<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
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 0-26458
WFS FINANCIAL INC
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0291646
(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)
(714) 727-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of October 31, 1996, the registrant had 25,684,175 shares outstanding of
common stock, no par value. The shares of common stock represent the only class
of common stock of the registrant.
The total number of sequentially numbered pages is 20.
<PAGE> 2
WFS FINANCIAL INC AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Short term investments $ 116,348,072 $ 65,019,858
Contracts receivable 46,425,455 103,914,277
Contracts held for sale 230,550,710 219,916,889
Allowance for credit losses (8,388,282) (7,794,974)
------------- -------------
Contracts receivable, net 268,587,883 316,036,192
Amounts due from trusts 170,460,392 110,230,750
Excess servicing receivable 102,453,273 78,045,241
Furniture, fixtures and equipment 2,889,464 4,282,614
Accrued interest receivable 1,300,431 1,927,979
Deferred taxes 7,192,327 5,054,931
Other 2,350,250 2,990,811
------------- -------------
$ 671,582,092 $ 583,588,376
============= =============
LIABILITIES
Senior note payable - parent $ 125,000,000 $ 125,000,000
Amounts held on behalf of trustee 394,269,839 341,692,369
Other liabilities 14,035,867 7,845,324
------------- -------------
533,305,706 474,537,693
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 18,749,250 shares
issued and outstanding 25,684,175 shares in 1996 and 1995 73,123,054 73,123,190
Paid-in capital 4,000,000 4,000,000
Retained earnings 61,153,332 31,927,493
------------- -------------
138,276,386 109,050,683
------------- -------------
$ 671,582,092 $ 583,588,376
============= =============
</TABLE>
- ----------
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 16,152,610 $ 15,504,623 $ 46,816,091 $ 44,734,115
Interest expense - parent 1,911,450 3,942,199 7,100,503 12,978,369
------------ ------------ ------------ ------------
Net interest income 14,241,160 11,562,424 39,715,588 31,755,746
Servicing income 29,260,941 19,694,243 79,505,315 51,168,474
Gain on sale of contracts 9,421,196 5,303,021 31,125,381 11,845,008
------------ ------------ ------------ ------------
TOTAL REVENUES 52,923,297 36,559,688 150,346,284 94,769,228
EXPENSES
Provision for credit losses 1,918,481 2,459,568 7,933,103 4,530,781
Operating expenses:
Salaries and employee benefits 17,590,073 11,722,933 50,824,316 30,844,587
General and administrative costs paid to
parent 5,320,825 2,714,671 14,646,131 8,396,305
Occupancy 1,861,096 1,157,870 5,065,329 3,093,075
Credit and collections 2,082,327 1,446,245 6,210,913 3,854,524
Telephone 1,048,660 561,048 2,746,901 1,550,805
Depreciation 164,025 352,896 508,659 948,365
Miscellaneous 5,120,823 2,114,780 11,699,004 6,150,418
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 33,187,829 20,070,443 91,701,253 54,838,079
------------ ------------ ------------ ------------
TOTAL EXPENSES 35,106,310 22,530,011 99,634,356 59,368,860
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 17,816,987 14,029,677 50,711,928 35,400,368
Income taxes 7,623,793 5,778,596 21,486,089 14,662,007
------------ ------------ ------------ ------------
NET INCOME $ 10,193,194 $ 8,251,081 $ 29,225,839 $ 20,738,361
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ 0.40 $ 0.34 $ 1.14 $ 0.95
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 25,684,175 23,997,509 25,684,175 21,748,619
============ ============ ============ ============
</TABLE>
- --------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,225,839 $ 20,738,361
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 7,933,103 4,530,781
Depreciation 508,659 948,365
Amortization of deferred fees (190,484) (214,539)
Amortization of excess servicing fee receivable 50,783,060 31,078,119
Decrease (increase) in interest receivable 627,548 (346,537)
Net change in other assets (1,496,835) 4,143,401
Net change in other liabilities 6,190,407 5,153,238
Origination of contracts (1,587,231,601) (1,114,875,424)
Proceeds from sale of contracts 1,545,000,000 1,055,000,000
Other change in contracts 81,937,291 122,628,667
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 133,286,987 128,784,432
INVESTING ACTIVITIES
Sale (purchase) of furniture, fixtures and equipment 884,491 (1,607,827)
Net increase in trust receivable (135,420,734) (78,741,572)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (134,536,243) (80,349,399)
FINANCING ACTIVITIES
Issuance of common stock 70,207,012
Increase in trustee accounts 52,577,470 91,644,567
Net decrease in borrowings from parent -- (195,792,182)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 52,577,470 (33,940,603)
--------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS $ 51,328,214 $ 14,494,430
Cash and equivalents at beginning of period 65,019,858 --
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 116,348,072 $ 14,494,430
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for:
Interest $ 7,778,744 $ 12,978,369
Income taxes 16,612,259 7,392,995
</TABLE>
- --------
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 1995 included in the WFS Financial Inc
("WFS") Form 10-K.
Certain amounts from the 1995 consolidated financial statement amounts have been
reclassified to conform to the 1996 presentation.
NOTE B - NET CONTRACTS RECEIVABLE
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Consumer:
Indirect contracts $ 300,650,897 $ 329,863,227
Direct contracts 15,471,032 25,194,734
Unearned discounts (45,580,071) (38,627,941)
------------- -------------
270,541,858 316,430,020
Allowance for credit losses (8,388,282) (7,794,974)
Deferred contract fees (320,718) (443,462)
Dealer participation 6,755,025 7,844,608
------------- -------------
268,587,883 316,036,192
Less contracts held for sale 230,550,710 219,916,889
------------- -------------
Total $ 38,037,173 $ 96,119,303
============= =============
</TABLE>
6
<PAGE> 7
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the changes in deferred contract fees and dealer
participations which are adjustments to the contract balance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 6,692,271 $ 8,244,158 $ 7,401,146 $ 10,085,951
Originations 15,883,766 12,132,860 46,857,971 31,734,481
Amortization (1,126,737) (1,137,876) (3,475,936) (3,072,624)
Sales (15,014,993) (10,691,356) (44,348,874) (30,200,022)
------------ ------------ ------------ ------------
Balance at end of period $ 6,434,307 $ 8,547,786 $ 6,434,307 $ 8,547,786
============ ============ ============ ============
</TABLE>
At September 30, 1996, WFS had forward agreements with a notional face amount
outstanding and a fair value of $40 million.
Contracts serviced by WFS for the benefit of others totalled approximately $2.6
billion at September 30, 1996 and $1.9 billion at December 31, 1995.
NOTE C - ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
1996 1995 1996 1995
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 8,575,489 $ 8,279,078 $ 7,794,974 $ 9,576,041
Provision for credit losses 1,918,481 2,459,568 7,933,103 4,530,781
Charged off contracts (3,292,373) (3,549,223) (11,321,779) (8,946,280)
Recoveries 1,186,685 1,276,749 3,981,984 3,305,630
------------------ ------------------ ------------------ -----------------
Balance at end of period $ 8,388,282 $ 8,466,172 $ 8,388,282 $ 8,466,172
================== ================== ================== =================
</TABLE>
7
<PAGE> 8
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - EXCESS SERVICING RECEIVABLE
Excess servicing receivable consists of the present value of estimated future
cash flows to be received by WFS from the excess spread created in
securitizations. The estimated future cash flows are determined by taking into
account certain assumptions principally regarding prepayments, credit losses and
servicing costs. These cash flows are then discounted at a rate management
believes to be at market. The balance of the excess servicing receivable is then
amortized against actual servicing income on a monthly basis. The assumptions
used are evaluated each quarter and adjusted, if appropriate, to reflect
performance of the contracts. The following table shows the activity of the
excess servicing receivable.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
1996 1995 1996 1995
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Beginning balance $ 93,765,434 $ 58,517,902 $ 78,045,241 $ 43,425,826
Additions 27,197,254 19,572,374 75,191,092 54,762,617
Amortization (18,509,415) (10,979,952) (50,783,060) (31,078,119)
------------------ ------------------ ------------------ -----------------
Ending balance $ 102,453,273 $ 67,110,324 $ 102,453,273 $ 67,110,324
================== ================== ================== =================
</TABLE>
Additions to excess servicing receivable result from new securitizations and
reflect the initial estimate of the present value of the future cash flows of
the contracts securitized. The amortization of excess servicing receivable
represents the decline in the excess servicing receivable for the respective
periods based upon the present value of the remaining estimated future cash
flows as of period end.
In initially valuing its excess servicing receivable, WFS establishes an off
balance sheet allowance for expected losses under the spread account provisions
of the securitization transactions and this allowance is included as a component
in calculating the excess servicing receivable. The allowance is based upon
historical experience and management's estimate of future performance regarding
primarily prepayments, credit losses, and servicing costs. The amount is
reviewed periodically and adjustments are made if actual experience or other
factors indicate that future performance may differ from management's prior
expectations.
The following table presents the estimated future undiscounted cash flows to be
received from securitizations, net of estimated costs to service and after
giving effect to estimated prepayments. To arrive at the excess servicing
receivable, this amount is reduced by the off balance sheet allowance
established for future losses and by discounting these cash flows to present
value.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
--------------------
<S> <C>
Estimated net undiscounted cash flows $ 269,849,312
Allowance for losses (150,272,082)
Discount to present value (17,123,957)
--------------------
Excess servicing receivable $ 102,453,273
====================
Outstanding balance of contracts sold through
securitizations $ 2,593,947,023
Allowance for losses as a percent of contracts sold through
securitizations 5.79%
</TABLE>
8
<PAGE> 9
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- ----------
<S> <C> <C>
Computers and software -- $4,620,278
Furniture, fixtures and leasehold improvements $2,310,859 1,327,706
Equipment 1,823,110 1,352,362
Automobiles 209,399 168,866
---------- ----------
4,343,368 7,469,212
Less accumulated depreciation 1,453,904 3,186,598
---------- ----------
$2,889,464 $4,282,614
========== ==========
</TABLE>
WFS transferred all computers and software to Westcorp, the holding company, as
part of its effort to combine the administrative services into one group for the
entire consolidated entity.
NOTE F - INTERCOMPANY ADVANCES
WFS receives advances in the form of a warehouse line of credit ("Line of
Credit") and a senior note payable ("Senior Note") from its parent, Western
Financial Bank F.S.B. (the "Bank") to fund its operations.
The Line of Credit agreement permits WFS to draw up to $400 million to be used
in its operations. The interest rate for the three months ended September 30,
1996 was 5.51%. Interest payments are calculated based on the average amount
outstanding. At September 30, 1996 and December 31, 1995, WFS did not have any
draws outstanding on the Line of Credit.
WFS also borrowed $125 million from the Bank under the terms of the Senior Note,
which is still outstanding. Interest is calculated at the rate of 7.25% per
annum.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The primary sources of revenue for WFS are servicing income and net interest
income. Servicing income is primarily generated following the securitization of
installment sales contracts and installment loans (collectively "contracts")
originated by WFS and consists of: (i) contractual servicing fees, (ii) excess
servicing income and (iii) fee income such as late charges and documentation
fees which are earned regardless of whether or not a securitization has
occurred. Contractual servicing is the servicing fee contractually due from a
trust for servicing contracts which have been securitized. Excess servicing is
the cash flow derived from the excess spread which is equal to the difference
between the stated interest rate on the contracts securitized and the interest
rate on the securitizations, adjusted for credit losses, administrative expenses
and contractual servicing fees. Late charges, deferment fees, documentation fees
and other fees are also collected on all contracts serviced and are retained by
WFS. Net interest income is the difference between the interest earned on
contracts not yet sold in securitization transactions and the interest paid on
the liabilities used to fund such contracts.
In addition to servicing income and net interest income, gain on sale of
contracts is also a source of revenue. WFS computes a gain on sale with respect
to contracts securitized based on the present value of the estimated future
excess cash flows to be received from such contracts using a market discount
rate. In order to determine the gain on sale, WFS also considers prepaid dealer
commissions, issuance costs and the effect of hedging activities. Gain on sale
is recorded as excess servicing receivable on the balance sheet and is amortized
against servicing income over the life of the contracts.
WFS originated $559 million and $1.6 billion of contracts for the three and nine
months ended September 30, 1996 compared to $421 million and $1.1 billion of
contracts for the same periods in 1995. This represents a 33% and 42% increase
in production for the respective periods. The company securitized $535 million
and $1.5 billion of contracts for the three and nine months ended September 30,
1996 compared with $375 million and $1.1 billion of contracts for the same
periods in 1995.
10
<PAGE> 11
The following table sets forth the loan origination, sale and principal
reduction activity of WFS for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ---------------------------------------
1996 1995 1996 1995
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Beginning balance $ 268,362,419 $ 362,535,942 $ 316,430,020 $ 425,957,378
Originations 559,230,911 421,048,364 1,587,231,601 1,114,875,424
Sales 535,000,000 375,000,000 1,545,000,000 1,055,000,000
Principal reductions (1) 22,051,472 49,193,945 88,119,763 126,442,441
------------------- -------------------- ------------------- -------------------
Ending balance $ 270,541,858 $ 359,390,361 $ 270,541,858 $ 359,390,361
=================== ==================== =================== ===================
</TABLE>
- -------------------
(1) Includes scheduled payments, prepayments and charge offs.
RESULTS OF OPERATIONS
SERVICING INCOME
Total servicing income was $29.3 million and $79.5 million for the three and
nine months ended September 30, 1996 compared to $19.7 million and $51.2 million
for the same periods in 1995. This represents a 49% and 55% increase in
servicing income for the respective periods and is due primarily to the
increased servicing portfolio. WFS' serviced portfolio, including contracts held
on balance sheet, increased to $2.9 billion at September 30, 1996 from $2.0
billion at September 30, 1995.
Excess servicing income may be impacted by changes in the amount of credit
losses and amount of prepayments. One of the factors that will cause excess
servicing income to fluctuate is the amount and timing of credit losses. Changes
in the amount of prepayments may also affect the amount and timing of excess
servicing income. Excess servicing income is dependent upon the average excess
spread on the contracts sold and the size of the serviced portfolio. Contractual
servicing income is earned at a rate of 1% per annum on the outstanding balance
of contracts securitized and is consistent with industry standards. Other fee
income, consisting primarily of documentation fees, late charges and deferment
fees also increased as a direct result of the increase in the number of
contracts originated and outstanding. Increased competition may also affect the
amount of other fee income that WFS may earn when originating or servicing
contracts.
11
<PAGE> 12
The following table summarizes servicing income for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
1996 1995 1996 1995
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Excess servicing income $ 14,512,990 $ 10,060,977 $ 39,365,972 $ 24,550,720
Contractual servicing income 6,498,338 4,167,914 17,520,965 11,646,560
Other fee income 8,249,613 5,465,352 22,618,378 14,971,194
------------------ ------------------ ------------------ -----------------
Total servicing income $ 29,260,941 $ 19,694,243 $ 79,505,315 $ 51,168,474
================== ================== ================== =================
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between the rate earned on contracts held
on balance sheet, generally during the warehousing period prior to
securitization, and the interest cost associated with WFS' borrowings. Net
interest income totalled $14.2 million and $39.7 million for the three and nine
months ended September 30, 1996 compared to $11.6 million and $31.8 million for
the same periods in 1995. The increase for the three and nine months ended
September 30, 1996 compared to the same period in 1995 is due to an increased
net interest rate spread. The following table shows the average rate earned on
contracts and the average rate paid on borrowings, consisting primarily of
advances from the Bank, together with the corresponding net interest rate spread
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- ------------------------------------
1996 1995 1996 1995
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Yield on interest earning assets 15.43% 13.94% 14.77% 14.10%
Cost of borrowings 6.03% 6.47% 6.25% 6.19%
------------------ ------------------ ------------------ -----------------
Net interest rate spread 9.40% 7.47% 8.52% 7.91%
================== ================== ================== =================
</TABLE>
Prior to securitizing contracts, WFS earns interest income on its contracts,
pays interest expense to fund the contracts and absorbs any credit losses. To
protect against changes in interest rates, WFS hedges contracts prior to their
securitization with forward agreements. The gain or loss on these forward
agreements is deferred and included as part of the basis of the underlying
contracts and recognized when the contracts are securitized. After
securitization, the net cash flows are recorded as servicing income.
WFS' borrowings from the Bank consist of a $125 million unsecured Senior Note
with a fixed interest rate of 7.25% and maturing in 2003. Borrowings under the
Line of Credit agreement are at a variable rate of interest based upon the
Federal composite commercial paper rate. WFS is not aware of any facts which
would preclude it from continuing to borrow from the Bank under the Line of
Credit.
12
<PAGE> 13
GAIN ON SALE OF CONTRACTS
WFS recorded a gain on sale of contracts of $9.4 million and $31.1 million for
the three and nine months ended September 30, 1996 compared to $5.3 million and
$11.8 million for the same periods of 1995. The increase in gain on sale
reported in 1996 is primarily the result of an increase in the amount
securitized and wider interest rate spreads. Contracts sold during the third
quarter of 1996 totalled $535 million compared to $375 million during the same
periods of 1995.
While the assumptions used in determining gain on sale of contracts have not
materially changed during the last three years, gain on sale of contracts has
fluctuated as a result of changes in the gross interest rate spread of contracts
securitized. Gross interest rate spread is affected by general market conditions
and overall market interest rates. The risks inherent in interest rate
fluctuation are substantially reduced through hedging activities.
PROVISION FOR CREDIT LOSSES
The Company maintains an allowance for credit losses to cover anticipated losses
for contracts held on balance sheet. The allowance for credit losses is
increased by charging the provision for credit losses and decreased by actual
net losses on the contracts held on balance sheet or by the reduction of
contracts held on balance sheet. The level of the allowance is based principally
on the outstanding balance of contracts held on balance sheet, pending sales of
contracts and historical loss trends. WFS believes that the allowance for credit
losses is currently adequate to absorb potential losses in the owned portfolio.
The provision for credit losses totalled $1.9 million and $7.9 million for the
three and nine months ended September 30, 1996 compared to $2.5 million and $4.5
million for the same periods in 1995. The decline for the three months ended
September 30, 1996, compared to the same period last year, is the result of a
$91 million reduction in the on balance sheet portfolio as WFS continues to
increase its securitization portfolio. At the same time, the allowance for loan
losses as a percent of total on balance sheet contracts increased 0.80% to 3.1%
from 2.3% a year earlier.
OPERATING EXPENSES
Total operating expenses were $33.2 million and $91.7 million for the three and
nine months ended September 30, 1996 compared to $20.1 million and $54.8 million
for the same periods in 1995. Except where otherwise noted, the increase in
total operating expenses is primarily attributable to an increase in the number
of contracts serviced and expansion into additional states. At September 30,
1996, WFS purchased contracts in 27 states from 125 office locations compared to
15 states and 80 offices at September 30, 1995.
Salaries and employee benefits expense increased to $17.6 million and $50.8
million for the three and nine months ended September 30, 1996 compared to $11.7
million and $30.8 million for the same periods in 1995. This increase is mainly
attributable to the increase in the number of employees due to the Company's
expansion. Occupancy expense increased to $1.9 million and $5.1 million for the
three and nine months ended September 30, 1996 compared to $1.2 million and $3.1
million for the same periods in 1995.
13
<PAGE> 14
The general and administrative costs paid to parent are based upon the actual
costs incurred and estimates of actual usage. WFS believes that these costs
approximate the cost to perform these services on its own behalf or acquire them
from third parties. WFS has the option, under management agreements, to procure
these services on its own should it be more economically beneficial for WFS to
do so. In 1996, the general and administrative costs paid to parent were $5.3
million and $14.6 million for the three and nine months ended September 30, 1996
compared to $2.7 million and $8.4 million for the same periods in 1995.
Other operating expenses include credit and collections costs, telephone and
other miscellaneous expenses. Credit and collections expense increased to $2.1
million and $6.2 million for the three and nine months ended September 30, 1996
compared to $1.4 million and $3.9 million for the same periods in 1995.
Telephone expense totalled $1.0 million and $2.7 million for the three and nine
months ended September 30, 1996 compared to $0.6 million and $1.6 million for
the same periods in 1995. Miscellaneous expenses, which include travel,
marketing, stationery, supplies, postage, legal, professional fees and other
ancillary costs, increased to $5.1 million and $11.7 million for the three and
nine months ended September 30, 1996 compared to $2.1 million and $6.2 million
for the same periods in 1995.
INCOME TAXES
WFS files consolidated federal and state tax returns as part of a consolidated
group that includes the Bank and Westcorp, the holding company parent of the
Bank. Taxes are paid in accordance with a tax sharing agreement that allocates
taxes based on the relative income or loss of each entity on a stand-alone
basis. The effective tax rates for the nine months ended September 30, 1996 and
1995 were 42.4% and 41.4%, respectively.
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
WFS holds a portfolio of contracts on balance sheet for investment that totalled
$46.4 million at September 30, 1996 and $104 million at December 31, 1995.
Contracts held for sale totalled $231 million at September 30, 1996 compared to
$220 million at December 31, 1995. The balance in these portfolios is largely
dependent upon the timing of the origination and securitization of contracts.
WFS completed securitization transactions of $1.5 billion during the first nine
months of 1996. WFS plans to continue to securitize contracts on a regular
basis.
14
<PAGE> 15
The following table presents information on the volume of contracts secured by
new and used autos for the periods indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ---------------------------------------
1996 1995 1996 1995
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
New autos $ 116,053,005 $ 106,355,115 $ 334,332,906 $ 263,883,618
Used autos 443,177,906 314,693,249 1,252,898,695 850,991,806
------------------- -------------------- ------------------- -------------------
Total volume $ 559,230,911 $ 421,048,364 $ 1,587,231,601 $ 1,114,875,424
=================== ==================== =================== ===================
</TABLE>
WFS is consistently expanding it operations to meet the needs of dealers in the
auto finance market. WFS is dedicated to developing and maintaining strong
relationships with its network of dealers. During the last year, WFS increased
its network of dealers from 5,450 to over 8,000, a 47% increase. These
relationships contribute to successful geographic expansion and increased
originations of contracts as shown in the table below.
<TABLE>
<CAPTION>
CONTRACTS ORIGINATED
------------------------------------------------------------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
--------------------------------------- --------------------------------------
# OF YEAR % OF % OF
STATE OFFICES BEGUN DOLLARS ORIGINATIONS DOLLARS ORIGINATIONS
- -------------------------------------------- -------------------- ------------------ -------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
California 41 1973 $ 854,254,292 54.0% $ 782,603,367 70.0%
Oregon 5 1992 87,337,774 5.5% 71,995,899 6.5%
Arizona 4 1993 94,022,056 5.9% 38,652,881 3.5%
Nevada 3 1993 86,594,235 5.4% 63,471,064 5.7%
Texas 19 1994 157,387,130 9.9% 105,446,535 9.5%
Washington 4 1994 63,607,527 4.0% 19,960,146 1.8%
New Mexico 1 1994 22,763,848 1.4% 7,303,725 0.7%
Idaho 1 1994 17,414,181 1.1% 3,478,344 0.3%
Colorado 4 1995 41,138,590 2.6% 10,900,837 0.9%
Missouri 4 1995 34,199,084 2.1% 4,243,934 0.4%
Florida 6 1995 24,198,304 1.7% 459,171 0.1%
North Carolina 3 1995 14,144,981 0.9%
Utah 2 1995 14,080,841 0.9% 4,384,068 0.4%
Georgia 2 1995 12,502,332 0.7% 1,258,707 0.1%
Oklahoma 2 1995 9,657,148 0.6%
Kansas 1 1995 8,420,330 0.5% 716,746 0.1%
Illinois 6 1996 16,158,115 1.0%
Tennessee 4 1996 6,601,043 0.4%
Indiana 1 1996 6,367,360 0.4%
Eight Other States 12 1996 16,382,430 1.0%
----------- -------------------- ------------------ -------------------- -----------------
Total 125 $ 1,587,231,601 100.0% $ 1,114,875,424 100.0%
=========== ==================== ================== ==================== =================
</TABLE>
15
<PAGE> 16
AMOUNTS DUE FROM TRUSTS
Under the terms of the securitization transactions, the excess cash flow
generated by contracts sold to trusts is deposited into spread accounts by the
trustee. In addition, at the time a securitization transaction closes, WFS
advances additional monies to these accounts. After the spread accounts reach a
predetermined funding level, these funds, as well as the excess spread, are paid
to WFS. Amounts due from trusts represent funds due to WFS that have not been
disbursed from the spread accounts. The amounts due from trusts at September 30,
1996 were $170 million as compared with $110 million at year-end 1995. The
increase from the year-end amount is a result of the increase in total contracts
securitized and outstanding.
ASSET QUALITY
Servicing income is affected by the quality of the underlying contracts
originated and securitized by WFS. Servicing contracts includes managing
delinquent contracts, repossessing and selling autos, securing defaulted
contracts and recovering deficiency balances. A delinquent contract is one on
which payment has not been made by the due date on which such payment was
contractually due. WFS monitors and attempts to minimize delinquencies and
losses through an online collections system. At September 30, 1996, delinquency
for the serviced portfolio was 1.61% based on the dollar amount of contracts
outstanding compared to 1.24% at December 31, 1995, as shown in the table below.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
----------------------------------- -----------------------------------
NUMBER NUMBER
OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Contracts serviced (1) 323,085 $2,864,494,190 258,665 $2,209,594,002
============== ============== ============== ==============
Period of delinquency (2)
31-59 days 3,562 $ 30,754,056 2,180 $ 18,557,510
60-89 days 1,021 8,903,353 690 6,142,551
90 days or more 698 6,371,172 308 2,701,084
-------------- -------------- -------------- --------------
Total contracts delinquent 5,281 $ 46,028,581 3,178 $ 27,401,145
============== ============== ============== ==============
Delinquencies as a percentage of
number and amount of contracts
outstanding 1.63% 1.61% 1.23% 1.24%
============== ============== ============== ==============
</TABLE>
- -------------------
(1) Includes delinquency information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced
by WFS.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
LOSSES
WFS has continued its aggressive geographic expansion, and has increased the
relative percentage of contracts that it purchases through its branch division.
This growth has led to higher yielding loans and higher loss experience.
Management believes the benefit of higher yielding loans more than offsets the
increase in loan loss experience. Management continues to monitor the level of
charge offs and collection activities to ensure strong asset quality.
16
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------- ---------------------------------------
1996 1995 1996 1995
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Contracts serviced
at end of period (1) $ 2,864,494,190 $ 2,048,467,229 $ 2,864,494,190 $ 2,048,467,229
=================== =================== =================== ===================
Average during period $ 2,734,349,797 $ 1,944,316,562 $ 2,516,773,136 $ 1,804,674,178
=================== =================== =================== ===================
Gross charge offs of contracts
during period $ 19,905,395 $ 13,129,791 $ 55,310,985 $ 33,377,642
Recoveries of contracts during
period 6,473,967 5,101,056 18,833,445 13,342,030
------------------- ------------------- ------------------- -------------------
Net charge offs $ 13,431,428 $ 8,028,735 $ 36,477,540 $ 20,035,612
=================== =================== =================== ===================
Net charge offs as a percentage of
contracts outstanding during
period (2) 1.96% 1.65% 1.93% 1.48%
</TABLE>
- -----------------
(1) Includes loan loss information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced
by WFS, and is net of unearned add-on interest.
(2) Annualized based on net charge offs as a percentage of average contracts
outstanding during the three months ended September 30, 1996.
REPOSSESSED ASSETS
WFS disposes of its repossessed vehicles within 30 to 45 days from acquisition,
primarily through third party wholesale programs to further limit potential
credit losses. At September 30, 1996 total serviced repossessed assets were $3.6
million or 0.13% of total serviced contracts compared to $2.4 million or 0.11%
at December 31, 1995 as shown in the table below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------- --------------------------------------
NUMBER NUMBER
OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
----------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Serviced repossessed assets 685 $ 3,666,433 462 $ 2,355,953
================= ================== ================== ===================
Serviced repossessed assets as a
percentage of number and amount of
serviced contracts outstanding .21% .13% .18% .11%
================= ================== ================== ===================
</TABLE>
17
<PAGE> 18
CAPITAL RESOURCES AND LIQUIDITY
WFS requires substantial capital resources to operate its business. The
resources available to WFS include contract securitizations, collections of
principal and interest from contracts and borrowings from its parent. These
sources provide capital to fund originations of contracts. It is anticipated
that contracts purchased will continue to be the major cash need of WFS.
Operating activities generate cash flows through securitizations and principal
receipts on contracts. In addition to cash flows generated through its operating
activities, WFS receives financing from the Bank under the terms of its $125
million Senior Note and its $400 million Line of Credit. These sources of
capital are expected to provide adequate funding of WFS' operations and WFS
believes that its sources of liquidity are sufficient to meet its short and long
term cash requirements.
WFS' hedging strategy includes the use of two-year Treasury securities forward
agreements. Generally, these agreements are entered into by WFS in amounts which
correspond to the principal amount of the securitization transactions. The
market value of these forward agreements responds inversely to the market value
changes of the underlying contracts. Because of this inverse relationship, WFS
can effectively lock in its gross interest rate spread at the time of entering
into the hedge transaction. Gains and losses relative to these 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. WFS uses only highly rated
counterparties and further reduces its risk by avoiding any material
concentration with a single counterparty. Credit exposure is limited to those
agreements with a positive fair value and only to the extent of that fair value.
WFS hedges substantially all of its contracts pending securitization.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WFS is involved as a party to certain legal
proceedings incidental to its business. WFS
believes that the outcome of such proceedings
will not have a material effect upon its business
or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WFS FINANCIAL INC
- --------------------------------------------------------------------------------
(Registrant)
Date: November 1, 1996 By:/s/JOY SCHAEFER
---------------- ------------------------------------
Joy Schaefer
Vice Chairman, President
and Chief Operating Officer
Date: November 1, 1996 By:/s/LEE A. WHATCOTT
---------------- --------------------------------------
Lee A. Whatcott
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-01-1996
<CASH> 116,348
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 276,976
<ALLOWANCE> 8,388
<TOTAL-ASSETS> 671,582
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 408,306
<LONG-TERM> 125,000
0
0
<COMMON> 73,123
<OTHER-SE> 65,153
<TOTAL-LIABILITIES-AND-EQUITY> 671,582
<INTEREST-LOAN> 46,816
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,816
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 7,100
<INTEREST-INCOME-NET> 39,716
<LOAN-LOSSES> 7,933
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 91,701
<INCOME-PRETAX> 50,712
<INCOME-PRE-EXTRAORDINARY> 29,226
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,226
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 12.47
<LOANS-NON> 0
<LOANS-PAST> 859
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,795
<CHARGE-OFFS> 11,322
<RECOVERIES> 3,982
<ALLOWANCE-CLOSE> 8,388
<ALLOWANCE-DOMESTIC> 8,388
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
