Back to GetFilings.com
1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 33-13646
WESTCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 51-0308535
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 727-1002
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $1 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2001:
COMMON STOCK, NO PAR VALUE -- $167,766,736
The number of shares outstanding of the issuer's class of common stock as of
February 28, 2001:
COMMON STOCK, NO PAR VALUE -- 31,959,172
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held May 3, 2001 are incorporated by reference into Part III.
================================================================================
2
WESTCORP AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 36
Item 3. Legal Proceedings........................................... 36
Item 4. Submission of Matters to a Vote of Security Holders......... 36
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 37
Item 6. Selected Financial Data..................................... 38
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................ 40
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 63
Item 8. Financial Statements and Supplementary Data................. 66
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 66
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 67
Item 11. Executive Compensation...................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 67
Item 13. Certain Relationships and Related Transactions.............. 67
PART IV
Item 14. Financial Statement Schedules, Exhibits and Reports on Form
8-K....................................................... 68
3
PART I
ITEM 1. BUSINESS
GENERAL
We are a diversified financial services company that provides automobile
lending services through our second tier subsidiary, WFS Financial Inc, also
known as WFS, and retail and commercial banking services through our wholly
owned subsidiary, Western Financial Bank, also known as 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 28 years of experience in the automobile finance industry. We originate,
service and securitize new and pre-owned automobile installment contracts which
are generated through our relationships with over 8,500 franchised and
independent automobile dealers in 42 states. We originated $4.2 billion of
automobile contracts during 2000 and serviced a portfolio of $6.8 billion of
automobile contracts at December 31, 2000.
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% of our contract originations are with borrowers who have
overcome past credit difficulties, otherwise known as non-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 44 offices.
All other operations are centralized.
We fund our purchases of automobile contracts, on an interim basis, with
deposits raised at the Bank which are insured by the Federal Deposit Insurance
Corporation, or the FDIC, and other borrowings raised by the Bank. For long-term
financing, we issue automobile contract asset-backed securities. Since 1985, we
have securitized over $20 billion of automobile contracts in 51 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 secured financings. 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 and by allowing us the ability to
enter the automobile contract asset-backed securities market on an opportunistic
basis.
The following table presents a summary of our automobile contracts
purchased:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
New vehicles...................................... $1,028,394 $ 796,339 $ 547,898
Pre-owned vehicles................................ 3,190,833 2,543,807 2,122,798
---------- ---------- ----------
Total volume................................. $4,219,227 $3,340,146 $2,670,696
========== ========== ==========
Prime contracts................................... $2,900,960 $2,313,573 $1,808,013
Non-prime contracts............................... 1,318,267 1,026,573 862,683
---------- ---------- ----------
Total volume................................. $4,219,227 $3,340,146 $2,670,696
========== ========== ==========
1
4
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
closed 96 underperforming offices and reduced our number of employees, also
known as associates, by approximately 20%.
Since this restructuring, we have:
- realized record net income of $52.6 million in 1999 and $74.7 million in
2000, a 42% increase;
- increased operating cash flows from automobile lending operations from
$16.5 million in 1998, to $102 million in 1999 and to $140 million in
2000;
- increased automobile contract originations from $2.7 billion in 1998, to
$3.3 billion in 1999 and to $4.2 billion in 2000;
- improved the percentage of applications funded to applications received
from 13% in the first quarter of 1998 to 22% in the fourth quarter of
2000;
- lowered automobile lending operating expenses as a percentage of average
serviced contracts from 4.1% in 1998 to 3.1% in 2000; and
- reduced automobile net chargeoffs as a percentage of average serviced
contracts from 3.4% in 1998 to 1.9% in 2000.
BANK OPERATIONS
The Bank's primary focus is to generate diverse, low-cost funds to provide
the liquidity needed to fund automobile contracts while retaining its status as
a qualified thrift lender under applicable federal regulations. 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 obtaining advances from the Federal Home Loan Bank, also known as the
FHLB, selling securities under agreements to repurchase and utilizing other
borrowings.
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, also known as MBS, to generate additional net
interest margin, manage interest rate risk, provide another source of liquidity
through repurchase agreements, support community reinvestment and housing
finance and 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, 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 of our sub-prime mortgage lending operations and sold the remaining $1.0
billion of mortgage servicing rights that we held. During the fourth quarter of
1999, we closed our mortgage 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, 2000, we owned
$507 million in single-family and multi-family mortgage loans that were
originated through previous mortgage lending activities.
2
5
The following table sets forth our loan origination, purchase and sale
activity over the past five years:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Loans originated:
Consumer loans:
Automobile contracts............ $4,219,227 $3,340,146 $2,670,696 $2,285,279 $2,121,689
Other........................... 12,888 15,586 9,645 52,080 35,867
---------- ---------- ---------- ---------- ----------
Total consumer loans....... 4,232,115 3,355,732 2,680,341 2,337,359 2,157,556
Mortgage loans:
Existing property............... 17,382 263,019 2,725,415 2,306,251 1,240,652
Construction.................... 14,718 11,969 18,721 17,078 10,207
Equity.......................... 1,024 1,948 10,262 8,177 8,857
---------- ---------- ---------- ---------- ----------
Total mortgage loans....... 33,124 276,936 2,754,398 2,331,506 1,259,716
Commercial loans:.................. 266,342 237,316 124,259 71,399 8,632
---------- ---------- ---------- ---------- ----------
Total loans originated..... 4,531,581 3,869,984 5,558,998 4,740,264 3,425,904
Loans purchased:
Mortgage loans on existing
property........................ 488 412 450 6,166 213
---------- ---------- ---------- ---------- ----------
Total loans purchased...... 488 412 450 6,166 213
Loans sold:
Automobile contracts............... 660,000 2,500,000 1,885,000 2,190,000 2,090,000
Mortgage loans..................... 3,394 502,157 2,884,073 1,974,423 992,582
---------- ---------- ---------- ---------- ----------
Total loans sold........... 663,394 3,002,157 4,769,073 4,164,423 3,082,582
Principal reductions(1).............. 1,126,520 679,224 670,310 440,607 359,334
---------- ---------- ---------- ---------- ----------
Increase (decrease) in total loans... $2,742,155 $ 189,015 $ 120,065 $ 141,400 $ (15,799)
========== ========== ========== ========== ==========
- ---------------
(1) Includes scheduled payments, prepayments and chargeoffs.
At December 31, 2000, our loan portfolio totaled $4.9 billion, of which 86%
were automobile contracts net of unearned interest, 10% were loans secured by
real property used primarily for residential purposes, 2% were commercial loans
and 2% were other consumer loans. Our loan portfolio totaled $2.2 billion at
December 31, 1999, 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. Consumer
loans serviced for the benefit of others totaled $2.6 billion at December 31,
2000 compared with $3.9 billion at December 31, 1999.
3
6
The following table sets forth the composition of our loan portfolio by
type of loan, including loans held for sale, as of the dates indicated:
DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997
-------------------- -------------------- -------------------- ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Consumer loans:
Automobile contracts... $4,307,267 87.5% $1,518,434 69.6% $ 923,952 46.4% $ 225,947
Other.................. 96,173 2.0 52,483 2.4 57,073 2.8 94,829
---------- ----- ---------- ----- ---------- ----- ----------
4,403,440 89.5 1,570,917 72.0 981,025 49.2 320,776
Less: unearned
interest............... 94,404 1.9 54,248 2.5 48,015 2.4 22,226
---------- ----- ---------- ----- ---------- ----- ----------
Total consumer
loans.............. 4,309,036 87.6 1,516,669 69.5 933,010 46.8 298,550
Mortgage loans:
Existing properties.... 498,963 10.1 589,286 27.0 993,645 49.9 1,529,776
Construction........... 14,784 0.3 23,190 1.1 18,345 0.9 15,835
---------- ----- ---------- ----- ---------- ----- ----------
513,747 10.4 612,476 28.1 1,011,990 50.8 1,545,611
Less: undisbursed loan
proceeds............... 6,316 0.1 14,174 0.7 5,057 0.4 8,657
---------- ----- ---------- ----- ---------- ----- ----------
Total mortgage
loans.............. 507,431 10.3 598,302 27.4 1,006,933 50.4 1,536,954
Commercial loans......... 107,586 2.1 66,927 3.1 52,940 2.8 37,314
---------- ----- ---------- ----- ---------- ----- ----------
Total loans.......... $4,924,053 100.0% $2,181,898 100.0% $1,992,883 100.0% $1,872,818
========== ===== ========== ===== ========== ===== ==========
DECEMBER 31,
------------------------------
1997 1996
------- --------------------
PERCENT AMOUNT PERCENT
------- ---------- -------
(DOLLARS IN THOUSANDS)
Consumer loans:
Automobile contracts... 12.1% $ 242,170 14.0%
Other.................. 5.0 82,568 4.7
----- ---------- -----
17.1 324,738 18.7
Less: unearned
interest............... 1.2 33,769 2.0
----- ---------- -----
Total consumer
loans.............. 15.9 290,969 16.7
Mortgage loans:
Existing properties.... 81.7 1,435,469 82.9
Construction........... 0.8 5,501 0.3
----- ---------- -----
82.5 1,440,970 83.2
Less: undisbursed loan
proceeds............... 0.4 8,201 0.4
----- ---------- -----
Total mortgage
loans.............. 82.1 1,432,769 82.8
Commercial loans......... 2.0 7,680 0.5
----- ---------- -----
Total loans.......... 100.0% $1,731,418 100.0%
===== ========== =====
The following table sets forth the composition of loans serviced for the
benefit of others:
DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998 1997
-------------------- -------------------- -------------------- ----------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
---------- ------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Loans serviced for the
benefit of others:
Automobile contracts... $2,608,017 100.0% $3,890,685 97.0% $3,491,457 68.4% $3,459,272
Mortgage loans......... 120,832 3.0 1,612,103 31.6 4,917,712
---------- ----- ---------- ----- ---------- ----- ----------
Total loans serviced
for the benefit of
others............. $2,608,017 100.0% $4,011,517 100.0% $5,103,560 100.0% $8,376,984
========== ===== ========== ===== ========== ===== ==========
DECEMBER 31,
------------------------------
1997 1996
------- --------------------
PERCENT AMOUNT PERCENT
------- ---------- -------
(DOLLARS IN THOUSANDS)
Loans serviced for the
benefit of others:
Automobile contracts... 41.3% $2,812,637 38.8%
Mortgage loans......... 58.7 4,436,789 61.2
----- ---------- -----
Total loans serviced
for the benefit of
others............. 100.0% $7,249,426 100.0%
===== ========== =====
THE HISTORY OF WESTCORP
Western Thrift & Loan Association, a California-licensed thrift and loan
association, was founded in 1972. In 1973, we were formed as the holding company
for Western Thrift & Loan Association under the name Western Thrift Financial
Corporation. We later changed our name to Westcorp. In 1982, we acquired
Evergreen Savings and Loan Association, a California-licensed savings and loan
association, which became our wholly owned subsidiary. 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, which changed its name to WFS Financial Inc. 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 in the excess spread payable from outstanding securitization
transactions. The Bank also transferred all of the outstanding stock of WFS
Financial Auto Loans, Inc., also known as WFAL, and WFS Financial Auto Loans 2,
Inc., also known as 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.
4
7
On March 2, 2001, we filed a registration statement with the Securities and
Exchange Commission, also known as the SEC to provide our shareholders an
exclusive opportunity to purchase additional shares of stock through a rights
offering. The registration statement has not yet become effective. The number of
shares to be offered and the price per share has not yet been determined. Our
board of directors will make this determination immediately prior to the time at
which the registration statement becomes effective. We expect to raise
approximately $60.0 million in new capital from this transaction.
Ernest S. Rady, the Chairman of the board of directors of Westcorp, has
informed us that he will exercise his rights and that he expects to also
exercise his right to oversubscribe. Mr. Rady is the beneficial owner of
approximately 68% of our common stock.
On March 2, 2001, our 82% owned subsidiary, WFS, filed a registration
statement with the SEC to provide its shareholders an exclusive opportunity to
purchase additional shares of stock through a rights offering. The registration
statement for this offering has not yet become effective. The number of shares
to be offered and the price per share has not yet been determined. The board of
directors of WFS will make this determination immediately prior to the time at
which the registration statement becomes effective. The board of directors of
the Bank has informed us that they intend to exercise the Bank's basic
subscription right and expects to exercise its oversubscription right as part of
this offering. WFS expects that this transaction will provide it with
approximately $100 million in new capital.
The Bank and its subsidiaries are subject to examination and comprehensive
regulation by the Office of Thrift Supervision, also known as the OTS, and the
FDIC. It is further subject to certain regulations of the Board of Governors of
the Federal Reserve System, also known as the 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 $700 billion of loan
and lease originations during 2000. The industry is generally segmented
according to the type of car sold (new versus pre-owned) and the credit
characteristics of the borrower (prime, non-prime or sub-prime). Based upon
industry data, we believe that during 2000, prime, non-prime and sub-prime loan
originations in the United States were $448 billion, $140 billion and $112
billion, respectively. The United States 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 2% market share. Other market participants
include the other captive automobile finance companies of other manufacturers,
banks, credit unions, independent automobile finance companies and other
financial institutions.
Our dealer servicing and underwriting capabilities and systems 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 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 pre-owned 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 our competitors also have
longstanding relationships with automobile dealers and may offer dealers or
their
5
8
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 financing 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 pre-owned
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 markets. 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.
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 of 23%. 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 is 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 35 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 number of applications received
from a dealer, thereby improving the efficiency of our dealer relationships. We
are also seeking to increase contract purchases through new dealer programs
targeting high volume, multiple location dealers. These programs focus on
creating relationships with dealers to achieve higher contract originations and
improving efficiencies. We also originate loans directly from consumers and
purchase loans from other finance companies 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.
6
9
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.
Our key technology systems include our:
- 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;
- behavioral delinquency management system which improves our ability to
queue accounts 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;
- centralized imaging system that provides for the electronic retention and
retrieval of account records; and
- second generation data warehouse that provides analytical tools necessary
to evaluate performance of our portfolio by multiple dimensions.
We are currently developing a third generation credit scorecard to improve
loss severity analytics within our application and an on-line, Internet-based
credit application process 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 behavioral 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 obtain advances from the FHLB, sell
securities under agreements to repurchase and 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 contract asset-backed securities market.
OPERATIONS
AUTOMOBILE LENDING
Locations
We currently originate automobile contracts in 42 states through 44
offices. Each office manager is accountable for the performance of contracts
originated in that office throughout the life of the contracts,
7
10
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 we have a centralized
asset recovery center located in California. Our corporate offices are located
in Irvine, California.
Business Development
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. The 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.
We 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 of 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 his
or her territory. This includes ensuring that a significant number of approved
applications received from each dealer are actually funded by us, ensuring that
the type of contracts 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 approximately 8,700 to 8,500, primarily as a result of us
eliminating dealers that did not meet our standards. Our increase in volume is
the result of funding more contracts from dealers that meet 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.
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 obtains credit
bureau information on the applicant and calculates our proprietary credit score.
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 risk-based criteria. They 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
8
11
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 funding 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 may include dealer participation for
consideration of the acquisition of the contract. The completed contract file is
then forwarded to the appropriate record center for imaging.
Under the direction of the Credit and Pricing Committee, the Chief Credit
Officer oversees credit risk management, sets underwriting policy, monitors
contract pricing, 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.
9
12
The following table sets forth information for automobile contracts
originated, contracts serviced and number of dealers in the states in which we
operate our business:
AUTOMOBILE CONTRACT PURCHASES
FOR THE TWELVE MONTHS ENDED
DECEMBER 31, AT DECEMBER 31, 2000
-------------------------------------- ----------------------------------------
STATE 2000 1999 1998 SERVICING PORTFOLIO NUMBER OF DEALERS
----- ---------- ---------- ---------- ------------------- -----------------
California........... $1,680,814 $1,375,877 $1,187,406 $2,862,894 2,169
Arizona.............. 277,217 196,935 155,439 424,319 286
Washington........... 186,078 166,760 135,271 297,738 380
Florida.............. 175,341 138,981 73,023 265,880 408
Ohio................. 165,860 103,615 70,183 247,326 547
Oregon............... 158,944 128,154 104,789 235,387 390
Texas................ 158,138 185,795 143,989 295,273 466
Colorado............. 130,247 111,486 80,800 201,197 231
North Carolina....... 106,664 84,543 59,454 167,394 237
Nevada............... 101,311 90,521 81,342 183,121 106
Virginia............. 97,997 61,094 39,592 143,272 256
South Carolina....... 91,246 57,315 32,782 128,589 160
Illinois............. 76,020 62,755 51,653 124,342 332
Georgia.............. 71,341 39,136 24,114 97,519 197
Tennessee............ 68,955 52,128 39,757 108,059 149
Missouri............. 64,372 46,456 28,958 100,437 197
Utah................. 63,531 45,767 24,394 87,771 182
Michigan............. 52,489 22,472 13,783 65,156 167
Alabama.............. 49,053 45,706 35,997 81,416 149
Idaho................ 48,639 36,649 34,961 78,011 146
Pennsylvania......... 39,317 28,831 37,508 69,539 177
Wisconsin............ 37,439 24,839 32,398 54,506 129
Maryland............. 36,431 26,279 13,556 58,112 103
Kentucky............. 34,658 23,603 16,793 50,145 106
Indiana.............. 26,759 23,951 17,829 46,273 133
New Jersey........... 26,552 17,690 6,844 40,175 81
Delaware............. 23,709 11,326 805 29,019 38
Kansas............... 22,683 12,736 14,166 34,208 70
Massachusetts........ 22,126 25,131 38,987 72
Mississippi.......... 17,434 14,901 13,503 31,932 36
West Virginia........ 16,763 7,241 9,750 21,956 54
Oklahoma............. 16,318 13,974 10,761 26,061 55
Connecticut.......... 13,638 15,799 1,448 22,539 55
Iowa................. 13,027 7,334 20,201 21,894 59
Minnesota............ 11,156 446 10,365 31
New Mexico........... 9,469 15,089 15,823 24,934 40
New Hampshire........ 7,157 4,125 4,837 10,427 28
Nebraska............. 5,427 683 1,303 5,802 25
Wyoming.............. 5,114 4,050 3,785 7,797 24
New York............. 5,097 395 158 5,199 54
Rhode Island......... 2,642 3,304 3,012 5,541 12
Maine................ 2,054 897 20,556 2,383 8
Hawaii............... 5,377 7,973 5,287
---------- ---------- ---------- ---------- -----
Total........... $4,219,227 $3,340,146 $2,670,696 $6,818,182 8,545
========== ========== ========== ========== =====
10
13
Servicing of Contracts
We service all of the 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 second quarter of 2000, we implemented a new decision support system
which incorporates behavioral scoring models and allows us to continually seek
the most efficient and effective collection methods.
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. Payments received in the mail or through our offices
are processed by our remittance processing center. 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, decision and collections system
automatically forwards accounts to our automated dialer or regional collection
centers based on the assessed risk of default or loss. Account assessment poses
several courses of action, including delaying collection activity based on the
likelihood of self curing, directing an account to the automated dialer for a
predetermined number of days before being forwarded to a regional collections
office, or directly forwarding to a collection specialist in the regional office
for accelerated collection efforts as early as seven days past due. This process
balances the efficiency of centralized collection efforts with the effectiveness
of decentralized personal collection efforts. Our systems track delinquencies
and chargeoffs, monitor the performance of our collection associates and assist
in delinquency forecasting. 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 the vehicles are sold, any remaining deficiency
balances are then charged off. At December 31, 2000, repossessed automobiles
outstanding managed by us was $6.2 million or 0.09% of the total serviced
portfolio, compared with $3.4 million or 0.06% of the total serviced portfolio
at December 31, 1999.
It is our policy to charge off an account when it becomes contractually
delinquent by 120 days, except for accounts that are in Chapter 13 bankruptcy,
even if we have not yet repossessed the vehicle. At the time that a contract is
charged off, all accrued interest is reversed. For those accounts that are in
Chapter 13 bankruptcy and contractually past due 120 days, all accrued interest
is reversed and income is recognized on a cash basis. Additionally, we mark down
such contracts to fair value and reclassify them as non-performing accounts.
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, 2000 and 1999, the total deposits
gathered by the retail banking division were $2.0 billion. Due
11
14
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.
Demand deposits and money market accounts obtained through our retail
banking operations totaled $460 million at December 31, 2000 compared with $477
million and $341 million at December 31, 1999 and 1998, respectively. At
December 31, 2000, demand deposits and money market accounts represented 23% of
our total retail deposits.
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 million and $100
million. We offer our commercial clients a full array of deposit and loan
products that are priced competitively and designed specifically for them. 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 London Interbank Offer Rate,
also known as LIBOR. 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 our executives. 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, 2000, the commercial banking division had generated $444
million in deposits compared with $216 million and $80 million at December 31,
1999 and 1998, respectively. Commercial loans outstanding totaled $108 million,
$66.9 million and $52.9 million at December 31, 2000, 1999 and 1998,
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.
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 six to twelve months with fully
indexed adjustable interest rates that range between 8.12% and 10.50%. 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.
12
15
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 and the Bank.
WFS borrowed $125 million from the Bank under the terms of the senior note.
The senior note provides for principal payments of $25 million per year,
commencing on April 30, 1999 and continuing through its final maturity, April
30, 2003. Interest payments on the senior note are due quarterly, in arrears,
calculated at the rate of 7.25% per annum. WFS made paydowns of $32.7 million
and $66.1 million for the years ended December 31, 2000 and 1999, respectively,
without prepayment penalties. There was $11.2 million and $43.9 million
outstanding on the senior note at December 31, 2000 and 1999, respectively.
Interest expense totaled $1.5 million, $5.4 million and $9.0 million for the
years ended December 31, 2000, 1999 and 1998, respectively.
Additionally, WFS borrowed $135 million under the terms of the promissory
note from 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 promissory note are due
quarterly, in arrears, calculated at the rate of 9.42% per annum. Pursuant to
the terms of the promissory note, WFS may not incur any other indebtedness which
is senior to the obligations evidenced by the promissory note except for (i)
indebtedness under the senior note (ii) indebtedness collateralized or secured
under the line of credit and (iii) indebtedness for similar types of warehouse
lines of credit. There was $135 million outstanding on the promissory note at
December 31, 2000 and 1999. Interest expense totaled $12.7 million, $9.3 million
and $4.7 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
WFS also has a line of credit extended by the Bank permitting it to draw up
to $1.8 billion as needed to be used in its operations. WFS does not pay a
commitment fee for the line of credit. The line of credit terminates on December
31, 2004, although the term may be extended by WFS for additional periods up to
60 months. When secured, the line of credit carries an interest rate equal to
one-month LIBOR plus 75 basis points. When unsecured, the line of credit carries
an interest rate equal to one-month LIBOR plus 125 basis points. The margins on
this line were increased from 62.5 basis points when secured and 112.5 basis
points when unsecured effective May 23, 2000. Interest on the amount outstanding
under the line of credit is paid monthly, in arrears, and is calculated on the
average amount outstanding that month. The Bank has the right under the line of
credit to refuse to permit additional amounts to be drawn on the line of credit
if, in the Bank's discretion, the amount sought to be drawn will not be used to
finance purchases of contracts or other working capital requirements. There was
$236 million and $551 million outstanding on the line of credit at December 31,
2000 and 1999, respectively. Interest expense totaled $38.4 million, $15.7
million and $11.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The weighted average interest rate was 7.09%, 5.33% and 7.31% for
the years ended December 31, 2000, 1999 and 1998, respectively.
SHORT-TERM INVESTMENTS
WFS also invests its excess 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 excess cash. The weighted average interest rate was 6.58%,
5.23% and 5.45% for the years ended December 31, 2000, 1999 and 1998. WFS held
no excess cash with the Bank under the investment agreement at December 31, 2000
and 1999. Interest income earned under this agreement totaled $1.2 million, $0.1
million and $0.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
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.
13
16
In each securitization transaction, the Bank and WFAL2 have entered into a
reinvestment contract that is deemed to be an eligible investment under the
relevant securitization agreements. The securitization agreements require,
provided certain conditions are met, that all cash flows of the relevant trust
and the associated spread accounts be invested in the applicable reinvestment
contract. 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
pursuant to the terms of the WFS Reinvestment Contract. Under the WFS
Reinvestment Contract, WFS receives access to all of the cash available to the
Bank under each trust reinvestment contract and is obligated to repay to the
Bank an amount equal to the cash so used when 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 pursuant to the terms of the sale and
servicing agreements.
In accordance with this agreement, the Bank and WFAL2 pledge property owned
by each for the benefit of the trustee of each trust and the surety. WFS pays
the Bank a fee equal to 12.5 basis points of the amount of collateral pledged by
the Bank as consideration for the pledge of collateral and for WFS' access to
cash under the WFS Reinvestment Contract. WFS paid the Bank $0.7 million, $0.6
million and $0.7 million for the years ended December 31, 2000, 1999 and 1998,
respectively, for this purpose. As WFAL2 directly utilizes the cash made
available to it to purchase contracts for its own account from WFS, no
additional consideration from WFS is required to support WFAL2's pledge of its
property under the agreement with Financial Security Assurance, also known as
FSA. While WFS is under no obligation to repurchase contracts from WFAL2, to the
extent WFAL2 needs to sell any such contracts to fund its repayment obligations
under the trust reinvestment contracts, it is anticipated that WFS would prefer
to purchase those contracts than for WFAL2 to sell those contracts to a third
party. The WFS Reinvestment Contract, by its terms, is to remain in effect so
long as any of the trust reinvestment contracts is an eligible investment for
its related securitization transaction. There was $832 million and $687 million
outstanding on the WFS Reinvestment Contract at December 31, 2000 and 1999,
respectively.
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 of the 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 Westcorp its estimated share of that tax liability when otherwise due, but
in no event may the amount paid exceed the amount of tax that 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 that 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. See "Consolidated
Financial Statements -- Note 21 -- Income Taxes".
MANAGEMENT AGREEMENTS
We have entered into certain management agreements with WFS and the Bank
pursuant to which we pay an allocated portion of certain costs and expenses
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. Amounts paid to WFS by the Bank relating to
these management agreements totaled $0.3 million, $0.7 million and $0.7 million
for the years ended December 31, 2000, 1999 and 1998, respectively. Amounts paid
by WFS to the Bank relating to these management agreements totaled $1.8 million,
$1.2 million and $4.8 million for the years ended December 31, 2000, 1999 and
1998, respectively. 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,
14
17
obligation, or duty contained in the applicable management agreement or for
violation of law, ordinance, statute, rule or regulation governing either party
to the applicable management agreement.
SUPERVISION AND REGULATION
GENERAL
In 1989, Congress adopted the Financial Institutions Reform, Recovery and
Enforcement Act, also known as FIRREA. Congress' adoption of FIRREA
substantially changed the laws under which we and the Bank operate. In 1991,
Congress enacted the Federal Deposit Insurance Corporation Improvement Act, also
known as 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, also known as RCDA, and the Deposit Insurance
Fund Act, also known as the Fund Act. The adoptions of RCDA and the Fund Act
modified some of FDICIA's requirements. Finally, in 1999 the Gramm-Leach-Bliley
Act, also known as GLBA, was adopted. The GLBA substantially modernized federal
banking law.
Set forth below is a discussion of those provisions of the foregoing acts
and of pre-existing laws that have a material effect upon our business. 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, we cannot assure you that we
will not be affected by any such further changes.
WESTCORP
The Savings and Loan Holding Company Act
We, by virtue of our ownership of the Bank, are a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as amended, also known
as HOLA, which was amended by FIRREA and most recently by the GLBA. Savings and
loan holding companies and their savings association subsidiaries, such as us
and the Bank, are extensively regulated by federal laws.
We are a savings and loan holding company registered with the OTS.
Therefore, we are subject to the OTS' regulations, examination and reporting
requirements. We are a "unitary" savings and loan holding company within the
meaning of regulations promulgated by the OTS. As a result, we are virtually
unrestricted in the types of business activities in which we may engage,
provided the Bank continues to meet the Qualified Thrift Lender test under HOLA.
We intend to remain a unitary savings and loan holding company. However, if we
acquire one or more insured institutions and operate them as separate
subsidiaries rather than merging them with the Bank, or if certain other
circumstances not currently applicable to us arise, we 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 us. We
do not anticipate that those circumstances will arise unless we acquire one or
more insured institutions 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
15
18
- 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 in the same manner and to the same extent as if the savings
association were a member bank of the Federal Reserve System, as well as
regulations adopted by the OTS. Section 23A of the Federal Reserve Act places
certain quantitative limitations on certain transactions between a bank and its
subsidiaries and an affiliate. The quantitative limitations are based upon a
percentage of the savings association's capital stock and surplus. Transactions
covered by Section 23A of the Federal Reserve Act, 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.
The 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.
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, we do not make loans to executive officers,
directors or principal shareholders.
16
19
The Gramm-Leach-Bliley Act
The 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, we do not anticipate that this
change in the laws applicable to bank holding companies will have a significant
affect upon us 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 Section 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, such as
the Bank and its subsidiaries, 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. Federal banking regulatory agencies implemented
these privacy guidelines in a recently issued regulation that provides detailed
instructions on safeguarding consumer financial information. We 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.
Other Matters
The OTS has recently proposed to require holding companies to notify the
OTS before engaging in certain debt transactions, in any transactions that
substantially reduce capital, in certain asset acquisitions and certain other
transactions on a case-by-case basis. The proposed notice is designed to prevent
activities that could have an adverse impact on the subsidiary savings
associations. We do not believe that these notice requirements will have a
significant impact on us, since we do not have a history of engaging in
activities that pose a material risk to the financial safety of our subsidiary
saving association.
The OTS has also recently proposed to codify its practice of requiring
additional capital and of case-by-case review of capital adequacy of savings and
loan holding companies. The proposed regulation identifies the key evaluating
factors -- debt, capital, cash flow and earnings and overall risk profile of the
holding company -- for determining if additional capital is necessary for a
holding company. Eventual codification of current OTS practice of a case-by-case
review is not expected to have an effect on us because we believe we are well
capitalized for the business in which we engage.
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
17
20
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 GLBA requires that the Bank, as a member of the FHLB System, fulfill
its minimum investment requirement in the FHLB System. The Bank is in compliance
with this requirement. The Federal Housing Finance Board, also known as the
Board, has recently proposed that either investment in capital stock of the FHLB
System or payment of an annual membership fee should satisfy the membership
investment requirement. The option of a membership fee might provide more
flexibility for the Bank and once the final regulation is issued, we will
consider that option.
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 bank in the FHLB System is required to transfer a
percentage of its annual net earnings to the Affordable Housing Program, as
defined in FIRREA. This amount is a minimum of 10% of the annual net income of
each bank in the FHLB System.
Insurance of Accounts
The FDIC administers the Savings Association Insurance Fund, also known as
SAIF, which insures the deposits of savings associations that were insured by
the Federal Savings and Loan Insurance Corporation, also known as FSLIC, prior
to the enactment of 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.
During 2000, the Bank was required to pay insurance premiums of $1.2
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.
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.
18
21
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 not aware of any existing circumstances that 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, 2000, the Bank's percentage was 10.23%. 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, 2000, the Bank met the capital requirements of a well
capitalized association as defined by the regulation. At that date, the Bank
held no 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 Bank exceeded the current minimum
requirements for core capital, tangible capital and risk-weighted capital as of
December 31, 2000 as more fully described below.
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,
also known as 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, 2000 was 8.03%. 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, also known as CSRs, and purchased credit
card relationships, also known as PCCRs meeting certain valuation
requirements.
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
19
22
exceed, in the aggregate, an amount equal to 100% of the institutions 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, 2000, 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,
2000, the Bank's tangible capital was 8.03%.
A savings institution's investments in, and extensions of credit to, a
subsidiary engaged in any activities not permissible for national banks, also
known as 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., also known as WCS, both equity and extensions of credit, because
WCS is engaged in residential real estate activities not permitted to national
banks. At December 31, 2000, the amount excluded from the Bank's core and
tangible capital was $0.1 million.
As of December 31, 2000, the Bank's core capital was $534 million,
exceeding the Bank's regulatory requirement by $334 million. The Bank's tangible
capital at December 31, 2000 was $534 million, exceeding the applicable
regulatory requirement by $434 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, also known as fully
capitalized assets, is deducted from the Bank's total capital and (b) neither
the risk-weighted value of the asset sold off balance sheet nor the amount of
the fully capitalized assets is included in the Bank's total risk-weighted
assets. The Bank's risk-based capital requirement at December 31, 2000 included
$261 million due to its recourse liability relating to trust financings,
including fully capitalized assets.
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.
20
23
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, 2000, the Bank's total
risk-weighted assets equaled $6.4 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.
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 $42.5 million of its 8.5% Subordinated Capital
Debentures and $147 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, 2000, the debentures then
outstanding represented 24.3% 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 Bank's total capital at
December 31, 2000 was $780 million and its risk-based capital ratio was 12.16%
As required by the provisions of FDICIA, the OTS has adopted an interest
rate risk component to its capital rules. The rule establishes a method for
determining an appropriate level of capital to be held by
21
24
savings associations subject to the supervision of the OTS, such as the Bank,
against interest rate risk, also known as IRR. The 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,
also known as 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, also known as 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 2001.
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' 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 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, 2000.
Interagency Guidance Statement Regarding Asset-Backed Securitization
The OTS, in conjunction with the other federal banking regulatory agencies,
collectively known as the Agencies, issued a guidance statement regarding asset
securitization activities of banks and savings associations which applies 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 interests 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. Moreover, as WFS' recent
securitization activities have been primarily accounted for as secured
financings or involved a sale of contracts servicing released, WFS has
substantially reduced and does not anticipate creating in the future any
non-cash gain on sale residual interests, the valuation of which would be
subject to the guidance statement. The Bank
22
25
and WFS believe that WFS' securitization activities to date, including the
creation, valuation and monitoring of our existing non-cash gain on sale
residual interests, have been conducted in full compliance with the guidance
statement.
The OTS, along with the other Agencies, has recently issued two proposals
to modify existing risk-based capital treatment of recourse obligations in asset
securitization activities of banking organizations. The first proposal provides
a single treatment for all types of recourse arrangements, including direct
credit substitutes and residual interests, regardless of the method used to
account for assets transferred with recourse. Such regulatory approach would
ensure that risk-based capital is held against the full amount of the
transferred assets that would be risk-weighted according to relative exposure to
credit risk. Determination of risk-weighted assets would also include all
securitization transactions that include early amortization provisions. The
Agencies' second proposal modifies risk-based capital treatment for residual
interests and restricts the amount of retained interest assets that may be
included in determining a bank's or savings association's regulatory capital.
Current capital standards do not require "dollar-for-dollar" capital protection
in case of residual interests that exceed the dollar amount of the full capital
charge on the assets transferred. The proposed modification would, however,
require that financial institutions hold "dollar-for-dollar" capital for the
organization's total contractual exposure to loss resulting from residual
interest assets retained by the financial institution. The rule would also limit
the amount of residual interests that can be included in Tier 1 capital by
including residual interests within the 25 percent of Tier 1 capital sublimit
already placed upon nonmortgage servicing assets and purchased credit card
relationships. Thus, the retained interests could be classified as loss and not
permitted to be included in calculating the institution's regulatory capital.
The Bank and numerous other financial institutions have submitted comments
to the proposed regulations, objecting primarily on the basis that the
regulations are unnecessary in light of the guidance statement and are
overbroad. The proposed retained interest regulation purports to be applicable
only to residual interests created upon a sale of financial assets. As such, the
proposal, even if adopted, should not apply to WFS or the Bank to the extent WFS
continues to account for its securitization transactions as secured financings.
At this time the Agencies have the proposals under consideration, and we cannot
predict when final regulations will be adopted or how the final regulations may
differ from those proposed. If the regulations are adopted as proposed, we
cannot determine the amount of additional capital the Bank may need to hold as
the amount of non-cash gain on sale residual interests we hold continue to
amortize as the underlying contracts are collected.
The OTS, along with the other Agencies, has adopted guidance pertaining to
sub-prime lending programs. Pursuant to the guidance, lending programs which
provide credit to borrowers whose credit histories reflect specified negative
characteristics, such as bankruptcies or payment delinquencies, are deemed to be
sub-prime lending programs. Pursuant to the guidance, examiners may require that
an institution with a sub-prime lending program hold additional capital,
typically one and one-half to three times the normal capital required for
similar loans made to borrowers who are not sub-prime borrowers, although
institutions whose sub-prime loans are well secured and well managed may not be
required to hold additional capital.
We cannot predict whether the regulations discussed above will be adopted
as proposed, whether any grandfather or phase-in features will be included in
the regulations as adopted or when the regulations, if adopted in any form, will
become effective. We also cannot predict whether the Bank will be required,
following its next examination, to hold additional capital with respect to those
contracts on its consolidated balance sheet as to which the borrowers are
sub-prime borrowers. To the extent that either the regulations, if adopted, or
the guidance, as implemented, require the Bank to raise and continue to maintain
higher levels of capital, our ability to originate, service and securitize new
and pre-owned automobile installment contracts, especially as to which the
borrower is a sub-prime borrower, may be adversely affected. Any changes to
regulations that would negatively impact the Bank may require us to curtail our
contract purchasing activities or change the relative percentage of types of
contracts we originate, either of which could have a material adverse effect on
our financial position, liquidity and results of operations.
23
26
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
- 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 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.
24
27
The OTS, in conjunction with the other 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 leverage ratio of 4% or greater; or
- 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, 2000, the Bank met the capital requirements of a "well
capitalized" institution, as its total risk-based capital ratio was 12.16%, its
Tier 1 risk-based capital ratio was 8.32% and its leverage ratio was 8.03%.
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.
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, 2000, 15% of the
Bank's unimpaired capital and unimpaired surplus for loans to one borrower
purposes was $117 million. The largest amount outstanding at December 31, 2000
to one borrower and related entities was $14.0 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
$0.1 million and its equity investments in operating subsidiaries was $392
million as of December 31, 2000.
25
28
Qualified Thrift Lender Test
A Qualified Thrift Lender, also known as QTL, test was enacted as a part of
FIRREA, and was modified by FDICIA and the Economic Growth and Regulatory
Paperwork Reduction Act, also known as 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
Internal Revenue Code, also known as IRC, "domestic building and loan
association", also known as 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";
- 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, 2000, the Bank's percentage of qualified thrift investments
to portfolio assets was 87.63%. We anticipate that the Bank will continue to
remain a QTL.
Dividend Regulations
The OTS has adopted regulations for determining if capital distributions of
a savings association are permitted. The regulation provides for a filing
process in which the OTS reviews proposed capital distributions. The regulation
requires that a savings association files the application for or gives prior
notice of the proposed distribution or it exempts a savings association from
filing. The filing status of a savings association depends on whether the
proposed capital distribution meets certain criteria. The criteria that the
regulation focuses on are: (i) eligibility of the savings association for
expedited treatment by the OTS; (ii) the total amount of all of the
26
29
capital distributions for the year; (iii) the capital requirements of an
"adequately capitalized" or a "well capitalized" institution; (iv) effect of the
proposed distribution on regulatory capital structure of a savings association;
(v) eventual violation of any applicable statute, rule or agreement between a
savings association and the OTS; and (vi) status of the association as a
subsidiary of a savings and loan holding company. Since the Bank qualifies for
expedited treatment by the OTS, it is not required to file an application for
any proposed capital distribution. The Bank, however, needs to file prior notice
of a proposed capital distribution because it is a subsidiary of a savings and
loan holding company, although it qualifies as a "well capitalized" institution.
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.
However, the Bank is also subject to certain limitations on the payment of
dividends by the terms of the indentures 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 $87 million. We received
dividends from the Bank during 2000 in the aggregate amount of $3.5 million.
Community Reinvestment Act
Congress passed the Community Reinvestment Act, also known as CRA, in 1977
to encourage each financial institution to help meet the credit needs of the
communities it serves, including low to moderate income neighborhoods. The CRA,
as amended and supplemented by applicable regulations, establishes certain
performance standards under which the Bank is to be examined. Periodically, the
OTS reviews the Bank's performance and publishes 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 CRA regulations, the Bank has identified eleven Primary
Metropolitan Statistical Areas and Metropolitan Statistical Areas in the state
of California as its assessment area(s). These geographic markets contain the
Bank's retail banking offices and are representative of where the Bank accepts
deposits from its customer base. The revised examination procedures will focus
on performance rather than process. The Bank received a "satisfactory" rating in
its 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 regulations, the Bank could seek to be assessed on its 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
regulations also emphasize the importance of an institution's CRA performance in
the corporate application process and seek to make the regulations more
enforceable.
The Bank has elected to be audited under the Lending Test, Investment Test
and Service Test. Following the scheduled audit, the Bank will receive an
updated performance evaluation which will be made public in each branch office.
Classification of Assets
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.
27
30
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 other federal banking regulatory agencies
as well. As of December 31, 2000, the Bank had established allowances for loan
and real estate losses of $95 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 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.
The Bank also has to comply with consumer regulations that apply to the
retail sales practices of insurance products by any depository institution. The
federal banking regulatory agencies have recently issued a regulation that
establishes consumer protection in connection with retail sales of insurance
products and annuities. We do not believe that the regulation will have a
significant impact on our insurance operations since we do not engage in any of
the prohibited practices and since we already provide affirmative disclosures,
as required by the newly issued rule.
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, also
known as 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.
The Bank's LTV standards are consistent with these supervisory limitations.
In addition, the OTS and the Agencies have adopted uniform real estate appraisal
guidelines. Those guidelines require the board of directors of financial
institutions to adopt appraisal and evaluation programs, which the Bank has
done.
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.
28
31
In addition, the EGRPRA amended 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 to permit federal
associations to make education loans without investment restriction, as opposed
to the previous limit of 5% of total assets.
The OTS has also 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 liberalized its restriction on suretyship and guaranty agreements under
Section 5(b)(2). 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. 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.
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.
The Financial Accounting Standards Board, also known as the FASB, has
provided guidance for the way enterprises report information about derivatives
and hedging. These statements require all derivatives to be recognized on the
balance sheet at fair value. Changes in the fair value of derivatives that are
hedges will be either offset against the change in the fair value of the hedged
assets, liabilities or firm commitments directly through income or recognized
through other comprehensive income on the balance sheet until the hedged item is
recognized in earnings, depending on the nature of the hedges. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings if the derivative is a fair value hedge. The ineffective portion of a
derivative's change in fair value for a cash flow hedge will be recognized in
comprehensive income on the balance sheet if the hedge is less than 100%
effective or in earnings if the hedge is greater than 100% effective. We adopted
FASB's new guidance on January 1, 2001 and recorded a cumulative effect
adjustment to other comprehensive income of $4.8 million, net of income tax,
which represents the deferred loss on hedge agreements outstanding at January 1,
2001. However, we do not expect that the adoption of FASB's new guidance for
these agreements will have a material effect on our earnings.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, also known as SFAS
29
32
No. 140. SFAS No. 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001. Other
provisions of the statement are effective for fiscal years ending after December
15, 2000 and include additional disclosure requirements and changes related to
the recognition and reclassification of collateral. We do not expect SFAS No.
140 will have a material effect on our earnings or financial position.
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 June, 2000.
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.
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.
30
33
The OTS, in conjunction with the 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 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.
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 income tax purposes.
Prior to 1996, savings and loan associations satisfying certain conditions were
permitted under the 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
31
34
for savings and loan associations. The repeal of the reserve method is effective
for tax years beginning after December 31, 1995. Savings and loan associations
are now subject to the same tax laws regarding bad debt reserves as banks. The
Bank is considered a "large bank" for federal income tax purposes and is
required to use the specific charge off 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, 1999 and 2000, are $11.4 million and $8.6 million, respectively. The Bank
was required to recapture approximately $2.8 million into taxable income for
2000 and each of the next three 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 shareholders.
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
shareholders 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 that 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.
We and our subsidiaries are under examination by the Internal Revenue
Service for the tax years ended December 31, 1995 through 1999. We do not
anticipate any significant changes based upon these examinations.
CALIFORNIA FRANCHISE TAX AND OTHER STATE PROVISIONS
At the end of 2000, we had a tax presence in approximately 39 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.
32
35
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 is 8.84% and the
financial corporation tax rate is 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 charge off method). The second method allows a reasonable addition to a
reserve to be deducted. A reasonable addition can be calculated using an
experience ratio, or may be determined by management to be greater than the
experience ratio, but not greater than the amount deducted for regulatory and
financial statement purposes, and not greater than 1% of outstanding loans at
year end. California has not 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 we were one business unit, and file one combined California franchise
tax return (excluding Westhrift Life Insurance Company).
SUBSIDIARIES
WFS RECEIVABLES CORPORATION 2
WFSRC2 is our wholly owned, Nevada based, limited purpose service
corporation. WFSRC2 was organized for the purpose of purchasing contracts from
WFS and securitizing them in the asset-based securities market. Automobile
contracts securitized through WFSRC2 are treated as secured financings for
accounting purposes.
WESTRAN SERVICES CORP.
Westran Services Corp., also known as 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.
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 our 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 WFAL, WFAL2, WFS Investments, Inc., also known
as WFSII, WFS Funding, Inc., also known as WFSFI and WFS Receivables
Corporation, also known as WFSRC. Other subsidiaries of the Bank include Westfin
Insurance Agency, also known as WFIA, Westhrift Life Insurance Company, also
known as Westhrift, WestFin Securities Corporation, also known as WestFin,
Western Reconveyance Company, Inc., also known as RECON, WCS, Western
Investments, also known as WII, and The Hammond Company, The Mortgage Bankers,
also known as THCMB. Each of these entities are described in further detail
below.
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 pre-owned car dealers. The
remaining interest is traded on the Nasdaq National 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 by its subsidiaries, WFAL or WFSRC. See "Automobile
Operations". During 2000, WFS originated $4.2 billion of automobile contracts.
33
36
WFS FINANCIAL AUTO LOANS, INC.
WFAL is a wholly owned, Nevada based, limited purpose operating subsidiary
of WFS. WFAL was organized primarily for the purpose of purchasing contracts
from WFS and securitizing them in the automobile contract asset-backed
securities 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, Nevada based, 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, Nevada based, 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, Nevada based, limited purpose service corporation
subsidiary of WFS. WFSFI was incorporated for the purpose of providing conduit
financings. WFSFI completed a $500 million conduit financing transaction during
1999. The conduit facility was paid off on March 15, 2000.
WFS RECEIVABLES CORPORATION
WFSRC is a wholly owned, Nevada based, limited purpose service corporation
subsidiary of WFS. WFSRC was organized for the purpose of purchasing contracts
from WFS and securitizing them in the asset-based securities market.
Securitization transactions in which contracts are sold through WFSRC are
treated as secured financings for accounting purposes.
WESTERN INVESTMENTS, INC.
WII is a wholly owned, Nevada based, limited purpose subsidiary of the
Bank. WII was incorporated for the purpose of purchasing limited ownership
interests in automobile loan securitization transactions. 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.
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 made 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 or physical injury. Westhrift has a Certificate of Authority from the
California Insurance Commissioner
34
37
authorizing it to conduct insurance business in California. At December 31,
2000, credit life and disability insurance in force was $3.7 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, 2000
were $0.3 million.
The aggregate reserves are computed in accordance with commonly accepted
actuarial standards consistently applied and are based on actuarial assumptions
that 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 $0.3 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. Management decided to discontinue its operations in 2000.
Operations are expected to be discontinued in 2001.
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, also known as 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 purposes 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, 2000, we had 2,018 full-time and 111 part-time associates.
None of our associates are represented by a collective bargaining unit or union,
and we believe we have good relations with our associates.
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-
35
38
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 we originate will reduce 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 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 notes treated as secured financings, as the level will
impact the timing of revenue recognition;
- 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, 2000, we owned eleven properties in California and one
property in Texas and leased 78 properties at various locations in various
states.
Our executive offices are located at 23 Pasteur, 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, 2000, the net book value of property and
leasehold improvements was approximately $52.2 million. We lease space at a
location from a company controlled by our major shareholder.
ITEM 3. LEGAL PROCEEDINGS
We or our subsidiaries are parties to certain legal proceedings incidental
to our business, including consumer class action lawsuits pertaining to our
automobile finance activities. We are vigorously defending these actions and do
not believe that the outcome of these proceedings will have a material effect on
our financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
36
39
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, also known as the NYSE, identified by the
symbol, WES. The following table illustrates the high and low prices by quarter
in 2000 and 1999, as reported by the NYSE, which prices are believed to
represent actual transactions:
2000 1999
---------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter................................... $15.00 $11.31 $ 9.06 $ 6.44
Second Quarter.................................. 14.50 10.63 11.69 7.88
Third Quarter................................... 16.25 11.31 16.13 11.13
Fourth Quarter.................................. 15.69 13.56 16.13 14.44
We had approximately 1,248 shareholders of our common stock at February 28,
2001. 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 $0.30, $0.20 and $0.25 per share for the years
ended December 31, 2000, 1999 and 1998, respectively. On December 14, 2000, we
declared a quarterly cash dividend of $0.10 per share for shareholders of record
as of February 1, 2001. This dividend was paid on February 15, 2001.
We anticipate completing a rights offering during the second quarter of
2001. Subsequent to this offering, the Board of Directors intends to increase
the quarterly dividend to $0.11 per share.
37
40
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary audited financial data for the years
ended December 31, 2000, 1999, 1998, 1997 and 1996. Since 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.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED SUMMARY OF
OPERATIONS:
Interest income................. $ 583,821 $ 297,616 $ 272,166 $ 270,532 $ 242,388
Interest expense................ 313,654 153,309 162,350 161,748 139,657
----------- ----------- ----------- ----------- -----------
Net interest income........... 270,167 144,307 109,816 108,784 102,731
Provision for credit losses..... 82,133 38,400 18,960 12,851 13,571
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for credit
losses..................... 188,034 105,907 90,856 95,933 89,160
Noninterest income.............. 177,643 210,006 128,654 220,278 183,587
Noninterest expense(1).......... 221,191 217,437 247,753 243,016 205,506
----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
(benefit) and extraordinary
item.......................... 144,486 98,476 (28,243) 73,195 67,241
Income tax (benefit)............ 58,132 41,460 (11,330) 31,287 28,095
----------- ----------- ----------- ----------- -----------
Income (loss) before minority
interest...................... 86,354 57,016 (16,913) 41,908 39,146
Minority interest in earnings
(loss) of subsidiaries........ 11,852 6,522 (2,216) 5,120 7,349
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary item............ 74,502 50,494 (14,697) 36,788 31,797
Extraordinary gain from early
extinguishment of debt (net of
income tax of $175 in 2000 and
$1,546 in 1999)............... 241 2,132
----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 74,743 $ 52,626 $ (14,697) $ 36,788 $ 31,797
=========== =========== =========== =========== ===========
OTHER SELECTED FINANCIAL DATA:
Book value per share(2)......... $ 15.26 $ 13.26 $ 12.43 $ 13.27 $ 12.23
Weighted average number of
shares and common share
equivalents -- diluted........ 29,525,677 26,505,128 26,305,117 26,351,144 26,199,537
Income (loss) before
extraordinary item............ $ 2.52 $ 1.91 $ (0.56) $ 1.40 $ 1.21
Extraordinary item.............. 0.01 0.08
----------- ----------- ----------- ----------- -----------
Net income (loss) per share --
diluted(2).................... $ 2.53 $ 1.99 $ (0.56) $ 1.40 $ 1.21
=========== =========== =========== =========== ===========
Dividends per share(2).......... $ 0.30 $ 0.20 $ 0.25 $ 0.40 $ 0.39
Dividend payout ratio........... 11.9% 10.1% N/A 28.6% 32.2%
- ---------------
(1) Includes $18.0 million in restructuring charges in 1998.
(2) Reflects a 5% stock dividend in 1996.
38
41
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CONSOLIDATED SUMMARY OF FINANCIAL
CONDITION:
Assets:
Cash and other assets............. $ 611,088 $ 714,357 $ 728,476 $ 699,237 $ 513,290
Loans:
Consumer(1).................... 4,309,036 1,516,669 933,010 298,550 290,969
Mortgage(2).................... 507,431 598,302 1,006,933 1,536,954 1,432,769
Commercial(2).................. 107,586 66,927 52,940 37,314 7,680
Mortgage-backed securities........ 2,230,448 1,431,376 980,044 941,448 849,548
Investments and time deposits..... 102,321 171,143 131,417 252,540 240,789
---------- ---------- ---------- ---------- ----------
Total assets.............. $7,867,910 $4,498,774 $3,832,820 $3,766,043 $3,335,045
========== ========== ========== ========== ==========
Liabilities:
Deposits.......................... $2,478,487 $2,212,309 $2,178,735 $2,000,896 $1,873,942
Notes payable on automobile
secured financing.............. 3,473,377 461,104
FHLB advances and other
borrowings..................... 616,193 498,901 440,924 563,922 569,357
Amounts held on behalf of
trustee........................ 494,858 687,274 528,092 488,653 393,449
Other liabilities................. 71,221 59,140 94,311 95,088 47,058
---------- ---------- ---------- ---------- ----------
Total liabilities......... 7,134,136 3,918,728 3,242,062 3,148,559 2,883,806
Subordinated debentures........... 189,962 199,298 239,856 239,195 104,917
Minority interest in equity of
subsidiaries................... 56,644 28,030 21,857 29,538 28,392
Shareholders' equity.............. 487,168 352,718 329,045 348,751 317,930
---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity.... $7,867,910 $4,498,774 $3,832,820 $3,766,043 $3,335,045
========== ========== ========== ========== ==========
OTHER SELECTED FINANCIAL DATA:
Average assets...................... $6,242,668 $3,952,360 $3,859,202 $3,682,781 $3,233,713
Return on average assets............ 1.20% 1.33% (0.38)% 1.00% 0.98%
Average shareholders' equity........ $ 431,486 $ 337,886 $ 333,298 $ 329,250 $ 308,305
Return on average shareholders'
equity............................ 17.32% 15.58% (4.41)% 11.17% 10.31%
Equity to assets ratio.............. 6.19% 7.84% 8.58% 9.26% 9.53%
Originations:
Consumer loans.................... $4,232,115 $3,355,732 $2,680,341 $2,337,359 $2,157,556
Mortgage loans.................... 33,124 276,936 2,754,398 2,331,506 1,259,716
Commercial loans.................. 266,342 237,316 124,259 71,399 8,632
---------- ---------- ---------- ---------- ----------
Total originations........ $4,531,581 $3,869,984 $5,558,998 $4,740,264 $3,425,904
========== ========== ========== ========== ==========
Interest rate spread................ 4.37% 3.59% 2.83% 2.65% 2.86%
- ---------------
(1) Net of unearned discounts.
(2) Net of undisbursed loan proceeds.
39
42
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
our 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
retained interest income on automobile contracts sold, contractually specified
servicing fees for the servicing of loans, late charges, gain on sale of
automobile contracts and mortgage loans, and other miscellaneous servicing fee
income. Other components of noninterest income include gains and losses from the
sale of investment and MBS, 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. We anticipate that all future securitizations will be recorded as
secured borrowings on the balance sheet.
EVENT FINANCIAL STATEMENT IMPACT
----- --------------------------
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 borrowings of the Bank and operating
cash flows
- Retain contract on balance sheet
Transfer contract to a securitization trust - Record securities as liabilities of the company
(on balance sheet) - Retain contract on balance sheet
- Pay down borrowings of the Bank with securitization
proceeds
Sell contract to a securitization trust - Pay down borrowings of the Bank with securitization
(off balance sheet) proceeds
- Remove contract receivable from balance sheet
- Capitalize retained interest income, also known as RISA,
which represents the present value of the estimated future
cash flows
- 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
(whether or not pledged to a securitization - Reduce borrowings of the Bank unless pledged to a
trust) securitization trust, in which case the payment is used to
reduce the outstanding amount of the respective notes to
the asset-backed securities investor
- Collect servicing related fees
Collect payment for off balance sheet - Amortize the RISA asset and show cash flows in excess of
contract the amortization of the RISA as retained interest income on
our income statement.
- 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
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
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
$270 million in 2000 compared with $144 million and $110 million in 1999 and
1998, respectively. Net interest income increased as more automobile contracts
were held on the balance sheet as we utilized our own liquidity sources and
completed securitization transactions totaling $3.9 billion accounted for as
secured financings.
40
43
The following table presents information relative to the average balances
and interest rates on an owned basis for the periods indicated:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Total investments:
Mortgage-backed
securities............. $1,870,908 $128,231 6.85% $1,423,655 $ 87,631 6.16% $ 990,074 $ 65,039 6.57%
Other short-term
investments............ 246,908 15,609 6.32 251,344 12,930 5.14 162,890 9,108 5.59
Investment securities.... 10,216 535 5.24 29,710 1,607 5.41 110,172 6,070 5.51
Interest earning deposits
with others............ 2,069 110 5.32 1,395 75 5.38 2,492 144 5.78
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total investments.... 2,130,101 144,485 6.78% 1,706,104 102,243 5.99% 1,265,628 80,361 6.35%
Total loans:
Consumer loans........... 2,672,690 386,182 14.45% 883,091 138,802 15.72% 598,883 91,496 15.28%
Mortgage loans(1)........ 551,498 44,225 8.02 693,270 51,666 7.45 1,271,406 96,612 7.60
Commercial loans......... 97,586 8,929 9.15 57,448 4,905 8.54 43,707 3,697 8.46
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total loans.......... 3,321,774 439,336 13.23% 1,633,809 195,373 11.96% 1,913,996 191,805 10.02%
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest
earning assets..... 5,451,875 583,821 10.71% 3,339,913 297,616 8.91% 3,179,624 272,166 8.56%
Noninterest earning assets:
Amounts due from trusts.... 413,653 384,153 316,419
Retained interest in
securitized assets....... 141,724 180,538 167,640
Capitalized servicing
rights................... 5,676 36,704
Premises, equipment and
real estate owned........ 84,627 90,306 87,741
Other assets............... 227,095 177 106,186
Less: allowance for credit
losses................... 76,306 48,403 35,112
---------- ---------- ----------
Total................ $6,242,668 $3,952,360 $3,859,202
========== ========== ==========
Interest bearing liabilities:
Deposits................... $2,380,155 133,610 5.61% $2,165,493 106,067 4.90% $2,086,972 109,004 5.22%
Securities sold under
agreements to
repurchase............... 449,778 27,950 6.21 369,999 19,102 5.16 321,367 18,639 5.80
FHLB advances and other
borrowings............... 270,043 16,694 6.18 130,608 8,595 6.58 185,863 13,253 7.13
Notes payable on automobile
secured financing........ 1,655,936 118,203 7.14
Subordinated debentures.... 192,025 17,197 8.96 218,164 19,545 8.96 239,585 21,454 8.95
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
Total interest
bearing
liabilities........ 4,947,937 313,654 6.34% 2,884,264 153,309 5.32% 2,833,787 162,350 5.73%
Noninterest bearing
liabilities:
Amounts held on behalf of
trustee.................. 693,810 443,072 389,276
Other liabilities.......... 169,435 287,138 302,841
Shareholders' equity....... 431,486 337,886 333,298
---------- ---------- ----------
Total................ $6,242,668 $3,952,360 $3,859,202
========== -------- ----- ========== -------- ----- ========== -------- -----
Net interest income and
interest rate spread....... $270,167 4.37% $144,307 3.59% $109,816 2.83%
======== ===== ======== ===== ======== =====
Net yield on average interest
earning assets............. 4.95% 4.32% 3.45%
===== ===== =====
- ---------------
(1) For the purpose of these computations, nonaccruing loans are included in the
average loan amounts outstanding.
41
44
The total interest rate spread increased 78 basis points for 2000 compared
with 1999 due to an increase of 180 basis points in the yield on interest
earning assets offset with an increase in the cost of funds of 102 basis points.
The increase in income on interest earning assets for 2000 compared with 1999
and 1998 was due primarily to a higher percentage of automobile contracts held
on the balance sheet. The increase in the cost of funds in 2000 compared to 1999
and 1998 is due to a higher interest rate environment.
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):
2000 COMPARED TO 1999 1999 COMPARED TO 1998
----------------------------------------- ---------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- -------- -------- -------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Interest income:
Mortgage-backed securities.............. $ 27,551 $ 9,823 $ 3,226 $ 40,600 $ 28,486 $(4,059) $(1,835) $ 22,592
Other short-term investments............ (228) 2,966 (59) 2,679 4,945 (733) (390) 3,822
Investment securities................... (1,055) (51) 34 (1,072) (4,433) (110) 80 (4,463)
Interest earning deposits with others... 36 (1) 35 (63) (9) 3 (69)
Total loans:
Consumer loans.......................... 281,325 (11,215) (22,730) 247,380 43,427 2,635 1,244 47,306
Mortgage loans.......................... (10,562) 3,952 (831) (7,441) (43,938) (1,907) 899 (44,946)
Commercial loans........................ 3,428 350 246 4,024 1,163 35 10 1,208
-------- -------- -------- -------- -------- ------- ------- --------
Total interest earning assets....... $300,495 $ 5,824 $(20,114) $286,205 $ 29,587 $(4,148) $ 11 $ 25,450
======== ======== ======== ======== ======== ======= ======= ========
Interest expense:
Deposits.................................. $ 10,518 $ 15,375 $ 1,650 $ 27,543 $ 4,099 $(6,678) $ (358) $ (2,937)
Securities sold under agreements to
repurchase.............................. 4,117 3,885 846 8,848 2,821 (2,057) (301) 463
FHLB advances and other borrowings........ 9,175 (522) (554) 8,099 (3,940) (1,022) 304 (4,658)
Notes payable on automobile secured
financing............................... 118,203 118,203
Subordinated debentures................... (2,342) (6) (2,348) (1,917) 24 (16) (1,909)
-------- -------- -------- -------- -------- ------- ------- --------
Total interest bearing
liabilities....................... $ 21,468 $ 18,738 $120,139 $160,345 $ 1,063 $(9,733) $ (371) $ (9,041)
======== ======== ======== ======== ======== ======= ======= ========
Net change in net interest income........... $125,860 $ 34,491
======== ========
PROVISION FOR CREDIT LOSSES
We maintain an allowance for credit losses to cover probable losses which
can be reasonably estimated for the loans held on the balance sheet. The
allowance for credit losses is increased by charging the provision for credit
losses and decreased by actual losses on the loans or reversing the allowance
for credit losses through the provision for credit losses when the amount of
loans held on balance sheet is reduced through loan sales. The level of
allowance is based principally on the outstanding balance of loans held on
balance sheet and historical loss trends. We believe that the allowance for
credit losses is currently adequate to absorb probable losses in our owned loan
portfolio which can be reasonably estimated. The provision for credit losses
totaled $82.1 million in 2000 compared with $38.4 million and $19.0 million in
1999 and 1998, respectively. The increase was the result of a higher level of
automobile contracts held on balance sheet as our securitization transactions in
2000 are predominately accounted for as secured financings.
NONINTEREST INCOME
Automobile Lending Income
On a regular basis, we securitize automobile contracts in the asset-backed
securities market and retain the servicing rights. Such transactions are treated
as sales to a securitization trust or as financings for accounting purpose. For
transactions treated as sales to a securitization trust, we record a non-cash
gain equal to the present value of the estimated future cash flows from the
portfolio of contracts sold less the write-off of dealer participation balances
and the effect of hedging activities. For these securitizations, net interest
earned
42
45
on the contracts sold and fees earned for servicing the contract portfolios are
recognized over the life of the securitization transactions as contractual
servicing income, retained interest income and other fee income.
The components of automobile lending income were as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
(DOLLARS IN THOUSANDS)
Gain on sale of automobile contracts................ $ 7,719 $ 51,345 $25,622
Retained interest income, net of RISA
amortization...................................... 51,429 47,812 1,961
Contractual servicing income........................ 41,767 46,847 37,180
Other fee income.................................... 57,786 42,702 34,360
-------- -------- -------
Total automobile lending income........... $158,701 $188,706 $99,123
======== ======== =======
We securitized $4.6 billion, $2.5 billion and $1.9 billion in contracts for
the years ended December 31, 2000, 1999 and 1998, respectively. Gain on sale of
contracts totaled $7.7 million in 2000, $51.3 million in 1999 and $25.6 million
in 1998. Gain on sale of automobile contracts declined as recent securitization
transactions were accounted for as secured financings. Gain on sale of contracts
represented only 1.7% of total revenues compared with 14.5% in 1999 and 10.7% in
1998.
Retained interest income was $51.4 million, $47.8 million and $2.0 million
in 2000, 1999 and 1998, respectively. The increase is primarily the result of
lower amortization of the RISA due to lower 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 generally 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. Our average serviced portfolio increased to $6.1
billion in 2000 from $4.8 billion in 1999 and $4.0 billion in 1998.
43
46
The following table lists each of our securitization transactions. The
first issue in 1985 was rated AA by Standard & Poors Rating Service, a division
of McGraw-Hill, Inc. also known as S&P, and Aa by Moody's Investor Service,
Inc., also known as 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 1997-B were paid in full on or before their contractual
maturity dates.
SECURITIZATION TRANSACTIONS
REMAINING GROSS
REMAINING BALANCE AS A ORIGINAL ORIGINAL INTEREST
ISSUE ORIGINAL BALANCE AT PERCENT OF WEIGHTED WEIGHTED AVERAGE RATE
NUMBER CLOSE DATE BALANCE DECEMBER 31, 2000 ORIGINAL BALANCE AVERAGE APR SECURITIZATION RATE SPREAD(1)
- ------- ----------------- ----------- ----------------- ---------------- ----------- ------------------- ---------
(DOLLARS IN THOUSANDS)
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 13.77 4.70 9.20
1993-3 September, 1993 187,500 Paid in full 0 13.97 4.25 9.52
1993-4 December, 1993 165,000 Paid in full 0 12.90 4.60 9.37
1994-1 March, 1994 200,000 Paid in full 0 13.67 5.10 7.80
1994-2 May, 1994 230,000 Paid in full 0 14.04 6.38 7.29
1994-3 August, 1994 200,000 Paid in full 0 14.59 6.65 7.39
1994-4 October, 1994 212,000 Paid in full 0 15.58 7.10 7.49
1995-1 January, 1995 190,000 Paid in full 0 15.71 8.05 7.53
1995-2 March, 1995 190,000 Paid in full 0 16.36 7.10 8.61
1995-3 June, 1995 300,000 Paid in full 0 15.05 6.05 10.31
1995-4 September, 1995 375,000 Paid in full 0 15.04 6.20 8.84
1995-5 December, 1995 425,000 Paid in full 0 15.35 5.88 9.47
1996-A March, 1996 485,000 Paid in full 0 15.46 6.13 9.33
1996-B June, 1996(2) 525,000 $ 14,890 2.84 15.74 6.75 8.99
1996-C September, 1996 535,000 Paid in full 0 15.83 6.60 9.23
1996-D December, 1996(2) 545,000 31,173 5.72 15.43 6.17 9.26
1997-A March, 1997(2) 500,000 40,916 8.18 15.33 6.60 8.73
1997-B June, 1997 590,000 63,278 10.73 15.36 6.37 8.99
1997-C September, 1997 600,000 84,017 14.00 15.43 6.17 9.26
1997-D December, 1997 500,000 84,688 16.94 15.19 6.34 8.85
1998-A March, 1998 525,000 106,180 20.22 14.72 6.01 8.71
1998-B June, 1998 660,000 172,125 26.08 14.68 6.06 8.62
1998-C November, 1998 700,000 246,909 35.27 14.42 5.81 8.61
1999-A January, 1999 1,000,000 404,823 40.48 14.42 5.70 8.72
1999-B July, 1999 1,000,000 530,801 53.08 14.62 6.36 8.26
1999-C November, 1999 500,000 309,394 61.88 14.77 7.01 7.76
2000-A March, 2000 1,200,000 891,703 74.31 14.66 7.28 7.38
2000-B May, 2000 1,000,000 786,744 78.67 14.84 7.78 7.03
2000-C August, 2000 1,390,000 1,217,391 87.58 15.04 7.32 7.72
2000-D November, 2000 1,000,000 953,802 95.38 15.20 6.94 8.20
2001-A February, 2001(3) 1,000,000 N/A 14.87 5.77 9.10
----------- ------------
Total $20,001,430 $ 5,938,834
=========== ============
44
47
- ---------------
(1) Represents the difference between the original weighted average annual
percentage rate, also known as APR, and the estimated weighted average
securitization rate on the closing date of the securitization transaction.
(2) The 1996-B, 1996-D and 1997-A securitization transactions were paid in full
in February 2001, January 2001 and March 2001, respectively.
(3) The 2001-A securitization transaction closed on February 2, 2001.
Pro Forma Portfolio Basis Statements of Operations
The following pro forma portfolio basis statements of operations present
our results under the assumption that all our securitization transactions are
treated as secured financings rather than 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 contracts. We refer to these pro forma results as "portfolio
basis" statements of operations since the contracts would have remained on our
on balance sheet contract portfolio 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 reconciliation to net income as reflected in our Consolidated Statements of
Operations.
PORTFOLIO BASIS STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
-------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income..................................... $1,011,637 $799,587 $715,605
Interest expense.................................... 549,476 411,379 397,595
---------- -------- --------
Net interest income............................... 462,161 388,208 318,010
Net chargeoffs(1)................................... 117,807 103,638 141,639
Provision for growth(2)............................. 23,233 20,310 16,621
---------- -------- --------
Provision for credit losses....................... 141,040 123,948 158,260
Net interest income after provision for credit
losses......................................... 321,121 264,260 159,750
Noninterest income.................................. 76,728 64,001 68,675
Noninterest expense................................. 222,156 224,960 259,223
---------- -------- --------
Income (loss) before income tax (benefit)......... 175,693 103,301 (30,798)
Income tax (benefit)(3)............................. 70,572 43,491 (12,355)
---------- -------- --------
Income (loss) before minority interest............ 105,121 59,810 (18,443)
Minority interest in earnings (loss)................ 14,963 6,614 (2,385)
---------- -------- --------
Income (loss) before extraordinary item........... 90,158 53,196 (16,058)
Extraordinary gain from early extinguishment of
debt.............................................. 241 2,132
---------- -------- --------
Portfolio basis net income (loss)................. $ 90,399 $ 55,328 $(16,058)
========== ======== ========
Portfolio basis net income (loss) per common share--
diluted
Income before extraordinary item.................. $ 3.05 $ 2.01 $ (0.61)
Extraordinary item................................ 0.01 0.08
---------- -------- --------
Net income (loss)................................. $ 3.06 $ 2.09 $ (0.61)
========== ======== ========
- ---------------
(1) Represents actual chargeoffs incurred during the period, net of recoveries.
(2) Represents additional allowance for credit losses that would be set aside
due to an increase in the serviced portfolio.
(3) Such tax effect is based upon our tax rate for the respective period.
45
48
RECONCILIATION OF GAAP BASIS NET INCOME (LOSS)
TO PORTFOLIO BASIS NET INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- ------- --------
(DOLLARS IN THOUSANDS)
GAAP basis net income (loss)................................ $ 74,743 $52,626 $(14,697)
Portfolio basis adjustments:
Gain on sale of contracts................................. (7,719) (51,345) (25,622)
Retained interest income.................................. (41,767) (47,812) (1,961)
Contractual servicing income.............................. (51,429) (46,847) (37,180)
Net interest income....................................... 191,994 242,878 207,200
Provision for credit losses............................... (58,907) (85,549) (139,299)
Operating expenses........................................ (965) (6,500) (5,690)
Minority interest......................................... (3,111) (92) 166
-------- ------- --------
Total portfolio basis adjustments................. 28,096 4,733 (2,386)
Net tax effect.............................................. 12,440 2,031 (1,025)
-------- ------- --------
Portfolio basis net income (loss)........................... $ 90,399 $55,328 $(16,058)
======== ======= ========
Mortgage Banking Income
Mortgage banking operations included gains and losses on the sale of loans
and servicing rights, loan servicing income net of amortization of capitalized
servicing rights and other income, primarily late charges. During 2000, mortgage
banking income totaled $6.9 million compared with $6.0 million and $14.2 million
in 1999 and 1998, respectively. The 58% decline in mortgage banking income from
1998 to 1999 is due to our decision to exit the mortgage banking business. This
decision resulted in the sale of our remaining mortgage banking operations in
1999. Mortgage banking income in 2000 related to the sale of mortgage loan
servicing rights for our owned portfolio.
The components of mortgage banking income were as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Net gains from sale of mortgage loans and
mortgage servicing rights............................. $6,704 $3,184 $14,769
Mortgage loan servicing income (loss)................... 2,001 (2,949)
Other fee income........................................ 152 862 2,410
------ ------ -------
Total mortgage banking income................. $6,856 $6,047 $14,230
====== ====== =======
Other Noninterest Income
Other noninterest income consists primarily of investment and MBS gains and
losses and insurance income. We recorded investment and MBS losses of $0.6
million for the year ended December 31, 2000 compared with gains of $1.3 million
and $7.6 million in 1999 and 1998, respectively. The loss on investments and MBS
recorded in 2000 was mainly the result of hedging activities related to the
potential issuance of debt. The gains in 1999 and 1998 were the result of the
sale of $110 million and $366 million, respectively, of investment securities
and MBS during those years. Insurance income, which totaled $7.0 million, $6.1
million and $5.7 million for the years ended December 31, 2000, 1999 and 1998,
respectively, includes premiums and commissions earned on insurance and
insurance-related products, including collateral protection and credit life
insurance. Income from the sale of mutual funds and annuities totaled $2.4
million in 2000, $2.1 million in 1999 and $2.0 million in 1998.
46
49
NONINTEREST EXPENSE
Total noninterest expense was $221 million, $217 million and $248 million
for the years ended December 31, 2000, 1999 and 1998, respectively. Noninterest
expense as a percentage of total revenues improved to 49% in 2000 compared to
61% in 1999 and 104% in 1998. Our ability to keep noninterest expenses
relatively flat while significantly growing our business is the result of
efficiency improvement strategies initiated in our automobile finance operations
as well as the result of us exiting the mortgage banking business.
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 40% in 2000 compared with 42% and 40% in 1999 and 1998,
respectively.
FINANCIAL CONDITION
OVERVIEW
We originated $4.2 billion of automobile contracts in 2000 compared with
$3.3 billion during 1999. As a result of higher contract originations, our
portfolio of serviced automobile contracts reached $6.8 billion at December 31,
2000, up from $5.4 billion at December 31, 1999.
Our retail banking division increased total demand deposit and money market
accounts by $35 million or 8% to $452 million at December 31, 2000. Total demand
deposit and money market accounts represented 22% of total retail banking
deposits. The commercial banking division had deposits of $444 million and $216
million outstanding at December 31, 2000 and 1999, 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 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.
The following table summarizes our investment securities at the dates
indicated:
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest bearing deposits with other
financial institutions.................... $ 720 $ 720 $ 515 $ 15,510 $ 510
Other short-term investments................ 66,500 137,000 22,864 84,136 62,798
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
U.S. Treasury securities and obligations
of other U.S. government agencies and
corporations -- held to maturity....... 1,504
Obligations of states and political
subdivisions........................... 1,533 1,506 1,572 1,532 1,513
Owner trust certificates.................. 6,517 7,865 5,687 3,723 1,666
FHLB stock................................ 24,367 23,313 24,555 25,762 31,967
Other..................................... 2,684 739 632 163 25
-------- -------- -------- -------- --------
$102,321 $171,143 $131,417 $252,540 $240,789
======== ======== ======== ======== ========
47
50
The following table sets forth the stated maturities of our investment
securities at December 31, 2000:
ONE YEAR FIVE YEARS
UP TO TO FIVE TO TEN TEN YEARS NO STATED
ONE YEAR YEARS YEARS OR MORE MATURITY
-------- -------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest bearing deposits with other financial
institutions................................. $ 720
Other short-term investments................... 66,500
Investment securities:
Obligations of states and political
subdivisions.............................. $ 491 $1,042
Owner trust certificates..................... 3,072 3,445
FHLB stock................................... $24,367
Other........................................ 2,684
------- ------ ------ ------- -------
$67,220 $3,563 $4,487 $27,051
======= ====== ====== ======= =======
Weighted average interest rate................. 7.06% 5.49% 5.48% 5.50%
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".
Our MBS portfolio is classified as available for sale. Accordingly, the
portfolio is reported at fair value with unrealized gains and losses reflected
as a separate component of shareholders' equity. The following table summarizes
our MBS portfolio by issuer:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Available for sale securities:
GNMA certificates......................................... $2,157,076 $1,344,450
FNMA participation certificates........................... 68,870 81,955
FHLMC participation certificates.......................... 1,938 2,084
Other..................................................... 2,564 2,887
---------- ----------
$2,230,448 $1,431,376
========== ==========
The portfolio has a weighted average interest rate of 6.9% at December 31,
2000. Our MBS portfolio had maturities of ten years or greater at December 31,
2000, although payments are generally received monthly throughout the life of
these securities.
LOAN PORTFOLIOS
Mortgage Loan Portfolio
We have from time to time 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.
48
51
Our total mortgage loan portfolio, including those held for sale, consisted
of the following:
DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Single family residential loans:
First trust deeds................................... $224,798 44.3% $278,318 46.5%
Second trust deeds.................................. 6,056 1.2 6,885 1.2
-------- ----- -------- -----
230,854 45.5 285,203 47.7
Multifamily residential loans......................... 230,004 45.3 269,800 45.1
Construction loans.................................... 14,784 2.9 23,190 3.9
Other................................................. 38,105 7.5 34,283 5.7
-------- ----- -------- -----
513,747 101.2 612,476 102.4
Less: undisbursed loan proceeds....................... 6,316 1.2 14,174 2.4
-------- ----- -------- -----
Total mortgage loans........................ $507,431 100.0% $598,302 100.0%
======== ===== ======== =====
The following table sets forth information on the amount of fixed rate
mortgage loans and adjustable rate mortgage loans, also known as ARMs, net of
undisbursed loan proceeds, in our portfolio:
DECEMBER 31,
--------------------------------------
2000 1999
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Fixed rate loans...................................... $ 38,843 7.6% $ 54,319 9.1%
Adjustable rate loans:
With negative amortization.......................... 328,109 64.7 392,410 65.6
Without negative amortization....................... 140,479 27.7 151,573 25.3
-------- ----- -------- -----
Total mortgage loans........................ $507,431 100.0% $598,302 100.0%
======== ===== ======== =====
Consumer Loan Portfolio
Our consumer loan portfolio, including those held for sale, consisted of
the following:
DECEMBER 31,
------------------------------------------
2000 1999
------------------- -------------------
AMOUNT % AMOUNT %
---------- ----- ---------- -----
(DOLLARS IN THOUSANDS)
Automobile contracts............................... $4,295,580 99.7% $1,495,718 98.6%
Other.............................................. 13,456 0.3 20,951 1.4
---------- ----- ---------- -----
$4,309,036 100.0% $1,516,669 100.0%
========== ===== ========== =====
The increase is the result of more automobile contracts held on the balance
sheet as our securitization transactions are accounted for as secured
financings.
Commercial Loan Portfolio
We had outstanding commercial loan commitments of $124 million at December
31, 2000 compared with $89 million at December 31, 1999. During 2000, we
originated $266 million of commercial loans compared with $237 million during
1999. 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,
2000.
AMOUNTS DUE FROM TRUSTS
The excess cash flows generated by contracts sold to each of the
securitization trusts is deposited into spread accounts by the trustee under the
terms of the securitization transactions. In addition, at the time a
49
52
securitization transaction closes, we advance additional monies to our
subsidiary which originated the securitization trust to initially fund these
spread accounts. For transactions treated as sales, we establish a liability
associated with the use of the spread account funds, which is reduced as such
funds reach predetermined funding levels. We are released from these obligations
after the spread account reaches a predetermined funding level. The amounts due
from trusts represent amounts due to us that are still under obligation to be
held in the spread accounts for transactions treated as sales. The amounts due
from trusts at December 31, 2000 was $357 million compared with $439 million at
December 31, 1999. The decrease is the result of a reduction in the outstanding
amount of securitization transactions treated as sales for accounting purposes.
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 cash flows to be
received by us from the excess spread created in securitization transactions.
Future cash flows are calculated by taking the coupon rate of the contracts
securitized less the interest rate paid to the investors less contractually
specified servicing fees and guarantor fees, after giving effect to estimated
credit losses and prepayments.
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 estimated future cash flows 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. On a
quarterly basis, we evaluate the carrying value of the RISA in light of the
actual performance of the underlying contracts and make adjustments to reduce
the carrying value, if appropriate.
Selected original assumptions used to estimate future cash flows for
contracts securitized in 2000, 1999 and 1998 were as follows:
FOR THE THREE MONTHS ENDED,
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000........................................... 2000-A
Cumulative net credit losses................... 6.1%
Average monthly ABS prepayment speed........... 1.5%
Discount rate.................................. 10.8%
Weighted average remaining maturity (in
months)...................................... 61
1999........................................... 1999-A 1999-B 1999-C
Cumulative net credit losses................... 6.2% 6.1% 6.1%
Average monthly ABS prepayment speed........... 1.5% 1.5% 1.5%
Discount rate.................................. 9.1% 9.7% 10.2%
Weighted average remaining maturity (in
months)...................................... 59 59 61
1998........................................... 1998-A 1998-B 1998-C
Cumulative net credit losses................... 7.0% 6.2% 6.2%
Average monthly ABS prepayment speed........... 1.5% 1.5% 1.5%
Discount rate.................................. 9.8% 9.8% 8.8%
Weighted average remaining maturity (in
months)...................................... 57 58 58
50
53
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of the RISA to immediate 10% and 20% adverse changes in
assumed economics were as follows:
DECEMBER 31,
2000
------------
(DOLLARS IN
THOUSANDS)
Fair value of the RISA...................................... $111,558
ABS prepayment speed (monthly rate)......................... 1.5%
Fair value after 10% adverse change......................... $107,843
Fair value after 20% adverse change......................... $103,574
Cumulative net credit losses (pool life rate)............... 6.1% - 7.6%
Fair value after 10% adverse change......................... $103,880
Fair value after 20% adverse change......................... $ 95,925
Discount rate (annual rate)................................. 8.8% - 10.8%
Fair value after 10% adverse change......................... $110,963
Fair value after 20% adverse change......................... $109,810
Cash flows from securitization trusts for securitization transactions
treated as sales totaled $127 million, $160 million and $98 million for 2000,
1999 and 1998, respectively. The balance of contracts 30 days or more delinquent
included in such securitization trusts totaled $110 million and $128 million at
December 31, 2000 and 1999, respectively. Net chargeoffs for these
securitization trusts totaled $75 million, $92 million and $127 million for
2000, 1999 and 1998, respectively.
The following table sets forth the components of the RISA:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at the beginning of period....................... $167,277 $ 171,230 $ 181,177
Additions................................................ 19,240 111,767 91,914
Amortization............................................. (75,958) (111,752) (103,610)
Change in unrealized gain/loss on RISA (1)............... 999 (3,968) 1,749
-------- --------- ---------
$111,558 $ 167,277 $ 171,230
======== ========= =========
- ---------------
(1) Change in unrealized gain/loss 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.
The following tables presents the estimated future undiscounted cash flows
to be received from securitizations treated as sales:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Estimated net undiscounted cash flows....................... $ 235,270 $ 410,066
Off balance sheet allowance for credit losses............... (110,339) (220,838)
Discount to present value................................... (13,373) (21,951)
---------- ----------
Retained interest in securitized assets..................... $ 111,558 $ 167,277
========== ==========
Outstanding balance of contracts sold through
securitizations........................................... $2,608,017 $3,890,685
Off balance sheet allowance for credit losses as a percent
of contracts sold through securitizations................. 4.23% 5.68%
51
54
The decline in the off balance sheet allowance for credit losses both on a
dollar and percent basis is the result of our securitization transactions no
longer being treated as sales. Older transactions treated as sales have lower
losses each month after securitization as estimated future credit losses are
realized.
We believe that the off balance sheet allowance for credit losses is
currently adequate to absorb probable losses in the sold portfolio that can be
reasonably estimated.
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.
Automobile Loan Quality
We provide 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 credit losses we incur, we monitor delinquent accounts, promptly
repossess and remarket vehicles, and seek to collect on deficiency balances.
At December 31, 2000, the percentage of accounts delinquent 30 days or
greater was 3.18% compared with 2.84% at December 31, 1999 and 3.64% at December
31, 1998. We calculate delinquency based on the contractual due date. Net
chargeoffs on average contracts outstanding for the year ended December 31, 2000
were 1.91% compared with 2.13% and 3.42% for the years ended December 31, 1999
and 1998, respectively. Stricter underwriting guidelines, the successful
implementation of our multiple credit scoring models, a greater concentration of
prime automobile contracts in our portfolio and an improved servicing platform
have all contributed to better asset quality.
The following table sets forth information with respect to the delinquency
of our portfolio of contracts serviced, which includes contracts that are owned
by us and contracts that have been sold and/or securitized but are serviced by
us:
DECEMBER 31,
---------------------------------------------------------------------------
2000 1999 1998
----------------------- ----------------------- -----------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Contracts serviced.................... $6,818,182 $5,354,385 $4,367,099
========== ========== ==========
Period of delinquency:
30 - 59 days........................ $ 157,843 2.32% $ 107,416 2.00% $ 112,208 2.57%
60 days or more..................... 59,166 0.86 44,610 0.84 46,541 1.07
---------- ---- ---------- ---- ---------- ----
Total contracts delinquent and
delinquencies as a percentage of
contracts serviced.................. $ 217,009 3.18% $ 152,026 2.84% $ 158,749 3.64%
========== ==== ========== ==== ========== ====
The following table sets forth information with respect to repossessions in
our portfolio of serviced contracts:
DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Contracts serviced.................... 616,011 $6,818,182 524,709 $5,354,385 464,257 $4,367,099
======= ========== ======= ========== ======= ==========
Repossessed vehicles.................. 946 $ 6,199 559 $ 3,374 1,232 $ 7,790
======= ========== ======= ========== ======= ==========
Repossessed assets as a percentage of
number and amount of contracts
outstanding......................... 0.15% 0.09% 0.11% 0.06% 0.27% 0.18%
52
55
The following table sets forth information with respect to actual credit
loss experience on our portfolio of contracts serviced:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Contracts serviced at end of period.................... $6,818,182 $5,354,385 $4,367,099
========== ========== ==========
Average contracts serviced during period............... $6,076,814 $4,840,363 $4,006,185
========== ========== ==========
Gross chargeoffs....................................... $ 165,937 $ 150,518 $ 173,422
Recoveries............................................. 49,697 47,581 36,230
---------- ---------- ----------
Net chargeoffs......................................... $ 116,240 $ 102,937 $ 137,192
========== ========== ==========
Net chargeoffs as a percentage of average contracts
serviced during period............................... 1.91% 2.13% 3.42%
========== ========== ==========
53
56
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, 2000
PERIOD(2) 1996-B 1996-C 1996-D 1997-A 1997-B 1997-C 1997-D 1998-A 1998-B 1998-C 1999-A
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
1....................... 0.01% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2....................... 0.09% 0.09% 0.10% 0.08% 0.06% 0.05% 0.05% 0.04% 0.02% 0.04% 0.04%
3....................... 0.20% 0.22% 0.24% 0.20% 0.15% 0.12% 0.14% 0.11% 0.08% 0.11% 0.11%
4....................... 0.35% 0.52% 0.44% 0.36% 0.33% 0.29% 0.31% 0.25% 0.18% 0.23% 0.20%
5....................... 0.61% 0.74% 0.71% 0.62% 0.56% 0.46% 0.56% 0.44% 0.38% 0.39% 0.33%
6....................... 0.88% 0.98% 0.93% 0.85% 0.77% 0.67% 0.75% 0.66% 0.59% 0.50% 0.46%
7....................... 1.14% 1.27% 1.16% 1.12% 1.10% 0.93% 0.99% 0.95% 0.83% 0.61% 0.62%
8....................... 1.42% 1.52% 1.43% 1.45% 1.40% 1.16% 1.24% 1.23% 1.03% 0.75% 0.76%
9....................... 1.67% 1.77% 1.72% 1.70% 1.70% 1.37% 1.47% 1.50% 1.21% 0.86% 0.92%
10....................... 1.91% 1.98% 2.03% 2.02% 2.00% 1.66% 1.75% 1.79% 1.40% 1.00% 1.11%
11....................... 2.18% 2.21% 2.34% 2.32% 2.22% 1.94% 2.06% 2.03% 1.53% 1.17% 1.30%
12....................... 2.38% 2.49% 2.62% 2.61% 2.43% 2.16% 2.35% 2.21% 1.62% 1.32% 1.47%
13....................... 2.58% 2.73% 2.97% 2.92% 2.66% 2.40% 2.63% 2.39% 1.74% 1.48% 1.61%
14....................... 2.79% 2.99% 3.27% 3.14% 2.91% 2.65% 2.86% 2.49% 1.84% 1.66% 1.73%
15....................... 2.95% 3.21% 3.53% 3.30% 3.15% 2.90% 3.05% 2.60% 1.96% 1.79% 1.81%
16....................... 3.14% 3.47% 3.79% 3.55% 3.47% 3.15% 3.19% 2.72% 2.10% 1.91% 1.89%
17....................... 3.38% 3.70% 4.02% 3.77% 3.77% 3.36% 3.32% 2.85% 2.22% 2.01% 2.00%
18....................... 3.55% 3.94% 4.19% 3.94% 3.97% 3.55% 3.42% 2.98% 2.40% 2.07% 2.10%
19....................... 3.80% 4.18% 4.43% 4.21% 4.20% 3.70% 3.50% 3.11% 2.55% 2.11% 2.24%
20....................... 3.98% 4.36% 4.65% 4.40% 4.39% 3.81% 3.60% 3.25% 2.69% 2.17% 2.35%
21....................... 4.14% 4.53% 4.80% 4.59% 4.53% 3.91% 3.69% 3.35% 2.79% 2.24% 2.46%
22....................... 4.31% 4.67% 5.07% 4.81% 4.67% 4.00% 3.81% 3.48% 2.85% 2.34% 2.55%
23....................... 4.46% 4.84% 5.27% 5.00% 4.75% 4.11% 3.96% 3.62% 2.89% 2.43% 2.63%
24....................... 4.58% 5.01% 5.47% 5.14% 4.81% 4.21% 4.10% 3.70% 2.92% 2.52%
25....................... 4.74% 5.17% 5.65% 5.24% 4.88% 4.30% 4.23% 3.75% 2.97% 2.62%
26....................... 4.87% 5.34% 5.80% 5.33% 4.94% 4.44% 4.34% 3.80% 3.04% 2.71%
27....................... 4.98% 5.50% 5.91% 5.39% 5.04% 4.56% 4.44% 3.87% 3.13%
28....................... 5.11% 5.67% 5.98% 5.44% 5.11% 4.66% 4.51% 3.92% 3.18%
29....................... 5.21% 5.78% 6.06% 5.50% 5.21% 4.77% 4.54% 3.98% 3.24%
30....................... 5.31% 5.89% 6.12% 5.56% 5.31% 4.79% 4.56% 4.06% 3.32%
31....................... 5.42% 5.98% 6.17% 5.65% 5.40% 4.83% 4.57% 4.11% 3.38%
32....................... 5.50% 6.02% 6.24% 5.71% 5.48% 4.86% 4.63% 4.17%
33....................... 5.55% 6.06% 6.29% 5.79% 5.52% 4.88% 4.67% 4.22%
34....................... 5.58% 6.11% 6.34% 5.85% 5.54% 4.90% 4.71% 4.27%
35....................... 5.60% 6.14% 6.39% 5.89% 5.56% 4.92% 4.76%
36....................... 5.62% 6.16% 6.44% 5.93% 5.58% 4.98% 4.80%
37....................... 5.65% 6.17% 6.47% 5.96% 5.61% 5.01% 4.84%
38....................... 5.68% 6.22% 6.53% 5.98% 5.64% 5.06%
39....................... 5.70% 6.27% 6.56% 6.01% 5.66% 5.10%
40....................... 5.71% 6.30% 6.58% 6.01% 5.67% 5.14%
41....................... 5.74% 6.34% 6.58% 6.02% 5.69%
42....................... 5.76% 6.35% 6.59% 6.04% 5.71%
43....................... 5.77% 6.37% 6.60% 6.06% 5.72%
44....................... 5.79% 6.37% 6.60% 6.07%
45....................... 5.79% 6.36% 6.61% 6.08%
46....................... 5.79% 6.36% 6.62% 6.10%
47....................... 5.78% 6.36% 6.63%
48....................... 5.78% 6.36% 6.63%
49....................... 5.77% 6.36% 6.64%
50....................... 5.75% 6.37%
51....................... 5.75% 6.37%
52....................... 5.74% 6.37%
53....................... 5.75%
54....................... 5.74%
55....................... 5.75%
Prime Mix(3)................ 58% 55% 51% 54% 55% 53% 49% 57% 67% 70% 70%
PERIOD(2) 1999-B 1999-C 2000-A 2000-B 2000-C 2000-D
--------- ------ ------ ------ ------ ------ ------
1....................... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2....................... 0.04% 0.02% 0.03% 0.02% 0.04% 0.03%
3....................... 0.11% 0.10% 0.10% 0.09% 0.13%
4....................... 0.26% 0.25% 0.20% 0.24% 0.27%
5....................... 0.47% 0.40% 0.36% 0.39% 0.46%
6....................... 0.66% 0.56% 0.55% 0.59%
7....................... 0.87% 0.71% 0.71% 0.78%
8....................... 1.00% 0.86% 0.91% 0.99%
9....................... 1.13% 1.01% 1.10%
10....................... 1.24% 1.14% 1.27%
11....................... 1.35% 1.34%
12....................... 1.44% 1.52%
13....................... 1.58% 1.74%
14....................... 1.74% 1.94%
15....................... 1.85% 2.09%
16....................... 2.03%
17....................... 2.16%
18....................... 2.30%
19.......................
20.......................
21.......................
22.......................
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.......................
53.......................
54.......................
55.......................
Prime Mix(3)................ 70% 67% 69% 69% 68% 70%
- ---------------
(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 securitized within
each pool.
54
57
Real Estate Loan Quality
The following table of mortgage delinquencies over 60 days by loan type
highlights the fact that real estate loan delinquencies have stabilized over the
past three years:
DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AMOUNT AMOUNT AMOUNT
PAST DUE PAST DUE PAST DUE
OVER % OF OVER % OF OVER % OF
60 DAYS CATEGORY 60 DAYS CATEGORY 60 DAYS CATEGORY
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Single family............................. $7,585 2.78% $8,508 2.64% $7,588 1.19%
Multifamily............................... 186 0.11 1,005 0.54 669 0.30
Construction.............................. 964 6.92
------ ---- ------ ---- ------ ----
$7,771 1.50% $9,513 1.58% $9,221 0.91%
====== ==== ====== ==== ====== ====
Nonperforming Assets
NPAs consist of nonperforming loans, also known as NPLs, Chapter 13
bankruptcy accounts greater than 120 days delinquent and real estate owned, also
known as REO. REO is carried at lower of cost or fair value. NPLs are defined as
all nonaccrual loans. This includes mortgage loans 90 days or more past due,
impaired loans where full collection of principal and interest is not reasonably
assured and automobile contracts that are contractually past due greater than
120 days and are in Chapter 13 bankruptcy. NPAs decreased $2.0 million to $11.5
million at December 31, 2000 compared with $13.5 million at December 31, 1999.
At December 31, 2000, NPAs represented 0.1% of total assets compared with 0.3%
at December 31, 1999. There were no impaired loans at December 31, 2000 compared
with $3.9 million at December 31, 1999.
When a loan is designated as nonaccrual, all previously accrued but unpaid
interest is reversed. For the years ended December 31, 2000, 1999 and 1998,
interest on nonperforming loans excluded from interest income totaled $0.5
million, $0.6 million and $0.4 million, respectively.
Allowance For Credit Losses
Our allowance for credit losses was $104 million at December 31, 2000
compared to $64.2 million at December 31, 1999. 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
as well as decreases in required allowances due to sales of loans and increased
by the provision for credit losses. For the year ended December 31, 2000, the
provision for credit losses was $82.1 million compared with $38.4 million and
$19.0 million for the years ended December 31, 1999 and 1998, respectively. Net
chargeoffs for the years ended December 31, 2000, 1999 and 1998 were $42.3
million, $11.8 million and $15.1 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 comprises 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.
55
58
The following table sets forth the activity in the allowance for credit
losses:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of
period.................... $ 64,217 $ 37,660 $ 33,834 $ 40,211 $ 39,260
Chargeoffs:
Mortgage loans............ (1,627) (2,495) (4,820) (6,850) (5,678)
Consumer loans............ (55,499) (18,787) (14,885) (15,956) (15,580)
-------- -------- -------- -------- --------
(57,126) (21,282) (19,705) (22,806) (21,258)
Recoveries:
Mortgage loans............ 62 1,883 427 66 2,010
Consumer loans............ 14,720 7,556 4,144 4,303 5,158
-------- -------- -------- -------- --------
14,782 9,439 4,571 4,369 7,168
-------- -------- -------- -------- --------
Net chargeoffs.............. (42,344) (11,843) (15,134) (18,437) (14,090)
Provision for credit
losses.................... 82,133 38,400 18,960 12,851 13,571
Business acquisition(1)..... (791) 1,470
-------- -------- -------- -------- --------
Balance at end of period.... $104,006 $ 64,217 $ 37,660 $ 33,834 $ 40,211
======== ======== ======== ======== ========
Ratio of net chargeoffs
during the period to
average loans outstanding
during the period......... 1.27% 0.72% 0.79% 0.93% 0.79%
- ---------------
(1) Adjustments related to the acquisition of The Hammond Company and its
subsidiaries.
The allowance for credit losses by loan category was as follows:
DECEMBER 31,
---------------------------------------------------------
2000 1999
--------------------------- ---------------------------
LOANS AS A % OF LOANS AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- --------------- --------- ---------------
(DOLLARS IN THOUSANDS)
Consumer............................... $ 83,501 87.5% $40,339 69.5%
Single family residential.............. 8,969 4.9 7,265 13.5
Multifamily residential................ 7,510 5.4 13,760 13.9
Commercial............................. 4,026 2.2 2,853 3.1
-------- ----- ------- -----
$104,006 100.0% $64,217 100.0%
======== ===== ======= =====
The allowance for real estate owned losses was $0.3 million at December 31,
2000 and $0.8 million at December 31, 1999. 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.
56
59
The following table presents summarized data relative to the allowances for
credit and real estate owned losses at the dates indicated:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Total loans(1).............................................. $4,924,053 $2,181,898
Allowance for credit losses................................. 104,006 64,217
Allowance for real estate owned losses...................... 250 784
Loans past due 60 days or more.............................. 37,911 17,514
Nonperforming loans......................................... 9,414 11,279
Nonperforming assets(2)..................................... 11,521 13,535
Allowance for credit losses as a percent of:
Total loans............................................... 2.1% 2.9%
Loans past due 60 days or more............................ 274.3 366.7
Nonperforming loans....................................... 1,104.8 569.4
Total allowance for credit losses and REO losses as a
percent of nonperforming assets........................... 904.9% 480.2%
Nonperforming loans as a percent of total loans............. 0.2% 0.5%
Nonperforming assets as a percent of total assets........... 0.1% 0.3%
- ---------------
(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 2000. Our ability
to maintain positive cash flows from 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 our operating
cash flows for our automobile lending operations:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Cash flows from owned loans........................ $182,295 $106,058 $ 74,098
Cash flows from trusts............................. 127,294 159,564 99,107
Contractual servicing income....................... 57,718 46,847 37,180
Other fee income................................... 61,772 46,121 43,433
Less:
Dealer participation............................... 100,300 83,435 72,255
Operating costs.................................... 188,870 173,453 165,042
-------- -------- --------
Operating cash flows............................... $139,909 $101,702 $ 16,521
======== ======== ========
Operating cash flows from automobile lending operations improved in 2000
compared with 1999 and 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.
57
60
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, we receive access to the amounts deposited into each
collection account and the amounts held in the spread accounts for each
securitization transaction. We use those amounts so received in our daily
operations to fund the purchase of automobile contracts or to cover the day to
day costs of our 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 $4.1 billion, $3.3 billion and $2.7 billion for the years ended December
31, 2000, 1999 and 1998, respectively. The increase in principal and interest
collections is primarily due to an increase in the amount of automobile
contracts serviced.
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:
DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
No minimum term:
Demand deposit accounts.... $ 8,229 $ 60,365 $ 38,511 $ 14,179 $ 28,734
Passbook accounts.......... 11,768 13,789 15,412 21,883 42,482
Money market accounts...... 810,169 574,589 320,160 126,956 438
Noninterest bearing
deposits................ 67,984 47,770 75,240 94,910 40,418
Certificate accounts:
Certificates (30 days to
five years)............. 1,414,956 1,311,916 1,461,539 1,488,352 1,481,847
IRAs....................... 165,381 175,286 192,473 214,640 231,535
Brokered deposits............ 28,594 75,400 39,976 48,489
---------- ---------- ---------- ---------- ----------
$2,478,487 $2,212,309 $2,178,735 $2,000,896 $1,873,943
========== ========== ========== ========== ==========
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 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.
58
61
The following table summarizes our average certificate accounts
outstanding:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Average certificate accounts outstanding.......... $1,524,232 $1,568,514
Average interest rate paid........................ 5.96% 5.24%
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:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Three months or less................................... $ 845 $ 1,731
Over three months through six months................... 3,427 5,673
Over six months through one year....................... 247,768 368,824
Over one year through three years...................... 278,428 45,406
Over three years....................................... 9,883 19,536
-------- --------
$540,351 $441,170
======== ========
Contract Sales and Securitizations
Since 1985, we have securitized over $20 billion of automobile receivables
in 51 public offerings, making us the fourth largest issuer of such securities
in the nation. For the year ended December 31, 2000, we securitized $4.6
billion, as compared to $2.5 billion for the year ended December 31, 1999 and
$1.9 billion for the year ended December 31, 1998. On February 2, 2001, we
completed the issuance of $1.0 billion of notes secured by automobile contracts.
We expect to continue to use securitization transactions as part of our
liquidity strategy when appropriate market conditions exist.
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.
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.
59
62
Subordinated Capital Debentures
In 1993 and 1998, we issued $125 million of 8.5% and $150 million of 8.875%
subordinated capital debentures due 2003 and 2007, respectively, of which $190
million was outstanding at December 31, 2000. In addition to providing
additional liquidity, the Bank is permitted to include $166 million of these
debentures in supplementary capital for purposes of determining compliance with
risk-based capital requirements. See "Business -- Supervision and
Regulation -- Regulatory Capital Requirements".
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 2000, loan originations totaled $4.5 billion
compared with $3.9 billion and $5.6 billion in 1999 and 1998, respectively. We
purchased $963 million of MBS and other investment securities during 2000
compared with $845 million and $665 million during 1999 and 1998, respectively.
Payments of Principal and Interest on Securitization Transactions
Under the terms of our reinvestment contract, we fund quarterly payments of
interest and principal to noteholders and certificateholders derived from the
cash flows received on the securitized contracts. Payments of principal and
interest to noteholders and certificateholders totaled $2.7 billion during 2000
compared with $2.3 billion and $2.1 billion during 1999 and 1998, respectively.
Amounts Paid to Dealers
Consistent with industry practice, we generally pay dealer participation to
the originating dealer for each automobile contract purchased. Participation
paid to dealers during 2000 totaled $100 million compared with $83.4 million and
$72.3 million in 1999 and 1998, respectively. Typically, the acquisition of
prime quality contracts higher up the prime credit quality spectrum requires a
higher amount of participation paid to the dealer due to increased level of
competition for such contracts.
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 flows until these predetermined levels are met. The amounts due from trusts
represent funds due to us that have not yet been disbursed from the spread
account on securitization transactions treated as sales. The amounts due from
trusts at December 31, 2000, including initial advances not yet returned, was
$357 million compared with $439 million at December 31, 1999. 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".
60
63
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 or 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
Requirements".
The following table summarizes the Bank's actual capital and required
capital as of December 31, 2000 and 1999:
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2000
Actual Capital:
Amount....................................... $533,571 $533,571 $533,571 $780,317
Capital ratio................................ 8.03% 8.03% 8.32% 12.16%
FIRREA minimum required capital:
Amount....................................... $ 99,664 $199,327 N/A $513,242
Capital ratio................................ 1.50% 3.00% N/A 8.00%
Excess....................................... $433,907 $334,244 N/A $267,075
FDICIA well capitalized required capital:
Amount....................................... N/A $332,212 $384,931 $641,552
Capital ratio................................ N/A 5.00% 6.00% 10.00%
Excess....................................... N/A $201,359 $148,640 $138,765
DECEMBER 31, 1999
Actual Capital:
Amount....................................... $400,438 $400,438 $400,438 $641,164
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
61
64
The following table reconciles the Bank's equity in accordance with GAAP to
the Bank's tangible, core and risk-based capital:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Bank shareholder's equity -- GAAP basis..................... $462,226 $351,200
Plus: unrealized losses under SFAS 115.................... 14,816 21,481
Less: non-permissible activities.......................... (115) (273)
Plus: minority interest in equity of subsidiaries......... 56,644 28,030
-------- --------
Total tangible and core capital............................. 533,571 400,438
Adjustments for risk-based capital:
Subordinated debentures(1)................................ 166,497 181,019
General loan valuation allowance(2)....................... 80,249 59,707
-------- --------
Risk-based capital.......................................... $780,317 $641,164
======== ========
- ---------------
(1) Excludes capitalized discounts and issue costs.
(2) Limited to 1.25% of risk-weighted assets.
ACCOUNTING PRONOUNCEMENTS
The FASB has provided guidance for the way enterprises report information
about derivatives and hedging. These statements require all derivatives to be
recognized on the balance sheet at fair value. Changes in the fair value of
derivatives that are hedges will be either offset against the change in the fair
value of the hedged assets, liabilities or firm commitments directly through
income or recognized through other comprehensive income on the balance sheet
until the hedged item is recognized in earnings, depending on the nature of the
hedges. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings if the derivative is a fair value hedge. The
ineffective portion of a derivative's change in fair value for a cash flow hedge
will be recognized in comprehensive income on the balance sheet if the hedge is
less than 100% effective or in earnings if the hedge is greater than 100%
effective. We adopted FASB's new guidance on January 1, 2001 and recorded a
cumulative effect adjustment to other comprehensive income of $4.8 million, net
of income tax, which represents the deferred loss on hedge agreements
outstanding at January 1, 2001. However, we do not expect that the adoption of
FASB's new guidance for these agreements will have a material effect on our
earnings.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, also known as SFAS No. 140. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Other provisions of the statement
are effective for fiscal years ending after December 15, 2000 and include
additional disclosure requirements and changes related to the recognition and
reclassification of collateral. We do not expect SFAS No. 140 will have a
material effect on our earnings or financial position.
62
65
FORWARD-LOOKING STATEMENTS
Included in our Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 we originate will reduce 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 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 notes treated as secured financings, as the level will
impact the timing of revenue recognition;
- 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest rates and early prepayment of loans and MBS are
the primary market risks facing us. The Credit and Pricing Committee is
responsible for setting credit and pricing policies and for monitoring credit
quality. 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, also
known as 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.
63
66
The following table summarizes our maturity GAP position:
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2000
--------------------------------------------------------------------------
WITHIN 3 MONTHS 1 YEAR TO 3 YEARS TO AFTER
3 MONTHS TO 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Interest earning assets:
Investment securities............. $ 9,229 $ 130 $ 355 $ 1,020 $ 10,734
Other investments................. 67,020 $ 200 67,220
Mortgage-backed securities........ 312,941 520,771 735,215 349,352 312,169 2,230,448
---------- ---------- ---------- ---------- --------- ----------
Total investments.......... 389,190 520,971 735,345 349,707 313,189 2,308,402
Consumer loans(1)................. 289,546 1,086,205 1,953,732 947,543 32,010 4,309,036
Mortgage loans:
Adjustable rate(2).............. 384,297 75,823 460,120
Fixed rate(2)................... 949 11,265 7,276 5,236 14,117 38,843
Construction loans(2)............. 8,468 8,468
Commercial loans(2)............... 85,628 17,755 1,817 1,131 1,255 107,586
---------- ---------- ---------- ---------- --------- ----------
Total interest earning
assets................... 1,158,078 1,712,019 2,698,170 1,303,617 360,571 7,232,455
Interest bearing liabilities:
Deposits:
Passbook accounts(3)............ 2,226 6,023 3,519 11,768
Demand deposit and money market
accounts(3)................... 288,477 257,493 272,428 818,398
Certificate accounts(4)......... 421,304 1,100,281 56,739 2,013 1,580,337
FHLB advances(4).................. 400,000 6,500 3,070 409,570
Securities sold under agreements
to repurchase(4)................ 178,821 178,821
Notes payable on automobile
secured financing(4)............ 228,838 901,341 1,606,952 736,246 3,473,377
Subordinated debentures(4)........ 41,970 147,992 189,962
Other borrowings(4)............... 27,802 27,802
---------- ---------- ---------- ---------- --------- ----------
Total interest bearing
liabilities.............. 1,547,468 2,265,138 1,988,108 738,259 151,062 6,690,035
---------- ---------- ---------- ---------- --------- ----------
Excess interest earning/bearing
assets (liabilities).............. (389,390) (553,119) 710,062 565,358 209,509 542,420
Effect of hedging activities(5)..... 1,174,500 (100,000) (165,000) (245,000) (664,500)
---------- ---------- ---------- ---------- --------- ----------
Hedged excess (deficit)............. $ 785,110 $ (653,119) $ 545,062 $ 320,358 $(454,991) $ 542,420
========== ========== ========== ========== ========= ==========
Cumulative excess (deficit)......... $ 785,110 $ 131,991 $ 677,053 $ 997,411 $ 542,420 $ 542,420
========== ========== ========== ========== ========= ==========
Cumulative difference as a
percentage of total interest
earning assets.................... 10.86% 1.82% 9.36% 13.79% 7.50% 7.50%
- ---------------
(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) Includes effect of interest rate caps and swaps on the MBS portfolio as of
December 31, 2000.
We utilize a variety of means in order to manage interest rate risk. To
protect against potential changes in interest rates affecting interest payments
on future securitization transactions, we enter into various hedge agreements.
Generally, we enter into these hedge agreements in amounts that correspond to
the principal amount of the contracts originated. The market value of these
hedge agreements is designed to respond inversely to potential changes in
interest rates. 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 use highly rated counterparties and further reduce 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 pending securitization
transactions.
64
67
We then sell or transfer 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 or losses
relative to hedge 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
if the securitization transaction is treated as a sale or amortized on a level
yield basis over the duration of the securities issued if the transaction is
treated as a secured financing.
We have entered into or committed to interest rate caps and interest rate
swaps as hedges against market value changes in designated portions of our MBS
portfolio to manage interest rate risk exposure. These financial instruments are
also recorded at fair value and are included in the basis of the designated
available for sale securities. The interest rate differential to be paid or
received is accrued and included as part of interest income, thereby adjusting
the overall yield on securities for which we are hedging our exposure to income
over the shorter of the remaining life of the derivative instrument or the
expected life of the associated asset. When the related MBS 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 mortgage banking
income.
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. There were no material
changes in market risks in the current year compared with the prior year.
65
68
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 contracts and MBS. 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. 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.
INTEREST RATE SENSITIVE INSTRUMENTS
THERE- FAIR
2001 2002 2003 2004 2005 AFTER TOTAL VALUE
---------- ---------- --------- --------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
RATE SENSITIVE ASSETS:
Fixed interest rate loans.... $1,413,709 $1,121,524 $ 840,292 $ 627,150 $326,440 $ 48,748 $4,377,863 $4,752,284
Average interest rate...... 14.65% 14.97% 15.08% 15.12% 14.66% 12.15% 14.86%
Variable interest rate
loans...................... $ 546,190 $ 546,190 $ 539,190
Average interest rate...... 8.61% 8.61%
Fixed interest rate
securities................. $ 689,141 $ 435,211 $ 300,288 $ 207,256 $142,525 $ 313,257 $2,087,678 $2,090,211
Average interest rate...... 7.32% 7.38% 7.38% 7.38% 7.38% 7.37% 7.36%
Variable interest rate
securities................. $ 220,724 $ 220,724 $ 222,803
Average interest rate...... 6.70% 6.70%
RATE SENSITIVE LIABILITIES:
Passbook deposits............ $ 8,249 $ 2,807 $ 712 $ 11,768 $ 11,555
Average interest rate...... 2.18% 2.18% 2.18% 2.18%
Money market and interest
bearing demand deposits.... $ 545,971 $ 158,457 $ 113,970 $ 818,398 $ 817,285
Average interest rate...... 5.99% 4.91% 4.61% 5.59%
Certificates of deposit...... $1,521,584 $ 52,180 $ 4,559 $ 394 $ 1,620 $1,580,337 $1,584,029
Average interest rate...... 6.50% 5.99% 5.46% 5.17% 5.55% 6.48%
Notes payable under
automobile secured
financing.................. $1,130,180 $ 926,417 $ 680,535 $ 736,245 $3,473,377 $3,552,053
Average interest rate...... 7.19% 7.24% 7.27% 7.21% 7.17%
Other fixed interest rate
borrowings................. $ 578,821 $ 6,500 $ 41,970 $ 151,062 $ 778,353 $ 791,403
Average interest rate...... 6.62% 8.19% 8.50% 8.83% 7.17%
Variable interest rate
borrowings................. $ 27,802 $ 27,802
Average interest rate...... 8.56% 8.56%
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Pay variable interest rate
swaps...................... $ 674,500 (50,000) (60,000) $(564,500) $ (28,711)
Average pay rate........... 6.62% 6.62% 6.68% 6.68%
Average receive rate....... 6.71% 6.71% 6.71% 6.71%
Interest rate caps
purchased.................. $ 400,000 $ (65,000) $ (50,000) $(150,000) $(35,000) $(100,000) $ 4,278
Average strike rate........ 6.25% 6.50% 7.50% 6.50% 6.00% 7.20%
Euro-dollar swaps............ $ 510,422 $ (223,102) $(138,537) $ (88,750) $(60,033) $ (7,773)
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.
66
69
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 Shareholders to be held May 3,
2001, 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 Us or Our
Subsidiaries" in the Proxy Statement and is incorporated herein by reference.
67
70
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
Our audited consolidated financial statements incorporated herein by
reference shall modify and supersede all documents filed prior to March 28,
2001.
(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, 2000 and
1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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 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)
68
71
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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(12)
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
- ---------------
(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.
69
72
(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 Westcorp and Joy
Schaefer (will be provided to the SEC upon request).
(9) Employment Agreement dated February 27, 1998 between WFS Financial, Inc,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).
(10) Employment Agreement, dated November 15, 1998 between the WFS Financial,
Inc, Westcorp 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 amended 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
70
73
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, 2001 By: /s/ ERNEST S. RADY
------------------------------------
Ernest S. Rady
Chairman of the Board and
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ERNEST S. RADY Chairman of the Board and March 22, 2001
- ----------------------------------------------------- Chief Executive Officer
Ernest S. Rady
Director March , 2001
- -----------------------------------------------------
Judith M. Barwick
/s/ ROBERT T. BARNUM Director March 22, 2001
- -----------------------------------------------------
Robert T. Barnum
/s/ STANLEY E. FOSTER Director March 22, 2001
- -----------------------------------------------------
Stanley E. Foster
Director March , 2001
- -----------------------------------------------------
Howard R. Reese
/s/ CHARLES E. SCRIBNER Director March 22, 2001
- -----------------------------------------------------
Charles E. Scribner
/s/ LEE A. WHATCOTT Executive Vice President March 22, 2001
- ----------------------------------------------------- (Principal Financial and
Lee A. Whatcott Accounting Officer) and Chief
Financial Officer
71
74
WESTCORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
PAGE
----
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December
31, 2000 and 1999......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
75
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, 2000 and 1999, 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,
2000. 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, 2000 and 1999 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Los Angeles, California
January 22, 2001
F-2
76
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash........................................................ $ 61,543 $ 33,645
Interest bearing deposits with other financial
institutions.............................................. 720 720
Other short-term investments................................ 66,500 137,000
---------- ----------
Cash and due from banks................................... 128,763 171,365
Investment securities available for sale.................... 10,734 10,111
Mortgage-backed securities available for sale............... 2,230,448 1,431,376
Loans held for sale......................................... 1,469,741
Loans receivable............................................ 4,924,053 712,157
Allowance for credit losses................................. (104,006) (64,217)
---------- ----------
Loans receivable, net..................................... 4,820,047 2,117,681
Amounts due from trusts..................................... 357,051 439,022
Retained interest in securitized assets..................... 111,558 167,277
Premises and equipment, net................................. 83,991 84,989
Other assets................................................ 125,318 76,953
---------- ----------
TOTAL ASSETS...................................... $7,867,910 $4,498,774
========== ==========
LIABILITIES
Deposits.................................................... $2,478,487 $2,212,309
Notes payable on automobile secured financing............... 3,473,377 461,104
Securities sold under agreements to repurchase.............. 178,821 249,675
Federal Home Loan Bank advances............................. 409,570 240,744
Amounts held on behalf of trustee........................... 494,858 687,274
Notes payable............................................... 27,802 8,482
Other liabilities........................................... 71,221 59,140
---------- ----------
TOTAL LIABILITIES................................. 7,134,136 3,918,728
Subordinated debentures..................................... 189,962 199,298
Minority interest........................................... 56,644 28,030
SHAREHOLDERS' EQUITY
Common stock (par value $1.00 per share; authorized
45,000,000 shares; issued and outstanding 31,931,826
shares in 2000 and 26,597,344 shares in 1999)............. 31,932 26,597
Paid-in capital............................................. 246,889 190,137
Retained earnings........................................... 223,163 157,465
Accumulated other comprehensive loss, net of tax............ (14,816) (21,481)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ 487,168 352,718
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $7,867,910 $4,498,774
========== ==========
See accompanying notes to consolidated financial statements.
F-3
77
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income:
Loans, including fees..................................... $ 439,336 $ 195,373 $ 191,805
Mortgage-backed securities................................ 128,231 87,631 65,039
Investment securities..................................... 535 1,607 6,070
Other..................................................... 15,719 13,005 9,252
----------- ----------- -----------
TOTAL INTEREST INCOME............................... 583,821 297,616 272,166
Interest expense:
Deposits.................................................. 133,610 106,067 109,004
Federal Home Loan Bank advances and other borrowings...... 152,094 28,140 34,707
Securities sold under agreements to repurchase............ 27,950 19,102 18,639
----------- ----------- -----------
TOTAL INTEREST EXPENSE.............................. 313,654 153,309 162,350
----------- ----------- -----------
NET INTEREST INCOME......................................... 270,167 144,307 109,816
Provision for credit losses................................. 82,133 38,400 18,960
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES....... 188,034 105,907 90,856
Noninterest income:
Automobile lending........................................ 158,701 188,706 99,123
Mortgage banking.......................................... 6,856 6,047 14,230
Investment and mortgage-backed securities gains
(losses)................................................ (628) 1,308 7,602
Insurance income.......................................... 6,984 6,126 5,713
Miscellaneous............................................. 5,730 7,819 1,986
----------- ----------- -----------
TOTAL NONINTEREST INCOME............................ 177,643 210,006 128,654
Noninterest expenses:
Salaries and associate benefits........................... 131,895 129,582 134,666
Credit and collections.................................... 21,150 21,833 22,277
Data processing........................................... 16,931 15,108 14,376
Occupancy................................................. 12,495 12,751 14,531
Telephone................................................. 5,868 6,660 9,787
Miscellaneous............................................. 32,852 31,503 34,116
Restructuring charge...................................... 18,000
----------- ----------- -----------
TOTAL NONINTEREST EXPENSES.......................... 221,191 217,437 247,753
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)................... 144,486 98,476 (28,243)
Income tax (benefit)........................................ 58,132 41,460 (11,330)
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST...................... 86,354 57,016 (16,913)
Minority interest in earnings (loss) of subsidiaries........ 11,852 6,522 (2,216)
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... 74,502 50,494 (14,697)
Extraordinary gain from early extinguishment of debt (net of
income tax of $175 in 2000 and $1,546 in 1999)............ 241 2,132
----------- ----------- -----------
NET INCOME (LOSS)........................................... $ 74,743 $ 52,626 $ (14,697)
=========== =========== ===========
Net income (loss) per common share -- basic:
Income (loss) before extraordinary item................... $ 2.53 $ 1.91 $ (0.56)
Extraordinary item........................................ 0.01 0.08
----------- ----------- -----------
Net income (loss)......................................... $ 2.54 $ 1.99 $ (0.56)
=========== =========== ===========
Net income (loss) per common share -- diluted:
Income (loss) before extraordinary item................... $ 2.52 $ 1.91 $ (0.56)
Extraordinary item........................................ 0.01 0.08
----------- ----------- -----------
Net income (loss)......................................... $ 2.53 $ 1.99 $ (0.56)
=========== =========== ===========
Weighted average number of common shares outstanding:
Basic..................................................... 29,494,497 26,503,796 26,305,117
=========== =========== ===========
Diluted................................................... 29,525,677 26,505,128 26,305,117
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
78
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME (LOSS),
SHARES STOCK CAPITAL EARNINGS NET OF TAX TOTAL
---------- ------- -------- -------- -------------- --------
(DOLLARS IN THOUSANDS)
Balance at January 1, 1998.............. 26,278,593 $26,279 $185,187 $131,427 $ 5,858 $348,751
Net loss.............................. (14,697) (14,697)
Unrealized gains on securities
available for sale and retained
interest in securitized assets, net
of tax(1)........................... 2,021 2,021
Less: reclassification adjustment for
gains included in net income........ (4,186) (4,186)
--------
Comprehensive loss.................... (16,862)
Issuance of common stock.............. 196,221 196 2,026 2,222
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 losses on securities
available for sale and retained
interest in securitized assets, net
of tax(1)........................... (24,312) (24,312)
Less: reclassification adjustment for
gains included in net income........ (862) (862)
--------
Comprehensive income.................. 27,452
Issuance of common stock.............. 122,530 122 929 1,051
Cash dividends........................ (5,299) (5,299)
Purchase of subsidiary stock.......... 469 469
---------- ------- -------- -------- -------- --------
Balance at December 31, 1999............ 26,597,344 26,597 190,137 157,465 (21,481) 352,718
Net income............................ 74,743 74,743
Unrealized gains on securities
available for sale and retained
interest in securitized assets, net
of tax(1)........................... 6,665 6,665
--------
Comprehensive income.................. 81,408
Issuance of common stock.............. 5,334,482 5,335 50,349 55,684
Issuance of subsidiary common stock... 6,403 6,403
Cash dividends........................ (9,045) (9,045)
---------- ------- -------- -------- -------- --------
Balance at December 31, 2000............ 31,931,826 $31,932 $246,889 $223,163 $(14,816) $487,168
========== ======= ======== ======== ======== ========
- ---------------
(1) The pre-tax decrease in unrealized losses on securities available for sale
and retained interest in securitized assets was $11.3 million for the year
ended December 31, 2000. For the year ended December 31, 1999, there was a
pre-tax increase in unrealized losses of $41.9 million offset with pre-tax
gains realized in income of $1.5 million. For the year ended December 31,
1998, there was a pre-tax increase in unrealized gains of $3.9 million
offset with pre-tax losses realized in income of $7.2 million.
See accompanying notes to consolidated financial statements.
F-5
79
WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss)........................................... $ 74,743 $ 52,626 $ (14,697)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for credit losses............................... 82,133 38,400 18,960
Depreciation and amortization............................. 16,845 16,306 31,629
Amortization of retained interest in securitized assets... 75,957 111,752 103,610
(Increase) decrease in other assets....................... (46,718) 18,817 10,534
Increase (decrease) in other liabilities.................. 12,081 (6,215) 2,801
Other, net................................................ 11,490 62 (9,682)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 226,531 231,748 143,155
INVESTING ACTIVITIES
Loans:
Origination of loans...................................... (4,531,581) (3,869,984) (5,558,998)
Proceeds from contract sales.............................. 660,000 2,500,000 1,885,000
Proceeds from sale of mortgage loans...................... 3,394 502,157 2,884,073
Other changes in loans.................................... 1,078,293 660,930 670,073
Investment securities available for sale:
Purchases................................................. (2,194) (244) (44,581)
Proceeds from sale........................................ 75,470 10,460
Proceeds from maturities.................................. 25 81,538
Mortgage-backed securities:
Purchases................................................. (960,876) (844,300) (620,328)
Proceeds from sale........................................ 17 109,726 365,990
Payments received......................................... 168,433 238,515 212,823
Increase in retained interest in securitized assets......... (19,240) (111,766) (91,914)
Decrease (increase) in amounts due from trusts.............. 81,971 (106,290) (37,609)
Purchase of premises and equipment.......................... (11,608) (24,529) (23,281)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (3,533,391) (870,290) (266,754)
FINANCING ACTIVITIES
Increase in deposits........................................ 266,178 33,574 177,839
Decrease in securities sold under agreements to
repurchase................................................ (70,854) (15,969) (21,427)
Increase in automobile secured financing.................... 3,012,273 461,104
Increase (decrease) in notes payable........................ 19,320 (5,945) (177,453)
(Decrease) increase in amounts held on behalf of trustee.... (192,416) 159,182 39,438
Increase in FHLB Advances................................... 168,826 79,890 75,882
Decrease in subordinated debentures......................... (8,608) (35,903)
Proceeds from issuance of common stock...................... 55,684
Cash dividends.............................................. (9,045) (5,299) (6,592)
Proceeds from issuance of subsidiary common stock........... 22,900
Other, net.................................................. 1,519 2,536
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 3,264,258 672,153 90,223
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (42,602) 33,611 (33,376)
Cash and cash equivalents at beginning of year.............. 171,365 137,754 171,130
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 128,763 $ 171,365 $ 137,754
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest.................................................. $ 286,306 $ 152,987 $ 160,630
Income taxes.............................................. 91,345 47,392 1,832
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Acquisition of real estate acquired through foreclosure..... 5,396 6,038 15,414
See accompanying notes to consolidated financial statements.
F-6
80
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include our accounts and
the accounts of our wholly owned subsidiary, Western Financial Bank, also known
as the Bank and our majority owned subsidiary, WFS Financial Inc, also known as
WFS. 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 accounting
principles generally accepted in the United States requires us 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
We are a financial services company that specializes primarily in
automobile lending, which is funded by our community banking operations and our
asset-backed securitization transactions. During 1999, we discontinued our
mortgage banking operations and, therefore, we have 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, also known as MBS, are
classified as available for sale and carried at fair value. Unrealized 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.
We have entered into or committed to interest rate caps and interest rate
swaps as hedges against market value changes in designated portions of our MBS
portfolio to manage interest rate risk exposure. These financial instruments are
also recorded at fair value and are included in the basis of the designated
available for sale securities. The interest rate differential to be paid or
received is accrued and included as part of interest income, thereby adjusting
the overall yield on securities for which we are hedging our exposure to
interest rate risk. 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 MBS 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 mortgage banking income and investment and MBS gains and losses.
Securitization Transactions
Certain loans are sold to investors with servicing rights retained by us.
We do not retain any direct recourse with respect to the automobile contracts
securitized. Automobile contracts securitized are treated as either sales to a
securitization trust or secured financings for accounting purposes.
For automobile contract securitization transactions treated as sales, we
record a non-cash gain equal to the present value of the estimated future cash
flows, net of the write-off of dealer participation and gains or
F-7
81
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
losses on hedges. These discounted cash flows or retained interest in
securitized assets, also known as RISA, are capitalized and amortized over the
expected life of the underlying contracts. Net interest income and servicing
fees earned on these contracts are recognized over the life of the
securitization transactions as contractual servicing income, retained interest
income and other fee income. These amounts are reported as automobile lending
income on the Consolidated Statements of Operations.
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 future cash flows 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. On a
quarterly basis, we evaluate the carrying value of the RISA in light of the
actual performance of the underlying contracts and make adjustments to reduce
the carrying value, if appropriate.
The excess cash flows generated by securitized contracts are deposited into
spread accounts by the trustee under the terms of the securitization
transactions. In addition, we advance additional monies to initially fund these
spread accounts. For securitization transactions treated as sales, amounts due
to us held in the spread accounts and servicing income earned by us for which we
have not yet received repayment from the trust are reported as amounts due from
trust on the Consolidated Statements of Financial Condition.
As servicer of these contracts, we hold and remit funds collected from the
borrowers on behalf of the trustee pursuant to reinvestment contracts that we
have entered into. For securitization transactions treated as sales, these
amounts are reported as amounts held on behalf of trustee on the Consolidated
Statements of Financial Condition.
For securitization transactions treated as secured financings, the
contracts are retained on the balance sheet with the securities used to finance
the contracts recorded as notes payable on automobile secured financing. We
recognize interest income when earned in accordance with the terms of the
contracts. Gains and losses relative to forward and Euro-dollar swap agreements
designated as hedges on these securitization transactions are recognized as an
adjustment to interest expense.
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, which
approximates the amount realized upon the securitization of the consumer
contracts.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that we believe is
adequate to absorb probable losses in the on balance sheet loan portfolio that
can be reasonably estimated. Our determination of the adequacy of the allowance
is based on an evaluation of the portfolio, past credit loss experience, current
economic conditions, volume, pending contract sales, growth and composition of
the loan portfolio, and other relevant factors. The allowance is increased by
provisions for credit losses charged against income.
Nonaccrual Loans
Nonaccrual loans are loans on which accrual of interest has been suspended.
Interest is suspended on all real estate loans when, in our 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. The accrual of interest income is suspended on all loans,
except consumer loans. On these loans, interest continues to accrue until the
loans are charged
F-8
82
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
off, which occurs automatically after the loans are past due 120 days, except
for accounts that are in Chapter 13 bankruptcy. At the time that a loan is
charged off, all accrued interest is reversed. For those accounts that are in
Chapter 13 bankruptcy and are contractually past due greater than 120 days, all
accrued interest is reversed and income is recognized on a cash basis. As of
December 31, 2000 and 1999, the amount of accrued interest reversed was not
material.
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.
Repossessed Assets
All accounts that have been repossessed and the redemption period for such
accounts has expired are reclassified from contracts receivable to repossessed
assets at fair value with any adjustment recorded against the allowance for
credit losses. Repossessed assets were included in other assets on the
Consolidated Statements of Financial Condition and were not material.
Non-performing Assets
Accounts that are in Chapter 13 bankruptcy and are contractually past due
greater than 120 days are reclassified from contracts receivable to
non-performing assets at fair value with any adjustment recorded against the
allowance for credit losses. Non-performing assets were included in other assets
on the Consolidated Statements of Financial Condition and were not material.
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 we believe to be adequate to absorb any probable losses in
the portfolio that can be reasonably estimated. Our determination of the
adequacy of the allowance is based on an evaluation of past credit loss
experience, current economic conditions, selling costs and other relevant
factors.
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 Consolidated Statements of
Financial Condition 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.
We defer 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.
F-9
83
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Insurance Commissions
Commissions on insurance policies sold are recognized as income over the
life of the policies.
Insurance Premiums
Premiums for life and accident/health insurance policies are recognized as
income over the term of the insurance contract.
Income Taxes
We file consolidated federal and state tax returns with all of our
subsidiaries except for Westhrift, which files a separate state tax return.
Fair Values of Financial Instruments
Fair value information about financial instruments is reported using quoted
market prices for which it is practicable to estimate that value. 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 rates 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 instruments. 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 our underlying value.
We use the following methods and assumptions in estimating our 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 MBS: 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 analysis, using interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Retained interest in securitized assets: RISA is carried at fair
value. The fair value is determined by calculating discounted cash flows.
Interest rate swaps, interest rate caps, forward agreements and Euro
dollar swap agreements: Hedge agreements are carried at fair value as
hedges of available for sale securities. The fair value is determined by
obtaining market quotes from brokers.
Loan commitments (including fixed and variable): The fair values of
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.
F-10
84
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities sold under agreements to repurchase, notes payable on
automobile secured financing, Federal Home Loan Bank advances, and
subordinated debentures: The fair value is estimated by using discounted
cash flow analyses based on our 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.
Amounts held on behalf of trustee: The carrying amounts reported in
the balance sheet approximate fair value.
Accounting Pronouncements
The Financial Accounting Standards Board, also known as FASB, has provided
guidance for the way enterprises report information about derivatives and
hedging. These statements require all derivatives to be recognized on the
balance sheet at fair value. Changes in the fair value of derivatives that are
hedges will be either offset against the change in the fair value of the hedged
assets, liabilities or firm commitments directly through income or recognized
through other comprehensive income on the balance sheet until the hedged item is
recognized in earnings, depending on the nature of the hedges. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings if the derivative is a fair value hedge. The ineffective portion of a
derivative's change in fair value for a cash flow hedge will be recognized in
comprehensive income on the balance sheet if the hedge is less than 100%
effective.
To protect against potential changes in interest rates affecting interest
payments on future securitization transactions, we enter into various hedge
agreements. As part of the adoption of FASB's new guidance, gains and losses on
these agreements will be deferred in other comprehensive income until the
completion of the securitization transaction. Once the transaction is complete,
the deferred amount in other comprehensive income is then amortized into
earnings over the duration of the securities. We adopted FASB's new guidance on
January 1, 2001 and recorded a cumulative effect adjustment to other
comprehensive income of $4.8 million, net of income tax, which represents the
deferred loss on such hedge agreements outstanding at January 1, 2001. However,
we do not expect that the adoption of FASB's new guidance for these agreements
will have a material effect on our earnings.
To protect against market value changes on our MBS portfolio, we enter into
various hedge agreements. As part of the adoption of FASB's new guidance, we
will redesignate these existing agreements from fair value hedges on our MBS
portfolio to cash flow hedges that will protect against potential changes in
interest rates affecting interest payments on future deposits gathered by us and
future securities sold under agreements to repurchase. As a result of this
redesignation, we will reclassify the market value of these derivatives from MBS
available for sale to deposits and securities sold under agreements to
repurchase. In conjunction with this redesignation, we will record a transition
adjustment to earnings for the unrealized loss on these derivatives offset by an
equal amount of unrealized gain on our MBS portfolio. The implementation of
FASB's new guidance for these derivatives will not have a material effect on our
earnings or comprehensive income.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, also known as SFAS No. 140. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Other provisions of the statement
are effective for fiscal years ending after December 15, 2000 and include
additional disclosure requirements and changes related to the recognition and
reclassification of collateral. We do not expect SFAS No. 140 will have any
effect on our earnings or financial position.
F-11
85
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale consisted of the following:
DECEMBER 31, 2000
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
Obligations of states and political
subdivisions................................... $ 1,509 $24 $ 1,533
Owner trust certificates......................... 6,517 6,517
Other............................................ 2,684 2,684
------- --- -------- -------
$10,710 $24 $10,734
======= === ======== =======
DECEMBER 31, 1999
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
Obligations of states and political
subdivisions................................... $ 1,510 $6 $10 $ 1,506
Owner trust certificates......................... 7,866 7,866
Other............................................ 739 739
------- -- --- -------
$10,115 $6 $10 $10,111
======= == === =======
At December 31, 2000, the stated maturities of our investment securities
available for sale were as follows:
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)
Obligations of states and
political subdivisions........ $ 486 $ 491 $1,023 $1,042
Owner trust certificates........ 3,072 3,072 3,445 3,445
Other........................... $2,684 $2,684
------ ------ ------ ------ ------ ------
$2,684 $2,684 $3,558 $3,563 $4,468 $4,487
====== ====== ====== ====== ====== ======
There were no proceeds from sales of investment securities available for
sale for the year ended December 31, 2000 compared with $75.5 million and $10.5
million for the years ended December 31, 1999 and 1998, respectively. There were
no gross realized gains or losses for the year ended December 31, 2000 compared
with $0.9 million gross gains and $21.0 thousand gross gains for the years ended
December 31, 1999, and 1998, respectively.
F-12
86
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
MBS available for sale consisted of the following:
DECEMBER 31, 2000
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
GNMA certificates............................ $2,181,067 $17,533 $41,524 $2,157,076
FNMA participation certificates.............. 69,278 3 411 68,870
FHLMC participation certificates............. 1,948 10 1,938
Other........................................ 2,564 2,564
---------- ------- ------- ----------
$2,254,857 $17,536 $41,945 $2,230,448
========== ======= ======= ==========
DECEMBER 31, 1999
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
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
========== ======= ======= ==========
Proceeds from the sale of MBS available for sale totaled approximately
$16.9 thousand, $110 million and $366 million for the years ended December 31,
2000, 1999, and 1998, respectively. There were no gross realized gains for the
year ended December 31, 2000 compared with $0.3 million and $8.3 million for the
years ended December 31, 1999 and 1998, respectively. There were no gross
realized losses for the year ended December 31, 2000 compared with $0.5 million
and $0.9 million realized for the years ended December 31, 1999 and 1998,
respectively.
Our MBS available for sale portfolio had maturities of ten years or more at
December 31, 2000 and 1999, although payments are generally received monthly
throughout the life of these securities.
We issued certain MBS that include recourse provisions. Subject to certain
limitations, we are 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 us had a total outstanding balance
of $84.1 million and $95.1 million at December 31, 2000 and 1999, respectively.
We have provided for probable losses which can be reasonably estimated that
may occur as a result of our recourse obligations. The maximum remaining
exposure under these recourse provisions was $46.6 million and $54.1 million at
December 31, 2000 and 1999, respectively. We have pledged $7.3 million and $8.3
million of MBS as collateral under these recourse provisions at December 31,
2000 and 1999, respectively.
F-13
87
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- NET LOANS RECEIVABLE
Net loans receivable consisted of the following:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Real estate:
Mortgage.......................................... $ 498,963 $ 589,286
Construction...................................... 14,784 23,190
---------- ----------
513,747 612,476
Less: undisbursed loan proceeds..................... 6,316 14,174
---------- ----------
507,431 598,302
Consumer:
Automobile contracts.............................. 4,307,267 1,518,434
Dealer participation, net of deferred contract
fees........................................... 82,717 31,532
Other............................................. 13,456 20,951
Unearned discounts................................ (94,404) (54,248)
---------- ----------
4,309,036 1,516,669
Commercial.......................................... 107,586 66,927
---------- ----------
4,924,053 2,181,898
Allowance for credit losses......................... (104,006) (64,217)
---------- ----------
4,820,047 2,117,681
Less: loans held for sale
Mortgage.......................................... 37,097
Consumer.......................................... 1,432,644
---------- ----------
1,469,741
---------- ----------
$4,820,047 $ 647,940
========== ==========
Contracts serviced by us for the benefit of others totaled approximately
$2.6 billion, $4.0 billion, and $5.1 billion at December 31, 2000, 1999 and
1998, respectively. The decrease in contracts serviced by us for the benefit of
others is the result of our newer securitization transactions being treated as
secured financings rather than sales.
NOTE 5 -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of year............... $ 64,217 $ 37,660 $ 33,834
Provision for credit losses................ 82,133 38,400 18,960
Chargeoffs................................. (57,126) (21,282) (19,705)
Recoveries................................. 14,782 9,439 4,571
-------- -------- --------
Balance at end of year..................... $104,006 $ 64,217 $ 37,660
======== ======== ========
F-14
88
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- RETAINED INTEREST IN SECURITIZED ASSETS
Selected original assumptions used to estimate cash flows for contracts
securitized in 2000, 1999, and 1998 were as follows:
FOR THE THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000 2000-A
Cumulative net credit losses................... 6.1%
Average monthly ABS prepayment speed........... 1.5%
Discount rate.................................. 10.8%
Weighted average remaining maturity (in
months)...................................... 61
1999 1999-A 1999-B 1999-C
Cumulative net credit losses................... 6.2% 6.1% 6.1%
Average monthly ABS prepayment speed........... 1.5% 1.5% 1.5%
Discount rate.................................. 9.1% 9.7% 10.2%
Weighted average remaining maturity (in
months)...................................... 59 59 61
1998 1998-A 1998-B 1998-C
Cumulative net credit losses................... 7.0% 6.2% 6.2%
Average monthly ABS prepayment speed........... 1.5% 1.5% 1.5%
Discount rate.................................. 9.8% 9.8% 8.8%
Weighted average remaining maturity (in
months)...................................... 57 58 58
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of the RISA to immediate 10% and 20% adverse changes in
assumed economics were as follows:
DECEMBER 31,
2000
------------
(DOLLARS IN
THOUSANDS)
Fair value of the RISA...................................... $111,558
ABS Prepayment speed (monthly rate)......................... 1.5%
Fair value after 10% adverse change......................... $107,843
Fair value after 20% adverse change......................... $103,574
Cumulative net credit losses (pool life rate)............... 6.1% - 7.6%
Fair value after 10% adverse change......................... $103,880
Fair value after 20% adverse change......................... $95,925
Discount rate (annual rate)................................. 8.8% - 10.8%
Fair value after 10% adverse change......................... $110,963
Fair value after 20% adverse change......................... $109,810
Cash flows from securitization trusts for securitization transactions
treated as sales totaled $127 million, $160 million and $98 million for the
years ended December 31, 2000, 1999, and 1998, respectively. The balance of
contracts 30 days or more delinquent included in such securitization trusts
totaled $110 million and $128 million at December 31, 2000 and 1999,
respectively. Net chargeoffs for these securitization trusts totaled $75
million, $92 million and $127 million for the years ended December 31, 2000,
1999, and 1998, respectively.
F-15
89
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the activity of the RISA:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................... $167,277 $ 171,230 $ 181,177
Additions........................................ 19,240 111,767 91,914
Amortization..................................... (75,958) (111,752) (103,610)
Change in unrealized gain/loss on RISA(1)........ 999 (3,968) 1,749
-------- --------- ---------
Balance at end of period......................... $111,558 $ 167,277 $ 171,230
======== ========= =========
- ---------------
(1) Change in unrealized gain/loss 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.
The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
Estimated net undiscounted RISA earnings............ $ 235,270 $ 410,066
Off balance sheet allowance for credit losses....... (110,339) (220,838)
Discount to present value........................... (13,373) (21,951)
---------- ----------
Retained interest in securitized assets............. $ 111,558 $ 167,277
========== ==========
Outstanding balance of automobile contracts sold
through securitizations........................... $2,608,017 $3,890,685
Off balance sheet allowance for losses as a percent
of automobile contracts sold through
securitizations................................... 4.23% 5.68%
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Land................................................... $ 16,274 $ 16,395
Buildings and improvements............................. 49,402 47,992
Computers and software................................. 40,631 31,515
Furniture and equipment................................ 14,551 14,100
Automobiles and airplane............................... 6,953 7,052
-------- --------
127,811 117,054
Less: accumulated depreciation......................... 43,820 32,065
-------- --------
$ 83,991 $ 84,989
======== ========
F-16
90
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Interest on loans receivable............................. $36,503 $14,504
Interest on securities................................... 14,507 8,370
------- -------
$51,010 $22,874
======= =======
Accrued interest receivable at December 31, 2000 and 1999 is included in
other assets in the Consolidated Statements of Financial Condition.
NOTE 9 -- DEPOSITS
Deposits consisted of the following:
WEIGHTED
AVERAGE RATE DECEMBER 31,
------------ ------------------------
2000 2000 1999
------------ ---------- ----------
(DOLLARS IN THOUSANDS)
Noninterest bearing deposits................... -- $ 67,984 $ 47,770
Demand deposit accounts........................ 2.0% 8,229 60,365
Passbook accounts.............................. 2.3 11,768 13,789
Money market deposit accounts.................. 5.3 810,169 574,589
Brokered certificate accounts.................. 5.9 28,594
Certificate accounts........................... 6.0 1,580,337 1,487,202
---------- ----------
$2,478,487 $2,212,309
========== ==========
The aggregate amount of deposits in denominations greater than or equal to
$100,000 was $540 million and $441 million at December 31, 2000 and 1999,
respectively. Deposit amounts in excess of $100,000 are not federally insured.
Scheduled maturities of certificate accounts at December 31, 2000 were as
follows:
WEIGHTED
AVERAGE RATE AMOUNT
------------ ----------
(DOLLARS IN THOUSANDS)
Six months or less.......................................... 6.28% $ 698,170
More than six months through one year....................... 6.69 822,829
More than one year through three years...................... 5.93 57,310
More than three years through ten years..................... 5.47 2,028
----------
$1,580,337
==========
F-17
91
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interest expense on deposits consisted of the following:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Demand deposit accounts............................ $ 373 $ 836 $ 858
Passbook accounts.................................. 296 380 487
Money market deposit accounts...................... 42,160 22,745 9,259
Certificate accounts............................... 90,460 80,471 93,200
Brokered certificate accounts...................... 321 1,635 5,200
-------- -------- --------
$133,610 $106,067 $109,004
======== ======== ========
Accrued interest payable on deposits at December 31, 2000 and 1999 was $1.5
million and $1.8 million, respectively, and is included in other liabilities in
the Consolidated Statements of Financial Condition.
The following table summarizes certificate accounts by interest rate within
maturity categories at:
DECEMBER 31, 2000
-----------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
---------- ------- ------ ---- ------ ---------- ----------
(DOLLARS IN THOUSANDS)
0% - 3.99%............... $ 4,351 $ 8 $ 22 $ 4,381
4.00% - 5.99%............... 160,888 22,071 4,424 $404 $1,624 189,411
6.00% - 7.99%............... 1,355,760 30,685 100 1,386,545
---------- ------- ------ ---- ------ ---- ----------
$1,520,999 $52,764 $4,546 $404 $1,624 $1,580,337
========== ======= ====== ==== ====== ==== ==========
DECEMBER 31, 1999
--------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL
---------- ------- ------- ------ ------ ---------- ----------
(DOLLARS IN THOUSANDS)
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
========== ======= ======= ====== ====== ==== ==========
NOTE 10 -- NOTES PAYABLE ON AUTOMOBILE SECURED FINANCING
For the year ended December 31, 2000, we issued $3.9 billion of notes
secured by automobile contracts. Interest payments on the notes are due
quarterly, in arrears, based on the respective note's interest rate. Interest
expense on these notes totaled $122 million for the year ended December 31,
2000.
In September 1999, we established a $500 million conduit facility secured
by automobile contracts in a private placement. At December 31, 2000, we had no
amount outstanding on the conduit facility compared with $461 million at
December 31, 1999. Interest expense totaled $6.2 million and $7.9 million for
the years ended December 31, 2000 and 1999, respectively.
F-18
92
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:
DECEMBER 31,
----------------------
2000 1999
-------- ----------
(DOLLARS IN THOUSANDS)
Balance at end of period............................. $178,821 $ 249,675
Balance at end of period, including accrued
interest........................................... 179,185 249,967
Estimated fair value at end of period................ 181,819 245,930
Average amount outstanding during the period......... 449,778 369,999
Maximum amount outstanding at any given month-end
during the period.................................. 798,271 1,036,205
Weighted average interest rate during the period..... 6.2% 5.2%
Weighted average interest rate at end of period...... 6.6% 5.5%
MBS available for sale sold under agreements to repurchase 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 us substantially identical
securities at the maturities of the agreements. The agreements at December 31,
2000 and 1999 mature within 30 days. Average amounts are computed based upon
daily ending balances.
NOTE 12 -- FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB are collateralized with eligible real estate loans
and MBS. The FHLB advances are collateralized with mortgage loans totaling $385
million and $340 million at December 31, 2000 and 1999, respectively, and MBS
totaling $942 million and $595 million at December 31, 2000 and 1999,
respectively.
Information as to interest rates and maturities on advances from the FHLB
were as follows:
DECEMBER 31,
----------------------------
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
Range of interest rates......................... 5.9% - 8.2% 5.5% - 8.2%
Weighted average interest rate.................. 6.5% 6.0%
Year due:
2000.......................................... $231,000
2001.......................................... $400,000
2002.......................................... 6,500 6,500
Thereafter.................................... 3,070 3,244
--------- ---------
$409,570 $240,744
--------- ---------
--------- ---------
We had available credit with the FHLB of approximately $831 million and
$695 million at December 31, 2000 and 1999, respectively.
NOTE 13 -- SHORT-TERM BORROWINGS
We have a line of credit with a bank which has a maximum availability of
$30.0 million. The line of credit has an interest rate tied to the FHLB
Reference Rate. There was $22.3 million and $2.5 million outstanding at December
31, 2000 and 1999, respectively. Interest expense totaled $1.3 million, $0.3
million, and $0.7 million for the years ended December 31, 2000, 1999, and 1998,
respectively.
F-19
93
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- SUBORDINATED DEBENTURES
Subordinated debentures consisted of the following:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Subordinated debentures................................ $192,540 $202,635
Discount and issuance costs............................ 2,578 3,337
-------- --------
Net subordinated debentures............................ $189,962 $199,298
======== ========
Our subordinated debentures were $190 million and $199 million at December
31, 2000 and 1999, respectively, net of discount and issuance costs of $2.6
million and $3.3 million at December 31, 2000 and 1999, respectively. The
subordinated debentures are unsecured and consist of two issuances with
outstanding balances of $42.5 million with an interest rate of 8.5% due in 2003
and $147 million with an interest rate of 8.875% due in 2007. They are
redeemable at our option, in whole or in part, 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 15 -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more were as follows:
DECEMBER 31, 2000
----------------------
(DOLLARS IN THOUSANDS)
2001.............................................. $ 4,198
2002.............................................. 3,395
2003.............................................. 3,339
2004.............................................. 2,857
2005.............................................. 1,469
Thereafter........................................ 28
-------
$15,286
=======
In certain cases, these agreements include various renewal options and
contingent rental agreements. Rental expense for premises and equipment totaled
$6.0 million, $6.1 million and $8.0 million for the years ended December 31,
2000, 1999 and 1998, respectively.
Our commercial and mortgage loan commitments and mortgage loans sold with
recourse were as follows:
DECEMBER 31,
-----------------------
2000 1999
---------- ---------
(DOLLARS IN THOUSANDS)
Commercial letters of credit and unused lines of credit
provided.............................................. $131,137 $98,301
======== =======
Commitments to fund commercial and mortgage loans
Fixed rate loans...................................... $ 33,506 $ 6,193
Variable rate loans................................... 90,007 83,299
-------- -------
$123,513 $89,492
======== =======
Mortgage loans sold with recourse....................... $ 46,562 $54,131
======== =======
F-20
94
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2000, we had commitments to fund fixed rate loans at rates
ranging from 7.75% to 10.5% with loan terms ranging from one month to 240
months.
We have pledged certain assets relative to amounts held on behalf of
trustee as follows:
DECEMBER 31,
----------------------
2000 1999
---------- --------
(DOLLARS IN THOUSANDS)
FNMA participation certificates...................... $ 50,810 $ 61,487
GNMA certificates.................................... 798,964 351,236
Automobile contracts................................. 316,924 365,305
Multifamily first mortgages.......................... 34,881 41,140
---------- --------
$1,201,579 $819,168
========== ========
We or our subsidiaries are involved as parties to certain legal proceedings
incidental to our businesses, including consumer class action lawsuits
pertaining to our automobile finance activities. We are vigorously defending
these actions and do not believe that the outcome of these proceedings will have
a material effect on our financial condition, results of operations and cash
flows.
NOTE 16 -- AUTOMOBILE LENDING INCOME
Automobile lending income consisted of the following components:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
(DOLLARS IN THOUSANDS)
Gain on sale of automobile contracts................ $ 7,719 $ 51,345 $25,622
Retained interest income, net of RISA
amortization...................................... 51,429 47,812 1,961
Contractual servicing income........................ 41,767 46,847 37,180
Other fee income.................................... 57,786 42,702 34,360
-------- -------- -------
Total automobile lending income..................... $158,701 $188,706 $99,123
======== ======== =======
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.
NOTE 17 -- EMPLOYEE STOCK OWNERSHIP AND SALARY SAVINGS PLAN
We have an Employee Stock Ownership and Salary Savings Plan, also known as
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 of Westcorp within limits set forth under
the Employee Retirement Income Security Act of 1974. Contributions to the Plan
are fully expensed in the year in which the contribution is made.
Our contributions to the Plan amounted to $8.0 million, $7.0 million and
$0.8 million in 2000, 1999 and 1998, respectively.
NOTE 18 -- STOCK OPTIONS
In 1991, we reserved 3,150,000 shares of common stock for future issuance
to certain associates under an incentive stock option plan, also known as the
Stock Option Plan. At December 31, 2000, there were 174,491 shares available for
future grants. The options may be exercised within five to seven years after the
date of
F-21
95
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
grant. Additionally, the weighted average life of the options at December 31,
2000 was 3.56 years and the exercise price of the options outstanding at
December 31, 2000 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, we 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:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
Outstanding at January 1, 1998.................... 983,157 $15.07
Granted......................................... 355,221 12.37
Exercised....................................... (118,905) 8.52
Cancelled....................................... (728,609) 17.09
-------- ------
Outstanding at December 31, 1998.................. 490,864 11.73
Granted......................................... 270,545 12.82
Exercised....................................... (122,530) 8.58
Cancelled....................................... (105,060) 12.98
-------- ------
Outstanding at December 31, 1999.................. 533,819 12.76
Granted......................................... 363,500 13.27
Exercised....................................... (15,013) 12.10
Cancelled....................................... (43,951) 12.78
-------- ------
Outstanding at December 31, 2000.................. 838,355 $12.94
======== ======
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 our stock options and WFS' stock options have
characteristics significantly different from those traded options, and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in our opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of our employee stock options.
The fair value of options granted in 2000, 1999 and 1998 was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions:
DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Risk-free interest rate..................... 4.8% 6.6% 4.7%
Volatility factor........................... 0.39 0.51 0.54
Expected option life........................ 5 to 7 years 5 to 7 years 5 to 7 years
The weighted average fair value of options granted during 2000, 1999, and
1998 was $6.59, $7.84 and $5.87, respectively.
F-22
96
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We elected to follow AICPA Accounting Principles Board Opinion 25, also
known as APB No. 25, and related Interpretations in accounting for our employee
stock options. Under APB No. 25, the exercise price of our 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 we had accounted for our employee stock options 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:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Pro forma net income (loss).......................... $74,237 $52,235 $(14,921)
Per diluted share.................................... $ 2.51 $ 1.97 $ (0.57)
The impact of applying SFAS No. 123 for the years ended December 31, 2000,
1999 and 1998 is not material to the financial statements of Westcorp.
NOTE 19 -- DIVIDENDS
We paid cash dividends of $0.30, $0.20 and $0.25 per share for the years
ended December 31, 2000, 1999 and 1998, respectively. On December 14, 2000, we
declared a cash dividend of $0.10 per share for shareholders of record as of
February 1, 2001, which was paid on February 15, 2001.
NOTE 20 -- RESTRUCTURING
In 1998, we completed an automobile lending restructuring plan. A total of
400 positions or 20% of our 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. During the fourth quarter of 1998, we incurred a $3.0 million
restructuring charge relating to the elimination of our mortgage banking
operations.
NOTE 21 -- INCOME TAXES
Income tax expense (benefit) consisted of the following:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- ------- --------
(DOLLARS IN THOUSANDS)
CURRENT:
Federal........................................... $ 69,210 $30,162 $ (353)
State franchise................................... 17,906 6,696 1,421
-------- ------- --------
87,116 36,858 1,068
DEFERRED:
Federal........................................... (23,162) 2,384 (7,999)
State franchise................................... (5,647) 3,764 (4,399)
-------- ------- --------
(28,809) 6,148 (12,398)
-------- ------- --------
$ 58,307 $43,006 $(11,330)
======== ======= ========
F-23
97
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
Tax at statutory rate................................ $50,570 $34,467 $ (9,885)
State tax (net of federal tax benefit)............... 7,968 6,799 (1,936)
Other................................................ (231) 1,740 491
------- ------- --------
$58,307 $43,006 $(11,330)
======= ======= ========
Deferred taxes reflect the net tax effect 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 reclassified. Such changes to
the components of the expense occur because all tax alternatives available to us
are not known for a number of months subsequent to year end.
Significant components of our deferred tax assets and liabilities were as
follows:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
DEFERRED TAX ASSETS:
Reserves for credit losses............................. $ 31,867 $ 15,673
State tax deferred benefit............................. 8,091 5,888
Deferred compensation accrual.......................... 3,655 3,209
Tax basis difference -- marketable securities.......... 518
Accelerated depreciation for tax purposes.............. 9
Other, net............................................. 2,777 3,762
-------- --------
Total deferred tax assets.................... 46,390 29,059
DEFERRED TAX LIABILITIES:
Loan fee income deferred for tax purposes.............. (470) (922)
FHLB dividends......................................... (6,046) (5,483)
Accelerated depreciation for tax purposes.............. (1,296)
Loan costs............................................. (1,188) (1,146)
Deferred taxes on unrealized gains under SFAS No.
115.................................................. (138)
Asset securitization income recognized for book
purposes............................................. (24,058) (32,105)
Other, net............................................. (8,237) (7,686)
-------- --------
Total deferred tax liabilities............... (41,433) (47,342)
-------- --------
Net deferred tax assets (liabilities)........ $ 4,957 $(18,283)
======== ========
NOTE 22 -- EXTRAORDINARY ITEM
For the years ended December 31, 2000 and 1999, we acquired $10.1 million
and $41.9 million of our subordinated debentures and subsequently retired these
debentures. As a result of these early retirements, we recorded extraordinary
gains of $0.2 million and $2.1 million for the years ended December 31, 2000,
and 1999, respectively.
F-24
98
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments were as follows:
DECEMBER 31,
----------------------------------------------------
2000 1999
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents........... $ 62,263 $ 62,263 $ 34,365 $ 34,365
Other short-term investments........ 66,500 66,500 137,000 137,000
Investment securities and MBS....... 2,265,615 2,265,615 1,404,333 1,404,333
Loans receivable (including held for
sale)............................ 4,924,053 5,291,474 2,181,898 2,229,138
Retained interest in securitized
assets........................... 111,558 111,558 167,277 167,277
Financial instrument agreements held
for purposes other than trading:
Interest rate swaps.............. (28,711) (28,711) 23,962 23,962
Interest rate options, floors and
caps........................... 4,278 4,278 13,192 13,192
Forward agreements............... 10,872
Euro-dollar swap agreements...... (7,773)
FINANCIAL LIABILITIES:
Deposits............................ 2,478,487 2,480,853 2,212,309 2,201,967
Securities sold under agreements to
repurchase....................... 178,821 181,819 249,675 245,930
Short-term borrowings............... 27,802 27,802 8,482 8,482
Notes payable on automobile secured
financing........................ 3,473,377 3,552,053 461,104 454,187
Federal Home Loan Bank advances..... 409,570 416,437 240,744 237,405
Amounts held on behalf of trustee... 494,858 494,858 687,274 687,274
Subordinated debentures............. 189,962 193,147 199,298 196,309
NOTE 24 -- FINANCIAL INSTRUMENT AGREEMENTS
We use financial instrument agreements to minimize our exposure to interest
rate risk. The fair value of these agreements may vary substantially with
changes in interest rates. Our portfolio of such agreements consisted of the
following:
DECEMBER 31, 2000
------------------------
NOTIONAL CREDIT
AMOUNT EXPOSURE
---------- --------
(DOLLARS IN THOUSANDS)
Interest rate swaps................................. $ 674,500
Interest rate caps.................................. 500,000 $4,278
Euro-dollar swap agreements......................... 795,000
---------- ------
$1,969,500 $4,278
========== ======
F-25
99
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
----------------------
NOTIONAL CREDIT
AMOUNT EXPOSURE
---------- --------
(DOLLARS IN THOUSANDS)
Interest rate swaps................................... $ 324,500 $23,962
Interest rate caps.................................... 440,000 13,192
Forward agreements.................................... 1,600,000
---------- -------
$2,364,500 $37,154
========== =======
Notional amounts do not represent amounts exchanged by parties and, thus,
are not a measure of our exposure to loss through our use of these agreements.
The amounts exchanged are determined by reference to the notional amounts and
the other terms of the agreements.
Our 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. We pay a fixed interest rate and receive a floating interest
rate on all of our interest rate swaps. At December 31, 2000 and 1999, the terms
of our interest rate swaps were to pay a weighted average fixed rate of 6.62%
and 5.92% in each year, and to receive a weighted average variable rate of 6.71%
and 6.11%, respectively, with expiration dates ranging from 2002 to 2009 with no
collateral requirements. Variable interest rates may change in the future.
The interest rate cap agreements have strike rates from 6.0% to 8.0% with
expiration dates ranging from 2001 to 2008 at December 31, 2000 and strike rates
from 6.0% to 7.5% with expiration dates ranging from 2001 to 2004 at December
31, 1999.
Our hedging strategy for our loan production has historically included the
use of forward agreements and Euro-dollar swap agreements. We have entered into
these agreements in numbers and amounts which have generally corresponded to the
principal amount of the sale and/or securitization transactions. Gains and
losses relative to these agreements are deferred and either recognized in full
as an adjustment to the gain or loss on the sale of the loans if the
securitization transaction is treated as a sale or amortized on a level yield
basis over the duration of the securities issued if the transaction is treated
as a secured financing. At December 31, 2000, we held Euro-dollar swap
agreements with an implied notional amount of $795 million. At December 31,
1999, we held forward agreements with a notional amount outstanding of $1.6
billion.
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 our exposure to credit losses
in the event of nonperformance by counterparties to financial instruments. We
use only highly rated counterparties and further reduce our risk by avoiding any
material concentration with a single counterparty.
F-26
100
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25 -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC:
Net income (loss)........................... $ 74,743 $ 52,626 $ (14,697)
Average basic common shares outstanding..... 29,494,497 26,503,796 26,305,117
Net income (loss) per common share --
basic..................................... $ 2.54 $ 1.99 $ (0.56)
DILUTED:
Net income (loss)........................... $ 74,743 $ 52,626 $ (14,697)
Average basic common shares outstanding..... 29,494,497 26,503,796 26,305,117
Stock option adjustment..................... 31,180 1,332
Average diluted common shares outstanding... 29,525,677 26,505,128 26,305,117
Net income (loss) per common share --
diluted................................... $ 2.53 $ 1.99 $ (0.56)
Options to purchase 12,700, 525,319, and 331,620 share of common stock at
prices ranging from $12.38 to $18.69 per share were outstanding at December 31,
2000, 1999, and 1998, respectively, but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares and therefore, the effect
would be antidilutive.
NOTE 26 -- REGULATORY CAPITAL
At December 31, 2000 and 1999, the Office of Thrift Supervision, also known
as the OTS, categorized the Bank as "well capitalized". 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, 2000 that we
believe have changed the Bank's category.
F-27
101
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, 2000 and 1999:
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2000
Actual Capital:
Amount....................................... $533,571 $533,571 $533,571 $780,317
Capital ratio................................ 8.03% 8.03% 8.32% 12.16%
FIRREA minimum required capital:
Amount....................................... $ 99,664 $199,327 N/A $513,242
Capital ratio................................ 1.50% 3.00% N/A 8.00%
Excess....................................... $433,907 $334,244 N/A $267,075
FDICIA well capitalized required capital:
Amount....................................... N/A $332,212 $384,931 $641,552
Capital ratio................................ N/A 5.00% 6.00% 10.00%
Excess....................................... N/A $201,359 $148,640 $138,765
DECEMBER 31, 1999
Actual Capital:
Amount....................................... $400,438 $400,438 $400,438 $641,164
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
The following table reconciles the Bank's equity to the Bank's tangible,
core and risk-based capital:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
Bank shareholder's equity -- GAAP basis................ $462,226 $351,200
Adjustment: unrealized losses under SFAS 115........... 14,816 21,481
Less: non-permissible activities..................... (115) (273)
Add: minority interest in equity of subsidiaries..... 56,644 28,030
-------- --------
Total tangible and core capital........................ 533,571 400,438
Adjustments for risk-based capital:
Subordinated debentures(1)........................... 166,497 181,019
General loan valuation allowance(2).................. 80,249 59,707
-------- --------
Risk-based capital..................................... $780,317 $641,164
======== ========
- ---------------
(1) Excludes capitalized discounts and issue costs.
(2) Limited to 1.25% of risk-weighted assets.
F-28
102
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27 -- WESTCORP (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Cash...................................................... $ 4,964 $ 2,011
Investment in subsidiaries................................ 505,293 350,528
Other..................................................... 1,476 4,409
-------- --------
Total assets...................................... $511,733 $356,948
======== ========
LIABILITIES
Other liabilities......................................... $ 26,068 $ 4,230
-------- --------
Total liabilities................................. 26,068 4,230
Shareholders' equity........................................ 485,665 352,718
-------- --------
Total liabilities and shareholders' equity........ $511,733 $356,948
======== ========
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
-------- -------- ---------
(DOLLARS IN THOUSANDS)
INCOME:
Dividends from subsidiaries................................. $ 3,500 $12,000 $ 14,000
------- ------- --------
Total income...................................... 3,500 12,000 14,000
EXPENSE:
Interest expense............................................ 1,295 470 70
Noninterest expenses........................................ 2,374 2,085 1,337
------- ------- --------
Total expense..................................... 3,669 2,555 1,407
Income (loss) before income taxes and equity in net income
of subsidiaries........................................... (169) 9,445 12,593
Income tax (benefit)........................................ (1,507) (780) (541)
------- ------- --------
Income before equity in net income of subsidiaries.......... 1,338 10,225 13,134
Equity in undistributed net income (loss) of subsidiaries... 71,902 42,401 (27,831)
------- ------- --------
Net income (loss)........................................... $73,240 $52,626 $(14,697)
======= ======= ========
F-29
103
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Operating Activities
Net income (loss).......................................... $ 73,240 $ 52,626 $(14,697)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 14 12
Equity in undistributed net (income) loss of
subsidiaries.......................................... (71,902) (42,401) 27,831
Other, net............................................... 4,958 (2,026) (1,195)
-------- -------- --------
Net cash provided by operating activities.................. 6,310 8,199 11,951
Investing Activities
Infusion of capital to subsidiary.......................... (69,848) (533) (15,120)
Sales of investment securities available for sale.......... 12,434
-------- -------- --------
Net cash used in investing activities...................... (69,848) (533) (2,686)
Financing Activities
Increase (decrease) in short-term borrowings............... 19,800 (2,718) (7,800)
Dividends paid............................................. (9,045) (5,299) (6,592)
Issuance of common stock................................... 55,684
Other, net................................................. 52 1,520 2,536
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities........ 66,491 (6,497) (11,856)
-------- -------- --------
Increase (decrease) in Cash................................ 2,953 1,169 (2,591)
Cash and cash equivalents at beginning of year............. 2,011 842 3,433
-------- -------- --------
Cash and Cash Equivalents at End of Year................... $ 4,964 $ 2,011 $ 842
======== ======== ========
NOTE 28 -- SUBSEQUENT EVENT (UNAUDITED)
On March 2, 2001, we filed a registration statement with the Securities and
Exchange Commission, also known as the SEC to provide our shareholders an
exclusive opportunity to purchase additional shares of stock through a rights
offering. The registration statement has not yet become effective. The number of
shares to be offered and the price per share has not yet been determined. Our
board of directors will make this determination immediately prior to the time at
which the registration statement becomes effective. We expect to raise
approximately $60.0 million in new capital from this transaction.
Ernest S. Rady, the chairman of the board of directors of Westcorp, has
informed us that he will exercise his rights and that he expects to also
exercise his right to oversubscribe. Mr. Rady is the beneficial owner of
approximately 68% of our common stock.
On March 2, 2001, our 82% owned subsidiary, WFS, filed a registration
statement with the SEC to provide its shareholders an exclusive opportunity to
purchase additional shares of stock through a rights offering. The registration
statement for this offering has not yet become effective. The number of shares
to be offered and the price per share has not yet been determined. The board of
director of WFS will make this determination immediately prior to the time at
which the registration statement becomes effective. The board of directors of
the Bank has informed us that they intend to exercise its basic subscription
right and expects to exercise its oversubscription right as part of this
offering. WFS expects that this transaction will provide it with approximately
$100 million in new capital from this transaction.
On February 2, 2001, we completed the issuance of $1.0 billion of notes
secured by automobile contracts.
F-30
104
WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 29 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 2000 and 1999. Certain quarterly amounts have been
adjusted to conform with the year-end presentation.
FOR THE THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000
Interest income............................. $100,889 $126,041 $164,655 $192,236
Interest expense............................ 50,112 66,533 90,895 106,114
-------- -------- -------- --------
Net interest income......................... 50,777 59,508 73,760 86,122
Provision for credit losses................. 11,945 15,246 24,906 30,036
Noninterest income.......................... 55,781 45,738 41,179 34,945
Noninterest expense......................... 55,997 56,029 53,891 55,274
-------- -------- -------- --------
Income before income taxes.................. 38,616 33,971 36,142 35,757
Income taxes................................ 16,148 13,541 14,911 13,532
-------- -------- -------- --------
Income before minority interest............. 22,468 20,430 21,231 22,225
Minority interest in earnings of
subsidiaries.............................. 2,627 2,873 3,082 3,270
-------- -------- -------- --------
Income before extraordinary item............ 19,841 17,557 18,149 18,955
Extraordinary gain from extinguishment of
debt, net of tax.......................... 158 61 16 6
-------- -------- -------- --------
Net income.................................. $ 19,999 $ 17,618 $ 18,165 $ 18,961
======== ======== ======== ========
Net income per common share -- basic........ $ 0.75 $ 0.64 $ 0.57 $ 0.59
======== ======== ======== ========
Net income per common share -- diluted...... $ 0.75 $ 0.64 $ 0.57 $ 0.59
======== ======== ======== ========
1999
Interest income............................. $ 61,078 $ 77,929 $ 73,525 $ 85,084
Interest expense............................ 33,854 40,071 35,874 43,510
-------- -------- -------- --------
Net interest income......................... 27,224 37,858 37,651 41,574
Provision for credit losses................. 12,157 4,355 15,924 5,964
Noninterest income.......................... 58,649 44,820 62,485 44,052
Noninterest expense......................... 56,616 54,527 55,817 50,477
-------- -------- -------- --------
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
======== ======== ======== ========
F-31
105
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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 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(12)
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)
106
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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
- ---------------
(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 Westcorp and Joy
Schaefer (will be provided to the SEC upon request).
(9) Employment Agreement dated February 27, 1998 between WFS Financial, Inc,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).
(10) Employment Agreement, dated November, 1998 between the WFS Financial, Inc,
Westcorp 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 amended 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).