are required to make quarterly payments of interest and
principal to noteholders and certificateholders. Payment of principal and
interest to noteholders and certificateholders was $2.3 billion during 1999
compared with $2.1 billion and $1.7 billion during 1998 and 1997, respectively.
The increase in payments was the result of an increase in total contracts sold.
Amounts Paid to Dealers and Brokers
Consistent with industry practice, we generally pay an up-front dealer
participation to the original dealer for each automobile contract purchased.
Participation paid to dealers during 1999 totaled $83.4 million compared with
$76.7 million and $68.0 million in 1998 and 1997, respectively. Historically, we
acquired our mortgage loans primarily through relationships with real estate
brokers and agents who would assist property buyers, homebuilders and thrifts.
During 1999, we paid $1.0 million in broker fees compared with $0.7 million and
$0.6 million during 1998 and 1997, respectively.
63
<PAGE> 66
Advances to Spread Accounts
At the time a securitization transaction closes, we are required to advance
monies to initially fund the spread account. Additionally, these spread accounts
are required to increase beyond the initial spread account funding to
predetermined levels. These spread accounts increase through receipt of excess
cash flow until these predetermined levels are met. The amounts due from trust
represent funds due to us that have not yet been disbursed from the spread
account. The amounts due from trusts at December 31, 1999, including initial
advances not yet returned, was $439 million compared with $333 million and $295
million at December 31, 1998 and 1997, respectively. See
"Business -- Transactions with Related Parties -- WFS Reinvestment Contract".
Advances Due to Servicer
As the servicer of automobile contracts sold in securitizations, we
periodically make advances to the securitization trusts to provide for temporary
delays in the receipt of required payments by borrowers in accordance with
servicing agreements. We receive reimbursement of these advances through
payments from the obligors on the automobile contracts or from the trustee at
the time a contract liquidates.
Operating Our Business
Our largest operating expenditure is salaries and benefits paid to our
associates. Other amounts include occupancy costs, costs associated with
collection and repossession, telephone and data processing costs. We also use
substantial amounts of cash in capital expenditures for automation and new
technologies to remain competitive and to become more efficient. See
"Business -- Our Business Strategy -- Leverage Technology to Improve Our
Business".
CAPITAL REQUIREMENTS
The Bank is a federally chartered savings bank. As such, it is subject to
certain minimum capital requirements imposed by FIRREA and FDICIA. FDICIA
separates all financial institutions into one of five capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." In order to be considered
"well capitalized," an institution must have a total risk-based capital ratio of
10.0% or greater, a Tier 1 (i.e., core) risk-based capital ratio of 6.0% or
greater, a leverage ratio of 5.0% or greater and not be subject to any OTS
order. The Bank currently meets all of the requirements of a "well capitalized"
institution. See Supervision and Regulation -- Regulatory Capital
64
<PAGE> 67
Requirements. The following table summarizes our actual capital and required
capital as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Actual Capital:
Amount....................................... $400,437 $400,437 $ 400,437 $ 641,163
Capital ratio................................ 8.85% 8.85% 6.49% 10.39%
FIRREA minimum required capital:
Amount....................................... $ 67,836 $135,672 N/A $ 493,442
Capital ratio................................ 1.50% 3.00% N/A 8.00%
Excess....................................... $332,601 $264,765 N/A $ 147,721
FDICIA well capitalized required capital:
Amount....................................... N/A $226,120 $ 370,082 $ 616,803
Capital ratio................................ N/A 5.00% 6.00% 10.00%
Excess....................................... N/A $174,317 $ 30,355 $ 24,360
DECEMBER 31, 1998
Actual Capital:
Amount....................................... $345,427 $345,427 $ 345,427 $ 604,552
Capital ratio................................ 9.02% 9.02% 6.42% 11.23%
FIRREA minimum required capital:
Amount....................................... $ 57,464 $114,929 N/A $ 430,112
Capital ratio................................ 1.50% 3.00% N/A 8.00%
Excess....................................... $287,963 $230,498 N/A $ 174,440
FDICIA well capitalized required capital:
Amount....................................... N/A $191,548 $ 322,584 $ 537,640
Capital ratio................................ N/A 5.00% 6.00% 10.00%
Excess....................................... N/A $153,879 $ 22,843 $ 66,912
</TABLE>
The following table reconciles the Bank's capital in accordance with GAAP
to the Bank's tangible, core and risk-based capital:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank shareholder's equity -- GAAP basis..................... $351,200 $332,951
Adjustment: unrealized losses (gains) under SFAS 115........ 21,481 (3,693)
Less: non-permissible activities(1)....................... (273) (4,811)
Add: minority interest in equity of subsidiaries.......... 28,030 21,857
Less: disallowed capitalized servicing rights............. (877)
-------- --------
Total tangible and core capital............................. 400,438 345,427
Adjustments for risk-based capital:
Subordinated debentures(2)................................ 181,019 224,844
General loan valuation allowance(3)....................... 59,707 34,281
-------- --------
Risk-based capital........................................ $641,164 $604,552
======== ========
</TABLE>
- ---------------
(1) Does not include minority interest in joint venture subsidiaries.
(2) Excludes capitalized discounts and issue costs.
(3) Limited to 1.25% of risk-weighted assets.
65
<PAGE> 68
EFFECT ON INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of our assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant effect on our performance than the general level of inflation. See
"Quantitative and Qualitative Disclosures about Market Risk."
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133". This statement defers for one year the effective date of FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). These statements provide guidance for the way public enterprises report
information about derivatives and hedging in annual financial statements and in
interim financial reports. The derivatives and hedging disclosure is required
for financial statements of all fiscal quarters of all fiscal years beginning
after June 15, 2000. These statements will require us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. We are in the process of evaluating the effect that SFAS
133, if any, will have on our earnings and financial position.
FORWARD-LOOKING STATEMENTS
Included in our Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-K are several
"forward-looking statements." Forward-looking statements are those which use
words such as "believe", "expect", "anticipate", "intend", "plan", "may",
"will", "should", "estimate", "continue" or other comparable expressions. These
words indicate future events and trends. Forward-looking statements are our
current views with respect to future events and financial performance. These
forward-looking statements are subject to many risks and uncertainties that
could cause actual results to differ significantly from historical results or
from those anticipated by us. The most significant risks and uncertainties we
face are:
- the level of chargeoffs, as an increase in the level of chargeoffs will
decrease our earnings;
- the ability to originate new contracts in a sufficient amount to reach
our needs, as a decrease in the amount of contracts we originate will
decrease our earnings;
- a decrease in the difference between the average interest rate we receive
on the contracts we originate and the rate of interest we must pay to
fund our cost of originating those contracts, as a decrease will reduce
our earnings;
- the continued availability of sources of funding for our operations, as a
reduction in the availability of funding will reduce our ability to
originate contracts;
- the level of operating costs, as an increase in those costs will reduce
our net earnings;
- the effect of new laws, regulations and court decisions; and
- a change in general economic conditions.
You are cautioned not to place undue reliance on our forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
66
<PAGE> 69
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest rates and early prepayment of our loans and MBS
are the primary market risks facing our company. The Credit and Pricing
Committee is responsible for setting credit and pricing policies and for
monitoring credit quality. See "Business -- Operations -- Underwriting and
Purchasing of Contracts". Our Asset/Liability Committee is responsible for the
management of interest rate and prepayment risks. Asset/liability management is
the process of measuring and controlling interest rate risk through matching the
maturity and repricing characteristics of interest earning assets with those of
interest bearing liabilities.
The Asset/Liability Committee closely monitors interest rate and prepayment
risks and recommends policies for managing such risks. The primary measurement
tool for evaluating this risk is the use of interest rate shock analysis. This
analysis simulates the effects of an instantaneous and sustained change in
interest rates (in increments of 100 basis points) on our assets and liabilities
and measures the resulting increase or decrease to the net portfolio value
("NPV") of our assets and liabilities. Another important measurement of our
interest rate risk is "GAP" analysis. GAP is defined as the difference between
the amount of interest sensitive assets that reprice versus the amount of
interest sensitive liabilities that also reprice within a defined period of
time. We have more interest sensitive liabilities rather than assets repricing
in shorter-term maturity buckets and more interest sensitive assets rather than
liabilities repricing in longer-term maturity buckets. In general, an increase
in interest rates would more adversely affect our NPV than would a decrease in
interest rates. As of December 31, 1999, a 200 basis point increase in interest
rates would decrease our NPV by 7.65%, whereas a 200 basis point decline in
interest rates would increase our NPV by 0.69%. It should be noted that shock
analysis is objective but not entirely realistic in that it assumes an
instantaneous and isolated set of events.
67
<PAGE> 70
The following table summarizes our maturity GAP position:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
AT DECEMBER 31, 1999
-------------------------------------------------------------------------
3 YEARS
WITHIN 3 MONTHS 1 YEAR TO TO AFTER 5
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS YEARS TOTAL
---------- ---------- ---------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Investment securities.......... $ 740 $ 485 $ 505 $ 515 $ 2,245
Other investments.............. 137,520 200 137,720
Mortgage-backed securities..... 181,622 258,223 $ 442,253 238,477 310,801 1,431,376
Consumer loans(1).............. 96,516 325,043 658,118 403,995 32,723 1,516,395
Mortgage loans:
Adjustable rate(2)........... 449,572 85,181 534,753
Fixed rate(2)................ 10,825 13,188 10,436 7,118 12,752 54,319
Construction loans(2).......... 9,016 9,016
Commercial loans(2)............ 53,944 8,445 1,199 1,919 1,634 67,141
---------- ---------- ---------- --------- --------- ----------
Total interest earning
assets................ 939,755 690,765 1,112,006 652,014 358,425 3,752,965
Interest bearing liabilities:
Deposits:
Passbook accounts(3)......... 2,605 7,052 4,132 13,789
Demand deposit and money
market accounts(3)......... 190,288 157,967 286,699 634,954
Certificate accounts(4)...... 549,765 902,845 59,355 3,831 1,515,796
FHLB advances(4)............. 231,000 6,500 3,244 240,744
Securities sold under
agreements to
repurchase(4).............. 249,675 249,675
Subordinated debentures(4)... 51,768 147,530 199,298
Note payable(4).............. 461,104 461,104
Other borrowings(4).......... 8,482 8,482
---------- ---------- ---------- --------- --------- ----------
Total interest bearing
liabilities........... 1,692,919 1,067,864 356,686 55,599 150,774 3,323,842
---------- ---------- ---------- --------- --------- ----------
Excess interest earning/bearing
assets (liabilities)........... (753,164) (377,099) 755,320 596,415 207,651 429,123
Effect of hedging
activities(5).................. 764,500 (215,000) (200,000) (349,500)
---------- ---------- ---------- --------- --------- ----------
Hedged excess(deficit)........... $ 11,336 $ (377,099) $ 540,320 $ 396,415 $(141,849) $ 429,123
========== ========== ========== ========= ========= ==========
Cumulative excess(deficit)....... $ 11,336 $ (365,763) $ 174,557 $ 570,972 $ 429,123 $ 429,123
========== ========== ========== ========= ========= ==========
Cumulative difference as a
percentage of total interest
earning assets................. 0.30% (9.75)% 4.65% 15.21% 11.43% 11.43%
</TABLE>
- ---------------
(1) Based on contractual maturities adjusted by our historical prepayment rate.
(2) Based on interest rate repricing adjusted for projected prepayments.
(3) Based on assumptions established by the OTS.
(4) Based on contractual maturity.
(5) Assumed two-year Treasury securities forward agreements with notional
amounts of $1.6 billion will settle within three months.
We utilize a variety of means in order to manage interest rate risk. For
real estate loans, we historically originated adjustable rate loans and held
them on the balance sheet. For fixed rate real estate loans, we would enter into
MBS forward agreements in order to limit the risk of change in interest rates
related to our pipeline and sold such loans in the secondary markets. For our
MBS portfolio, we hedge to limit our interest rate risk by utilizing interest
rate caps and swaps.
68
<PAGE> 71
For automobile contracts, we hedge with two-year Treasury securities
forward agreements until such contracts are securitized. Generally, we enter
into forward agreements in amounts that correspond to the principal amount of
the automobile contracts originated. The market value of these forward
agreements is designed to respond inversely to the market value changes of the
underlying contracts. Because of this inverse relationship, we can effectively
lock in a gross interest rate spread at the time of entering into the hedge
transaction. We enter into these forward agreements either with highly rated
counterparties, which further reduces our risk by avoiding any material
concentration with a single counterparty. Credit exposure is limited to those
agreements with a positive fair value and only to the extent of that fair value.
We currently hedge substantially all of our automobile contracts pending
securitization. We then sell such contracts to securitization trusts that in
turn sell asset-backed securities to investors. By securitizing our contracts,
we are able to lock in the gross interest rate spread between the yield on such
contracts and the interest rate on the asset-backed securities. Gains and losses
relative to these forward agreements are deferred and recognized in full at the
time of securitization as an adjustment to the gain or loss on the sale of the
contracts.
The Asset/Liability Committee monitors our hedging activities to ensure
that the value of hedges, their correlation to the contracts being hedged and
the amounts being hedged continue to provide effective protection against
interest rate risk. The amount and timing of hedging transactions are determined
by our senior management based upon the monitoring activities of the
Asset/Liability Committee. As a result of this approach to interest rate risk
management and our hedging strategies, we do not anticipate that changes in
interest rates will materially affect our results of operations or liquidity,
although we can provide no assurance in this regard.
The following table provides information about our derivative financial
instruments and other financial instruments used that are sensitive to changes
in interest rates. For loans, securities and liabilities with contractual
maturities, the table presents principal cash flows and related weighted average
interest rates by contractual maturities as well as our historical experience of
the impact of interest rate fluctuations on the prepayment of real estate loans,
automobile loans and mortgage-backed securities. For passbook, money market and
interest bearing demand deposit accounts that have no contractual maturity, the
table presents principal cash flows and, as applicable, related weighted average
interest rates based on our historical experience, management's judgment and
statistical analysis, as applicable, concerning their most likely withdrawal
behaviors.
69
<PAGE> 72
For interest rate swaps and interest rate caps, the table presents notional
amounts and, as applicable, weighted average interest rates by contractual
maturity date. Notional amounts are used to calculate the contractual payments
to be exchanged under the contracts.
<TABLE>
<CAPTION>
THERE- FAIR
1999 2000 2001 2002 2003 AFTER TOTAL VALUE
---------- --------- -------- -------- --------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans...... $ 458,212 $ 367,457 $301,149 $246,717 $ 165,603 $ 46,986 $1,586,124 $1,711,522
Average interest rate........ 14.14% 14.79% 14.84% 14.88% 14.45% 11.87% 14.50%
Variable interest rate loans... $ 595,500 $ 595,500 $ 581,234
Average interest rate........ 7.65% 7.65%
Fixed interest rate
securities................... $ 482,409 $ 242,339 $175,485 $128,972 $ 94,833 $ 292,675 $1,416,713 $1,352,802
Average interest rate........ 6.90% 7.11% 7.09% 7.05% 7.03% 6.94% 6.99%
Variable interest rate
securities................... $ 96,626 $ 12,827 $ 10,106 $ 7,825 $ 6,110 $ 21,134 $ 154,628 $ 154,241
Average interest rate........ 6.41% 6.05% 6.06% 6.05% 6.05% 6.05% 6.27%
RATE SENSITIVE LIABILITIES:
Passbook deposits.............. $ 9,658 $ 3,294 $ 837 $ 13,789 $ 13,307
Average interest rate........ 2.67% 2.67% 2.67% 2.67%
Money market and interest
bearing demand deposits...... $ 348,255 $ 163,830 $122,869 $ 634,954 $ 630,954
Average interest rate........ 5.11% 4.57% 4.43% 4.84%
Certificates of deposits....... $1,452,611 $ 23,488 $ 35,866 $ 2,757 $ 1,074 $1,515,796 $1,509,936
Average interest rate........ 5.36% 5.12% 5.95% 5.34% 5.23% 5.37%
Fixed interest rate
borrowings................... $ 925,780 $ 6,500 $ 51,768 $ 150,773 $1,134,821 $1,117,831
Average interest rate........ 6.10% 8.19% 8.50% 8.83% 6.59%
Variable interest rate
borrowings................... $ 24,482 $ 24,482 $ 24,482
Average interest rate........ 6.39% 6.39%
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Forward agreements in net
receivable positions......... $ 10,872
Pay variable interest rate
swaps........................ $ 324,500 $(50,000) $(274,500) $ 23,962
Average pay rate............. 5.86% 5.86%
Average receive rate......... 6.11% 6.11%
Interest rate caps purchased... $ 440,000 $(100,000) $(65,000) $(50,000) $(150,000) $ (75,000) $ 13,120
Average strike rate.......... 6.25% 6.50% 7.50% 6.50% 6.00%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements begin on page F-3 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
70
<PAGE> 73
PART III
Certain information required by Part III is omitted from this report, as we
will file a definitive proxy statement (the "Proxy Statement") within 120 days
after the end of our fiscal year pursuant to Regulation 14A of the Securities
Exchange Act of 1934 for our Annual Meeting of Stockholders to be held May 23,
2000, and the information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Compensation of Executive Officers" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Management Directors
and Nominees" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Certain Transactions Between Management and the
Company or its Subsidiaries" in the Proxy Statement and is incorporated herein
by reference.
71
<PAGE> 74
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent auditors for us and our subsidiaries are included in this
Report commencing on page F-2.
Report of Independent Auditors.
Consolidated Statements of Financial Condition at December 31, 1999 and
1998.
Consolidated Statements of Operations for the years ended December 31,
1999, 1998, and 1997.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.
Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES
Schedules to the consolidated financial statements are omitted because
the required information is inapplicable or the information is presented
in our consolidated financial statements or related notes.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
3.1 Certificate of Incorporation(13)
3.2 Bylaws(13)
4.1 Indenture dated as of June 17, 1993 issued by Western
Financial Bank, formerly Western Financial Savings Bank,
F.S.B., with respect to $125,000,000 in aggregate principal
amount of 8.5% Subordinated Capital Debentures due 2003(14)
4.2 Indenture dated as of June 25, 1998 issued by Western
Financial Bank, formerly Western Financial Savings Bank,
F.S.B., with respect to $150,000,000 in aggregate principal
amount of 8.875% Subordinated Capital Debentures due
2007(15)
10.1 Westcorp Incentive Stock Option Plan(2)
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings
Plan(3)
10.3 Westcorp 1991 Stock Option Plan(4)
10.4 1985 Executive Deferral Plan(1)
10.5 1988 Executive Deferral Plan II(1)
10.6 1992 Executive Deferral Plan III(1)
10.7 Transfer Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.8 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.9 Line of Credit Agreement between WFS Financial Inc and
Western Financial Bank, dated June 15, 1999(12)
10.9.1 Amendment No. 1, dated as of August 1, 1999, to the
Revolving Line of Credit Agreement between WFS Financial Inc
and Western Financial Bank(12)
</TABLE>
72
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.10 Tax Sharing Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1994(1)
10.11 Master Reinvestment Contract between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.12 Amendment No. 1, dated as of June 1, 1995, to the Restated
Master Reinvestment Reimbursement Agreement(11)
10.13 Amended and Restated Master Collateral Assignment Agreement,
dated as of March 1, 2000
10.14 Form of WFS Financial Inc Dealer Agreement(5)
10.15 Form of WFS Financial Inc Loan Application(5)
10.16 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
10.16.1 Amendment No. 1, dated as of December 1998, to Westcorp
Employee Stock Ownership and Salary Savings Plan(12)
10.16.2 Amendment No. 2, dated as of January 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan(12)
10.16.3 Amendment No. 3, dated as of June 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan(12)
10.17 Amended and Restated WFS 1996 Incentive Stock Option Plan,
dated January 1, 1997(6)
10.18 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated August 1, 1997(11)
10.18.1 Amendment No. 1, dated February 23, 1999, to the Promissory
Note of WFS Financial Inc in favor of Western Financial
Bank(11)
10.18.2 Amendment No. 2, dated July 30, 1999, to the Promissory Note
of WFS Financial Inc in favor of Western Financial Bank(11)
10.19 Investment Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1996(11)
10.20 Management Services Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated January 1, 1997(11)
10.21 Employment Agreement(8)(9)(10)
21.1 Subsidiaries of Westcorp
23.1 Consent of Independent Auditors, Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration
Statement on Form S-1 (File No. 33-93068), filed August 8, 1995
incorporated herein by reference under Exhibit Number indicated.
(2) Exhibits previously filed with Westcorp Registration Statement on Form
S-1 (File No. 33-4295), filed May 2, 1986 incorporated herein by
reference under Exhibit Number indicated.
(3) Exhibits previously filed with Westcorp Registration Statement on Form
S-4 (File No. 33-34286), filed April 11, 1990 incorporated herein by
reference under Exhibit Number indicated.
(4) Exhibits previously filed with Westcorp Registration Statement on Form
S-8 (File No. 33-43898), filed December 11, 1991 incorporated herein
by reference under Exhibit Number indicated.
(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration Statement on Form S-1 (File No. 33-93068) incorporated
herein by reference under Exhibit Number indicated.
73
<PAGE> 76
(6) Exhibit previously filed with WFS Registration Statement on Form S-8
(File No. 33-7485), filed July 3, 1996 incorporated by reference under
the Exhibit Number indicated. Amendment No. 1 dated as of November 13,
1997 filed with the WFS Registration Statement on Form S-8 (File No.
333-40121) incorporated herein by reference under Exhibit Number
indicated.
(7) Exhibits previously filed with Westcorp Registration Statement on Form
S-8 (File No. 333-11039), filed August 29, 1996 incorporated herein by
reference under Exhibit Number indicated.
(8) Employment Agreement dated February 27, 1998 between the registrant
and Joy Schaefer (will be provided to the SEC upon request).
(9) Employment Agreement dated February 27, 1998 between the registrant,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon
request).
(10) Employment Agreement, dated November, 1998 between the registrant and
Mark Olson (will be provided to the SEC upon request).
(11) Exhibits previously filed with Annual Report on Form 10-K of WFS
Financial Inc for the year ended December 31, 1998 (File No. 33-93068)
as filed on or about March 31, 1999.
(12) Exhibits previously filed with WFS Registration Statements on Form S-2
(File No. 333-91277) filed November 19, 1999 and subsequently amend on
January 20, 2000 incorporated by reference under Exhibit Number
indicated.
(13) Exhibits previously filed with Westcorp Registration Statement on Form
S-4 (File No. 33-34286), filed April 11, 1990, incorporated herein by
reference under Exhibit Numbers indicated.
(14) Exhibit previously filed with, Western Financial Bank, formerly
Western Financial Savings Bank, F.S.B., Offering Circular with the
OTS, dated June 17, 1993 (will be provided to the SEC upon request).
(15) Exhibit previously filed with Western Financial Bank, formerly Western
Financial Bank, F.S.B., Offering Circular with the OTS, dated July 25,
1998 (will be provided to the SEC upon request).
(b) REPORT ON FORM 8-K
None
74
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTCORP
Dated: March 22, 2000
By: /s/ ERNEST S. RADY
------------------------------------
Ernest S. Rady
Chairman of the Board
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ERNEST S. RADY Chairman of the Board, and March 22, 2000
- ----------------------------------------------------- Chief Executive Officer
Ernest S. Rady
/s/ JUDITH M. BARDWICK Director March 22, 2000
- -----------------------------------------------------
Judith M. Bardwick
/s/ ROBERT T. BARNUM Director March 22, 2000
- -----------------------------------------------------
Robert T. Barnum
/s/ STANLEY E. FOSTER Director March 22, 2000
- -----------------------------------------------------
Stanley E. Foster
/s/ HOWARD C. REESE Director March 22, 2000
- -----------------------------------------------------
Howard C. Reese
/s/ CHARLES E. SCRIBNER Director March 22, 2000
- -----------------------------------------------------
Charles E. Scribner
/s/ LEE A. WHATCOTT Executive Vice President March 22, 2000
- ----------------------------------------------------- (Principal Financial and
Lee A. Whatcott Accounting Officer) and
Chief Financial Officer
</TABLE>
75
<PAGE> 78
WESTCORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December
31, 1999 and 1998......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Westcorp
We have audited the accompanying consolidated statements of financial
condition of Westcorp and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. These consolidated financial statements are the responsibility of
Westcorp'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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
Westcorp and Subsidiaries at December 31, 1999 and 1998 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Los Angeles, California
January 18, 2000, except for Notes 12
and 27 as to which the date is
March 15, 2000
F-2
<PAGE> 80
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 33,645 $ 114,375
Interest bearing deposits with other financial
institutions.............................................. 720 515
Other short-term investments................................ 137,000 22,864
---------- ----------
Cash and due from banks................................... 171,365 137,754
Investment securities available for sale.................... 2,245 77,796
Mortgage-backed securities available for sale............... 1,431,376 980,044
Loans held for sale......................................... 1,469,741 1,157,079
Loans receivable............................................ 711,883 835,754
Allowance for credit losses................................. (64,217) (37,660)
---------- ----------
Loans receivable, net..................................... 2,117,407 1,955,173
Amounts due from trusts..................................... 439,022 332,732
Retained interest in securitized assets..................... 167,277 171,230
Premises and equipment, net................................. 84,989 86,417
Other assets................................................ 85,093 91,674
---------- ----------
TOTAL ASSETS...................................... $4,498,774 $3,832,820
========== ==========
LIABILITIES
Deposits.................................................... $2,212,309 $2,178,735
Securities sold under agreements to repurchase.............. 249,675 265,644
Federal Home Loan Bank advances............................. 240,744 160,853
Amounts held on behalf of trustee........................... 687,274 528,092
Note payable................................................ 461,104
Other liabilities........................................... 67,622 108,738
---------- ----------
TOTAL LIABILITIES................................. 3,918,728 3,242,062
Subordinated Debentures..................................... 199,298 239,856
Minority Interests.......................................... 28,030 21,857
SHAREHOLDERS' EQUITY
Common stock, (par value $1.00 per share; authorized
45,000,000 shares issued and outstanding 26,597,344 shares
in 1999 and 26,474,814 shares in 1998).................... 26,597 26,475
Paid-in capital............................................. 190,137 188,739
Retained earnings........................................... 157,465 110,138
Accumulated other comprehensive (loss) income, net of tax... (21,481) 3,693
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 352,718 329,045
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $4,498,774 $3,832,820
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 81
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Interest income:
Loans, including fees..................................... $ 195,373 $ 191,781 $ 187,489
Mortgage-backed securities................................ 87,631 65,039 68,055
Investment securities..................................... 1,650 6,070 7,376
Other..................................................... 12,962 9,252 7,612
---------- ---------- ----------
TOTAL INTEREST INCOME.............................. 297,616 272,142 270,532
Interest expense:
Deposits.................................................. 106,068 109,005 107,078
Federal Home Loan Bank advances and other borrowings...... 27,115 33,687 36,616
Securities sold under agreements to repurchase............ 19,102 18,639 17,376
---------- ---------- ----------
TOTAL INTEREST EXPENSE............................. 152,285 161,331 161,070
---------- ---------- ----------
NET INTEREST INCOME......................................... 145,331 110,811 109,462
Provision for credit losses................................. 38,400 18,960 12,851
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES....... 106,931 91,851 96,611
Noninterest income:
Automobile lending........................................ 188,667 99,147 176,192
Mortgage banking.......................................... 6,047 14,230 24,540
Investment and mortgage-backed securities gains........... 1,308 7,602 8,026
Insurance income.......................................... 6,126 5,713 6,454
Miscellaneous............................................. 7,858 6,746 7,641
---------- ---------- ----------
TOTAL NONINTEREST INCOME........................... 210,006 133,438 222,853
Noninterest expenses:
Salaries and associate benefits........................... 129,582 134,666 137,741
Credit and collections.................................... 21,833 22,277 15,703
Occupancy................................................. 12,751 14,531 18,091
Data processing........................................... 15,108 14,376 17,894
Telephone................................................. 6,660 9,787 9,585
Miscellaneous............................................. 32,527 39,895 47,255
Restructuring charge...................................... 18,000
---------- ---------- ----------
TOTAL NONINTEREST EXPENSES......................... 218,461 253,532 246,269
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)................... 98,476 (28,243) 73,195
Income tax (benefit)........................................ 41,460 (11,330) 31,287
---------- ---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... 57,016 (16,913) 41,908
Minority interest in earnings (loss) of subsidiaries........ 6,522 (2,216) 5,120
---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 50,494 (14,697) 36,788
Extraordinary gain from early extinguishment of debt
(net of income taxes of $1,546)........................... 2,132
---------- ---------- ----------
NET INCOME (LOSS)........................................... $ 52,626 $ (14,697) $ 36,788
========== ========== ==========
Net income (loss) per common share -- basic
Income (loss) before extraordinary item................... $ 1.91 $ (0.56) $ 1.41
Extraordinary item........................................ .08
Net income (loss)......................................... $ 1.99 $ (0.56) $ 1.41
========== ========== ==========
Net income (loss) per common share -- diluted
Income (loss) before extraordinary item................... $ 1.91 $ (0.56) $ 1.40
Extraordinary item........................................ .08
Net income (loss)......................................... $ 1.99 $ (0.56) $ 1.40
========== ========== ==========
Weighted average number of common shares outstanding:
Basic..................................................... 26,503,796 26,305,117 26,165,678
Diluted................................................... 26,505,128 26,305,117 26,351,144
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 82
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
SHARES STOCK CAPITAL EARNINGS NET OF TAX TOTAL
---------- ------- -------- -------- ------------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... 25,996,618 $25,997 $185,742 $105,108 $ 1,084 $317,931
Net income................... 36,788 36,788
Unrealized gains (losses) on
retained interest in
securitized assets, net of
tax(1).................... 4,893 4,893
Less: Reclassification
adjustment for losses
(gains) included in net
income.................... (119) (119)
--------
Comprehensive income......... 41,562
Stock options exercised...... 116,605 117 940 1,057
Issuance of stock for ESOP
contribution.............. 165,370 165 2,728 2,893
Cash dividends............... (10,469) (10,469)
Purchase of subsidiary
stock..................... (4,223) (4,223)
---------- ------- -------- -------- -------- --------
Balance at December 31, 1997... 26,278,593 26,279 185,187 131,427 5,858 348,751
Net loss..................... (14,697) (14,697)
Unrealized gains (losses) on
retained interest in
securitized assets, net of
tax(1).................... 2,021 2,021
Less: Reclassification
adjustment for losses
(gains) included in net
income.................... (4,186) (4,186)
--------
Comprehensive loss........... (16,862)
Stock options exercised...... 118,905 119 891 1,010
Issuance of stock for ESOP
contribution.............. 77,316 77 1,135 1,212
Cash dividends............... (6,592) (6,592)
Purchase of subsidiary
stock..................... 1,526 1,526
---------- ------- -------- -------- -------- --------
Balance at December 31, 1998... 26,474,814 26,475 188,739 110,138 3,693 329,045
Net income................... 52,626 52,626
Unrealized gains (losses) on
retained interest in
securitized assets, net of
tax(1).................... (24,312) (24,312)
Less: reclassification
adjustment for losses
(gains) included in net
income.................... (862) (862)
--------
Comprehensive income......... 27,452
Stock options exercised...... 122,530 122 929 1,214
Cash dividends............... (5,299) (5,299)
Purchase of subsidiary
stock..................... 469 306
---------- ------- -------- -------- -------- --------
Balance at December 31, 1999... 26,597,344 $26,597 $190,137 $157,465 $(21,481) $352,718
========== ======= ======== ======== ======== ========
</TABLE>
- ---------------
(1) Included securities available for sale and retained interest in securitized
assets. The pre-tax decrease in unrealized gains on securities available for
sale was $41.9 million at December 31, 1999 compared with pre-tax increases
of $3.9 million and $8.4 million at December 31, 1998 and 1997,
respectively.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 83
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 52,626 $ (14,697) $ 36,788
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for credit losses............................... 38,400 18,960 12,851
Depreciation and amortization............................. 16,306 31,629 26,649
Amortization of retained interest in securitized assets... 111,752 103,610 53,421
(Increase) decrease in assets:
Origination of loans.................................... (3,869,984) (5,558,998) (4,740,264)
Proceeds from sale of loans............................. 3,002,157 4,769,073 4,164,423
Other changes in loans.................................. 661,154 670,015 398,759
Other assets............................................ 46,659 17,257 (11,216)
(Increase) decrease in other liabilities.................. (35,522) (5,071) 46,949
Other, net................................................ 62 (9,682) (2,905)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ 23,610 22,096 (14,545)
INVESTING ACTIVITIES
Investment securities available for sale:
Purchases................................................. (244) (44,581) (29,976)
Proceeds from sale........................................ 75,470 10,460
Proceeds from maturities.................................. 25 81,538 53,000
Mortgage-backed securities:
Purchases................................................. (844,300) (620,328) (582,687)
Proceeds from sale........................................ 109,726 365,990 393,599
Payments received......................................... 238,515 212,823 109,628
Increase in retained interest in securitized assets......... (111,766) (91,914) (112,230)
Increase in amounts due from trusts......................... (106,290) (37,609) (103,654)
Purchase of premises and equipment.......................... (24,529) (23,281) (22,585)
Other, net.................................................. 1,241 1,207 6,205
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............... (662,152) (145,695) (288,700)
FINANCING ACTIVITIES
Increase in deposits........................................ 33,574 177,839 126,954
Decrease in securities sold under agreements to
repurchase................................................ (15,969) (21,427) (341)
Increase (decrease) in borrowings........................... 455,159 (177,453) 135,935
Increase in amounts held on behalf of trustee............... 159,182 39,438 95,204
Increase in FHLB Advances................................... 79,890 75,882 (141,029)
(Decrease) increase in subordinated debentures.............. (35,903) 133,505
Cash dividends.............................................. (5,299) (6,592) (10,469)
Other, net.................................................. 1,519 2,536 (3,166)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 672,153 90,223 336,593
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 33,611 (33,376) 33,348
Cash and equivalents at beginning of period................. 137,754 171,130 137,782
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 171,365 $ 137,754 $ 171,130
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest.................................................. 152,987 160,630 156,852
Income taxes.............................................. 47,392 1,832 5,738
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Acquisition of real estate acquired through foreclosure..... 6,038 15,414 20,953
Investment securities and mortgage-backed securities held to
maturity transferred to available for sale................ 395,411
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 84
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of Westcorp ("the Company"), its wholly owned subsidiaries,
Westran Services Corp., Westcorp Investments, Inc., WestFin Securities
Corporation and Western Financial Bank, and the Bank's subsidiaries including
WFS Financial Inc ("WFS") of which the Bank owned 87% at December 31, 1999. All
significant intercompany accounts and transactions have been eliminated upon
consolidation. Certain prior year amounts have been reclassified to conform with
the current year's presentation.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Nature of Operations: The Company is a federally chartered savings bank
that specializes primarily in automobile lending, which is funded by the
Company's community banking operations and its asset-backed securitization
transactions. During 1999, the Company discontinued its mortgage banking
operations and, therefore, has only one reportable segment.
Cash and Cash Equivalents: Cash and cash equivalents include cash,
interest-bearing deposits with other financial institutions and other short-term
investments, which have no material restrictions as to withdrawal or usage.
Investment Securities and Mortgage-Backed Securities Available for Sale:
Investments and mortgage-backed securities intended to be held for an indefinite
period of time but which may be sold in response to events reasonably expected
in the foreseeable future are classified as available for sale and carried at
fair value. Unrealized holding gains and losses on such investments are recorded
as a separate component of shareholders' equity, net of income taxes. Any
decline in the fair value of the investments which is deemed to be other than
temporary is charged against current earnings. The method used in determining
the cost of investments sold is specific identification.
The Company has entered into or committed to interest rate caps, swaps and
forward agreements as hedges against market value changes in designated portions
of its mortgage-backed securities and loans held for sale portfolios and to
manage interest rate risk exposure on its available for sale securities. These
financial instruments are also recorded at fair value and are included in the
basis of the designated available for sale securities and loans held for sale.
The interest rate differential to be paid or received is accrued and included as
part of interest income, thereby adjusting the overall yield on securities or
loans for which management is attempting to reduce its exposure to interest rate
risk. Recognition of unrealized gains and losses on these contracts are deferred
and amortized into interest income over the shorter of the remaining life of the
derivative instrument or the expected life of the associated asset. When the
related mortgage-backed securities or loans are sold, settled or terminated, the
deferred gains or losses from these contracts are recognized in the Consolidated
Statements of Operations as a component of automobile lending income, mortgage
banking income and investment and mortgage-backed securities gains and losses.
Allowance for Credit Losses: The allowance for credit losses for loans
receivables is maintained at a level believed adequate by management to absorb
probable losses in the loan portfolios that can be reasonably estimated.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, past loan loss experience, current economic
conditions, volume, growth and composition of the loan portfolio, and other
relevant factors. The allowance is increased by provisions for credit losses
charged against income.
F-7
<PAGE> 85
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loans Held for Sale: Loans held for sale are stated at the lower of
aggregate amortized cost or market. The carrying amount of the specific loan
pools sold is used to compute gains or losses. Market value is based on
prevailing market quotes for real estate loans and discounted cash flow
calculations for consumer loans.
Sales of Loans and Securitized Assets and Capitalized Servicing
Rights: Certain mortgage and consumer loans are originated and sold to investors
with servicing rights retained by the Company. The Company does not retain any
direct recourse with respect to the automobile loans securitized. As part of the
automobile loan sale, the trustee reimburses the Company for borrowing costs
incurred between the cut-off of the loans and the closing date of the sale.
Gain on sale of automobile loans represents the present value of the
estimated future earnings to be received from the excess spread created in the
securitization transactions less prepaid dealer commission, issuance costs, and
the effect of hedging activities. Retained interest in securitized assets
("RISA") is capitalized and amortized over the expected repayment life of the
underlying automobile loans. The Company evaluates quarterly the carrying value
of its RISA in light of the actual repayment experience of the underlying
automobile loans and makes adjustments to reduce the carrying value, if
appropriate. The Company utilizes the cash-out method in determining the
valuation of the RISA. Servicing income and amortization of the RISA are
included in automobile lending income in noninterest income in the Consolidated
Statements of Operations.
Gain on sale of mortgage loans represents the difference between the
allocated cost basis of loans sold and the proceeds from sale, which includes
the carrying value of capitalized servicing rights ("CSR") created as a result
of the sale. The carrying value of the CSR assets represent an allocation of the
cost basis of loans sold between the CSR and the loans based upon their relative
fair value at the date the loans are originated or purchased. The fair value of
CSR is calculated by estimating future servicing revenues, including servicing
fees, late charges, other ancillary income, and float benefit, less the actual
cost to service loans. The amortization of the CSR is a component of mortgage
banking income in noninterest income over the period of, and in proportion to,
the expected repayment term of the underlying loans. CSR is evaluated for
impairment based on the excess of the carrying amount of the CSR over its fair
value. See Note 5 for additional disclosure related to the RISA and CSR.
Nonaccrual Loans: Nonaccrual loans are loans on which accrual of interest
has been suspended. Interest is suspended on all real estate loans when, in
management's judgement, the interest will not be collectible in the normal
course of business or when loans are 90 days or more past due or full collection
of principal is not assured. When a loan is placed on nonaccrual, interest
accrued is reversed against interest income. Interest income is suspended on all
loans, except consumer loans. On these loans, interest continues to accrue until
the loans are charged off, which occurs automatically after the loans are past
due 120 days, whereupon all accrued interest is reversed.
Premises and Equipment: Premises and equipment are recorded at cost less
accumulated depreciation and amortization and are depreciated over their
estimated useful lives principally using the straight-line method for financial
reporting and accelerated methods for tax purposes. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, whichever is shorter.
Real Estate Owned: Real estate acquired through foreclosure is recorded at
the lower of cost or fair value less estimated costs to sell. Costs of holding
this real estate, and related gains and losses on disposition, are credited or
charged to real estate operations as incurred. These values are periodically
reviewed and write-downs are recorded, if appropriate.
Real estate owned is carried net of an allowance for losses which is
maintained at a level believed by management to be adequate to absorb any
probable losses in the portfolio that can be reasonably estimated. Management's
determination of the adequacy of the allowance is based on an evaluation of the
past loss experience, current economic conditions, selling costs and other
relevant factors.
F-8
<PAGE> 86
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest Income and Fee Income: Interest income on real estate and certain
consumer loans is earned using the effective yield method and classified on the
balance sheets as part of other assets to the extent not collected. Certain
automobile contracts use the sum of the month's digits method, which
approximates the effective yield method.
The Company defers loan origination and commitment fees and certain loan
origination costs. The net amount is amortized as an adjustment to the related
loans' yield over the contractual life of the related loans. Commitment fees
based on a percentage of a customer's unused line of credit are recognized over
the commitment period. Fees for other services are recorded as income when
earned.
Insurance Commissions: Commissions on insurance policies sold are
recognized as income over the life of the policies.
Insurance Premiums: Premiums for life and accident/health insurance
policies are recognized as income over the term of the insurance contract.
Stock Options: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), provides for companies
to recognize compensation expense associated with stock-based compensation plans
over the anticipated service period based on the fair value of the award on the
date of grant. However, SFAS 123 allows companies to continue to measure
compensation costs prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to
continue accounting for stock-based compensation plans under APB 25 must make
pro forma disclosures of net income and earnings per share as if SFAS 123 has
been adopted if the fair value of the options has a material impact on earnings.
Westcorp has continued to account for stock-based compensation plans under APB
25. The impact of applying SFAS 123 in 1999, 1998 and 1997 is immaterial to the
financial statements of Westcorp.
Income Taxes: The Company files consolidated federal and state tax returns
with all of its subsidiaries except for Westhrift, which files a separate state
tax return.
Fair Values of Financial Instruments: Fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value, are reported using quoted market
prices. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and in many cases, could not be realized in immediate settlement of the
instrument. Fair values for certain financial instruments and all non-financial
instruments are not required to be disclosed. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents and other short-term investments: The carrying
amounts reported in the balance sheet for cash and short-term instruments
approximate those assets' fair values.
Investment securities and mortgage-backed securities: Fair values for
investment securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable (including held for sale): The fair values for loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
F-9
<PAGE> 87
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Retained interest in securitized assets: The fair value of retained
interest in securitized assets is based on discounted cash flow calculations.
Capitalized servicing rights: The fair values are estimated using
discounted cash flows based on a current market interest rate. These cash flows
generally include servicing fees, float income from payments and escrow
accounts, servicing costs, foreclosure costs and interest expense for funds
advanced.
Interest rate swaps: Interest rate swaps are carried at fair value as
hedges of available for sale securities. The fair value is determined by
obtaining market quotes from brokers.
Interest rate options, floors and caps: The carrying amount comprises the
unamoritized premiums paid for the contracts. The fair value is estimated by
obtaining market quotes from brokers.
Forward agreements: The carrying amount comprises the amount of the gain or
loss deferred on expired agreements. The fair value is estimated by obtaining
market quotes from brokers.
Loan Commitments (including fixed and variable): The fair values of the
loan commitments are based on quoted market prices of similar loans sold in the
secondary market.
Deposits: The fair values disclosed for demand deposit accounts, passbook
accounts, certificate accounts, brokered certificate accounts and certain types
of money market accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
of deposit to a schedule of aggregated expected monthly maturities on time
deposits.
Securities sold under agreements to repurchase: The fair value is estimated
by using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Short-term borrowings: The carrying amounts of the commercial paper and the
lines of credit with a bank approximate their fair values.
Federal Home Loan Bank advances: The fair value is estimated by using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Amounts held on behalf of trustee: The carrying amounts reported in the
balance sheet approximate fair value.
Subordinated debentures: The fair values of the subordinated debentures are
estimated using discounted cash flow analyses, based on the current incremental
borrowing rates for similar types of borrowing arrangements.
Current Accounting Pronouncements: In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 ("SFAS 137"). This Statement defers
for one year the effective date of FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). These statements
provide guidance for the way public enterprises report information about
derivatives and hedging in annual financial statements and in interim financial
reports. The derivatives and hedging disclosure is required for financial
statements of all fiscal quarters of all fiscal years beginning after June 15,
2000. These Statements will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of the derivative will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in earnings. The ineffective
portion of a derivative's change
F-10
<PAGE> 88
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in fair value will be immediately recognized in earnings. The Company is in the
process of evaluating the effect that SFAS 133, if any, will have on the
earnings and financial position of the Company.
NOTE 2 -- INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Obligations of states and political
subdivisions.................................... $1,510 $6 $10 $1,506
Other............................................. 739 739
------ -- --- ------
$2,249 $6 $10 $2,245
====== == === ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other
U.S. Government agencies and corporations...... $74,307 $1,285 $75,592
Obligations of states and political
subdivisions................................... 1,510 62 1,572
Other............................................ 632 632
------- ------ -------- -------
$76,449 $1,347 $77,796
======= ====== ======== =======
</TABLE>
At December 31, 1999, the stated maturities of the Company's investment
securities available for sale were as follows:
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS
UP TO ONE YEAR TO FIVE YEARS TO TEN YEARS
----------------------- ----------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----------- --------- ----- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Obligations of states and political
subdivisions........................... $486 $487 $1,024 $1,019
Other.................................... $739 $739
---- ---- ---- ---- ------ ------
$739 $739 $486 $487 $1,024 $1,019
==== ==== ==== ==== ====== ======
</TABLE>
Proceeds from the sale of investment securities available for sale totaled
$75.5 million in 1999 compared with $10.5 million in 1998. The Company had gross
realized gains of $0.9 million and $21.0 thousand in 1999 and 1998,
respectively, and had no gross realized losses in 1999 and 1998.
F-11
<PAGE> 89
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates............................ $1,378,111 $27,853 $61,514 $1,344,450
FNMA participation certificates.............. 83,883 1,928 81,955
FHLMC participation certificates............. 2,154 70 2,084
Other........................................ 2,887 2,887
---------- ------- ------- ----------
$1,467,035 $27,853 $63,512 $1,431,376
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GNMA certificates............................ $ 858,682 $6,261 $5,316 $ 859,627
FNMA participation certificates.............. 112,351 1,511 20 113,842
FHLMC participation certificates............. 3,600 58 3,658
Other........................................ 2,917 2,917
---------- ------ ------ ----------
$ 977,550 $7,830 $5,336 $ 980,044
========== ====== ====== ==========
</TABLE>
Proceeds from the sale of mortgage-backed securities available for sale
totaled approximately $110 million and $366 million in 1999 and 1998,
respectively. The Company had gross realized gains of $0.3 million and $8.3
million in 1999 and 1998, respectively, and gross realized losses of $0.5
million and $0.9 million in 1999 and 1998, respectively.
The Company's mortgage-backed securities available for sale all had
maturities of ten years or more at December 31, 1999 and 1998, although payments
are generally received monthly throughout the life of these securities.
The Company has issued certain mortgage-backed securities that include
recourse provisions. Subject to certain limitations, the Company is required,
for the life of the loans, to repurchase the buyer's interest in individual
loans on which foreclosure proceedings have been completed. Securities with
recourse issued by the Company had a total outstanding balance of $95.1 million
and $146 million at December 31, 1999 and 1998, respectively.
The Company has provided for probable losses which can be reasonably
estimated that may occur as a result of its recourse obligations. The maximum
remaining exposure under these recourse provisions at December 31, 1999 and 1998
was $54.1 million and $128 million, respectively. The Company has pledged $8.3
million and $11.1 million of mortgage-backed securities as collateral under
these recourse provisions at December 31, 1999 and 1998, respectively.
F-12
<PAGE> 90
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate:
Mortgage.................................................. $ 589,072 $ 993,649
Construction.............................................. 23,190 18,345
---------- ----------
612,262 1,011,994
Less: undisbursed loan proceeds............................. 14,174 5,057
---------- ----------
598,088 1,006,937
Consumer:
Automobile contracts...................................... 1,486,901 903,820
Dealer participation, net of deferred contract fees....... 31,532 20,133
Other..................................................... 52,210 57,024
Unearned discounts........................................ (54,248) (48,015)
---------- ----------
1,516,395 932,962
Commercial.................................................. 67,141 52,934
---------- ----------
2,181,624 1,992,833
Allowance for credit losses................................. (64,217) (37,660)
---------- ----------
2,117,407 1,955,173
Less: loans held for sale
Mortgage.................................................. 37,097 309,013
Consumer.................................................. 1,432,644 848,066
---------- ----------
1,469,741 1,157,079
---------- ----------
$ 647,666 $ 798,094
========== ==========
</TABLE>
Loans serviced by the Company for the benefit of others totaled
approximately $4.0 billion, $5.1 billion, and $8.4 billion at December 31, 1999,
1998 and 1997, respectively.
NOTE 5 -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year....................... $ 37,660 $ 33,834 $ 40,211
Provision for credit losses........................ 38,400 18,960 12,851
Chargeoffs......................................... (21,282) (19,705) (22,806)
Recoveries......................................... 9,439 4,571 4,369
Business acquisition adjustment.................... (791)
-------- -------- --------
Balance at end of year............................. $ 64,217 $ 37,660 $ 33,834
======== ======== ========
</TABLE>
F-13
<PAGE> 91
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- SECURITIZED ASSETS AND CAPITALIZED SERVICING RIGHTS
Following a transfer of financial assets, the Company must recognize the
assets it controls and the liabilities it has incurred, and derecognize assets
for which control has been surrendered and liabilities that have been
extinguished.
Retained Interest in Securitized Assets
RISA is capitalized upon the sale of contracts to securitization trusts.
RISA represents the present value of the estimated future earnings to be
received by us from the excess spread created in securitization transactions.
Excess spread is calculated by taking the coupon rate of the contracts sold less
the interest rate paid to the investors less contractually specified servicing,
guarantor fees, credit losses and prepayments.
Prepayment and credit loss assumptions are also utilized to estimate future
excess spread. We currently use a prepayment rate of 1.6% Absolute Prepayment
Model ("ABS"). Credit losses are estimated using a cumulative loss rate
estimated by management to reduce the likelihood of impairment to the value of
the RISA. We determine the cumulative loss rate based upon our review of
historical cumulative loss experience, collection and repossession data,
estimates of the value of the underlying collateral, economic conditions and
trends, the mix of prime and non-prime contracts and other information.
Cumulative net credit loss assumptions utilized during 1999 and 1998 ranged from
6% to 7%. Future earnings are discounted at a rate management believes to be
representative of the market at the time of securitization. Currently, we use a
discount rate of 425 basis points over the two-year Treasury rate. All
assumptions used are evaluated each quarter and adjusted, if appropriate, to
reflect actual performance of the contracts.
The balance of the RISA is amortized on a monthly basis over the expected
repayment life of the underlying contracts. Actual cash flows in excess of the
amortization of the RISA are shown in our income statement as retained interest
income. RISA is classified in a manner similar to available for sale securities
and as such is marked to market each quarter. Market value changes are
calculated by discounting the excess spread using a current market discount
rate. Any changes in the market value of the RISA are reported as a separate
component of stockholders' equity on our consolidated statements of financial
condition as accumulated other comprehensive income (loss), net of applicable
taxes.
The following table presents the activity of the RISA:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................ $ 171,230 $ 181,177 $121,597
Additions........................................ 111,767 91,914 112,230
Amortization..................................... (111,752) (103,610) (53,421)
Change in unrealized gains (losses) on RISA(1)... (3,968) 1,749 771
--------- --------- --------
Ending balance................................... $ 167,277 $ 171,230 $181,177
========= ========= ========
</TABLE>
- ---------------
(1) Change in unrealized gains (losses) on securities available for sale
represents the effect that current changes in interest rates have on the
valuation of the RISA. Such amount will not be realized unless the RISA is
sold.
Estimated future undiscounted RISA earnings are calculated by taking the
difference between the coupon rate of the contracts sold and the interest rate
paid to the investors, less the contractually specified servicing fee and
guarantor fees, after giving effect to estimated prepayments and assuming no
losses. To arrive at the RISA, this amount is reduced by the off balance sheet
allowance established for probable future losses which can be reasonably
estimated and by discounting to present value.
F-14
<PAGE> 92
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings.................... $ 410,066 $ 361,209
Off balance sheet allowance for credit losses............... (220,838) (170,664)
Discount to present value................................... (21,951) (19,315)
---------- ----------
Retained interest in securitized assets..................... $ 167,277 $ 171,230
========== ==========
Outstanding balance of automobile contracts sold through
securitizations........................................... $3,890,685 $3,491,452
Off balance sheet allowance for losses as a percent of
automobile contracts sold through securitizations......... 5.68% 4.89%
</TABLE>
We believe that the off balance sheet allowance for credit losses is currently
adequate to absorb probable future losses in the sold portfolio that can be
reasonably estimated.
Capitalized Servicing Rights
Capitalized servicing rights consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Purchased mortgage servicing rights......................... $ $ 6,360
Originated mortgage servicing rights........................ 6,136
Impairment allowance for mortgage servicing rights.......... (3,723)
------- -------
$ $ 8,773
======= =======
</TABLE>
CSR assets represent an allocation of the cost basis of loans sold between
the CSR and the loans based upon their relative fair value at the date the loans
are originated or purchased. The fair value of CSR is calculated by estimating
future servicing revenues, including servicing fees, late charges, other
ancillary income, and float benefit, less the actual cost to service loans.
As part of our strategy to exit the mortgage banking business, we sold our
entire remaining mortgage servicing rights portfolio during 1999. Amortization
of capitalized servicing rights is reflected as a component of mortgage banking
income in noninterest income. Amortization expense for the year ended December
31, 1999 was $2.3 million, compared with $15.5 million for the year ended
December 31, 1998.
F-15
<PAGE> 93
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land..................................................... $16,395 $23,516
Construction in progress................................. 8,211
Buildings and improvements............................... 47,992 52,324
Computers and software................................... 26,865 19,456
Furniture and equipment.................................. 18,750 12,233
Automobiles and airplanes................................ 7,052 6,994
------- -------
117,054 122,734
Less: accumulated depreciation........................... 32,065 36,317
------- -------
$84,989 $86,417
======= =======
</TABLE>
NOTE 8 -- NONPERFORMING ASSETS
Nonperforming loans consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Unimpaired loans placed on nonaccrual.................... $ 7,362 $ 8,181
Impaired loans........................................... 3,917 4,046
------- -------
$11,279 $12,227
======= =======
</TABLE>
Interest forgone on nonaccrual loans was $0.6 million, $0.4 million and
$0.8 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The following table presents a breakdown of impaired loans and the
impairment allowance related to impaired loans:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Recorded investment with allowance......................... $5,192 $5,321
Less: impairment allowance................................. 1,275 1,275
------ ------
$3,917 $4,046
====== ======
</TABLE>
For the years ended December 31, 1999 and 1998, average impaired loans were
$4.0 million and $3.7 million, respectively. For the years ended December 31,
1999 and 1998, Westcorp recognized $2.1 million and $1.8 million, respectively,
of interest income on impaired loans, all of which was recognized on a cash
basis.
F-16
<PAGE> 94
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Real estate owned consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure................. $ 2,256 $ 4,861
Less: allowance for losses............................... 784 784
------- -------
$ 1,472 $ 4,077
======= =======
</TABLE>
There were no changes in the allowance for REO losses for the years ended
December 31, 1999, 1998 and 1997.
NOTE 9 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest on loans receivable............................. $14,509 $11,970
Interest on securities................................... 8,365 6,762
------- -------
$22,874 $18,732
======= =======
</TABLE>
Accrued interest receivable at December 31, 1999 and 1998 is included in
other assets in the Consolidated Statements of Financial Condition.
NOTE 10 -- DEPOSITS
Deposits consisted of the following at December 31:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE 1999 1998
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Noninterest bearing deposits........... -- $ 47,770 $ 75,240
Demand deposit accounts................ 1.7% 60,365 38,511
Passbook accounts...................... 2.4 13,789 15,412
Money market deposit accounts.......... 4.8 574,589 320,160
Brokered certificate accounts.......... 4.9 28,594 75,400
Certificate accounts................... 5.2 1,487,202 1,654,012
---------- ----------
$2,212,309 $2,178,735
========== ==========
</TABLE>
The aggregate amount of deposits in denominations greater than or equal to
$100,000 at December 31, 1999 and 1998 was $441 million and $443 million,
respectively. Deposit amounts in excess of $100,000 are not federally insured.
F-17
<PAGE> 95
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scheduled maturities of certificate accounts at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE RATE AMOUNT
------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Six months or less.................................. 5.07% $ 696,859
More than six months through one year............... 5.65 718,108
More than one year through three years.............. 5.56 66,534
More than three years through ten years............. 4.32 5,701
----------
$1,487,202
==========
</TABLE>
Interest expense on deposits consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Demand deposit accounts.................... $ 836 $ 858 $ 399
Passbook accounts.......................... 380 404 746
Money market deposit accounts.............. 22,745 9,259 2,181
Certificate accounts....................... 80,669 93,283 101,085
Brokered certificate accounts.............. 1,438 5,201 2,667
-------- -------- --------
$106,068 $109,005 $107,078
======== ======== ========
</TABLE>
Accrued interest payable on deposits at December 31, 1999 and 1998 was $1.8
million and $2.2 million, respectively, which is included in other liabilities
in the Consolidated Statements of Financial Condition.
The following table summarizes certificate accounts by interest rate within
maturity categories at:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL
---------- ------- ------- ------ ------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0% - 3.99%.............. $ 10,448 $145 $ 10,593
4.00% - 5.99%............. 1,220,310 $29,191 $13,338 $2,683 $1,089 1,266,611
6.00% - 7.99%............. 185,935 283 23,721 59 209,998
---------- ------- ------- ------ ------ ---- ----------
$1,416,693 $29,474 $37,059 $2,742 $1,089 $145 $1,487,202
========== ======= ======= ====== ====== ==== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL
---------- ------- ------- ------- ------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
0% - 3.99%............. $ 5,092 $ 52 $ 72 $19 $ 5,235
4.00% - 5.99%............ 1,411,285 63,860 11,311 $11,599 $4,044 1,502,099
6.00% - 7.99%............ 89,300 31,972 161 25,187 58 146,678
---------- ------- ------- ------- ------ --- ----------
$1,505,677 $95,884 $11,544 $36,786 $4,102 $19 $1,654,012
========== ======= ======= ======= ====== === ==========
</TABLE>
F-18
<PAGE> 96
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period.................................... $ 249,675 $265,644
Balance at end of period, including accrued interest........ 249,967 266,238
Estimated fair value at end of period....................... 245,930 247,846
Average amount outstanding during the period................ 369,999 321,367
Maximum amount outstanding at any given month-end during the
period.................................................... 1,036,205 532,519
Weighted average interest rate during the period............ 5.2% 5.8%
Weighted average interest rate at end of period............. 5.5% 5.4%
</TABLE>
Mortgage-backed securities available for sale sold under reverse repurchase
agreements were delivered to dealers who arranged the transactions. The dealers
may have sold, loaned, or otherwise disposed of such securities to other parties
in the normal course of their operations, and have agreed to resell to the
Company substantially identical securities at the maturities of the agreements.
The agreements at December 31, 1999 and 1998 mature within 30 days. Average
amounts are computed based upon daily ending balances.
NOTE 12 -- CONDUIT FACILITY
In September 1999, WFS established a $500 million conduit facility secured
by automobile contracts in a private placement. The amount outstanding on the
credit facility at December 31, 1999 was $461 million. The Notes are rated AAA
by Standard & Poor's and Aaa by Moody's. Timely principal and interest payments
on the Notes are guaranteed by an insurance policy. Interest payments on the
Notes are due quarterly, in arrears, calculated at a commercial paper index rate
plus 30 basis points. Interest expense totaled $7.9 million for the year ended
December 31, 1999. The average amount outstanding during 1999 was $494 million.
The conduit facility was paid off on March 15, 2000.
NOTE 13 -- SHORT-TERM BORROWINGS
The Company had a letter of credit with the Federal Home Loan Bank
("FHLB"), which was collateralized by eligible real estate loans and mortgage
backed securities described in Note 14 -- Federal Home Loan Bank Advances. The
maximum amount approved on the letter of credit was $400 million in 1999, 1998
and 1997. The maximum amount outstanding at any month end was $200 million
during 1999, $388 million during 1998 and $399 million during 1997. The average
amount of the letter of credit outstanding and the weighted average interest
rate during 1999, 1998 and 1997 was $18.4 million and 4.9%, $175 million and
5.7% and $178 million and 5.7%, respectively. The Company's letter of credit
generally matured within 30 days from the issuance date. The Company
discontinued its use of the letter of credit on July 9, 1999. There was no
amount of the letter of credit outstanding at December 31, 1999.
The Company also has a line of credit with a bank which has a maximum
availability of $30.0 million and had $2.5 million outstanding at December 31,
1999. The line of credit has an interest rate tied to the FHLB Reference Rate.
In 1998, the Company had two lines of credit. The lines of credit had a maximum
availability of $25.0 million. There was $5.2 million outstanding at December
31, 1998. The line of credit had an interest rate tied to the FHLB Reference
Rate.
F-19
<PAGE> 97
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB are collateralized with eligible real estate loans
and mortgage-backed securities. The FHLB letter of credit disclosed in Note
13 -- Short-Term Borrowings is also secured by the same collateral. The FHLB
advances and the FHLB letter of credit are collateralized with mortgage loans
totaling $340 million and $471 million at December 31, 1999 and 1998,
respectively, and mortgage-backed securities totaling $595 million and $219
million at December 31, 1999 and 1998, respectively.
Information as to interest rates and maturities on the advances from the
FHLB are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Range of interest rates............................. 5.5% - 8.2% 5.3%
Weighted average interest rate...................... 6.0% 5.5%
Year due:
2000.............................................. $151,500
2001.............................................. $ 231,000
2002
2003.............................................. 6,500 6,500
Thereafter........................................ 3,244 2,853
----------- --------
$ 240,744 $160,853
=========== ========
</TABLE>
The Company had available credit with the FHLB of approximately $695
million at December 31, 1999.
NOTE 15 -- SUBORDINATED DEBENTURES
Subordinated capital debentures of the Company ("subordinated debentures")
totaled $199 million at December 31, 1999 and $240 million at December 31, 1998,
net of discount and issuance costs of $3.3 million and $4.7 million for 1999 and
1998, respectively. The subordinated debentures are unsecured and consist of two
issuances with outstanding balances of $52.4 million with an interest rate of
8.5% due in 2003 and $146 million with an interest rate of 8.875% due in 2007.
They are redeemable, in whole or in part, at the option of the Company, on or
after July 1, 2000 and August 1, 2004, respectively, both at 100% of the
principal amount being redeemed plus accrued interest as of the date of
redemption. For regulatory purposes, the subordinated debentures are included as
part of the Bank's supplementary capital, subject to certain limitations.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
2000................................................. $ 5,417
2001................................................. 4,024
2002................................................. 2,699
2003................................................. 2,255
2004................................................. 1,667
Thereafter........................................... 525
-------
$16,587
=======
</TABLE>
F-20
<PAGE> 98
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense amounted to $4.9 million, $6.1
million and $7.8 million in 1999, 1998 and 1997, respectively.
The Company's commercial, mortgage loan commitments and mortgage loans sold
with recourse were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial letter of credit and unused lines of credit
provided............................................. $ 39,530 $ 21,159
======== ========
Commitments to fund commercial and mortgage loans
Fixed rate loans..................................... $ 6,193 $276,144
Variable rate loans.................................. 83,299 22,724
-------- --------
89,492 $298,868
======== ========
Commitments to sell mortgage loans..................... $336,362
======== ========
Mortgage loans sold with recourse...................... $ 54,131 $ 94,334
======== ========
</TABLE>
At December 31, 1999, the Company had commitments to fund fixed rate loans
at rates ranging from 5.0% to 10.5% with loan terms ranging from 1 month to 240
months.
The Company has pledged certain assets relative to amounts held on behalf
of trustees as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FNMA participation certificates........................ $ 61,487 $ 82,460
GNMA certificates...................................... 351,236 203,695
Automobile contracts................................... 365,305 357,805
Multifamily first mortgages............................ 41,140 48,910
-------- --------
$819,168 $692,870
======== ========
</TABLE>
The Company is also involved as a party to certain legal proceedings
incidental to its business. Management of the Company believes that the outcome
of such proceedings will not have a material effect upon its business or
financial condition, results of operations or cash flows.
NOTE 17 -- EMPLOYEE STOCK OWNERSHIP AND SALARY SAVINGS PLAN
The Company has an Employee Stock Ownership and Salary Savings Plan ("the
Plan"), which covers essentially all full-time associates who have completed six
months of service. Contributions to the Plan are discretionary and determined by
the Board of Directors within limits set forth under the Employment Retirement
Income Security Act of 1974. Contributions to the Plan are fully expensed in the
year to which the contribution applies.
The Company's contribution to the Plan amounted to $7.0 million, $0.8
million and $2.4 million in 1999, 1998 and 1997, respectively.
NOTE 18 -- STOCK OPTIONS
In 1991, the Company reserved 3,150,000 shares of common stock for future
issuance to certain associates under an incentive stock option plan ("the
Plan"). At December 31, 1999, there were 1,813,200 shares available for future
grants. The options may be exercised, within five to seven years after the
F-21
<PAGE> 99
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
date of grant. Additionally, the weighted average life of the options at
December 31, 1999 was 2.8 years and the exercise price of the options
outstanding at December 31, 1999 ranged from $9.94 to $18.69 per share.
At December 31, 1998, all stock options were anti-dilutive under the plan.
In October 1998, the Company canceled 405,250 of existing options as part of a
voluntary stock option exchange program. All option holders taking part in this
program forfeited their existing options and were issued a proportionately
smaller number of new options at a reduced exercise price. Stock option activity
is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997.................... 894,206 $13.10
Issued.......................................... 348,000 18.09
Exercised....................................... (116,605) 11.86
Cancelled....................................... (142,444) 15.32
-------- ------
Outstanding at December 31, 1997.................. 983,157 15.07
Issued.......................................... 355,221 12.37
Exercised....................................... (118,905) 8.52
Cancelled....................................... (728,609) 17.09
-------- ------
Outstanding at December 31, 1998.................. 490,864 11.73
Issued.......................................... 270,545 12.82
Exercised....................................... (122,530) 8.58
Cancelled....................................... (105,060) 12.98
-------- ------
Outstanding at December 31, 1999.................. 533,819 $12.76
======== ======
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its associate stock options.
The fair value of options granted in 1999, 1998 and 1997 was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ------------ -------
<S> <C> <C> <C>
Risk-free interest rate................. 6.6% 4.7% 5.7%
Volatility factor....................... .51 0.54 0.41
Expected option life.................... 5 to 7 years 5 to 7 years 5 years
</TABLE>
The weighted average fair value of options granted during 1999, 1998, and
1997 was $7.84, $5.87 and $2.39, respectively.
Westcorp elected to follow Accounting Principles Board Opinion ("APB") No.
25 and related Interpretations in accounting for its employee stock options.
Under APB 25, the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant and, therefore, no
compensation expense is recognized. Pro-forma information regarding net income
and earnings per share is required by SFAS No. 123, and has been determined as
if the Company had accounted for its
F-22
<PAGE> 100
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employee stock option under the fair value method of that statement. Pro-forma
net income/(loss) and earnings/(loss) per diluted share for the respective
periods were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro-forma net income/(loss).................. $52,235 $(14,921) $36,081
Per diluted share............................ $ 1.97 $ (0.57) $ 1.37
</TABLE>
The impact of applying SFAS 123 in 1999, 1998, 1997 and 1996 is immaterial
to the financial statements of Westcorp.
NOTE 19 -- DIVIDENDS
The Company paid cash dividends of $0.20, $0.25 and $0.40 per share for the
years ended December 31, 1999, 1998 and 1997, respectively. On December 17,
1999, the Company declared a cash dividend of $0.05 per share for shareholders
of record as of January 14, 2000, and paid on January 28, 2000. On February 15,
2000, the Company declared a cash dividend of $0.05 per share for shareholders
of record as of April 27, 2000, with a payable date of May 11, 2000.
NOTE 20 -- RESTRUCTURING
In 1998, the Company completed the restructuring plan initially announced
on February 10, 1998. The goal of the plan was to consolidate offices and
eliminate redundant staff positions on a national level. The plan was achieved
in two phases. Phase I of the plan, completed in the first quarter of 1998,
consisted of the restructuring of operations in the Western United States. Phase
II of the plan, completed in the third quarter of 1998 and patterned after Phase
I, consisted of the restructuring of operations in the Central and Eastern
United States. As a result of these two restructurings, a total of 400 positions
or 20% of the Company's work force were eliminated and 96 offices were closed.
The total pre-tax restructuring charge in 1998 for the completed plan was $15.0
million. Restructuring related costs included $1.8 million for associate
severance and $13.2 million for lease termination fees and write off of disposed
assets. The restructuring charge was substantially utilized in 1998. Through the
restructuring, WFS merged prime and non-prime office locations with close
geographic proximity and closed poorly performing offices.
During the fourth quarter of 1998 the Company incurred a $3.0 million
restructuring charge relating to the consolidation of its 14 mortgage banking
offices into three Regional Operating Centers and the elimination of 200
positions, or 55% of the work force in the mortgage banking area. This
restructuring was the result of the Company's decision to focus on primarily
sub-prime mortgage products rather than prime and non-agency originations.
Restructuring related costs included $0.6 million for associate severance and
$2.4 million for lease termination fees and the write off of disposed assets.
The restructuring charge was substantially utilized in 1998.
During the third quarter of 1999, the Company completed the sale of its
sub-prime mortgage division and sold the remaining $1.0 billion of mortgage
servicing rights that it held. During the fourth quarter of 1999, the Company
closed its loan servicing department and entered into an agreement to sell the
rights to service its remaining owned portfolio, thereby completing its mortgage
banking exit strategy. At December 31, 1999, the Company owned $598 million in
single-family and multi-family mortgage loans that were originated through
previous mortgage lending activities.
F-23
<PAGE> 101
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21 -- INCOME TAXES
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................... $33,176 $ (353) $ 1,562
State franchise............................ 9,548 1,421 349
------- -------- -------
42,724 1,068 1,911
Deferred:
Federal.................................... (630) (7,999) 21,617
State franchise............................ 912 (4,399) 7,759
------- -------- -------
282 (12,398) 29,376
------- -------- -------
$43,006 $(11,330) $31,287
======= ======== =======
</TABLE>
A reconciliation of total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate........................ $34,467 $ (9,885) $25,618
State tax (net of Federal tax benefit)....... 6,799 (1,936) 5,270
Other........................................ 1,740 491 399
------- -------- -------
$43,006 $(11,330) $31,287
======= ======== =======
</TABLE>
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Amounts previously reported as
current and deferred income tax expense have been restated. Such changes to the
components of the expense occur because all tax alternatives available to the
Company are not known for a number of months subsequent to year-end.
F-24
<PAGE> 102
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss reserves................................... $ 15,673 $ 2,941
State tax deferred benefit........................... 5,816 2,712
Deferred compensation accrual........................ 3,209 3,306
Tax basis difference -- marketable securities........ 1,554 (55)
Accelerated depreciation for tax purposes............ 2,082 3,266
Other, net........................................... 4,728 7,835
-------- --------
33,062 20,005
Deferred tax liabilities:
Loan fee income deferred for tax purposes............ (922) (2,034)
FHLB dividends....................................... (5,483) (5,244)
Loan costs........................................... (1,146) (2,227)
SFAS 115 deferred taxes.............................. (2,710)
Asset securitization income recognized for book
purposes.......................................... (33,488) (32,149)
Capitalized mortgage service rights.................. (1,115)
Other, net........................................... (4,361) (4,877)
-------- --------
(45,400) (50,356)
-------- --------
$(12,338) $(30,351)
======== ========
</TABLE>
F-25
<PAGE> 103
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............... $ 34,365 $ 34,365 $ 114,890 $ 114,890
Other short-term investments............ 137,000 137,000 22,864 22,864
Investment securities and
mortgage-backed securities........... 1,470,775 1,470,775 1,052,332 1,052,332
Loans receivable (including held for
sale)................................ 2,181,624 2,292,756 1,992,833 2,106,759
Retained interest in securitized
assets............................... 167,277 167,277 171,230 171,230
Capitalized servicing rights............ 8,773 8,773
Financial instrument agreements held for
purposes other than trading:
Interest rate swaps..................... 23,962 23,962 354 354
Interest rate options, floors and
caps................................. 13,192 13,192 5,154 5,154
Forward agreements...................... 10,872 4,389
Fixed rate loan commitments............. 25,930
Variable rate loan commitments.......... 5
Financial liabilities:
Deposits................................ $2,212,309 $2,201,967 $2,178,735 $2,177,251
Securities sold under agreements to
repurchase........................... 249,675 245,930 265,644 247,846
Short-term borrowings................... 8,482 8,482 14,427 14,427
Note payable............................ 461,104 454,187
Federal Home Loan Bank advances......... 240,744 237,405 160,853 150,076
Amounts held on behalf of trustee....... 687,274 687,274 528,092 528,092
Subordinated debentures................. 199,298 196,309 239,856 223,786
</TABLE>
NOTE 23 -- FINANCIAL INSTRUMENT AGREEMENTS
The Company uses interest rate swaps, purchased options, forward
agreements, floors and caps to minimize its exposure to interest rate risk. The
fair value of these agreements may vary substantially with changes in interest
rates. At December 31, the Company's portfolio of such agreements consisted of
the following:
<TABLE>
<CAPTION>
1999
----------------------
NOTIONAL CREDIT
AMOUNT EXPOSURE
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest rate swaps................................... $ 324,500 $23,962
Interest rate caps.................................... 440,000 13,192
Forward agreements.................................... 1,600,000
---------- -------
$2,364,500 $37,154
========== =======
</TABLE>
F-26
<PAGE> 104
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------
NOTIONAL CREDIT
AMOUNT EXPOSURE
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Interest rate swaps................................... $ 50,000 $ 354
Interest rate caps.................................... 540,000 5,154
Forward agreements.................................... 775,000
---------- -------
$1,365,000 $ 5,508
========== =======
</TABLE>
Notional amounts do not represent amounts exchanged by parties and, thus,
are not a measure of the Company's exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.
The Company's interest rate swaps consist of agreements with other parties
to exchange, at specified intervals, the difference between fixed rate and
floating rate interest amounts calculated by reference to an agreed notional
amount and a specified index. The Company pays a fixed interest rate and
receives a floating interest rate on all of its interest rate swaps. At December
31, 1999 and 1998, the terms of the Company's interest rate swaps were to pay a
weighted average fixed rate of 5.92% in each year, and to receive a weighted
average variable rate of 6.11% and 5.20%, respectively, with expiration dates
ranging from 2002 to 2009 with collateral requirements of 0.7%. Variable
interest rates may change in the future.
The Company purchases interest rate caps to effectively remove lifetime
interest rate caps on mortgage-backed securities, to hedge interest rate
fluctuations on assets available for sale and to limit the erosion of net
interest income resulting from increases in interest rates. The interest rate
cap agreements had strike rates from 6.0% to 7.5% with expiration dates ranging
from 2000 to 2008 as of December 31, 1999 and 6.0% to 7.5% with expiration dates
ranging from 2001 to 2004 as of December 31, 1998.
The Company's hedging strategy for its loan production includes the use of
forward agreements. The Company enters into these agreements in numbers and
amounts which generally correspond to the principal amount of the sale and/or
securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying loans. Because
of this inverse relationship, the Company can effectively lock in its gross
interest rate spread at the time of the hedge transaction. Gains and losses
relative to these agreements are deferred and recognized in full at the time of
loan sale and/or securitization as an adjustment to the gain or loss on the sale
of loans. The Company uses only highly rated counterparties and further reduces
its risk by avoiding any material concentration with a single counterparty.
Credit exposure is limited to those agreements with a positive fair value and
only to the extent of fair value that has been recognized in the Consolidated
Statement of Condition. At December 31, 1999, and 1998, the Company held forward
agreements with a notional amount outstanding of $1.6 billion and $775 million,
respectively.
The current credit exposure under these agreements is limited to the fair
value of the agreements with a positive fair value at the reporting date. Master
netting agreements are arranged or collateral is obtained through physical
delivery of, or rights to, securities to minimize the Company's exposure to
credit losses in the event of nonperformance by counterparties to financial
instruments. The Company also minimizes its counterparty risk by entering into
agreements only with highly rated counterparties.
NOTE 24 -- EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common share outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is similar to the
F-27
<PAGE> 105
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
previously required fully diluted earnings per share method and is calculated by
dividing the weighted average number of shares outstanding, adjusted for the
dilutive effect of outstanding stock options.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
BASIC
Net income (loss)........................... $ 52,626 $ (14,697) $ 36,788
=========== =========== ===========
Average common shares outstanding........... 26,503,796 26,305,117 26,165,678
=========== =========== ===========
Net income (loss) per common
share -- basic............................ $ 1.99 $ (0.56) $ 1.41
=========== =========== ===========
DILUTED
Net income (loss)........................... $ 52,626 $ (14,697) $ 36,788
=========== =========== ===========
Average common shares outstanding........... 26,503,796 26,305,117 26,165,678
Stock option adjustment..................... 1,332 185,466
----------- ----------- -----------
Average common shares outstanding........... 26,505,128 26,305,117 26,351,144
=========== =========== ===========
Net income (loss) per common
share -- diluted.......................... $ 1.99 $ (0.56) $ 1.40
=========== =========== ===========
</TABLE>
Options to purchase 331,620 shares of common stock ranging from $12.60 to
$18.69 at December 31, 1998 were not included in the computation of diluted
earnings per share because the Company experienced a loss from operations. The
weighted average price at December 31, 1999, 1998 and 1997 was $12.76, $11.73,
and $18.72, respectively.
NOTE 25 -- REGULATORY CAPITAL
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions supervised by the
Office of Thrift Supervision ("OTS"). The Bank must follow specific capital
guidelines stipulated by the OTS which involve quantitative measures of the
Bank's assets, liabilities and certain off balance sheet items as calculated
under regulatory accounting practices. An institution that fails to comply with
its regulatory capital requirements must obtain OTS approval of a capital plan
and can be subject to a capital directive and certain restrictions on its
operations which could have a direct material effect on the Bank's financial
statements.
At December 31, 1999 and 1998, the Bank's most recent notification from the
OTS categorized the Bank as "well capitalized" under the prompt corrective
action ("PCA") regulations adopted by the OTS pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). To be categorized as
"well capitalized", the Bank must maintain minimum capital ratios as set forth
in the table below. The Bank's capital is subject to review by federal
regulators for the components, amounts, risk weighting classifications and other
factors. There are no conditions or events since December 31, 1999 that
management believes have changed the Bank's category.
F-28
<PAGE> 106
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Bank's actual capital and required
capital as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
TIER 1
TANGIBLE RISK-BASED RISK-BASED
CAPITAL CORE CAPITAL CAPITAL CAPITAL
-------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Actual Capital:
Amount...................................... $400,437 $400,437 $400,437 $641,163
Capital ratio............................... 8.85% 8.85% 6.49% 10.39%
FIRREA minimum required capital:
Amount...................................... $ 67,836 $135,672 N/A $493,442
Capital ratio............................... 1.50% 3.00% N/A 8.00%
Excess...................................... $332,601 $264,765 N/A $147,721
FDICIA well capitalized required capital:
Amount...................................... N/A $226,120 $370,082 $616,803
Capital ratio............................... N/A 5.00% 6.00% 10.00%
Excess...................................... N/A $174,317 $ 30,355 $ 24,360
DECEMBER 31, 1998
Actual Capital:
Amount...................................... $345,427 $345,427 $345,427 $604,552
Capital ratio............................... 9.02% 9.02% 6.42% 11.23%
FIRREA minimum required capital:
Amount...................................... $ 57,464 $114,929 N/A $430,112
Capital ratio............................... 1.50% 3.00% N/A 8.00%
Excess...................................... $287,963 $230,498 N/A $174,440
FDICIA well capitalized required capital:
Amount...................................... N/A $191,548 $322,584 $537,640
Capital ratio............................... N/A 5.00% 6.00% 10.00%
Excess...................................... N/A $153,879 $ 22,843 $ 66,912
</TABLE>
The following table reconciles the Bank's capital in accordance with
generally accepted accounting principles ("GAAP") to the Bank's tangible, core
and risk-based capital:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Bank shareholder's equity -- GAAP basis..................... $351,200 $332,951
Adjustment: Unrealized losses (gains) under SFAS 115........ 21,481 (3,693)
Less: Non-permissible activities(1)....................... (273) (4,811)
Add: Minority interest in equity of subsidiaries.......... 28,030 21,857
Less: Disallowed capitalized servicing rights............. (877)
-------- --------
Total tangible and core capital................... 400,438 345,427
Adjustments for risk-based capital:
Subordinated debentures(2)................................ 181,019 224,844
General loan valuation allowance(3)....................... 59,707 34,281
-------- --------
Risk-based capital........................................ $641,164 $604,552
======== ========
</TABLE>
F-29
<PAGE> 107
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ---------------
(1) Does not include minority interest in joint venture subsidiaries.
(2) Excludes capitalized discounts and issue costs.
(3) Limited to 1.25% of risk-weighted assets.
NOTE 26 -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Cash...................................................... $ 2,011 $ 842
Investment in subsidiaries................................ 350,528 333,364
Other..................................................... 4,409 4,704
-------- --------
Total assets........................................... $356,948 $338,910
======== ========
Liabilities and shareholders' equity
Other liabilities......................................... $ 4,230 $ 9,865
-------- --------
Total liabilities...................................... 4,230 9,865
Shareholders' equity........................................ 352,718 329,045
-------- --------
Total liabilities and shareholders' equity............. $356,948 $338,910
======== ========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income
Dividends from subsidiaries............................... $12,000 $ 14,000 $46,366
Other..................................................... 9
------- -------- -------
12,000 14,000 46,375
Interest expense............................................ 470 70 1,473
Noninterest expenses........................................ 2,085 1,337 1,156
------- -------- -------
Income before income taxes and equity in net income of
subsidiaries.............................................. 9,445 12,593 43,746
Income tax benefit.......................................... (780) (541) (1,099)
------- -------- -------
Income before equity in net income of subsidiaries.......... 10,225 13,134 44,845
Equity in undistributed net income (loss) of subsidiaries... 42,401 (27,831) (8,057)
------- -------- -------
Net Income (Loss)........................................... $52,626 $(14,697) $36,788
======= ======== =======
</TABLE>
F-30
<PAGE> 108
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $52,626 $(14,697) $ 36,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 12 343
Equity in undistributed net (income) loss of
subsidiaries........................................... (42,401) 27,831 8,057
Other, net................................................ (2,026) (1,195) 5,107
------- -------- --------
Net Cash Provided By Operating Activities......... 8,199 11,951 50,295
INVESTMENT ACTIVITIES
Infusion of capital to subsidiary........................... (533) (15,120) (15,000)
Sales (purchases) of investment securities available for
sale...................................................... 12,434 (12,434)
Addition to premises and equipment.......................... 698
------- -------- --------
Net Cash Used In Investing Activities............. (533) (2,686) (26,736)
FINANCING ACTIVITIES
Decrease in short-term borrowings........................... (2,718) (7,800) (15,382)
Dividends paid.............................................. (5,299) (6,592) (10,469)
Other, net.................................................. 1,520 2,536 (3,430)
------- -------- --------
Net Cash Used In Financing Activities............. (6,497) (11,856) (29,281)
------- -------- --------
Increase (Decrease) In Cash................................. 1,169 (2,591) (5,722)
Cash and cash equivalents at beginning of year.............. 842 3,433 9,155
------- -------- --------
Cash and Cash Equivalents At End of Year.................... $ 2,011 $ 842 $ 3,433
======= ======== ========
</TABLE>
NOTE 27 -- SUBSEQUENT EVENT -- FOLLOW-ON OFFERING
On February 10, 2000, The Company's subsidiary, WFS, completed a follow-on
offering of 2,350,000 shares of common stock at a price of $15.00 per share. On
March 10, 2000, underwriters for the follow-on offering exercised their over
allotment options to purchase 300,000 additional shares, bringing the total net
proceeds raised to approximately $37.9 million. The primary purpose of the
offering is to provide WFS with additional capital to fund growth, to increase
the amount of contracts which can be acquired and held prior to sale in the
asset-backed securities market, and to provide working capital for general
corporate purposes. After the follow-on offering, the Bank owns approximately
82% of WFS' shares.
On March 15, 2000, the Company completed the issuance of $1.2 billion in
automobile asset-backed securities.
F-31
<PAGE> 109
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 28 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1999 and 1998. Certain quarterly amounts have been
adjusted to conform with the year-end presentation.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Interest income............................. $ 61,070 $ 77,920 $ 73,525 $ 85,101
Interest expense............................ 33,614 39,844 35,665 43,162
-------- -------- -------- --------
Net interest income....................... 27,456 38,076 37,860 41,939
Provision for loan losses................... (12,157) (4,355) (15,924) (5,964)
Noninterest income.......................... 59,204 44,929 62,486 43,387
Noninterest expense......................... (57,403) (54,854) (56,027) (50,177)
-------- -------- -------- --------
Income before income taxes................ 17,100 23,796 28,395 29,185
Income taxes................................ 7,234 10,075 11,947 12,204
-------- -------- -------- --------
Income before minority interest............. 9,866 13,721 16,448 16,981
Minority interest in earnings of
subsidiaries.............................. 1,506 1,584 1,706 1,726
-------- -------- -------- --------
Income before extraordinary item............ 8,360 12,137 14,742 15,255
Extraordinary gain from extinguishment of
debt, net of tax.......................... 980 639 315 198
-------- -------- -------- --------
Net income.................................. $ 9,340 $ 12,776 $ 15,057 $ 15,453
======== ======== ======== ========
Net income per common share -- basic........ $ 0.35 $ 0.48 $ 0.57 $ 0.58
======== ======== ======== ========
Net income per common share -- diluted...... $ 0.35 $ 0.48 $ 0.57 $ 0.58
======== ======== ======== ========
1998
Interest income............................. $ 65,046 $ 64,501 $ 69,515 $ 73,080
Interest expense............................ 40,155 39,015 40,592 41,569
-------- -------- -------- --------
Net interest income....................... 24,891 25,486 28,923 31,511
Provision for credit losses................. (6,388) (2,402) (2,347) (7,823)
Noninterest income.......................... 30,327 38,159 27,251 37,701
Noninterest expense......................... (73,587) (60,014) (60,846) (59,085)
-------- -------- -------- --------
Income (loss) before income taxes......... (24,757) 1,229 (7,019) 2,304
Income taxes................................ (10,392) 550 (2,816) 1,328
-------- -------- -------- --------
Income before minority interest............. (14,365) 679 (4,203) 976
Minority interest in earnings of
subsidiaries.............................. (2,162) 61 (329) 214
-------- -------- -------- --------
Net income (loss)......................... (12,203) 618 (3,874) 762
======== ======== ======== ========
Net income (loss) per common
share -- basic............................ $ (0.46) $ 0.02 $ (0.15) $ 0.03
======== ======== ======== ========
Net income (loss) per common
share -- diluted.......................... $ (0.46) $ 0.02 $ (0.15) $ 0.03
======== ======== ======== ========
</TABLE>
F-32
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
3.1 Certificate of Incorporation(13)
3.2 Bylaws(13)
4.1 Indenture dated as of June 17, 1993 issued by Western
Financial Bank, formerly Western Financial Savings Bank,
F.S.B., with respect to $125,000,000 in aggregate principal
amount of 8.5% Subordinated Capital Debentures due 2003(14)
4.2 Indenture dated as of June 25, 1998 issued by Western
Financial Bank, formerly Western Financial Savings Bank,
F.S.B., with respect to $150,000,000 in aggregate principal
amount of 8.875% Subordinated Capital Debentures due
2007(15)
10.1 Westcorp Incentive Stock Option Plan(2)
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings
Plan(3)
10.3 Westcorp 1991 Stock Option Plan(4)
10.4 1985 Executive Deferral Plan(1)
10.5 1988 Executive Deferral Plan II(1)
10.6 1992 Executive Deferral Plan III(1)
10.7 Transfer Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.8 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.9 Line of Credit Agreement between WFS Financial Inc and
Western Financial Bank, dated June 15, 1999(12)
10.9.1 Amendment No. 1, dated as of August 1, 1999, to the
Revolving Line of Credit Agreement between WFS Financial Inc
and Western Financial Bank(12)
10.10 Tax Sharing Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1994(1)
10.11 Master Reinvestment Contract between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.12 Amendment No. 1, dated as of June 1, 1995, to the Restated
Master Reinvestment Reimbursement Agreement(11)
10.13 Amended and Restated Master Collateral Assignment Agreement,
dated as of March 1, 2000
10.14 Form of WFS Financial Inc Dealer Agreement(5)
10.15 Form of WFS Financial Inc Loan Application(5)
10.16 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
10.16.1 Amendment No. 1, dated as of December 1998, to Westcorp
Employee Stock Ownership and Salary Savings Plan(12)
10.16.2 Amendment No. 2, dated as of January 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan(12)
10.16.3 Amendment No. 3, dated as of June 1, 1999, to Westcorp
Employee Stock Ownership and Salary Savings Plan(12)
10.17 Amended and Restated WFS 1996 Incentive Stock Option Plan,
dated January 1, 1997(6)
10.18 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated August 1, 1997(11)
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.18.1 Amendment No. 1, dated February 23, 1999, to the Promissory
Note of WFS Financial Inc in favor of Western Financial
Bank(11)
10.18.2 Amendment No. 2, dated July 30, 1999, to the Promissory Note
of WFS Financial Inc in favor of Western Financial Bank(11)
10.19 Investment Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1996(11)
10.20 Management Services Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated January 1, 1997(11)
10.21 Employment Agreement(8)(9)(10)
21.1 Subsidiaries of Westcorp
23.1 Consent of Independent Auditors, Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration Statement on
Form S-1 (File No. 33-93068), filed August 8, 1995 incorporated herein by
reference under Exhibit Number indicated.
(2) Exhibits previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference
under Exhibit Number indicated.
(3) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
(4) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under Exhibit Number indicated.
(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration Statement on Form S-1 (File No. 33-93068) incorporated herein
by reference under Exhibit Number indicated.
(6) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 33-7485), filed July 3, 1996 incorporated by reference under the
Exhibit Number indicated. Amendment No. 1 dated as of November 13, 1997
filed with the WFS Registration Statement on Form S-8 (File No. 333-40121)
incorporated herein by reference under Exhibit Number indicated.
(7) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039), filed August 29, 1996 incorporated herein by
reference under Exhibit Number indicated.
(8) Employment Agreement dated February 27, 1998 between the registrant and Joy
Schaefer (will be provided to the SEC upon request).
(9) Employment Agreement dated February 27, 1998 between the registrant,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).
(10) Employment Agreement, dated November, 1998 between the registrant and Mark
Olson (will be provided to the SEC upon request).
(11) Exhibits previously filed with Annual Report on Form 10-K of WFS Financial
Inc for the year ended December 31, 1998 (File No. 33-93068) as filed on or
about March 31, 1999.
(12) Exhibits previously filed with WFS Registration Statements on Form S-2
(File No. 333-91277) filed November 19, 1999 and subsequently amend on
January 20, 2000 incorporated by reference under Exhibit Number indicated.
(13) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990, incorporated herein by reference
under Exhibit Numbers indicated.
(14) Exhibit previously filed with, Western Financial Bank, formerly Western
Financial Savings Bank, F.S.B., Offering Circular with the OTS, dated June
17, 1993 (will be provided to the SEC upon request).
(15) Exhibit previously filed with Western Financial Bank, formerly Western
Financial Bank, F.S.B., Offering Circular with the OTS, dated July 25, 1998
(will be provided to the SEC upon request).
<PAGE> 1
EXHIBIT 10.13
THIRD AMENDED AND RESTATED
MASTER COLLATERAL ASSIGNMENT AGREEMENT
dated as of September 30, 1993
as amended and restated
dated as of June 1, 1995
as further amended and restated
dated as of November 1, 1998
and as further amended and restated
dated as of March 1, 2000
among
WESTERN FINANCIAL BANK
WFS FINANCIAL AUTO LOANS, INC.,
WFS RECEIVABLES CORPORATION,
WFS FINANCIAL AUTO LOANS 2, INC.,
FINANCIAL SECURITY ASSURANCE INC.,
BANKERS TRUST COMPANY,
as Trustee and Collateral Agent
and
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Master Collateral Agent
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I DEFINITIONS................................................................................3
Section 1.01. Definitions.............................................................................3
Section 1.02. Rules of Interpretation.................................................................7
ARTICLE II THE COLLATERAL.............................................................................8
Section 2.01. Security Interests......................................................................8
Section 2.02. Priority...............................................................................11
Section 2.03. Maintenance of Collateral..............................................................11
Section 2.04. General Authority......................................................................12
Section 2.05. Termination of Security Interests......................................................12
ARTICLE III THE COLLATERAL ACCOUNT....................................................................13
Section 3.01. Establishment..........................................................................13
Section 3.02. Delivery and Release of Collateral.....................................................13
Section 3.03. Collateral Account Funds...............................................................14
Section 3.04. General Provisions Regarding the Accounts..............................................15
Section 3.05. FSA Notices............................................................................16
Section 3.06. Representations by the Bank and WFAL 2.................................................16
ARTICLE IV THE MASTER COLLATERAL AGENT...............................................................16
Section 4.01. Appointment and Powers.................................................................16
Section 4.02. Performance of Duties..................................................................17
Section 4.03. Limitation on Liability; Indemnification...............................................17
Section 4.04. Reliance upon Documents................................................................18
Section 4.05. Successor Master Collateral Agent......................................................18
Section 4.06. Representations and Warranties of Bankers Trust Company of California, N.A.............19
Section 4.07. Waiver of Setoffs......................................................................19
Section 4.08. Control by the Controlling Party.......................................................19
ARTICLE V COVENANTS OF THE BANK AND WFAL 2..........................................................21
Section 5.01. Preservation of Collateral.............................................................21
Section 5.02. Opinions as to Collateral..............................................................21
Section 5.03. Notices................................................................................22
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 5.04. Waiver of Stay or Extension Laws; Marshalling of Assets................................22
Section 5.05. Noninterference, etc...................................................................22
Section 5.06. Changes................................................................................22
ARTICLE VI REMEDIES UPON DEFAULT.....................................................................22
Section 6.01. Rights and Remedies Upon Default.......................................................23
Section 6.02. Restoration of Rights and Remedies.....................................................24
Section 6.03. No Remedy Exclusive....................................................................24
ARTICLE VII CUSTODY...................................................................................24
Section 7.01. Collateral Schedule; Collateral Files..................................................24
Section 7.02. Release of Documents to Servicer.......................................................26
Section 7.03. Insurance..............................................................................26
Section 7.04. Master Collateral Agent's Interest in Collateral.......................................26
ARTICLE VIII MISCELLANEOUS.............................................................................27
Section 8.01. Further Assurances.....................................................................27
Section 8.02. Waiver.................................................................................27
Section 8.03. Amendments.............................................................................27
Section 8.04. Severability...........................................................................27
Section 8.05. Notices................................................................................28
Section 8.06. Term of this Agreement.................................................................29
Section 8.07. Assignments; Third-Party Rights; Reinsurance...........................................30
Section 8.08. Consent of the Controlling Party.......................................................30
Section 8.09. Trial by Jury Waived...................................................................30
Section 8.10. Counterparts...........................................................................31
Section 8.11. Governing Law..........................................................................31
SCHEDULE A - COLLATERAL GUIDELINES..................................................................35
SCHEDULE B - FORM OF MONTHLY COLLATERAL STATEMENT...................................................35
</TABLE>
-ii-
<PAGE> 4
THIRD
AMENDED AND RESTATED
MASTER COLLATERAL ASSIGNMENT AGREEMENT
THIS THIRD AMENDED AND RESTATED MASTER COLLATERAL ASSIGNMENT AGREEMENT
dated as of March 1, 2000 (the "Agreement"), which amends and restates the
Master Collateral Assignment Agreement dated as of September 30, 1993, as
amended and restated as of June 1, 1995 (the "Original Agreement"), as amended
and restated as of November 1, 1998 (the "Second Amended and Restated
Agreement") is by and among WESTERN FINANCIAL BANK, a federally-chartered
savings association formerly known as Western Financial Savings Bank, F.S.B.
(including its successors and assigns, the "Bank"), WFS FINANCIAL AUTO LOANS,
INC., a California corporation formerly known as Western Financial Auto Loans,
Inc. ("WFAL"), WFS RECEIVABLES CORPORATION, a California corporation ("WFSRC"
and collectively with WFAL, the "Depositors" and individually, each a
"Depositor"), WFS FINANCIAL AUTO LOANS 2, INC., a California corporation
formerly known as Western Financial Auto Loans 2, Inc. ("WFAL 2"), FINANCIAL
SECURITY ASSURANCE INC., a New York stock insurance company (including its
successors and assigns, "Financial Security"), BANKERS TRUST COMPANY, a New York
banking corporation, in its capacities as Trustee and Collateral Agent (each as
defined herein) and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., in its capacity
as Master Collateral Agent (as defined herein). Capitalized terms used without
definition have the meanings set forth in Article I hereof.
R E C I T A L S
- - - - - - - -
The Bank (i) is, the obligor under certain reinvestment contracts (as
amended from time to time, the "Bank Reinvestment Contracts") and may in the
future be an obligor together with WFAL 2 under certain reinvestment contracts
(as amended from time to time, the "Joint Reinvestment Contracts", and, with the
Bank Reinvestment Contracts, the "Reinvestment Contracts") all as referenced in
the Trust Agreements (as defined in Section 1.01 hereof), pursuant to which
Trusts (as defined in Section 1.01 hereof) have been or will be formed, in favor
of Bankers Trust Company, in its capacity as each of the trustees (collectively,
the "Trustee") under the Trust Agreements and/or in its capacity as each of the
collateral agents (acting for the benefit of Financial Security) referenced in
the Trust Agreements (collectively, together with any collateral agent appointed
by Financial Security thereunder or under the Master RIC Reimbursement
Agreement, the "Collateral Agent"), and (ii) was formerly the obligor under
certain spread account agreements with Financial Security, the Trustee and the
Collateral Agent ("Spread Account Agreements") relating to the Trusts insofar as
the Bank was obligated thereunder to repay moneys deposited in its general
ledger accounts when due.
WFAL 2 is and may in the future be the obligor under Joint Reinvestment
Contracts.
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In transactions in which certificates insured by Financial Security
were issued under the Trust Agreements dated as of a date prior to January 1,
1993, WFAL 2 pledged, pursuant to the related Spread Account Agreements, to the
Collateral Agent for the benefit of Financial Security all its right, title and
interest in and to the Spread Accounts (as defined in the relevant Agreements)
(together with the Spread Accounts referred to in the next succeeding paragraph,
the "Spread Accounts") and all investments and moneys therein from time to time
and all proceeds thereof (collectively, the related "Spread Amounts").
In certain transactions in which certificates insured by Financial
Security were issued under the pooling and servicing agreements dated as of a
date on or after January 1, 1993, the Depositor or WFAL 2 pledged pursuant to
the Trust Agreements, to the Trustee, as collateral agent, all their right,
title and interest in and to the Spread Accounts (as defined in the relevant
pooling and servicing agreements) and all investments and moneys therein from
time to time and related Spread Amounts in order to secure their respective
obligations under such pooling and servicing agreements and related Spread
Account Agreements.
All securities issued in transactions referenced in the foregoing two
paragraphs in which WFAL 2 was a depositor have been fully paid and discharged,
and all obligations of the Bank and the Depositor in respect of Spread Account
Agreements referenced in clause (ii) of the first Recital hereof have been fully
performed and discharged.
To the extent provided in the Reinvestment Contracts, the Bank and/or
WFAL 2, as applicable, will receive funds credited to (i) in the Collection
Accounts, the Note Distribution Accounts and the Certificate Distribution
Accounts, (ii) in the Spread Accounts and (iii) in the Holding Accounts for
investment in Reinvestment Accounts.
The parties hereto desire to amend and restate the Second Amended and
Restated Agreement to reflect (i) the addition of WFSRC as a Depositor under one
or more future Trust Agreements.
Except as specifically amended by this Agreement the Original Agreement
shall continue in full force and effect in accordance with its existing terms.
Any reference to this Agreement prior to the date hereof shall refer to the
Original Agreement.
A G R E E M E N T S
- - - - - - - - - -
In consideration of the premises, the mutual agreements contained
herein and the reduction of Financial Security's premium for the Policies, and
for other consideration, the parties hereto agree as follows:
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ARTICLE I
DEFINITIONS
Section 1.01. Definitions. The following terms shall have the following
respective meanings:
"Aggregate Collateral Value" means, as of any date of
determination, (i) the aggregate outstanding principal amount of all items of
Collateral pledged to the Master Collateral Agent pursuant to Section 2.01
hereof, discounted as set forth on Schedule A hereto less (ii) the collection
discount determined in Section II.B. of the relevant Monthly Statement.
"Aggregate Commingled Account Balance" means, as of any date
of determination, the aggregate amounts as determined in Section I of the
relevant Monthly Statement.
"Authorized Officer" means, (i) with respect to the Bank and
WFAL 2, the President, the Chief Financial Officer, Treasurer or any Vice
President, (ii) with respect to Financial Security, the Chairman of the Board,
the President, the Executive Vice President or any Managing Director, (iii) with
respect to the Master Collateral Agent, any Vice President, Assistant Vice
President or Trust Officer, (iv) with respect to the Collateral Agent or
Trustee, any Vice President or Trust Officer.
"Business Day" means any day that is not (a) a Saturday or
Sunday or (b) a day on which banking institutions in the City of New York or in
the State of California are authorized or obligated by law or executive order to
be closed.
"Clearing Corporation" shall mean a "clearing corporation" (as
defined in Section 8-102(a)(5) of the UCC) with which the Master Collateral
Agent maintains an account and which is used by the Master Collateral Agent to
hold Securities and Securities Entitlement.
"Collateral" has the meaning specified in Section 2.01(c)
hereof.
"Collateral Account" has the meaning specified in Section 3.01
hereof.
"Collateral Schedule" has the meaning specified in Section
7.01 hereof.
"Contract" means any retail installment sales contract and
security agreement, or installment loan agreement and security agreement, which
have been executed by an obligor and pursuant to which such obligor purchased or
financed a motor vehicle, not inconsistent with the criteria set forth on
Schedule A hereto.
"Controlling Party" means Financial Security so long as no
Financial Security Insolvency shall have occurred and no Insurer Default shall
have occurred and be continuing, and, at any other time, the Trustee.
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"Default" means (i) any failure by the Bank or WFAL 2 to
Deliver Collateral as and when required hereunder, (ii) any other material
breach by the Bank or WFAL 2 of its obligations hereunder and failure to cure
such breach within two (2) Business Days after receipt of notice thereof from
the Controlling Party or (iii) any default by the Bank, WFAL 2, WFS or the
Depositor under any Existing Agreement to which it is a party.
"Delivery" means, with respect to Collateral, the
accomplishment of the following:
(i) all "instruments" and "certificated securities" (as such
terms are defined in the UCC)("Possessory Collateral") shall be in bearer form
or registered in the name of the Master Collateral Agent or its nominee or duly
indorsed to the Master Collateral Agent or in blank, and in no case will any
Collateral be registered in the name of the Bank or WFAL 2, payable to the order
of the Bank or WFAL 2 or specially indorsed to the Bank or WFAL 2 (except to the
extent the foregoing have been further specially indorsed by the Bank or WFAL 2
to the Master Collateral Agent or its nominee or in blank);
(ii) all Security Entitlements in certificated Securities
included in the Collateral and held by or for a Clearing Corporation shall be
(A) held by the Clearing Corporation (or its custodian and/or nominee) as
specified in clause (i) above, (B) evidenced by a written or electronic advice
of the book-entry registration of such Securities Entitlement in an account of
the Master Collateral Agent (or its nominee) as such Clearing Corporation
maintained in accordance with the rules of such Clearing Corporation (a
"Clearing Corporation Account"), and (C) the corresponding Security Entitlement
shall be evidenced by written records of the Master Collateral Agent as being
credited to the Collateral Account; and
(iii) as to all Uncertificated Securities included in the
Collateral the Master Collateral Agent shall have received evidence that (A) it
or its nominee is the registered owner on the books of the issuer thereof or (B)
a Clearing Corporation or its nominee is so registered and the corresponding
Security Entitlement is evidenced by written records of the Master Collateral
Agent as being credited to the Collateral Account.
"Depositor" or "Depositors" means (i) WFS Financial Auto
Loans, Inc., in its capacity as depositor under relevant Trust Agreements, and
its successors and assigns in such capacity, and (ii) WFS Receivables
Corporation, in its capacity as depositor under relevant Trust Agreements, and
its successors and assigns in such capacity.
"Eligible Account" means (i) a segregated trust account in the
corporate trust department that is maintained with a depository institution or
trust company the commercial paper or other short-term debt obligations of which
have credit ratings from S&P at least equal to "A-1" and from Moody's equal to
"P-1", which account is fully insured up to applicable limits by the Federal
Deposit Insurance Corporation or (ii) a general ledger account or deposit
account (a) that is maintained at a depository institution or trust company
satisfying the criteria specified in clause (i) above or (b) that otherwise is
maintained at a depository institution acceptable to Financial Security as
evidenced by a letter to such effect from Financial Security to the Master
Collateral Agent.
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"Entitlement Order" shall mean a notification communicated in
accordance with this Agreement by the Controlling Party to the Master Collateral
Agent directing transfer, redemption or other action with respect to a Financial
Asset credited to a Custody Account hereunder.
"Existing Agreements" means the Trust Agreements and any
related Policy, insurance, indemnity and pledge agreement, sub-servicing
agreement, indemnification agreement, Reinvestment Contract and Spread Account
Agreement relating to a Trust to which the Bank, WFS or WFAL is a party.
"Federal Agency Security" means any mortgage-backed security
issued by the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation or guaranteed by the Government National Mortgage
Association.
"Financial Asset" shall mean Collateral which is a security or
an obligation of a Person or a share, participation, or other interest in a
Person or in property or an enterprise of a Person which is, or is of a type,
dealt in or traded on financial markets, or which is recognized in any area in
which it is issued or dealt in as a medium for investment. As the context
requires, references to "Financial Asset" herein shall mean the Financial Asset
itself or the means by which the interest of a Person holding an interest
therein is evidenced, including a Security Certificate or Uncertificated
Security or a Security Entitlement.
"FSA Notice" has the meaning set forth in Section 3.05 hereof.
"Insurer Default" has the meaning set forth in the latest
Indenture referenced in the relevant Trust Agreement.
"Insurer Insolvency" has the meaning set forth in the latest
Indenture referenced in the relevant Trust Agreement.
"Lien" means, as applied to the property or assets (or the
income, proceeds, products, rents or profits therefrom) of any Person, in each
case whether the same is consensual or nonconsensual or arises by contract,
operation of law, legal process or otherwise: (a) any mortgage, lien, pledge,
attachment, charge, lease, conditional sale or other title retention agreement,
or other security interest or encumbrance of any kind; or (b) any arrangement,
express or implied, under which such property or assets (and/or such income,
proceeds, products, rents or profits) are transferred, sequestered or otherwise
identified for the purpose of subjecting or making available the same for
payment of debt or performance of any other obligation in priority to the
payment of the general, unsecured creditors of such Person.
"Master Collateral Agent" means, initially, Bankers Trust
Company of California, N.A., including its successors and assigns, in its
capacity as collateral agent on behalf of the Trustee, the Collateral Agent and
Financial Security, or any successor which shall have become the Master
Collateral Agent pursuant to Section 4.05 hereof, and thereafter "Master
Collateral Agent" shall mean such successor.
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"Master RIC Reimbursement Agreement" means, the Amended and
Restated Master RIC Reimbursement Agreement dated as of the date hereof among
the Bank, WFAL 2 and Financial Security.
"Master Secured Obligations" means, on any date, (i) the
respective obligations of the Bank and, WFAL 2 set forth in Sections 2.01(a) and
2.01(b) hereof, and (ii) all costs, expenses, attorney's fees and disbursements
and other amounts expended or incurred by the Trustee, the Master Collateral
Agent, or Financial Security in connection with the protection or preservation
of any Collateral and the enforcement of the rights and remedies of the Trustee,
the Master Collateral Agent or Financial Security under this Agreement.
"Monthly Statement" means the Monthly Collateral Statement of
the Bank and WFAL 2 in the form of Schedule B hereto Delivered pursuant to
Section 3.02(b) hereof.
"Mortgage Loan" means any single-family or multi-family
mortgage loan, representing a first or second lien on residential mortgaged
property, not inconsistent with the criteria set forth on Schedule A hereto.
"Opinion of Counsel" means a written opinion of counsel
acceptable, as to form, substance and issuing counsel (which may be counsel to
the Bank and WFAL 2), to the Controlling Party and the Master Collateral Agent.
"Person" means any individual, sole proprietorship, joint
stock company, unincorporated association, joint venture, corporation,
partnership, business or owner trust, government, governmental department or
agency or any other entity whatsoever.
"Policies" means financial guaranty insurance policies in
respect of the Trusts (including, in each case, any endorsements thereto) issued
by Financial Security.
"Securities Intermediary" shall have the meaning set forth in
Section 8-102(a)(14) of the UCC.
"Security" shall mean an obligation of an issuer or a share,
participation, or other interest in an issuer or in property or an enterprise or
an issuer which is represented by a Security Certificate in bearer or registered
form, or an Uncertificated Security, the transfer of which may be registered
upon books maintained for that purpose by or on behalf of the issuer, or which
is one of a class or series or by its terms is divisible into class or series of
shares, participations, interests, or obligations and which is, or is of a type,
dealt in or traded on securities exchanges or securities markets.
"Security Entitlement" shall mean the rights and property
interest of an Entitlement Holder with respect to Financial Assets.
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<PAGE> 10
"Security Interests" means the Liens on the Collateral granted
to the Master Collateral Agent under this Agreement to secure the Master Secured
Obligations.
"Servicer" means Western Financial Savings Bank, F.S.B.
(including its successors), as servicer under the Servicing Agreement.
"Servicing Agreement" means the Servicing Agreement dated as
of September 30, 1993 between the Servicer and the Master Collateral Agent, with
the Controlling Party as a third party beneficiary thereof, as such agreement
may be amended from time to time in accordance with the terms thereof.
"Termination Date" means the date which is the earlier of (A)
the latest of (i) the date on which all Reinvestment Contracts shall have
terminated and all amounts owing by the Bank, WFAL 2 and each Depositor to the
relevant Trust, Financial Security and the Trustee shall have been paid in full,
(ii) the date on which Financial Security shall have received full payment and
performance by the Bank, WFAL 2 and WFAL pursuant to the Existing Agreements,
(iii) the latest date on which any payment received by Financial Security
pursuant to the Existing Agreements could be avoided in whole or in part as a
preference payment under the United States Bankruptcy Code or any similar
federal or state law relating to insolvency, bankruptcy, rehabilitation,
liquidation or reorganization, or (B) the date on which no amounts in any
accounts under Trust Agreements or Spread Account Agreements are invested in
Reinvestment Contracts or general ledger accounts at the Bank or are otherwise
commingled with funds of the Bank, or (C) any date mutually agreed by the Bank,
WFAL 2 and the Controlling Party.
"Trust Agreements" mean the trust agreements pursuant to which
the Trusts are constituted, as amended from time to time in accordance with
their terms.
"Trusts" means the grantor trusts or business trusts created
in respective automobile installment sale contract securitization transactions
established prior to the date hereof or from time to time hereafter by the Bank
and its affiliates whose certificates of beneficial interest or other securities
have the benefit of Policies.
"Uncertificated Security" shall mean a Security that is not
represented by a certificate.
"Uniform Commercial Code" or "UCC" means the Uniform
Commercial Code as in effect in the State of California or other applicable
jurisdiction.
"WFS Sale and Servicing Agreement" means the Sale and
Servicing Agreement dated as of the date hereof between WFS Financial Inc. and
WFAL 2.
Section 1.02. Rules of Interpretation. The terms "hereof," "herein" or
"hereunder," unless otherwise modified by more specific reference, shall refer
to this Agreement in its entirety. Unless otherwise indicated in context, the
terms "Article," "Section," "Exhibit" or "Annex" shall refer to an Article or
Section of, or Exhibit or Annex to, this Agreement. The
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definition of a term shall include the singular, the plural, the past, the
present, the future, the active and the passive forms of such term.
ARTICLE II
THE COLLATERAL
Section 2.01. Security Interests.
(a) In order to secure the full and punctual payment of all
amounts when due by the Bank or WFAL 2 under, and the performance by the Bank
and WFAL 2 of all of their other obligations pursuant to, the Reinvestment
Contracts and the Master RIC Reimbursement Agreement from time to time in
accordance with the terms thereof, the Bank hereby pledges, assigns, transfers
and conveys all of its right, title and interest in and to all of the
securities, property and assets set forth in Section 2.01(c) hereof (the
"Collateral") to the Master Collateral Agent on behalf of, and for the benefit
of, the Trustee, the Collateral Agent and Financial Security. The Security
Interests granted to the Master Collateral Agent, the Trustee, each Depositor,
the Collateral Agent and Financial Security shall be pari passu in all respects.
(b) In order to secure the full and punctual payment of all
amounts when due by WFAL 2 or the Bank under, and the performance by WFAL 2 and
the Bank of all of their other obligations pursuant to, the Reinvestment
Contracts and the Master RIC Reimbursement Agreement from time to time in
accordance with the terms thereof, WFAL 2 hereby pledges, assigns, transfers and
conveys all of its right, title and interest in and to all of the securities,
property and assets set forth in Section 2.01(c) hereof (the "Collateral") to
the Master Collateral Agent on behalf of, and for the benefit of, the Trustee,
the Collateral Agent and Financial Security. The Security Interests granted to
the Master Collateral Agent, the Trustee, each Depositor, the Collateral Agent
and Financial Security shall be pari passu in all respects.
(c) The "Collateral" shall at any time consist of (i) the
assets, property and Financial Assets set forth on the most recent Schedule B
hereto and any other assets, property and Financial Assets, and proceeds
thereof, approved in writing by the Controlling Party (which may be by amendment
of Schedule A or B by mutual agreement of the Bank, WFAL 2 and the Controlling
Party), and (ii) the WFS Sale and Servicing Agreement, including:
(i) the related documentation, and all proceeds, income
and profits thereon, and all interest, principal and other payments and
distributions with respect thereto;
(ii) all rights and remedies for the enforcement of
payment of any principal, interest and proceeds;
(iii) any collateral securing any Collateral including,
without limitation, all rights and remedies of a beneficiary of such
security to foreclose upon,
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repossess and sell the related collateral, or all rights and remedies
assertable against any Person other than the related obligor under a
guaranty, warranty or otherwise in connection with any Collateral;
(iv) insurance proceeds, if any, and any other proceeds
received in connection with the disposition, repossession, foreclosure,
destruction or condemnation of, or impairment of title to, any
Collateral;
(v) any cash, securities or other property received on
account of the Collateral from any liquidation thereof or any
adjustment of debt of the obligors and any portion of the Collateral
which may be distributed in kind in connection with any such
liquidation or adjustment of debt of the obligors;
(vi) the Collateral Account and each other account, if
any, established by or with the Master Collateral Agent hereunder; and
(vii) all distributions, revenues, products,
substitutions, benefits, profits and proceeds, in whatever form, of any
of the foregoing.
(d) Each of the Bank and WFAL 2 agrees that it will not (i)
use any adverse selection method in including Collateral hereunder, and (ii)
include any Collateral which would be charged off in accordance with its normal
accounting practices. If any Collateral Delivered to the Master Collateral Agent
hereunder shall be or become subject to charge off by the Bank or WFAL 2, the
Bank or WFAL 2, as the case may be, will promptly substitute new Collateral
therefor to the extent necessary to satisfy the requirements of Section 3.02
hereof.
(e) In order to effectuate the provisions and purposes of this
Agreement, including to effectuate the collateral assignment to the Master
Collateral Agent, as agent for the Trustee and the Collateral Agent, pursuant to
this Section 2.01, each of the Bank and WFAL 2 hereby Delivers, and in the
future agrees to Deliver, to the Master Collateral Agent, all items of
Collateral pledged by it hereunder in which a security interest must be
perfected by possession, and the Master Collateral Agent hereby agrees to accept
such Collateral on the terms set forth in this Agreement. The Bank and WFAL 2,
and each of them, hereby agree to take all additional steps that may be
necessary or reasonably requested by the Master Collateral Agent or the
Controlling Party from time to time for the perfection, preservation,
protection, maintenance or continuation of such transfers, assignments and
security interests including, but not limited to, the execution, recording,
registering and filing of any appropriate collateral assignments, security
interests and Uniform Commercial Code financing statements and the making of
notations on records or documents of title.
(f) The Security Interests are granted as security only and
shall not (i) transfer or in any way affect or modify, or relieve the Bank or
WFAL 2, or any of them, from any obligation to perform or satisfy, any term,
covenant, condition or agreement to be performed or satisfied by them or any of
them under or in connection with this Agreement, the Servicing Agreement or any
Existing Agreement to which it is a party or (ii) impose any obligation on
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Financial Security, the Trustee or the Master Collateral Agent to perform or
observe any such term, covenant, condition or agreement or impose any liability
on Financial Security, the Trustee or the Master Collateral Agent for any act or
omission on its part relative thereto or for any breach of any representation or
warranty on its part contained therein or made in connection therewith.
Section 2.02. Priority. The Bank and WFAL 2, and each of them, intend
the Security Interests granted hereunder to be prior to all other Liens in
respect of the Collateral, and the Bank and WFAL 2, and each of them, shall take
all actions necessary to obtain and maintain, in favor of the Master Collateral
Agent, a first lien on and a first priority, perfected security interest in the
Collateral other than in general intangibles and rights under insurance policies
not perfected by the means used to perfect the Security Interest in the items of
Collateral set forth on Schedule A hereto. The Master Collateral Agent shall
have all of the rights, remedies and recourse with respect to the Collateral
afforded a secured party under the Uniform Commercial Code of the State of
California and all other applicable law, in addition to, and not in limitation
of, the other rights, remedies and recourse granted to the Master Collateral
Agent by this Agreement, the Servicing Agreement, any Existing Agreement or any
other law relating to the creation and perfection of liens on, and security
interests in, the Collateral.
Section 2.03. Maintenance of Collateral.
(a) Safekeeping. The Master Collateral Agent agrees to
maintain the Collateral received by it and all records and documents relating
thereto at the office of the Master Collateral Agent or such other address as
may be approved by the Controlling Party. The Master Collateral Agent shall keep
or cause to be kept all Collateral and related documentation in its possession
separate and apart from all other property that it is holding in its possession
and from its own general assets and shall maintain accurate records pertaining
to the Collateral and the Collateral Account in such a manner as shall enable
the Master Collateral Agent and the Controlling Party to verify the accuracy of
such record-keeping. The Master Collateral Agent's books and records shall at
all times show that the Collateral is held by the Master Collateral Agent as
agent for the Trustee and the Collateral Agent and is not the property of the
Master Collateral Agent. The Master Collateral Agent will promptly report to
Financial Security, the Trustee, the Bank and WFAL 2 any failure on its part to
hold the Collateral as provided in this Section 2.03(a) and will promptly take
appropriate action to remedy any such failure.
(b) Access. The Master Collateral Agent shall permit Financial
Security or the Trustee, or their respective duly authorized representatives,
attorneys, auditors or designees, to inspect the Collateral in the possession of
or otherwise under the control of the Master Collateral Agent pursuant hereto at
such reasonable times during normal business hours as Financial Security or the
Trustee may reasonably request with prior written notice. Prior to a Default
such inspection shall be at the expense of Financial Security or the Trustee, as
the case may be, but after a Default such inspection shall be at the expense of
the Bank and WFAL 2.
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(c) Servicing. The Bank and WFAL 2 agree that they shall cause
all Contracts pledged hereunder to be serviced by WFS Financial Inc. pursuant to
the WFS Sale and Servicing Agreement.
(d) Limitations on Investments and Collateral.
(i) Specified Account Funds, Spread Account Funds and
Holding Account Deposited Funds, as such terms are defined in the
Reinvestment Contracts, may be invested in Bank Reinvestment Contracts
and WFAL 2 Reinvestment Contracts subject to the aggregate limitations
and other provisions set forth in Schedule A hereto, which may be
amended from time to time by a writing signed only by Financial
Security, the Bank and WFAL 2.
(e) Liquidity. In order to ensure that WFAL 2 has sufficient
funds to satisfy its repayment obligations pursuant to Section 4 of each
Reinvestment Contract, the Bank hereby agrees to lend WFAL 2 sufficient
immediately available funds in order to enable WFAL 2 timely to perform its
obligations under each such Sections and any other payments obligations due by
WFAL 2 under any Reinvestment Contract, or otherwise to make available, or cause
to be made available, to WFAL 2 immediately available funds for such purpose.
Section 2.04. General Authority. The Bank and WFAL 2, and each of them,
hereby irrevocably appoint each of the Master Collateral Agent and the
Controlling Party its true and lawful attorney, with full power of substitution,
in the name of the Bank, WFAL 2, the Master Collateral Agent, Financial
Security, the Trustee or otherwise, for the sole use and benefit of the Master
Collateral Agent, the Trustee and Financial Security, but at the expense of the
Bank and WFAL 2, to the extent permitted by law, to exercise, at any time while
a Default has occurred and is continuing, all or any of the following powers
with respect to all or any of the Collateral:
(i) to demand, sue for, collect, receive and give
acquittance for any and all monies due or to become due upon or by
virtue thereof,
(ii) to settle, compromise, compound, prosecute or
defend any action or proceeding with respect thereto,
(iii) to sell, transfer, assign or otherwise deal in or
with the same or the proceeds or avails thereof, as fully and
effectually as if the Master Collateral Agent were the absolute owner
thereof, and
(iv) to extend the time of payment of any or all
thereof and to make any allowance and other adjustments with reference
thereto;
provided that the Controlling Party or the Master Collateral Agent (as the case
may be) shall give the Bank and WFAL 2 such prior notice of the time and place
of sale of any of the Collateral as may be required pursuant to Section 6.01
hereof.
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Section 2.05. Termination of Security Interests. On the Termination
Date, the rights, remedies, powers, duties, authority and obligations conferred
upon the Master Collateral Agent, Financial Security and the Trustee pursuant to
this Agreement in respect of the Collateral shall terminate and be of no further
force and effect and all rights, remedies, powers, duties, authority and
obligations of the Master Collateral Agent, Financial Security and the Trustee
with respect to such Collateral shall be automatically released. In addition,
the Trustee, the Master Collateral Agent and Financial Security agree that, upon
request by the Bank and WFAL 2, they, or any of them, shall execute and Deliver
such instruments as the Bank or WFAL 2 may reasonably request to effectuate such
release, and any such instruments so executed and Delivered shall be fully
binding on the Master Collateral Agent, Financial Security and the Trustee.
ARTICLE III
THE COLLATERAL ACCOUNT
Section 3.01. Establishment. On the date of this Agreement, the Master
Collateral Agent shall establish a segregated, non-interest bearing trust
account, which shall be an Eligible Account under the control (as defined in
Article 8-106 of the UCC) of the Controlling Party, designated "Collateral
Account - Bankers Trust Company of California, N.A., as Master Collateral Agent
for Bankers Trust Company, as Trustee and as Collateral Agent (for the benefit
of Financial Security Assurance Inc.)" (the "Collateral Account"). The
Collateral Account shall be established at a banking office, located in the
State of California, of Bankers Trust Company of California, N.A. or another
depository institution acceptable to the Controlling Party. Funds in the
Collateral Account shall not be commingled with any other funds. The Controlling
Party shall have sole signature authority over the Collateral Account, and no
withdrawals of funds in the Collateral Account shall be made except as specified
in this Agreement.
Section 3.02. Delivery and Release of Collateral.
(a) Concurrently with each Delivery or other pledge of
Collateral hereunder, the Bank and WFAL 2 shall furnish to the Master Collateral
Agent, the Trustee and Financial Security an Opinion of Counsel to the effect
that the Master Collateral Agent has a valid, perfected first priority security
interest in such items of Collateral listed in the relevant Collateral Schedule,
and so Delivered or otherwise pledged hereunder, subject to customary
exceptions.
(b) On the tenth (10th) Business Day of each calendar month,
the Bank and WFAL 2 shall Deliver to the Master Collateral Agent, the Trustee
and Financial Security the Monthly Statement, signed by an Authorized Officer
each of the Bank and WFAL 2, certifying the Aggregate Collateral Value of
Collateral Delivered by it to the Master Collateral Agent and held by the Master
Collateral Agent as of the last day of the preceding calendar month and the
Aggregate Commingled Account Balance required to be maintained as of such day.
If the Aggregate Collateral Value so certified is less than the Aggregate
Commingled Account Balance as so certified, either or both of the Bank and WFAL
2 shall, together with such certificate, Deliver additional Collateral in an
amount necessary to make the Aggregate Collateral Value (after giving effect to
such Delivery) at least equal to the Aggregate Commingled Account Balance.
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(c) The Master Collateral Agent may release items of
Collateral (i) to the Servicer in connection with the Servicer's performance of
its duties pursuant to Section 7.02 hereof and (ii) to the Bank and WFAL 2, in
the capacity of each as a pledgor hereunder, in connection with the substitution
of new Collateral against Delivery by the Bank and/or WFAL 2 to the Master
Collateral Agent of substitute Collateral in an amount necessary to make the
Aggregate Collateral Value (after giving effect to such substitution) at least
equal to the Aggregate Collateral Value prior to such substitution.
(d) On any date on which the Master Collateral Agent shall
have received an FSA Notice to the effect that a Default has occurred and is
continuing, and for as long as stated in such FSA Notice, no Collateral shall be
released to the Bank, WFAL 2 or any other Person, except as specified in
Sections 3.03(d) and/or 6.01 hereof.
(e) Pending its maturity or disposition hereunder, all
Collateral consisting of Possessory Collateral shall be held, pending maturity
or disposition, solely by the Master Collateral Agent; all Collateral consisting
of Security Entitlements shall be continuously maintained by the Master
Collateral Agent, pending maturity or disposition hereunder, through continued
book-entry registration of such Collateral as described in clause (ii) of the
definition of "Delivery"; and all Collateral consisting of Uncertificated
Securities shall be maintained pending its maturity or deposition hereunder,
through continued registration of the ownership of such Security as described in
Clause (iii) of the definition of "Delivery".
(f) All Collateral consisting of chattel paper or general
intangibles (including the WFS Sale and Servicing Agreement) shall be duly
perfected by the filing of financing statements with appropriate filing officer,
as set forth in the Opinion of Counsel required to be delivered pursuant to
subsection (a) above.
Section 3.03. Collateral Account Funds.
(a) Payments on the Collateral received by the Servicer shall
be paid over to the Bank or WFAL 2 as pledgor of such Collateral free of the
lien created by this Agreement until the Servicer shall have received an FSA
Notice specifying that a Default has occurred and is continuing. After receipt
of such an FSA Notice, the Servicer shall transfer to the Master Collateral
Agent any moneys received by it on or in respect of the Collateral for deposit
in the Collateral Account.
(b) Following delivery of an FSA Notice, all payments made to
the Master Collateral Agent on or otherwise received by the Master Collateral
Agent in respect of any Collateral shall be deposited on the date of receipt by
the Master Collateral Agent in the Collateral Account. Any income received by
the Master Collateral Agent with respect to the balance from time to time
credited to the Collateral Account, including any interest or capital gains on
investments, shall be deposited in the Collateral Account. All right, title and
interest in and to the funds on deposit from time to time in the Collateral
Account, together with any investments made pursuant to paragraph (c) below,
shall vest in the Master Collateral Agent, shall constitute part of
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the Collateral hereunder and shall not constitute payment of any Master Secured
Obligations until applied as specified herein.
(c) Amounts, if any, on deposit in the Collateral Account
shall be invested and re-invested from time to time in such investments as shall
be specified by instructions (which may include, subject to the other provisions
hereof, general standing instructions) given to the Master Collateral Agent by
the Controlling Party; provided that if the Master Collateral Agent receives an
FSA Notice, the Master Collateral Agent shall, if instructed by the Controlling
Party, liquidate any such investments and apply or cause to be applied the
proceeds thereof to the payment of the Master Secured Obligations in the manner
specified in Section 3.03(c) hereof. If no such instruction with respect to
investment of any portion of the Collateral Account is received by the Master
Collateral Agent, no investment shall be made of such portion and the Master
Collateral Agent shall not be liable for any resulting absence of income.
(d) On each Business Day specified by the Controlling Party
after delivery of an FSA Notice, the Master Collateral Agent shall withdraw from
the Collateral Account an amount (up to the balance therein) that is sufficient
to pay to Financial Security or the Trustee all amounts constituting Master
Secured Obligations owing to Financial Security or the Trustee, as the case may
be (such payments to be applied to reduce the Master Secured Obligations in such
manner as the Controlling Party shall specify). All amounts or investments, if
any, remaining in the Collateral Account on any date after giving effect to the
distribution required to be made on such date pursuant to this paragraph shall
remain on deposit in the Collateral Account until required or permitted to be
withdrawn therefrom pursuant to the provisions of this Section.
Section 3.04. General Provisions Regarding the Accounts.
(a) Promptly upon the establishment (initially or upon any
relocation) of the Collateral Account hereunder, the Master Collateral Agent
shall advise the Bank, WFAL 2, Financial Security and the Trustee in writing of
the name and address of the depository institution at which such Collateral
Account was established (if not Bankers Trust Company of California, N.A. or any
successor Master Collateral Agent in its commercial banking capacity), the name
of the officer of the depository institution who is responsible for overseeing
the Collateral Account, the Collateral Account number and the individuals whose
names appear on the signature cards for the Collateral Account. The Bank and
WFAL 2 shall cause such depository institution to execute a written agreement,
in form and substance satisfactory to the Controlling Party, waiving, in each
case to the extent permitted under applicable law, (i) any banker's or other
statutory or similar Lien, and (ii) any right of setoff or other similar right
under applicable law with respect to the Collateral Account and agreeing to
notify the Bank, WFAL 2, the Master Collateral Agent, Financial Security and the
Trustee of any charge or claim against or with respect to the Collateral
Account. The Master Collateral Agent shall give the Bank, WFAL 2, Financial
Security and the Trustee at least ten (10) Business Days' prior written notice
of any change in the location of the Collateral Account or in any related
account information. Anything herein to the contrary notwithstanding, unless
otherwise consented to by the Controlling Party in writing, the Master
Collateral Agent shall have no right to change the location of the Collateral
Account.
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(b) If at any time the Collateral Account ceases to be an
Eligible Account, the Master Collateral Agent shall establish, in accordance
with paragraph (a) of this Section, a successor Collateral Account thereto which
shall be an Eligible Account at Bankers Trust Company of California, N.A. or at
another depository institution acceptable to the Controlling Party.
(c) Any investment of funds in the Collateral Account shall be
made in accordance with the provisions of Section 3.02(c) hereof in the name of
the Master Collateral Agent (in its capacity as such). Subject to the other
provisions hereof, the Master Collateral Agent shall have sole control over each
such investment and the income thereon, and any certificate or other instrument
evidencing any such investment, if any, shall be delivered directly to the
Master Collateral Agent, together with each document of transfer, if any,
necessary to transfer title to such investment to the Master Collateral Agent in
a manner which complies with Article II and this Section.
(d) Subject to Section 4.03 hereof, the Master Collateral
Agent shall not be liable by reason of any insufficiency in the Collateral
Account resulting from any loss on any investment included therein except for
losses attributable to the Master Collateral Agent's failure to make payments on
investments as to which the Master Collateral Agent, in its commercial capacity,
is obligated.
Section 3.05. FSA Notices. The Controlling Party may at any time give
notice (an "FSA Notice") to the Master Collateral Agent stating that (i) a
Default has occurred and is continuing or (ii) the Controlling Party has,
pursuant to any Existing Agreement, terminated the status of a Reinvestment
Contract as an eligible investment under a Trust Agreement or other Existing
Agreement.
Section 3.06. Representations by the Bank and WFAL 2. The Bank and WFAL
2 hereby jointly and severally represent and warrant to the other parties
hereto, as of the date hereof and as of the Delivery of any Collateral
hereunder, as follows:
(a) Immediately prior to Delivery or other pledge hereunder of
any item of Collateral, the Bank or WFAL 2 shall have owned such Collateral free
and clear of all liens, adverse claims or rights of others of any nature
whatsoever.
(b) Upon Delivery or other pledge of Collateral hereunder, the
Master Collateral Agent will have a valid perfected first priority security
interest in such Collateral.
ARTICLE IV
THE MASTER COLLATERAL AGENT
Section 4.01. Appointment and Powers. (a) Subject to the terms and
conditions hereof, the Collateral Agent, the Trustee and each Depositor in their
capacities as pledgees hereunder hereby appoint Bankers Trust Company of
California, N.A. as the Master Collateral
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Agent with respect to the Collateral, and Bankers Trust Company of California,
N.A. hereby accepts such appointment and agrees to act as Master Collateral
Agent hereunder. The Collateral Agent, the Trustee and each Depositor in their
capacities as pledgees hereunder hereby authorize the Master Collateral Agent to
take such action on their behalf, and to exercise such rights, remedies, powers
and privileges hereunder as the Controlling Party may direct and as are
specifically authorized to be exercised by the Master Collateral Agent by the
terms hereof, together with such actions, rights, remedies, powers and
privileges as are reasonably incidental thereto. The Master Collateral Agent
shall execute the Servicing Agreement and shall act upon and in compliance with
the written instructions of the Controlling Party delivered pursuant to this
Agreement promptly following receipt of such written instructions.
(b) The Master Collateral Agent is, and shall at all times
during the term of this Agreement be, a Securities Intermediary for Financial
Security.
(c) The Master Collateral Agent is eligible to maintain, and
does maintain, and will continue to be eligible to maintain and will maintain,
one or more accounts in its name (or the name of a nominee) with each Clearing
Corporation through which Securities or Security Entitlements constituting
Collateral are held.
Section 4.02. Performance of Duties. The Master Collateral Agent may
perform any of its duties hereunder by or through agents and employees, shall be
entitled to retain counsel and act in reliance upon the written advice of such
counsel concerning all matters pertaining to the agencies hereby created or its
duties hereunder and shall not be liable for actions taken, or omitted to be
taken, in good faith reliance upon the opinion of counsel selected by it. The
duties of the Master Collateral Agent shall be mechanical and administrative in
nature. The Master Collateral Agent shall not have by reason of this Agreement a
fiduciary relationship. Nothing in this Agreement, express or implied, is
intended to or shall be construed as to impose upon the Master Collateral Agent
any obligations in respect of this Agreement except as expressly set forth
herein.
Section 4.03. Limitation on Liability; Indemnification. Neither the
Master Collateral Agent nor any of its directors, officers or employees, shall
be liable for any action taken or omitted to be taken by it or them hereunder,
or in connection herewith, except that the Master Collateral Agent shall be
liable for its own gross negligence or willful misconduct; nor shall the Master
Collateral Agent be responsible for the validity, effectiveness, value,
sufficiency or enforceability against the Bank or WFAL 2 of this Agreement or
any of the Collateral (or any part thereof).
The Bank and WFAL 2 hereby jointly and severally agree to
indemnify and hold the Master Collateral Agent harmless from and against all
damage, liability and expense (including reasonable attorneys' fees) arising out
of or in connection with this Agreement, except to the extent such damage,
liability or expense arises out of the Master Collateral Agent's negligence,
willful misconduct or breach of the obligations imposed hereby on the Master
Collateral Agent.
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Section 4.04. Reliance upon Documents. Subject to the provisions of
Section 4.08 hereof, in the absence of gross negligence or willful misconduct on
its part, the Master Collateral Agent shall be entitled to rely on any
communication, instrument, paper or other document reasonably believed by it to
be genuine and correct and to have been signed or sent by the proper Person and
shall have no liability in acting, or omitting to act, where such action or
omission to act is in reasonable reliance upon any statement or opinion
contained in any such document or instrument.
Section 4.05. Successor Master Collateral Agent. The Master Collateral
Agent acting hereunder at any time may resign by giving not less than ninety
(90) days' prior written notice in writing to the Bank, WFAL 2, the Trustee and
Financial Security. If the Master Collateral Agent is also a Trustee and, as
such, determines that it has a conflicting interest on account of its acting as
Master Collateral Agent, the Master Collateral Agent shall eliminate such
conflicting interest by resigning as Master Collateral Agent hereunder rather
than resigning as such Trustee. The Controlling Party shall appoint a successor
to the Master Collateral Agent upon any such resignation by an instrument of
substitution complying with the requirements of applicable law, or, in the
absence of any such requirements, without formality other than appointment and
designation in writing, a copy of which instrument or writing shall be sent to
the Bank and WFAL 2; provided, however, that the validity of any such
appointment shall not be impaired or affected by any failure to give any such
notice to the Bank and WFAL 2 or by any defect therein. Notwithstanding the
foregoing, prior to the receipt by the Bank and WFAL 2 of an FSA Notice, such
appointment shall be subject to the consent of the Bank and WFAL 2, which
consent shall not be unreasonably withheld. Upon the making and acceptance of
such appointment, the execution and delivery by such successor Master Collateral
Agent of a ratifying instrument pursuant to which such successor Master
Collateral Agent agrees to assume the duties and obligations imposed on the
Master Collateral Agent by the terms of this Agreement, and the delivery to such
successor Master Collateral Agent of the Collateral and related documents then
held by the retiring Master Collateral Agent, such successor Master Collateral
Agent shall thereupon succeed to and become vested with all the estate, rights,
powers, remedies, privileges, immunities, indemnities, duties and obligations
hereby granted to or conferred or imposed upon the Master Collateral Agent named
herein, and one such appointment and designation shall not exhaust the right to
appoint and designate further successor Master Collateral Agents hereunder. No
Master Collateral Agent shall be discharged from its duties or obligations
hereunder until the Collateral and related documents then held by such Master
Collateral Agent shall have been transferred and delivered to the successor
Master Collateral Agent and such retiring Master Collateral Agent shall have
executed and delivered to the successor Master Collateral Agent appropriate
instruments establishing the successor Master Collateral Agent as the record
holder of all liens and security interests in favor of the Trustee and the
Collateral Agent in the Collateral and transferring to such successor Master
Collateral Agent all power given pursuant to this Agreement to act as
attorney-in-fact of the Bank and WFAL 2, and each of them, for purposes of this
Agreement. Each such successor Master Collateral Agent shall provide the Bank,
WFAL 2 and Financial Security with its address, and its telephone and telecopier
numbers, to be used for purposes of Section 7.05 hereof, in a notice complying
with the terms of said Section.
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Section 4.06. Representations and Warranties of Bankers Trust Company
of California, N.A.. Bankers Trust Company of California, N.A. represents and
warrants to the Bank, WFAL 2, the Trustee and Financial Security as follows:
(a) Bankers Trust Company of California, N.A. is a national
banking association, duly organized, validly existing and in good standing.
(b) Bankers Trust Company of California, N.A. has full power,
authority and legal right to execute, deliver and perform this Agreement and the
Servicing Agreement and has taken all necessary action to authorize the
execution, delivery and performance by it of this Agreement and the Servicing
Agreement.
(c) This Agreement and the Servicing Agreement constitute
valid and binding obligations of Bankers Trust Company of California, N.A. in
its capacity as Master Collateral Agent enforceable against it in accordance
with their respective terms.
(d) The execution and delivery by Bankers Trust Company of
California, N.A. of this Agreement and the Servicing Agreement and the
performance by it of its obligations hereunder and thereunder, will not violate
any law, rule or regulation or any agreement, order or decree binding on it or
its properties.
Section 4.07. Waiver of Setoffs. The Master Collateral Agent hereby
expressly waives any and all rights of setoff that the Master Collateral Agent
may otherwise at any time have under applicable law with respect to the
Collateral Account and agrees that amounts in the Collateral Account shall at
all times be held and applied solely in accordance with the provisions of this
Agreement.
Section 4.08. Control by the Controlling Party. The Master Collateral
Agent shall comply with notices and instructions given by the Bank or WFAL 2
only if expressly contemplated hereby or if accompanied by the written consent
of the Controlling Party, except that if any Default shall have occurred and be
continuing, the Master Collateral Agent shall act upon and comply with notices
and instructions given by the Controlling Party alone in the place and stead of
the Bank or WFAL 2. In the absence of any written communication by the
Controlling Party to the Master Collateral Agent to the effect that a Default
has occurred and is continuing, the Master Collateral Agent may assume that no
Default has occurred and is continuing. The Master Collateral Agent shall have
no duty to verify whether or not a Default has occurred or is continuing or the
facts stated in any FSA Notice. Any written communication by the Controlling
Party to the Master Collateral Agent specifying the amount of any obligations
owing to Financial Security or the Trustee shall be conclusive evidence of such
amount, notwithstanding any notice to the contrary received by the Master
Collateral Agent from the Bank, WFAL 2 or any other Person.
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ARTICLE V
COVENANTS OF THE BANK AND WFAL 2
Section 5.01. Preservation of Collateral. Subject to the rights, powers
and authorities granted to the Master Collateral Agent, Financial Security, and
the Trustee in this Agreement, the Bank and WFAL 2 shall take such action as is
necessary and proper with respect to the Collateral in order to preserve,
maintain and service such Collateral and to cause (subject to the rights of the
Controlling Party) the Master Collateral Agent to perform its obligations with
respect to such Collateral as provided herein. The Bank and WFAL 2, and each of
them, will do, execute, acknowledge and deliver, or cause to be done, executed,
acknowledged and delivered, such instruments of transfer or take such other
steps or actions as may be necessary, or required by the Controlling Party, to
perfect the Security Interests granted hereunder in (a) prior to delivery of an
FSA Notice to the Master Collateral Agent, the items of Collateral referenced in
Schedule A hereto and (b) after delivery of an FSA Notice to the Master
Collateral Agent, all Collateral, to ensure that such Security Interests rank
prior to all other Liens and to preserve the priority of such Security Interests
and the validity and enforceability thereof. Upon any Delivery or substitution
of Collateral, the Bank and/or WFAL 2, as pledgor, shall be obligated to create
for the benefit of the Master Collateral Agent a valid first Lien on, and valid
and perfected, first priority security interest in, (a) prior to delivery of an
FSA Notice to the Master Collateral Agent, the items of Collateral referenced in
Schedule A hereto and (b) after delivery of an FSA Notice to the Master
Collateral Agent, all Collateral so delivered and to deliver such Collateral to
the Master Collateral Agent, free and clear of any other Lien, together with
satisfactory assurances thereof, and to pay any reasonable costs incurred by the
Controlling Party or the Master Collateral Agent (including its agents) or
otherwise in connection with such Delivery.
Section 5.02. Opinions as to Collateral. On the date of delivery of the
Monthly Statement following each January and July, commencing with such date
following January 1999, the Bank and WFAL 2 shall, at their own cost and
expense, furnish to Financial Security, the Trustee and the Master Collateral
Agent an Opinion of Counsel either stating that, in the opinion of such counsel,
(a) such actions have been taken as are necessary under California law to
perfect, maintain and protect the lien and security interest of the Master
Collateral Agent with respect to the items of Collateral set forth on Schedule A
that have been granted to the Master Collateral Agent as of the last Business
Day of the relevant January or July under California law (and other applicable
law) against all creditors of and purchasers from the Bank or WFAL 2, as the
case may be, and reciting the details of such action, or (b) no action is
necessary to maintain such perfected lien and security interest. Such Opinion of
Counsel shall describe each execution and filing of any documents and
instruments and such other actions as will, in the opinion of such counsel, be
required to perfect, maintain and protect the lien and security interest of the
Master Collateral Agent, on behalf of the Trustee and the Collateral Agent with
respect to such Collateral under California law (and other applicable law)
against all creditors of and purchasers from the Bank or WFAL 2, as the case may
be, for a period, specified in such Opinion, continuing until a date not earlier
than eighteen months from the date of such Opinion.
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Section 5.03. Notices. In the event the Bank or WFAL 2 acquires
knowledge of the occurrence and continuance of any Default, the Bank or WFAL 2,
as the case may be, shall promptly give notice thereof to the Master Collateral
Agent, the Trustee and Financial Security.
Section 5.04. Waiver of Stay or Extension Laws; Marshalling of Assets.
The Bank and WFAL 2 covenant, to the fullest extent permitted by applicable law,
that they, and each of them, will not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any appraisement,
valuation, stay, extension or redemption law wherever enacted, now or at any
time hereafter in force, in order to prevent or hinder the enforcement of this
Agreement or any sale of the Collateral or any part thereof in accordance with
this Agreement or the possession thereof by any purchaser at any sale, pursuant
to and in accordance with Section 6.01 hereof; and the Bank and WFAL 2, to the
fullest extent permitted by applicable law, for themselves and all who may claim
under them, or any of them, hereby waive the benefit of all such laws, and
covenant that they will not hinder, delay or impede the execution of any power
herein granted to the Master Collateral Agent, but will suffer and permit the
execution of every such power as though no such law had been enacted. The Bank
and WFAL 2, for themselves and all who may claim under them, waive, to the
fullest extent permitted by applicable law, all right to have the Collateral
marshalled upon any foreclosure or other disposition thereof.
Section 5.05. Noninterference, etc.. The Bank and WFAL 2 shall not take
any action, or fail to take any action, if such action or failure to take action
will interfere with the enforcement of any rights under this Agreement, the
Servicing Agreement or the Existing Agreements.
Section 5.06. Changes. Neither the Bank nor WFAL 2 shall change its
name unless it shall have given Financial Security, the Trustee and the Master
Collateral Agent at least sixty (60) days' prior written notice thereof. The
Bank or WFAL 2, as the case may be, shall give Financial Security, the Trustee
and the Master Collateral Agent at least sixty (60) days' prior written notice
of any relocation of its principal executive office. If the Bank or WFAL 2
relocates (i) its principal executive office or principal place of business from
that set forth in Section 8.05 hereof or (ii) the locations where it keeps or
holds any Collateral or any records relating thereto from that set forth in
Section 8.05 hereof, the Bank or WFAL 2, as the case may be, shall give prior
notice thereof to Financial Security, the Trustee and the Master Collateral
Agent.
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ARTICLE VI
REMEDIES UPON DEFAULT
Section 6.01. Rights and Remedies Upon Default.
(a) In addition to and not in limitation of the rights
otherwise provided to the Controlling Party pursuant to this Agreement, to the
fullest extent permitted by applicable law, if a Default has occurred and is
continuing, the Controlling Party in its discretion may, or may direct the
Master Collateral Agent to, exercise the following rights, privileges and
remedies:
(i) Collection of the Collateral. The Master Collateral
Agent shall have the right to collect all proceeds of the Collateral, to pay all
expenses of such collection, including the reasonable expenses and compensation
of the Master Collateral Agent, its agents and attorneys, and to apply the
remainder of the moneys so received as provided herein.
(ii) Sale of Collateral. The Master Collateral Agent may
sell, or cause to be sold, the Collateral or any part thereof or interest
therein, at public auction to the highest bidder for cash or at private sale or
auction with or without demand, advertisement or notice of the date, time or
place of sale or any adjournment thereof, upon such terms as the Controlling
Party may approve, and upon such sale the Master Collateral Agent shall make and
deliver to the purchaser or purchasers an appropriate instrument or instruments
of transfer. The Master Collateral Agent is hereby irrevocably appointed the
true and lawful attorney of the Bank and WFAL 2, and each of them, in its name
and stead, to make all necessary transfers of property thus sold; and for that
purpose it may execute all necessary instruments of transfer, and may substitute
one or more Persons with like power, the Bank and WFAL 2, and each of them,
hereby ratifying and confirming all that its said attorney, or such substitute
or substitutes, shall lawfully do by virtue hereof. Nevertheless, if so
requested by the Master Collateral Agent or any purchaser of the Collateral or
any part thereof, the Bank and WFAL 2, and each of them, shall ratify and
confirm any such sale or transfer by executing and delivering to the Master
Collateral Agent or such purchaser all proper instruments of transfer and
releases as may be designated in any such request. The Master Collateral Agent
may proceed at law or in equity to foreclose the lien of this Agreement against
all or any part of the Collateral and to have the same sold under the judgment
or decree of a court having jurisdiction or as otherwise may be required or
permitted by law. Upon any such sale, whether made under the power of sale
hereby given or by virtue of judicial proceedings, the Controlling Party may bid
for and purchase the Collateral or any part thereof and, upon compliance with
the terms of such sale, may hold, retain, possess or dispose of such property in
its or their own absolute right without accountability. Upon any sale, whether
made under the power of sale hereby given or by virtue of judicial proceedings,
a receipt of the Master Collateral Agent, or of the officer making such sale
under judicial proceedings, shall be a sufficient discharge to the purchaser or
purchasers at such sale for its or their purchase money, and such purchaser or
purchasers shall not be obliged to see to the application thereof. Any such
sale, whether under the power of sale hereby given or by virtue of judicial
proceedings, shall bind the Master Collateral Agent, the Bank and WFAL 2, shall
operate to divest all right, title and interest whatsoever, either at law or in
equity,
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of each of them in and to the property sold, and shall be a perpetual bar, both
at law and in equity, against each of them and their successors and assigns, and
against any and all Persons claiming through or under them.
(iii) Other Actions. The Master Collateral Agent shall
have the right to cause any other action permitted at law or in equity to be
initiated and prosecuted to enforce this Agreement and any rights granted by
virtue of the pledge of the Collateral hereunder.
(b) In the event that the Bank or WFAL 2 shall default in the
performance or observance of any covenant or agreement contained herein, the
Master Collateral Agent shall have the right to take any action or initiate any
proceeding at law or equity available to it to enforce the terms of this
Agreement.
Section 6.02. Restoration of Rights and Remedies. If the Master
Collateral Agent has instituted any proceeding to enforce any right or remedy
under this Agreement, and such proceeding has been discontinued or abandoned for
any reason, or has been determined adversely to such Master Collateral Agent,
then and in every such case the Bank, WFAL 2 and the Master Collateral Agent
shall, subject to any determination in such proceeding, be restored severally
and respectively to their former positions hereunder, and thereafter all rights
and remedies of the Controlling Party shall continue as though no such
proceeding had been instituted.
Section 6.03. No Remedy Exclusive. No right or remedy herein conferred
upon or reserved to the Master Collateral Agent or the Controlling Party is
intended to be exclusive of any other right or remedy, and every right or remedy
shall, to the extent permitted by law, be cumulative and in addition to every
other right and remedy given hereunder or now or hereafter existing at law, in
equity or otherwise, and each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time and as often and in such order as may be deemed expedient by the
Controlling Party, and the exercise of or the beginning of the exercise of any
right or power or remedy shall not be construed to be a waiver of the right to
exercise at the same time or thereafter any other right, power or remedy.
ARTICLE VII
CUSTODY
Section 7.01. Collateral Schedule; Collateral Files. On each date on
which the Bank and/or WFAL 2 pledge items of Collateral to the Master Collateral
Agent hereunder (each such date, a "Pledge Date"), the Bank and WFAL 2 shall
deliver to the Master Collateral Agent, the Trustee and Financial Security a
schedule of Collateral (each, a "Collateral Schedule") which, as to each item of
Collateral, sets forth, to the extent applicable, the obligor's name, the loan
or other identifying number, the interest rate, the original principal balance,
the outstanding principal balance, the origination or issue date, the scheduled
monthly principal and interest payment and the maturity date.
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On each Pledge Date, the Bank and WFAL 2 shall deliver to the
Master Collateral Agent the following documents with respect to each Mortgage
Loan pledged on such date to the Master Collateral Agent:
a. Original mortgage note endorsed or assigned without
recourse to Bankers Trust Company of California, N.A., as
Master Collateral Agent;
b. Original recorded mortgage or deed of trust or certified
copy thereof; and
c. Original assignment, in recordable form, of mortgage or
deed of trust (which may be a blanket assignment for all
Mortgage Loans) to Bankers Trust Company of California,
N.A., as Master Collateral Agent.
The Bank and WFAL 2 jointly and severally represent, warrant
and covenant to the Master Collateral Agent, the Trustee and Financial Security
that, with respect to each Mortgage Loan pledged to the Master Collateral Agent
hereunder, the Bank or WFAL 2 has (i) originals of all assumption and
modification agreements related thereto, (ii) evidence of homeowners insurance
on the related mortgaged property, and (iii) a title insurance policy.
Upon receipt by the Bank and WFAL 2 of an FSA Notice stating
that a Default has occurred and is continuing, the Bank and WFAL 2 shall deliver
to the Master Collateral Agent all documents and instruments specified in the
immediately preceding paragraph and such other documents and instruments with
respect to each Mortgage Loan, Contract, Federal Agency Security or other item
of Collateral pledged hereunder to the Master Collateral Agent in which a
security interest may be perfected by possession.
The documents and instruments delivered in respect of each
Mortgage Loan, Contract, Federal Agency Security or other item of Collateral are
herein referred to as the "Collateral File". The Master Collateral Agent shall
segregate and maintain continuous custody of all documents constituting each
Collateral File in secure and fireproof facilities within the State of
California in accordance with customary standards for such custody.
Section 7.02. Release of Documents to Servicer. In the event that a
specific document relating to an item of Collateral is required to be obtained
by the Servicer because such Collateral has been paid in full and is to be
released by the Servicer to the related obligor or to facilitate enforcement and
collection procedures with respect to such Collateral, the Servicer shall be
entitled to obtain such document by submitting to the Master Collateral Agent
(with copies to the Trustee and Financial Security) a written request therefor,
indicating and confirming that it will hold such document in trust for the
benefit of the Master Collateral Agent until such time as it is released to the
related obligor upon full payment or is otherwise returned to the Master
Collateral Agent. Upon its receipt of an FSA Notice stating that a Default has
occurred and is continuing, the Master Collateral Agent shall not release such
document to the Servicer until it has received the written authorization from
the Controlling Party.
23
<PAGE> 27
Section 7.03. Insurance. The Master Collateral Agent shall, at its own
expense, maintain at all times during the existence of this Agreement and keep
in full force and effect (a) fidelity insurance, (b) theft of documents
insurance and (c) forgery insurance. All such insurance shall be in amounts,
with standard coverage and subject to deductibles, as are customary for
insurance typically maintained by institutions which act as custodian in similar
transactions.
Section 7.04. Master Collateral Agent's Interest in Collateral. By
execution of this Agreement, the Master Collateral Agent warrants and covenants
that it currently does not hold, and during the existence of this Agreement will
not hold, any adverse interest, by way of security or otherwise, in any
Collateral and hereby waives and releases any such interest which it may have or
acquire in the future. The Master Collateral Agent expressly waives (i) any lien
which might arise in connection with unpaid fees or any lien which might arise
in connection with any other claims against any party hereto and (ii) any
possessory lien, claim or right of set-off with respect to any Collateral.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Further Assurances. Each of the Bank, WFAL 2 and the
Master Collateral Agent shall take such action and deliver such instruments, in
addition to the actions and instruments specifically provided for herein, as may
be reasonably requested or required by the Controlling Party to effectuate the
purpose or provisions of this Agreement or to confirm or perfect any transaction
described or contemplated herein. The parties hereto will make any changes
required by the Office of Thrift Supervision if mutually agreed by the parties
hereto and if there is no such mutual agreement, the Bank, WFAL 2 and the
Controlling Party agree to terminate this Agreement.
Section 8.02. Waiver. Any waiver by any party of any provision of this
Agreement or any right, remedy or option hereunder shall only prevent and stop
such party from thereafter enforcing such provision, right, remedy or option if
such waiver is given in writing and only as to the specific instance and for the
specific purpose for which such waiver was given. The failure or refusal of any
party hereto to insist in any one or more instances, or in a course of dealing,
upon the strict performance of any of the terms or provisions of this Agreement
by any party hereto or the partial exercise of any right, remedy or option
hereunder shall not be construed as a waiver or relinquishment of any such term
or provision, but the same shall continue in full force and effect.
Section 8.03. Amendments. This Agreement may be amended, changed,
modified, altered or terminated only by written instrument or written
instruments signed by each of the parties hereto; provided that the consent of
the Master Collateral Agent shall not be withheld or delayed with respect to any
amendment that does not adversely affect the Master Collateral Agent and,
provided further that Schedule A hereto may be amended or replaced as set forth
in
24
<PAGE> 28
Section 2.03 (d) hereof. The Original Agreement, as amended and restated hereby,
shall remain in full force and effect.
Section 8.04. Severability. In the event that any provision of this
Agreement or the application thereof to any party hereto or to any circumstance
or in any jurisdiction governing this Agreement shall, to any extent, be invalid
or unenforceable under any applicable statute, regulation or rule of law, then
such provision shall be deemed inoperative to the extent that it is invalid or
unenforceable and the remainder of this Agreement, and the application of any
such invalid or unenforceable provision to the parties, jurisdictions or
circumstances other than to whom or to which it is held invalid or
unenforceable, shall not be affected thereby nor shall the same affect the
validity or enforceability of any other provision of this Agreement. The parties
hereto further agree that the holding by any court of competent jurisdiction
that any remedy pursued by the Master Collateral Agent or by the Controlling
Party hereunder is unavailable or unenforceable shall not affect in any way the
ability of the Master Collateral Agent or the Controlling Party to pursue any
other remedy available to it.
Section 8.05. Notices. All notices, demands, certificates, requests and
communications hereunder ("notices") shall be in writing and shall be effective
(a) upon receipt when sent through the U.S. mails, registered or certified mail,
return receipt requested, postage prepaid, with such receipt to be effective the
date of delivery indicated on the return receipt, or (b) one Business Day after
delivery to an overnight courier, or (c) on the date personally delivered to an
Authorized Officer of the party to which sent, or (d) on the date transmitted by
legible telecopier transmission with a confirmation of receipt, in all cases
addressed to the recipient as follows:
(i) If to the Bank or the Bank as Servicer:
Western Financial Bank
16485 Laguna Canyon Road
Irvine, California 92618
Attention: Joy Schaefer
Telecopier No.: (949) 727-2306
(ii) If to WFAL:
WFS Financial Auto Loans, Inc.
23 Pasteur
Irvine, California 92618
Attention: Guy DuBose, Esq.
Telecopier No.: (949) 753-3085
25
<PAGE> 29
(iii) If to WFSRC:
WFS Receivables Corporation
6655 West Sahara Avenue
Las Vegas, Nevada 89102
Attention: David A. Guay
Telecopier No.: 702-247-4602
(iv) If to WFAL 2:
WFS Financial Auto Loans 2, Inc.
23 Pasteur
Irvine, California 92618
Attention: Guy DuBose, Esq.
Telecopier No.: (949) 753-3085
(v) If to WFS as Servicer:
WFS Financial Inc.
23 Pasteur
Irvine, California 92618
Attention: Joy Schaefer
Telecopier No.: (949) 727-2306
(vi) If to Financial Security:
Financial Security Assurance Inc.
350 Park Avenue - 13th Floor
New York, New York 10022
Attention: Surveillance Department
Telecopier No. (212) 755-5165
(212) 688-3101
(vii) If to the Trustee or the Collateral Agent:
Bankers Trust Company
Four Albany Street, 10th Floor
New York, New York 10006
Attention: Corporate Trust and Agency Group/
Western Financial Master Collateral
Telecopier No.: (212) 250-6533
26
<PAGE> 30
(viii) If to the Master Collateral Agent:
Bankers Trust Company of California, N.A.
3 Park Plaza, 16th Floor
Irvine, California 92714
Telecopier No.: (949) 253-7577
Attention: Western Financial Collateral
Assignment
A copy of each notice given hereunder to any party hereto shall also be given to
(without duplication) the Controlling Party and the Master Collateral Agent.
Each party hereto may, by notice given in accordance herewith to each of the
other parties hereto, designate any further or different address to which
subsequent notices shall be sent.
Section 8.06. Term of this Agreement. This Agreement shall take effect
on the date hereof and shall continue in effect until the Termination Date. On
the Termination Date, this Agreement shall terminate, all obligations of the
parties hereunder shall cease and terminate and the Collateral, if any, held
hereunder and not to be used or applied in discharge of any obligations of the
Bank or WFAL 2 in respect of the Master Secured Obligations or otherwise under
this Agreement, shall be released to and in favor of the Bank or WFAL 2, as
pledgor as the case may be.
Section 8.07. Assignments; Third-Party Rights; Reinsurance.
(a) This Agreement shall be a continuing obligation of the
Bank and WFAL 2 and shall (i) be binding upon the Bank and WFAL 2 and their
respective successors and assigns, and (ii) inure to the benefit of and be
enforceable by Financial Security, the Trustee and the Master Collateral Agent,
and by their respective successors and assigns. Neither the Bank nor WFAL 2 may
assign this Agreement or delegate any of its duties hereunder, without the prior
written consent of the Controlling Party. Any assignment made in violation of
this Agreement shall be null and void.
(b) Financial Security shall have the right to give
participations in its rights under this Agreement and to enter into contracts of
reinsurance with respect to any Policy issued in connection with any of the
Trusts upon such terms and conditions as Financial Security may in its
discretion determine; provided, however, that no such participation or
reinsurance agreement or arrangement shall relieve Financial Security of its
obligations hereunder or under any such Policy.
(c) In addition, Financial Security shall be entitled to
assign or pledge to any bank or other lender providing liquidity or credit with
respect to any Trust or the obligations of Financial Security in connection
therewith any rights of Financial Security under this Agreement, the Servicing
Agreement or the Existing Agreements or with respect to any real or personal
property or other interests pledged to Financial Security, or in which Financial
Security has a security interest, in connection with any Trust.
27
<PAGE> 31
(d) Except as provided herein with respect to participants
and, nothing in this Agreement shall confer any right, remedy or claim, express
or implied, upon any Person, any owner or other holder of any security or other
investment covered by any Policy, other than Financial Security, against the
Bank or WFAL 2, and all the terms, covenants, conditions, promises and
agreements contained herein shall be for the sole and exclusive benefit of the
parties hereto and their successors and permitted assigns.
Section 8.08. Consent of the Controlling Party. In the event that the
Controlling Party's consent is required under the terms hereof, it is understood
and agreed that, except as otherwise provided expressly herein, the
determination whether to grant or withhold such consent shall be made solely by
the Controlling Party in its sole discretion.
Section 8.09. Trial by Jury Waived. EACH OF THE PARTIES HERETO WAIVES,
TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY
IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT, THE SERVICING AGREEMENT, ANY OF THE EXISTING
AGREEMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREUNDER OR THEREUNDER. EACH
OF THE PARTIES HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY
WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THIS WAIVER.
Section 8.10. Counterparts. This Agreement may be executed in two or
more counterparts by the parties hereto, and each such counterpart shall be
considered an original and all such counterparts shall constitute one and the
same instrument.
Section 8.11. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER
SHALL BE DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
28
<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date set forth on the first page hereof.
WESTERN FINANCIAL BANK
By:
--------------------------------------------------
Name:
Title:
WFS FINANCIAL AUTO LOANS, INC.
By:
--------------------------------------------------
Name:
Title:
WFS FINANCIAL AUTO LOANS 2, INC.
By:
--------------------------------------------------
Name:
Title:
WFS RECEIVABLES CORPORATION
By:
--------------------------------------------------
Name:
Title:
FINANCIAL SECURITY ASSURANCE INC.
By:
--------------------------------------------------
Name:
Title:
BANKERS TRUST COMPANY, as Trustee
and Collateral Agent
By:
--------------------------------------------------
Name:
Title:
29
<PAGE> 33
BANKERS TRUST COMPANY OF CALIFORNIA, N.A.,
as Master Collateral Agent
By:
--------------------------------------------------
Name:
Title:
30
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF WESTCORP
Westran Services Corp., a California Corporation
Westcorp Investments, Inc., a California Corporation
Western Financial Bank, a Federal Savings Bank
WFS Financial Inc, a California Corporation
WFS Financial Auto Inc., a California Corporation
WFS Financial Auto 2, Inc., a California Corporation
WFS Investments, Inc., a California Corporation
WFS Funding, Inc., a California Corporation
WFS Receivables Corporation, a California Corporation
WestFin Insurance Agency, a California Corporation
Westhrift Life Insurance Company, an Arizona Corporation
WestFin Securities Corporation, a California Corporation
Westran Services Corp., a California Corporation
Westcorp Investments, Inc., a California Corporation
Western Reconveyance Company, Inc., a California Corporation
Western Consumer Services, Inc., a California Corporation
The Hammond Company, The Mortgage Bankers, a California Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-04295, No. 33-43898 and No. 333-11039) pertaining to the
Incentive Stock Option Plan of Westcorp, the Westcorp 1991 Incentive Stock
Option Plan and the Westcorp Employee Stock Ownership and Salary Savings Plan,
respectively, and in the related prospectus of our report dated January 18, 2000
except for Notes 12 and 27, as to which the date is March 15, 2000, with respect
to the consolidated financial statements of Westcorp included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 170,645
<INT-BEARING-DEPOSITS> 720
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,433,621
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,181,624
<ALLOWANCE> 64,217
<TOTAL-ASSETS> 4,498,774
<DEPOSITS> 2,212,309
<SHORT-TERM> 951,523
<LIABILITIES-OTHER> 754,896
<LONG-TERM> 199,298
0
0
<COMMON> 26,597
<OTHER-SE> 326,121
<TOTAL-LIABILITIES-AND-EQUITY> 4,498,774
<INTEREST-LOAN> 195,373
<INTEREST-INVEST> 89,281
<INTEREST-OTHER> 12,962
<INTEREST-TOTAL> 297,616
<INTEREST-DEPOSIT> 106,068
<INTEREST-EXPENSE> 152,285
<INTEREST-INCOME-NET> 145,331
<LOAN-LOSSES> 38,400
<SECURITIES-GAINS> 1,308
<EXPENSE-OTHER> 218,461
<INCOME-PRETAX> 98,476
<INCOME-PRE-EXTRAORDINARY> 50,494
<EXTRAORDINARY> 2,132
<CHANGES> 0
<NET-INCOME> 52,626
<EPS-BASIC> 1.99
<EPS-DILUTED> 1.99
<YIELD-ACTUAL> 8.92
<LOANS-NON> 11,279
<LOANS-PAST> 2,810
<LOANS-TROUBLED> 7,923
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 37,660
<CHARGE-OFFS> 21,282
<RECOVERIES> 9,439
<ALLOWANCE-CLOSE> 64,217
<ALLOWANCE-DOMESTIC> 64,217
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
