<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 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
JUNE 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
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 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>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Short term investments $111,073,120 $ 65,019,858
Contracts receivable 41,905,689 103,914,277
Contracts held for sale 233,149,001 219,916,889
Allowance for credit losses (8,575,489) (7,794,974)
------------ ------------
Contracts receivable, net 266,479,201 316,036,192
Amounts due from trusts 148,771,859 110,230,750
Excess servicing receivable 93,765,434 78,045,241
Furniture, fixtures and equipment 2,224,632 4,282,614
Accrued interest receivable 1,361,392 1,927,979
Deferred taxes 7,192,327 5,054,931
Other 1,668,952 2,990,811
------------ ------------
$632,536,917 $583,588,376
============ ============
LIABILITIES
Senior note payable - parent $125,000,000 $125,000,000
Amounts held on behalf of trustee 367,068,357 341,692,369
Other liabilities 12,385,232 7,845,324
------------ ------------
504,453,589 474,537,693
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 25,684,175 shares in 1996 and 1995 73,123,190 73,123,190
Paid-in capital 4,000,000 4,000,000
Retained earnings 50,960,138 31,927,493
------------ ------------
128,083,328 109,050,683
------------ ------------
$632,536,917 $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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Interest income $16,326,560 $15,157,832 $30,663,482 $29,229,492
Interest expense - parent 2,493,036 4,656,315 5,189,053 9,036,170
----------- ----------- ----------- -----------
Net interest income 13,833,524 10,501,517 25,474,429 20,193,322
Servicing income 26,653,634 15,557,345 50,244,374 31,474,231
Gain on sale of contracts 9,416,823 5,416,484 21,704,185 6,541,987
----------- ----------- ----------- -----------
TOTAL REVENUES 49,903,981 31,475,346 97,422,988 58,209,540
EXPENSES
Provision for credit losses 827,622 1,939,695 6,014,623 2,071,213
Operating expenses:
Salaries and employee benefits 18,590,162 9,671,605 33,234,243 19,121,654
General and administrative costs
paid to parent 4,927,208 2,813,986 9,325,306 5,681,633
Occupancy 1,642,518 994,318 3,204,233 1,935,206
Credit and collections 2,152,097 1,223,071 4,128,586 2,408,278
Telephone 933,373 491,096 1,698,241 989,758
Depreciation 177,716 316,401 344,634 595,469
Miscellaneous 3,913,757 2,313,251 6,578,181 4,035,638
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 32,336,831 17,823,728 58,513,424 34,767,636
----------- ----------- ----------- -----------
TOTAL EXPENSES 33,164,453 19,763,423 64,528,047 36,838,849
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 16,739,528 11,711,923 32,894,941 21,370,691
Income taxes 7,026,505 4,826,728 13,862,296 8,883,411
----------- ----------- ----------- -----------
NET INCOME $ 9,713,023 $ 6,885,195 $19,032,645 $12,487,280
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE $ 0.38 $ 0.33 $ 0.74 $ 0.61
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 25,684,175 20,624,175 25,684,175 20,624,175
=========== =========== =========== ===========
</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>
Six Months Ended June 30,
----------------------------------
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 19,032,645 $ 12,487,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 6,014,623 2,071,213
Depreciation 344,634 595,469
Amortization of deferred fees (134,161) (143,031)
Decrease (increase) in interest receivable 566,587 (187,271)
Net change in other assets (815,537) (496,681)
Net change in other liabilities 4,539,908 3,862,147
Origination of contracts (1,028,000,691) (693,827,059)
Proceeds from sale of contracts 1,010,000,000 680,000,000
Other change in contracts 61,677,220 75,390,791
--------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 73,225,228 79,752,858
INVESTING ACTIVITIES
Sale (purchase) of furniture, fixtures and equipment 1,713,348 (1,049,998)
Net increase in trust receivable (54,261,302) (24,277,272)
--------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (52,547,954) (25,327,270)
FINANCING ACTIVITIES
Increase in trustee accounts 25,375,988 61,107,696
Net increase in borrowings from parent - (115,533,284)
--------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 25,375,988 (54,425,588)
--------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS $ 46,053,262 -
Cash and equivalents at beginning of period 65,019,858 -
--------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 111,073,120 -
=============== =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for:
Interest $ 4,858,865 $ 9,036,170
Income taxes 11,737,887 6,562,045
</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 six months ended June 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.
6
<PAGE> 7
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - NET CONTRACTS RECEIVABLE
- ----------------------------------------------------
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Consumer:
Indirect contracts $300,595,178 $329,863,227
Direct contracts 15,257,913 25,194,734
Unearned discounts (47,490,672) (38,627,941)
------------ ------------
268,362,419 316,430,020
Allowance for credit losses (8,575,489) (7,794,974)
Deferred contract fees (293,852) (443,462)
Dealer participation 6,986,123 7,844,608
------------ ------------
266,479,201 316,036,192
Less contracts held for sale 233,149,001 219,916,889
------------ ------------
Total $ 33,330,200 $ 96,119,303
============ ============
</TABLE>
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 Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 7,425,967 $ 12,178,901 $ 7,401,146 $ 10,085,951
Originations 15,558,726 10,085,484 30,974,205 19,601,621
Amortization (1,179,875) (1,014,944) (2,349,199) (1,934,748)
Sales (15,112,547) (13,005,283) (29,333,881) (19,508,666)
------------ ------------ ------------ ------------
Balance at end of period $ 6,692,271 $ 8,244,158 $ 6,692,271 $ 8,244,158
============ ============ ============ ============
</TABLE>
At June 30, 1996, WFS had forward agreements with a notional face amount
outstanding and a fair value of $160 million.
Contracts serviced by WFS for the benefit of others totalled approximately
$2.4 billion at June 30, 1996 and $1.9 billion at December 31, 1995.
7
<PAGE> 8
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - ALLOWANCE FOR CREDIT LOSSES
- ------------------------------------
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 9,739,256 $ 8,289,513 $ 7,794,974 $ 9,576,041
Provision for credit losses 827,622 1,939,695 6,014,623 2,071,213
Charged off contracts (3,335,682) (3,086,323) (8,029,407) (5,397,057)
Recoveries 1,344,293 1,136,193 2,795,299 2,028,881
----------- ----------- ----------- -----------
Balance at end of period $ 8,575,489 $ 8,279,078 $ 8,575,489 $ 8,279,078
=========== =========== =========== ===========
</TABLE>
NOTE D -FURNITURE, FIXTURES AND EQUIPMENT
- -----------------------------------------
Furniture, fixtures and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Computers and software $4,620,278
Furniture, fixtures and leasehold improvements $1,679,704 1,327,706
Equipment 1,681,212 1,352,362
Automobiles 183,930 168,866
---------- ----------
3,544,846 7,469,212
Less accumulated depreciation 1,320,214 3,186,598
---------- ----------
$2,224,632 $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.
8
<PAGE> 9
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - 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 Savings 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 June 30, 1996
was 5.54%. Interest payments are calculated based on the average amount
outstanding. At June 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.
NOTE F - DIVIDENDS
- ------------------
On June 28, 1996, WFS announced a 10% stock dividend. The dividend is payable
August 9, 1996 to shareholders of record as of July 19, 1996. All stock related
data in the consolidated financial statements reflect the stock dividend for
all periods.
NOTE G - OTHER EVENTS
- ---------------------
On June 28, 1996, WFS adopted an incentive stock option plan and a stock
repurchase plan which were designed to replace the company's current stock
appreciation rights (SARs) plan. The incentive stock option plan will
eliminate the income effects that result from the accounting treatment required
of SARs.
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 $524 million and $1.0 billion of contracts for the three and six
months ended June 30, 1996 compared to $358 million and $694 million of
contracts for the same periods in 1995. This represents a 46% and 48% increase
in production for the respective periods. The company securitized $525 million
and $1.0 billion of contracts for the three and six months ended June 30, 1996
compared with $490 million and $680 million 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 Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------------
1996 1995 1996 1995
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Beginning balance $308,762,282 $526,003,683 $ 316,430,020 $425,957,378
Originations 523,878,235 357,777,114 1,028,000,691 693,827,059
Sales 525,000,000 490,000,000 1,010,000,000 680,000,000
Principal reductions (1) 39,278,098 31,244,855 66,068,292 77,248,495
------------ ------------ -------------- ------------
Ending balance $268,362,419 $362,535,942 $ 268,362,419 $362,535,942
============ ============ ============== ============
</TABLE>
- --------------------
(1) Includes scheduled payments, prepayments and charge offs.
RESULTS OF OPERATIONS
SERVICING INCOME
- ----------------
Total servicing income was $26.7 million and $50.2 million for the three and
six months ended June 30, 1996 compared to $15.6 million and $31.5 million for
the same periods in 1995. This represents a 71% and 60% 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 $2.6 billion at June 30, 1996 from $1.9 billion at
June 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 Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Excess servicing income $13,566,910 $ 6,807,409 $24,852,982 $14,489,743
Contractual servicing income 5,796,020 3,963,889 11,022,627 7,478,646
Other fee income 7,290,704 4,786,047 14,368,765 9,505,842
----------- ----------- ----------- -----------
Total servicing income $26,653,634 $15,557,345 $50,244,374 $31,474,231
=========== =========== =========== ===========
</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 $13.8 million and $25.5 million for the three and six
months ended June 30, 1996 compared to $10.5 million and $20.2 million for the
same periods in 1995. The increase for the three and six months ended June 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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Yield on interest earning assets 14.88% 13.98% 14.45% 14.13%
Cost of borrowings 6.20% 6.34% 6.34% 6.04%
----- ----- ----- -----
Net interest rate spread 8.68% 7.64% 8.11% 8.09%
===== ===== ===== =====
</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 with the Bank consist of a $125 million unsecured Senior Note
with a fixed interest rate of 7.25% 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 $21.7 million for
the three and six months ended June 30, 1996 compared to $5.4 million and $6.5
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 second quarter of 1996
totalled $525 million compared to $490 million during the same periods of 1995.
Additionally, the owners trust transaction in the second quarter included an
accelerated payment structure to asset backed investors that reduced the
interest cost of the owners trust which is a component in calculating the gain
on sale.
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 $0.8 million and
$6.0 million for the three and six months ended June 30, 1996 compared to $1.9
million and $2.1 million for the same periods in 1995.
OPERATING EXPENSES
- ------------------
Total operating expenses were $32.3 million and $58.5 million for the three and
six months ended June 30, 1996 compared to $17.8 million and $34.8 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 June 30, 1996, WFS
operated in 103 offices in 21 states compared to 77 offices in 11 states at
June 30, 1995.
Salaries and employee benefits expense increased to $18.6 million and $33.2
million for the three and six months ended June 30, 1996 compared to $9.7
million and $19.1 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. Additionally, there was $2.0 million in compensation
expense related to the Company's SARs plan for the same six month period.
See "Note G - Other Events" to WFS Consolidated Financial Statements.
Occupancy expense increased to $1.6 million and $3.2 million for the three and
six months ended June 30, 1996 compared to $1.0 million and $1.9 million for
the same periods in 1995. The general and administrative costs paid to parent
are based upon the actual costs incurred and estimates
13
<PAGE> 14
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 $4.9 million and $9.3
million for the three and six months ended June 30, 1996 compared to $2.8
million and $5.7 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 $2.2
million and $4.1 million for the three and six months ended June 30, 1996
compared to $1.2 million and $2.4 million for the same periods in 1995.
Telephone expense totalled $0.9 million and $1.7 million for the three and six
months ended June 30, 1996 compared to $0.5 million and $1.0 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 $3.9 million and $6.6 million for the three and six months
ended June 30, 1996 compared to $2.3 million and $4.0 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 six months ended June 30, 1996 and 1995
were 42.1% and 41.6%, respectively.
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
- ------------------------------------------------
WFS holds a portfolio of contracts on balance sheet for investment that
totalled $41.9 million at June 30, 1996 and $104 million at December 31, 1995.
Contracts held for sale totalled $233 million at June 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 $1.0 billion during the first six
months of 1996. WFS plans to continue to securitize contracts on a regular
basis.
14
<PAGE> 15
The following table presents information on the value of the contracts
purchased from dealers ("indirect contracts"), or originated directly from
consumers ("direct contracts"), as well as the value of contracts secured by
new and used autos for the periods indicated below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------------
1996 1995 1996 1995
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
Indirect contracts $506,056,250 $336,596,692 $ 994,545,384 $653,260,134
Direct contracts 17,821,985 21,180,422 33,455,307 40,566,925
------------ ------------ -------------- ------------
Total volume $523,878,235 $357,777,114 $1,028,000,691 $693,827,059
New autos $104,624,636 $ 80,105,343 $ 218,279,901 $157,528,503
Used autos 419,253,599 277,671,771 809,720,790 536,298,556
------------ ------------ -------------- ------------
Total volume $523,878,235 $357,777,114 $1,028,000,691 $693,827,059
============ ============ ============== ============
</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 over 6,500 dealers. These relationships
contribute to successful geographic expansion and increased originations of
contracts as shown in the table below.
<TABLE>
<CAPTION>
Contracts Originated
-----------------------------------------------------------------
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
# OF YEAR ----------------------------- -----------------------------
STATE OFFICES BEGUN Dollars Dealers Dollars Dealers
- ----- ------- ----- -------------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
California 40 1973 $576,339,697 3,054 $498,555,267 2,887
Oregon 5 1992 58,191,283 440 51,376,193 414
Arizona 4 1993 60,014,238 270 20,831,784 140
Nevada 3 1993 56,675,750 135 35,894,275 110
Texas 19 1994 100,490,139 1,020 69,073,133 710
Washington 4 1994 42,048,025 319 5,223,221 153
New Mexico 1 1994 13,418,952 95 4,807,696 49
Idaho 1 1994 10,589,451 126 2,286,070 45
Colorado 2 1995 25,901,358 154 3,149,096 24
Missouri 3 1995 20,356,724 144
Florida 4 1995 14,153,699 154
Utah 2 1995 8,271,871 114 2,236,553 45
North Carolina 2 1995 8,123,327 99
Georgia 2 1995 7,521,889 79
Oklahoma 2 1995 5,371,329 86
Kansas 1 1995 4,500,691 40 393,771 38
7 Other States 8 1996 16,032,268 173
--- -------------- ----- ------------ -----
Total 103 $1,028,000,691 6,502 $693,827,059 4,615
=== ============== ===== ============ =====
</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 June
30, 1996 were $149 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.
EXCESS SERVICING RECEIVABLE
- ---------------------------
Excess servicing receivable consists of the estimated present value of future
excess cash flows from the excess spread in securitizations. Future cash flows
are computed by taking into account certain assumptions principally regarding
prepayments, losses and servicing costs. These cash flows are then discounted
at a market-based rate. The balance is then amortized against actual servicing
income on a monthly basis. The assumptions and discount rates used are
reviewed each quarter and adjusted, if appropriate, to reflect actual
performance of the contracts. The following table provides a rollforward of
the excess servicing receivable.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning balance $ 85,747,849 $ 41,853,786 $ 78,045,241 $ 43,425,826
Additions 24,260,933 27,602,748 47,993,838 35,190,243
Amortization (16,243,348) (10,938,632) (32,273,645) (20,098,167)
------------ ------------ ------------ ------------
Ending balance $ 93,765,434 $ 58,517,902 $ 93,765,434 $ 58,517,902
============ ============ ============ ============
</TABLE>
Additions to excess servicing receivable result from new securitizations and
reflect the estimated present value of the future cash flows of the contracts
securitized. The amortization of excess servicing receivable presented above
represents the scheduled amortization based upon the assumptions underlying the
calculation of the estimated present value of the remaining future cash flows.
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 June 30, 1996, delinquency for
the serviced portfolio was 1.25% based on the dollar amount of contracts
outstanding compared to 1.24% at December 31, 1995, as shown in the table
below.
16
<PAGE> 17
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------------------ -------------------------------
Number Number
of of
Contracts Amount Contracts Amount
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Contracts serviced (1) 300,215 $2,631,851,454 258,665 $2,209,594,002
========= ============== ========= ==============
Period of delinquency (2)
31-59 days 2,434 $ 21,051,345 2,180 $ 18,557,510
60-89 days 788 7,301,692 690 6,142,551
90 days or more 508 4,644,575 308 2,701,084
--------- -------------- --------- --------------
Total contracts delinquent 3,730 $ 32,997,612 3,178 $ 27,401,145
========= ============== ========= ==============
Delinquencies as a percentage of
number and amount of contracts
outstanding 1.24% 1.25% 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Contracts serviced (1)
At end of period $2,631,851,454 $1,878,169,414 $2,631,851,454 $1,878,169,414
============== ============== ============== ==============
Average during period $2,518,379,322 $1,801,493,494 $2,407,984,806 $1,734,852,986
============== ============== ============== ==============
Gross charge offs of contracts
during period $ 16,980,925 $ 10,813,707 $ 35,405,590 $ 20,247,851
Recoveries of contracts during
period 6,416,707 4,592,737 12,359,479 8,240,974
-------------- -------------- -------------- --------------
Net charge offs $ 10,564,218 $ 6,220,970 $ 23,046,111 $ 12,006,877
============== ============== ============== ==============
Net charge offs as a percentage of
contracts outstanding during period (2) 1.68% 1.38% 1.91% 1.38%
</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 June 30, 1996.
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. WFS' financing is provided by 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 parties 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: August 1, 1996 By: /s/ JOY SCHAEFER
-------------- -------------------------------
Joy Schaefer
Vice Chairman, President
and Chief Operating Officer
Date: August 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 111,073
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 275,055
<ALLOWANCE> 8,575
<TOTAL-ASSETS> 632,537
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 379,454
<LONG-TERM> 125,000
0
0
<COMMON> 73,123
<OTHER-SE> 54,960
<TOTAL-LIABILITIES-AND-EQUITY> 632,537
<INTEREST-LOAN> 30,663
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,663
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 5,189
<INTEREST-INCOME-NET> 25,474
<LOAN-LOSSES> 6,015
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 58,513
<INCOME-PRETAX> 32,895
<INCOME-PRE-EXTRAORDINARY> 19,033
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,033
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 11.93
<LOANS-NON> 0
<LOANS-PAST> 784
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,795
<CHARGE-OFFS> 8,029
<RECOVERIES> 2,795
<ALLOWANCE-CLOSE> 8,575
<ALLOWANCE-DOMESTIC> 8,575
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
