<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 JUNE 30, 1997
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, 1997, the registrant had 25,684,168 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 22.
<PAGE> 2
WFS FINANCIAL INC AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</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,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Short term investments $ 82,390,297 $ 109,237,133
Contracts receivable(1) 37,404,905 53,287,645
Contracts held for sale(1) 230,019,310 186,302,823
Allowance for credit losses (7,512,675) (7,647,986)
------------- -------------
Contracts receivable, net 259,911,540 231,942,482
Amounts due from trusts 255,124,970 191,469,153
Retained interest in securitized assets 159,487,367 121,597,461
Property, plant and equipment, net 19,597,314 16,904,239
Accrued interest receivable 1,429,114 1,517,682
Other assets 3,682,293 2,903,507
------------- -------------
$ 781,622,895 $ 675,571,657
============= =============
LIABILITIES
Senior note payable - parent $ 125,000,000 $ 125,000,000
Amounts held on behalf of trustee 471,029,818 393,449,007
Other liabilities 19,355,221 9,431,124
------------- -------------
615,385,039 527,880,131
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 25,684,168 shares in 1997 and 1996 73,123,054 73,123,054
Additional paid-in capital 4,000,000 4,000,000
Retained earnings 89,150,128 70,568,472
Unrealized loss on retained interest in securitized assets,
net of tax (35,326) --
------------- -------------
166,237,856 147,691,526
------------- -------------
$ 781,622,895 $ 675,571,657
============= =============
</TABLE>
- --------
(1) Net of unearned discount
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,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 16,298,740 $ 16,326,560 $ 30,591,058 $ 30,663,482
Interest expense - parent 2,431,428 2,493,036 3,896,395 5,189,053
------------ ------------ ------------ ------------
Net interest income 13,867,312 13,833,524 26,694,663 25,474,429
Servicing income 42,582,326 26,653,634 81,229,301 50,244,374
Gain on sale of contracts 6,490,811 9,416,823 13,834,998 21,704,185
------------ ------------ ------------ ------------
TOTAL REVENUES 62,940,449 49,903,981 121,758,962 97,422,988
EXPENSES
Provision for credit losses 1,233,356 827,622 4,537,378 6,014,623
Operating expenses:
Salaries and employee benefits 26,396,023 18,590,162 50,176,842 33,234,243
Occupancy 3,182,297 1,748,896 6,341,147 3,411,544
Credit and collections 3,594,378 2,152,097 6,648,983 4,128,586
Telephone 1,785,135 933,373 3,698,243 1,698,241
Data processing 2,508,688 2,541,057 3,873,471 4,792,772
General and administrative costs paid to
parent 1,135,509 2,386,151 1,950,365 4,532,534
Other operating expenses 5,790,750 3,985,095 12,208,981 6,715,504
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 44,392,780 32,336,831 84,898,032 58,513,424
------------ ------------ ------------ ------------
TOTAL EXPENSES 45,626,136 33,164,453 89,435,410 64,528,047
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 17,314,313 16,739,528 32,323,552 32,894,941
Income taxes 7,364,347 7,026,505 13,741,896 13,862,296
------------ ------------ ------------ ------------
NET INCOME $ 9,949,966 $ 9,713,023 $ 18,581,656 $ 19,032,645
============ ============ ============ ============
NET INCOME PER COMMON SHARE $ 0.39 $ 0.38 $ 0.72 $ 0.74
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 25,684,168 25,684,168 25,684,168 25,684,168
============ ============ ============ ============
</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,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,581,656 $ 19,032,645
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for credit losses 4,537,378 6,014,623
Depreciation 4,330,498 344,634
Amortization of deferred fees (101,318) (134,161)
Amortization of retained interest in securitized assets 13,430,769 32,273,645
Decrease in interest receivable 88,568 566,587
Net change in other assets (753,205) 2,090,517
Net change in other liabilities 9,924,097 1,633,855
Origination of contracts (1,165,594,410) (1,028,000,691)
Proceeds from sale of contracts 1,090,000,000 1,010,000,000
Other change in contracts 43,189,292 61,677,219
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,633,325 105,498,873
INVESTING ACTIVITIES
(Purchase) sale of property, plant and equipment (7,023,573) 1,713,348
Increase in trust receivable (63,655,817) (38,541,109)
Increase in retained interest in securitized asset (51,381,582) (47,993,838)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (122,060,972) (84,821,599)
FINANCING ACTIVITIES
Increase in trustee accounts 77,580,811 25,375,988
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 77,580,811 25,375,988
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (26,846,836) 46,053,262
Cash and cash equivalents at beginning of period 109,237,133 65,019,858
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,390,297 $ 111,073,120
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for:
Interest $ 3,386,315 $ 4,858,865
Income taxes 4,376,406 9,697,675
</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 six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and footnotes thereto for the year
ended December 31, 1996 included in the WFS Financial Inc ("WFS" or the
"Company") Form 10-K.
Certain amounts from the 1996 consolidated financial statement amounts have been
reclassified to conform to the 1997 presentation.
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125 ("SFAS 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". See "Note D - Securitized
Assets" in WFS' Unaudited Consolidated Financial Statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share", which
is required to be adopted on December 31, 1997. Earlier application of SFAS 128
is not permitted. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of SFAS 128 on
the calculation of primary earnings per share and fully diluted earnings per
share is not expected to be material.
NOTE B - NET CONTRACTS RECEIVABLE
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Consumer:
Indirect contracts $ 281,038,891 $ 252,598,389
Direct contracts 14,855,070 15,117,565
Less unearned discounts 34,674,368 33,768,190
------------- -------------
261,219,593 233,947,764
Allowance for credit losses (7,512,675) (7,647,986)
Dealer participation, net of deferred contract fees 6,204,622 5,642,704
------------- -------------
Net contracts receivable $ 259,911,540 $ 231,942,482
============= =============
</TABLE>
6
<PAGE> 7
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the changes in amounts deferred and carried as
adjustments to the contract balance including contract fees and dealer
participation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 6,494,594 $ 7,425,967 $ 5,642,704 $ 7,401,146
New deferrals 17,056,739 15,558,726 33,316,162 30,974,205
Amortization (1,126,175) (1,179,875) (2,166,690) (2,349,199)
Sales (16,220,536) (15,112,547) (30,587,554) (29,333,881)
------------ ------------ ------------ ------------
Balance at end of period $ 6,204,622 $ 6,692,271 $ 6,204,622 $ 6,692,271
============ ============ ============ ============
</TABLE>
WFS uses two-year Treasury securities forward agreements to minimize its
exposure to interest rate risk. The fair value of these instruments may vary
with changes in interest rates. At June 30, 1997, WFS had forward agreements
with a notional face amount outstanding of $180 million. The fair value of these
forward agreements results in a gain of $3 thousand.
Contracts serviced by WFS for the benefit of others totalled approximately $3.2
billion at June 30, 1997 and $2.8 billion at December 31, 1996.
NOTE C - ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for owned contracts were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 8,260,560 $ 9,739,256 $ 7,647,986 $ 7,794,974
Provision for credit losses 1,233,356 827,622 4,537,378 6,014,623
Charged off contracts (3,023,244) (3,335,682) (6,808,479) (8,029,407)
Recoveries 1,042,003 1,344,293 2,135,790 2,795,299
----------- ----------- ----------- -----------
Balance at end of period $ 7,512,675 $ 8,575,489 $ 7,512,675 $ 8,575,489
=========== =========== =========== ===========
</TABLE>
NOTE D - SECURITIZED ASSETS
SFAS 125 requires that following a transfer of financial assets, an entity is to
recognize the assets it controls and the liabilities it has incurred, and
derecognize assets for which control has been surrendered and liabilities that
have been extinguished. For securitization transactions, SFAS 125 defines two
separate financial assets retained at the time of securitization, a retained
interest in securitized assets, which
7
<PAGE> 8
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
represents the excess spread created from securitization, and a servicing rights
asset which represents the benefit derived from retaining the rights to service
the contracts securitized. Previous accounting guidance did not separately
distinguish these rights.
Retained interests in securitized assets ("RISA") capitalized upon
securitization of contracts represent the present value of the estimated future
earnings to be received by WFS from the excess spread created in securitization
transactions. Excess spread is calculated by taking the difference between the
coupon rate of the contracts sold and the certificate rate paid to the investors
less contractually specified servicing and guarantor fees.
Prepayment and credit loss assumptions are utilized to project future earnings
and are based upon historical experience. Credit losses are estimated using a
cumulative loss rate estimated by management to reduce the likelihood of asset
impairment. All assumptions used are evaluated each quarter and adjusted, if
appropriate, to reflect actual performance of the contracts.
Future earnings are discounted at a rate management believes to be
representative of the market at the time of securitization. The balance of the
RISA is amortized against actual excess spread income earned on a monthly basis
over the expected repayment life of the underlying contracts. RISAs are
classified in a manner similar to available for sale securities and as such are
marked to market each quarter. Market value changes are calculated by
discounting the excess spread using a current market discount rate. Any changes
in the market value of the RISA is reported as a separate component of
shareholders' equity as an unrealized gain or loss, net of applicable taxes.
WFS retains the rights to service all contracts it securitizes. Consumer
servicing rights assets ("CSRA") which can be capitalized upon securitization,
represent the present value of the estimated future earnings to be received from
servicing securitized contracts. These earnings are calculated by estimating
future servicing revenues, including contractually specified servicing fee, late
charges, other ancillary income, and float benefit and netting them against the
actual cost to service contracts. WFS has not capitalized any servicing rights
as of June 30, 1997.
The following table presents the activity of the RISA.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1997 1997
------------- -------------
<S> <C> <C>
Beginning balance $ 135,113,266 $ 121,597,461
Additions 29,597,396 51,381,582
Amortization (6,228,966) (13,430,769)
Change in unrealized gain/(loss) on retained interest
in securitized assets 1,005,671 (60,907)
------------- -------------
Ending balance $ 159,487,367 $ 159,487,367
============= =============
</TABLE>
8
<PAGE> 9
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In initially valuing the RISA, WFS established an off balance sheet allowance
for expected future credit losses. The allowance is based upon historical
experience and management's estimate of future performance regarding credit
losses. 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 retained interest
earnings to be received from securitizations. Estimated future undiscounted RISA
earnings are calculated by taking the difference between the coupon rate of the
contracts sold and the certificate rate paid to the investors, less the
contractually specified servicing fee of 1.0% and guarantor fees, after giving
effect to estimated prepayments and assuming no losses. To arrive at the RISA,
this amount is reduced by the off balance sheet allowance established for
potential future losses and by discounting to present value. Prior to the
adoption of SFAS 125, WFS reduced excess spread by the actual cost to service
contracts instead of the contractually specified servicing fee. The actual cost
to service contracts is now included in the computation of the CSRA.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------
<S> <C>
Estimated net undiscounted RISA earnings $ 407,953,030
Off balance sheet allowance for losses (231,844,685)
Discount to present value (16,620,978)
--------------
Retained interest in securitized assets $ 159,487,367
==============
Outstanding balance of contracts sold through securitizations $3,160,005,041
Off balance sheet allowance for losses as a percent of contracts sold
through securitizations 7.34%
</TABLE>
WFS believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio. Had SFAS 125 been in
effect at December 31, 1996, the off balance sheet allowance for losses as a
percent of contracts sold through securitizations would have been 8.03%.
9
<PAGE> 10
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C>
Land $ 1,296,131
Computers and software 26,434,287 $22,432,667
Furniture, fixtures and leasehold improvements 4,090,664 2,951,804
Equipment 2,352,009 2,082,573
Automobiles 224,498 209,399
----------- -----------
34,397,589 27,676,443
Less accumulated depreciation 14,800,275 10,772,204
----------- -----------
$19,597,314 $16,904,239
=========== ===========
</TABLE>
Depreciation expense was $4,330,498 and $344,634 for the six months ended June
30, 1997 and June 30, 1996, respectively.
NOTE F - INTERCOMPANY AGREEMENTS
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 was 5.66% and 5.51% for the six months
ended June 30, 1997 and 1996, respectively. Interest payments are calculated
based on the average amount outstanding. At June 30, 1997, 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.
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 5.59% and 5.57%
for the six months ended June 30, 1997 and 1996, respectively. At June 30, 1997,
WFS held $89 million of excess cash with the Bank under the Investment
Agreement.
10
<PAGE> 11
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) retained
interest 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. Retained interest income is the
earnings 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 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
retained interest earnings 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.
RISA is capitalized upon securitization of contracts and represents the present
value of the estimated future earnings to be received by WFS from the excess
spread created in securitization transactions and is amortized against servicing
income over the life of the contracts.
WFS originated $613 million and $1.2 billion of contracts for the three and six
months ended June 30, 1997 compared to $524 million and $1.0 billion of
contracts for the same periods in 1996. This represents a 17% and 13% increase
in production for the respective periods. WFS securitized $590 million and $1.1
billion of contracts for the three and six months ended June 30, 1997 compared
with $525 million and $1.0 billion for the same periods in 1996.
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,
------------------------------- -------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Beginning balance $ 262,887,601 $ 308,762,282 $ 233,947,764 $ 316,430,020
Originations 613,288,527 523,878,235 1,165,594,410 1,028,000,691
Sales 590,000,000 525,000,000 1,090,000,000 1,010,000,000
Principal reductions(1) 24,956,535 39,278,098 48,322,581 66,068,292
-------------- -------------- -------------- --------------
Ending balance $ 261,219,593 $ 268,362,419 $ 261,219,593 $ 268,362,419
============== ============== ============== ==============
</TABLE>
- -----------
(1) Includes scheduled payments, prepayments and charge offs.
11
<PAGE> 12
RESULTS OF OPERATIONS
SERVICING INCOME
Total servicing income was $42.6 million and $81.2 million for the three and six
months ended June 30, 1997 compared to $26.7 million and $50.2 million for the
same periods in 1996. WFS' serviced portfolio, including contracts held on
balance sheet, increased to $3.4 billion at June 30, 1997 from $3.0 billion at
December 31, 1996.
Retained interest income may be impacted by changes in the amount of credit
losses and amount of prepayments. One of the factors that will cause retained
interest 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 retained
interest income. Retained interest 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. 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.
Servicing income consists of the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Retained interest income $25,570,835 $13,499,486 $48,340,352 $24,709,384
Contractual servicing income 7,825,461 5,796,020 14,504,528 11,022,627
Other fee income 9,186,030 7,358,128 18,384,421 14,512,363
----------- ----------- ----------- -----------
Total servicing income $42,582,326 $26,653,634 $81,229,301 $50,244,374
=========== =========== =========== ===========
</TABLE>
NET INTEREST INCOME
Net interest income is the difference between the rate earned on contracts held
on balance sheet and the interest costs associated with WFS' borrowings. Net
interest income totalled $13.9 million and $26.7 million for the three and six
months ended June 30, 1997 compared to $13.8 million and $25.4 million for the
same periods in 1996. The increase for the six months ended June 30, 1997
compared to the same period in 1996 is due to an increase in the average
interest earning assets. 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.
12
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Yield on interest earning assets 14.14% 14.88% 14.29% 14.45%
Cost of borrowings 6.47 6.20 6.54 6.34
----- ----- ----- -----
Net interest rate spread 7.67% 8.68% 7.75% 8.11%
===== ===== ===== =====
</TABLE>
As WFS securitizes its on balance sheet contracts, revenue previously recognized
as net interest income will, upon such securitization, be recognized as
servicing income. Prior to securitizing contracts, WFS earns interest income on
its contracts, pays interest expense to fund the contracts and absorbs any
credit losses. After securitization, the net earnings are recorded as servicing
income. To protect against changes in interest rates, WFS hedges contracts prior
to their securitization with two-year treasury forward agreements. Gains or
losses on these forward agreements are deferred and included as part of the
basis of the underlying contracts and recognized when the contracts are
securitized.
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.
GAIN ON SALE OF CONTRACTS
WFS recorded a gain on sale of contracts of $6.5 million and $13.8 million for
the three and six months ended June 30, 1997 compared to $9.4 million and $21.7
million for the same periods of 1996. The decrease in the gain on sale reported
in 1997 is primarily the result of a narrowing interest rate spread for
contracts sold which was slightly offset by the increase in contracts sold.
Contracts sold during the second quarter of 1997 totalled $590 million compared
to $525 million during the same period of 1996. Gross interest rate spread is
affected by product mix, 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
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. When WFS sells contracts in a
securitization transaction, it reduces its allowance for credit losses and
factors potential losses into its calculation of gain on sale. 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 $1.2 million
and $4.5 million for the three and six months ended June 30, 1997 compared to
$0.8 million and $6.0 million for the same periods in 1996. The decline for the
six months ended June 30, 1997, compared to the same period last year, is the
result of a decline in the on balance sheet contract loss experience. The
allowance for loan losses as a percent of total on balance sheet contracts
decreased to 2.9% from 3.3% a year earlier.
13
<PAGE> 14
OPERATING EXPENSES
Total operating expenses were $44.4 million and $84.9 million for the three and
six months ended June 30, 1997 compared to $32.3 million and $58.5 million for
the same periods in 1996. Except where otherwise noted, the increase in total
operating expenses is primarily attributable to an increase in the number of
contracts serviced, automation and centralization programs and expansion into
additional states. At June 30, 1997, WFS purchased contracts in 35 states from
143 office locations compared to 21 states and 103 offices at June 30, 1996.
Salaries and employee benefits expense increased to $26.4 million and $50.2
million for the three and six months ended June 30, 1997 compared to $18.6
million and $33.2 million for the same periods in 1996. This increase is mainly
attributable to the increase in the number of employees due to the Company's
expansion. Occupancy expense increased to $3.2 million and $6.3 million for the
three and six months ended June 30, 1997 compared to $1.7 million and $3.4
million for the same periods in 1996.
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. On January 1, 1997, various administrative departments of Westcorp, the
holding company parent of the Bank, were transferred to the Bank and WFS as part
of a restructuring plan to provide greater focus and specialization within each
company. As part of this plan, WFS retained all administrative operations except
for payroll, human resources and certain treasury functions. Because of this
transfer, items that had previously been reported as general and administrative
costs paid to parent and data processing are now included in other operating
expense line items. In 1997, the general and administrative costs paid to parent
were $1.1 million and $2.0 million for the three and six months ended June 30,
1997 compared to $2.4 million and $4.5 million for the same periods in 1996.
Data processing expense was $2.5 million and $3.9 million for the three and six
months ended June 30, 1997 compared to $2.5 million and $4.8 million for the
same periods in 1996.
Other operating expenses include credit and collections costs, telephone and
other miscellaneous expenses. Credit and collections expense increased to $3.6
million and $6.6 million for the three and six months ended June 30, 1997
compared to $2.2 million and $4.1 million for the same periods in 1996.
Telephone expense totalled $1.8 million and $3.7 million for the three and six
months ended June 30, 1997 compared to $0.9 million and $1.7 million for the
same periods in 1996. Miscellaneous expenses, which include travel, marketing,
stationery, supplies, postage, legal, professional fees and other ancillary
costs, increased to $5.8 million and $12.2 million for the three and six months
ended June 30, 1997 compared to $4.0 million and $6.7 million for the same
periods in 1996.
14
<PAGE> 15
INCOME TAXES
WFS files federal and certain state tax returns as part of a consolidated group
that includes the Bank and Westcorp. Other state tax returns are filed by WFS as
a separate entity. Tax liabilities from the consolidated returns are allocated
in accordance with a tax sharing agreement that is 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, 1997 and 1996 were 42.5% and 42.1%, respectively.
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
WFS holds a portfolio of contracts on balance sheet for investment that totalled
$37.4 million at June 30, 1997 and $53.3 million at December 31, 1996. Contracts
held for sale totalled $230 million at June 30, 1997 compared to $186 million at
December 31, 1996. The balance in the held for sale portfolio is largely
dependent upon the timing of the origination and securitization of contracts.
WFS completed securitization transactions of $1.1 billion during the first six
months of 1997. WFS plans to continue to securitize contracts on a regular
basis.
The following tables present information on the volume of contracts secured by
new and used autos as well as growth in volume by states for the periods
indicated below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
New vehicles $ 108,665,234 $ 104,624,636 $ 209,348,444 $ 218,279,901
Used vehicles 504,623,293 419,253,599 956,245,966 809,720,790
-------------- -------------- -------------- --------------
Total volume $ 613,288,527 $ 523,878,235 $1,165,594,410 $1,028,000,691
============== ============== ============== ==============
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
CONTRACTS ORIGINATED
-------------------------------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
----------------------------- ------------------------------
# OF YEAR % OF % OF
STATE OFFICES BEGUN DOLLARS ORIGINATIONS DOLLARS ORIGINATIONS
- ----- ------- ----- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
California 41 1972 $ 524,305,463 45.0% $ 582,616,818 56.8%
Oregon 5 1992 60,156,818 5.1% 59,415,138 5.8%
Arizona 4 1993 65,342,684 5.5% 59,924,434 5.8%
Nevada 3 1993 51,844,895 4.4% 56,237,529 5.5%
Washington 4 1994 55,866,480 4.7% 40,347,996 3.9%
Texas 16 1994 53,256,023 4.5% 98,044,762 9.5%
New Mexico 1 1994 18,049,000 1.6% 13,226,558 1.3%
Idaho 1 1994 16,102,758 1.4% 10,323,897 1.0%
Missouri 4 1995 35,991,568 3.1% 19,777,575 1.9%
Colorado 4 1995 35,379,704 3.0% 25,458,941 2.5%
Florida 6 1995 20,922,885 1.8% 13,799,619 1.3%
North Carolina 3 1995 15,909,419 1.4% 8,003,410 0.8%
Utah 2 1995 15,263,476 1.3% 8,274,727 0.8%
Oklahoma 2 1995 9,556,172 0.8% 5,244,933 0.5%
Kansas 1 1995 9,069,938 0.8% 4,392,075 0.4%
Georgia 1 1995 8,483,821 0.7% 7,391,349 0.7%
Ohio 7 1996 31,170,993 2.7%
Illinois 6 1996 20,904,882 1.8% 7,658,768 0.8%
Tennessee 4 1996 16,701,622 1.4%
Pennsylvania 4 1996 15,368,045 1.3%
Virginia 3 1996 12,658,222 1.1%
Indiana 4 1996 12,202,444 1.1% 3,140,507 0.3%
South Carolina 3 1996 11,206,150 1.0%
Wisconsin 3 1996 8,815,356 0.8% 993,048 0.1%
Maryland 1 1996 6,576,211 0.6%
Kentucky 2 1996 6,460,538 0.6%
Iowa 1 1996 6,410,049 0.6% 1,467,665 0.1%
New Jersey 1 1996 5,513,910 0.5%
Seven other states 6 1996-97 16,104,884 1.4% 2,260,942 0.2%
--- -------------- ----- -------------- -----
Total 143 $1,165,594,410 100.0% $1,028,000,691 100.0%
=== ============== ===== ============== =====
</TABLE>
WFS expands its 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 twelve months, WFS increased its network
of dealers from 6,508 to over 11,000, a 69% increase.
AMOUNTS DUE FROM TRUSTS
The excess cash flow generated by contracts sold to trusts is deposited into
spread accounts by the trustee under the terms of the securitization
transactions. In addition, at the time a securitization transaction closes, WFS
advances additional monies to initially fund these spread accounts. These funds,
as well as the excess spread, are released to WFS after the spread accounts
reach a predetermined funding level. Amounts due from trusts represent funds due
to WFS not yet disbursed from the spread accounts. The amounts due from trusts
at June 30, 1997 were $255 million as compared with $191 million at year-end
1996. The increase is a result of the increase in total contracts securitized
and outstanding.
16
<PAGE> 17
ASSET QUALITY
WFS has automated and centralized several processes related to asset quality
which continues to be an area of significant focus. WFS utilizes an automated
telephone dialing system ("predictive dialer") to aid in the service and
collection process. The predictive dialer automatically dials the delinquent
obligors account and transfers the call to an available collector located at one
of the two regional service centers. If the collection effort does not result in
satisfactory resolution, then the call is forwarded to a collection specialist
located in the appropriate dealer center or branch office.
If satisfactory arrangements are not made to cure the past due account, the
automobile is generally repossessed within 45 to 90 days of the date of
delinquency. WFS writes down the value of the vehicle to fair value and
reclassifies the loan as a repossessed asset. WFS sells substantially all of its
repossessed automobiles through wholesale auto auctions. WFS has centralized its
remarketing functions into a single department which is responsible for
transportation of the vehicle to wholesale auction houses, reconditioning and
repairs, when necessary, and tracking vehicles until they are sold. Once the
vehicle is sold, any deficiency balance is charged off.
After chargeoff, WFS will seek to collect on deficiency balances through its
centralized asset recovery center ("ARC"). The ARC will first attempt to collect
directly from the obligor with its in-house collection staff. If efforts are not
successful, the ARC will seek a deficiency judgment through a small claims court
procedure, where available, or an attorney retained by WFS will take more formal
judicial action against customers with deficiency balances in excess of that
which may be brought in small claims court proceedings.
WFS has completed its nationwide expansion plan. In order to insure consistency
throughout the larger organization, WFS has begun the centralization of its
credit risk management functions. This centralized area will be responsible for
setting and monitoring credit policy for the entire organization and will
oversee the development and implementation of an enhanced computerized credit
scoring tool. This system will aid underwriters in making contract decisions so
that rate, term and loan to value ratio can be adequately balanced against the
assessed credit risk.
The following tables reflect the delinquency, repossession and loss experience
of WFS for the periods indicated.
17
<PAGE> 18
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
NUMBER NUMBER
OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Contracts serviced(1) 378,610 $3,421,213,459 341,486 $3,046,584,858
========== ============== ========== ==============
Period of delinquency(2)
31-59 days 4,125 $ 35,179,485 4,511 $ 38,173,395
60-89 days 1,390 12,555,957 1,305 11,469,637
90 days or more 631 5,421,157 567 5,144,451
---------- -------------- ---------- --------------
Total contracts delinquent 6,146 $ 53,156,599 6,383 $ 54,787,483
========== ============== ========== ==============
Delinquencies as a percentage of
number and amount of contracts
outstanding 1.62% 1.55% 1.87% 1.80%
========== ============== ========== ==============
</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.
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
NUMBER AMOUNT NUMBER AMOUNT
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO(1) 378,610 $3,421,213,459 341,486 $3,046,584,858
========== ============== ========== ==============
Repossessed Assets 945 $ 5,185,501 1,133 $ 6,135,120
========== ============== ========== ==============
Repossessed assets as a percentage
of number and amount of
contracts outstanding 0.25% 0.15% 0.33% 0.20%
========== ============== ========== ==============
</TABLE>
- -------------------
(1) Includes repossession information relating to contracts which are owned
by WFS and contracts which have been sold and securitized but are
serviced by WFS.
18
<PAGE> 19
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Contracts serviced
at end of period(1) $3,421,213,459 $2,631,851,454 $3,421,213,459 $2,631,851,454
============== ============== ============== ==============
Average during period $3,303,619,391 $2,518,379,322 $3,207,650,853 $2,407,984,806
============== ============== ============== ==============
Gross chargeoffs of contracts
during period $ 30,486,400 $ 16,980,925 $ 61,908,363 $ 35,405,591
Recoveries of contracts charged
off in prior periods 8,481,798 6,416,707 16,279,964 12,359,479
-------------- -------------- -------------- --------------
Net chargeoffs $ 22,004,602 $ 10,564,218 $ 45,628,399 $ 23,046,112
============== ============== ============== ==============
Net chargeoffs as a percentage of
contracts outstanding during
period(2) 2.66% 1.68% 2.84% 1.91%
</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 chargeoffs as a percentage of average contracts
outstanding during the three and six months ended June 30, 1997 and 1996.
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.
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.
19
<PAGE> 20
FORWARD-LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of Financial Condition and
Results of Operations section contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a new "safe harbor" for these types of statements. This Quarterly
Report on Form 10-Q contains forward-looking statements which reflect WFS'
current views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The forward-looking
terminology such as "believe," "expect," "anticipate," "intend," "may," "will,"
"should," "estimate," "continue," and/or the negative thereof or other
comparable expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. WFS
undertakes no obligation to publicly update or revise any forward- looking
statements, whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the level of demand for auto
contracts, which is affected by such external factors as the level of interest
rates, the strength of the various segments of the economy, debt burden held by
the consumer and demographics of WFS' lending markets; (2) continued dealer
relationships; (3) fluctuations between auto interest rates and the cost of
funds; (4) federal and state regulation of WFS' auto lending operations; (5)
competition within the auto lending industry and (6) the availability and cost
of securitization transactions.
20
<PAGE> 21
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
A report on Form 8-K was filed May 6, 1997 announcing the
departure of Lee Thyer, Senior Executive Vice President of the
Branch Division and Director of WFS Financial Inc.
A report on Form 8-K was filed July 15, 1997 announcing the
second quarter earnings of WFS Financial Inc.
21
<PAGE> 22
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 12, 1997 By: /s/ JOY SCHAEFER
------------------- --------------------------------------------
Joy Schaefer
Vice Chairman, President
and Chief Operating Officer
Date: August 12, 1997 By: /s/ LEE A. WHATCOTT
------------------- --------------------------------------------
Lee A. Whatcott
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 82,390
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 267,424
<ALLOWANCE> 7,513
<TOTAL-ASSETS> 781,623
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 490,387
<LONG-TERM> 125,000
0
0
<COMMON> 73,123
<OTHER-SE> 93,113
<TOTAL-LIABILITIES-AND-EQUITY> 781,623
<INTEREST-LOAN> 30,591
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,591
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 3,896
<INTEREST-INCOME-NET> 26,695
<LOAN-LOSSES> 4,537
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 84,898
<INCOME-PRETAX> 32,324
<INCOME-PRE-EXTRAORDINARY> 32,324
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,582
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
<YIELD-ACTUAL> 12.61
<LOANS-NON> 0
<LOANS-PAST> 574
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,648
<CHARGE-OFFS> 6,808
<RECOVERIES> 2,136
<ALLOWANCE-CLOSE> 7,513
<ALLOWANCE-DOMESTIC> 7,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
