<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 MARCH 31, 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 April 30, 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
MARCH 31, 1997
TABLE OF CONTENTS
----------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
Three Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Short term investments $ 134,239,766 $ 109,237,133
Contracts receivable (1) 46,426,596 53,287,645
Contracts held for sale (1) 222,955,599 186,302,823
Allowance for credit losses (8,260,560) (7,647,986)
------------- -------------
Contracts receivable, net 261,121,635 231,942,482
Amounts due from trusts 217,109,496 191,469,153
Retained interest in securitized assets 135,113,266 121,597,461
Property, plant and equipment 18,685,185 16,904,239
Accrued interest receivable 1,368,515 1,517,682
Other assets 3,482,217 2,903,507
------------- -------------
$ 771,120,080 $ 675,571,657
============= =============
LIABILITIES
Senior note payable - parent $ 125,000,000 $ 125,000,000
Amounts held on behalf of trustee 476,934,494 393,449,007
Other liabilities 13,480,985 9,431,124
------------- -------------
615,415,479 527,880,131
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 79,200,162 70,568,472
Unrealized loss on retained interest in securitized assets,
net of tax (618,615)
------------- -------------
155,704,601 147,691,526
------------- -------------
$ 771,120,080 $ 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
MARCH 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Interest income $14,292,318 $14,336,920
Interest expense - parent 1,464,967 2,696,016
----------- -----------
Net interest income 12,827,351 11,640,904
Servicing income 38,646,975 23,590,739
Gain on sale of contracts 7,344,187 12,287,362
----------- -----------
TOTAL REVENUES 58,818,513 47,519,005
EXPENSES
Provision for credit losses 3,304,023 5,187,000
Operating expenses:
Salaries and employee benefits 23,780,819 14,644,081
General and administrative costs paid to parent 814,856 2,146,383
Occupancy 3,158,849 1,662,647
Credit and collections 3,054,605 1,976,489
Telephone 1,913,108 764,867
Data processing 1,364,783 2,251,715
Miscellaneous 6,418,231 2,730,411
----------- -----------
TOTAL OPERATING EXPENSES 40,505,251 26,176,593
----------- -----------
TOTAL EXPENSES 43,809,274 31,363,593
----------- -----------
INCOME BEFORE INCOME TAXES 15,009,239 16,155,412
Income taxes 6,377,549 6,835,791
----------- -----------
NET INCOME $ 8,631,690 $ 9,319,621
=========== ===========
NET INCOME PER COMMON SHARE $ 0.34 $ 0.36
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 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>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,631,690 $ 9,319,621
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for credit losses 3,304,023 5,187,000
Depreciation 241,937 166,918
Amortization of deferred fees (46,792) (73,172)
Amortization of retained interest in securitized assets 7,201,803 16,030,297
Decrease in interest receivable 149,167 503,171
Net change in other assets (130,747) 6,370,477
Net change in other liabilities 4,049,861 (779,069)
Origination of contracts (552,305,883) (504,122,456)
Proceeds from sale of contracts 500,000,000 485,000,000
Other change in contracts 19,869,499 23,595,827
------------- -------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (9,035,442) 41,198,614
INVESTING ACTIVITIES
(Purchase) sale of property, plant and equipment (2,022,883) 2,225,768
Net increase in trust receivable (47,424,529) (38,460,004)
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (49,447,412) (36,234,236)
FINANCING ACTIVITIES
Increase in trustee accounts 83,485,487 9,670,103
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 83,485,487 9,670,103
INCREASE IN CASH AND CASH EQUIVALENTS $ 25,002,633 $ 14,634,481
Cash and cash equivalents at beginning of period 109,237,133 65,019,858
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 134,239,766 $ 79,654,339
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for:
Interest $ 1,262,658 $ 3,431,123
Income taxes 17,000
</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 months ended March 31, 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>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Consumer:
Indirect contracts $ 285,213,937 $ 252,598,389
Direct contracts 15,102,395 15,117,565
Less unearned discounts 37,428,731 33,768,190
------------- -------------
262,887,601 233,947,764
Allowance for credit losses (8,260,560) (7,647,986)
Dealer participation, net of deferred contract fees 6,494,594 5,642,704
------------- -------------
261,121,635 231,942,482
Less contracts held for sale 222,955,599 186,302,823
------------- -------------
$ 38,166,036 $ 45,639,659
============= =============
</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
participations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Balance at beginning of period $ 5,642,704 $ 7,401,146
New deferrals 16,259,424 15,415,479
Amortization (1,040,516) (1,169,324)
Sales (14,367,018) (14,221,334)
------------ ------------
Balance at end of period $ 6,494,594 $ 7,425,967
============ ============
</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 March 31, 1997, WFS held two-year Treasury
securities forward agreements with a notional amount outstanding of $140
million. The fair value of these forward agreements was a gain of $34 thousand.
Contracts serviced by WFS for the benefit of others totalled approximately $3.0
billion at March 31, 1997 and $2.8 billion at December 31, 1996.
NOTE C - ALLOWANCE FOR CREDIT LOSSES
- ------------------------------------
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of period $ 7,647,986 $ 7,794,974
Provision for credit losses 3,304,023 5,187,000
Charged off contracts (3,785,235) (4,693,725)
Recoveries 1,093,786 1,451,007
----------- -----------
Balance at end of period $ 8,260,560 $ 9,739,256
=========== ===========
</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 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 March 31, 1997.
The following table presents the activity of the RISA.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1997
-------------
<S> <C>
Beginning balance $ 121,597,461
Additions 21,784,186
Amortization (7,201,803)
Change in unrealized loss on retained
interest in securitized assets (1,066,578)
-------------
Ending balance $ 135,113,266
=============
</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 and includes an unallocated amount to reduce the likelihood of impairment
of the RISA. 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>
MARCH 31, 1997
---------------
<S> <C>
Estimated net undiscounted RISA earnings $ 380,114,033
Off balance sheet allowance for losses (231,665,845)
Discount to present value (13,334,922)
---------------
Retained interest in securitized assets $ 135,113,266
===============
Outstanding balance of contracts sold through securitizations $ 2,952,243,619
Off balance sheet allowance for losses as a percent of contracts sold
through securitizations 7.85%
</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>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Land $ 1,296,131
Computers and software 22,518,643 $22,432,667
Furniture, fixtures and leasehold improvements 4,805,569 2,951,804
Equipment 2,296,242 2,082,573
Automobiles 224,498 209,399
----------- -----------
31,141,083 27,676,443
Less accumulated depreciation 12,455,898 10,772,204
----------- -----------
$18,685,185 $16,904,239
=========== ===========
</TABLE>
Depreciation expense was $241,937 and $166,918 for the three months ended March
31, 1997 and 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 for the three months ended March 31, 1997
was 5.58%. Interest payments are calculated based on the average amount
outstanding. At March 31, 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 5.64% and 5.54%
for the three months ended March 31, 1997 and 1996, respectively. At March 31,
1997, WFS held $132 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 $552 million of contracts for the three months ended March 31,
1997 compared to $504 million of contracts for the same period in 1996, which
represents a 10% increase in production. WFS securitized $500 million of
contracts for the three months ended March 31, 1997 compared with $485 million
for the same period 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
MARCH 31,
-----------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Beginning balance $ 233,947,764 $ 316,430,020
Originations 552,305,883 504,122,456
Sales (500,000,000) (485,000,000)
Principal reductions (1) (23,366,046) (26,790,194)
------------- -------------
Ending balance $ 262,887,601 $ 308,762,282
============= =============
</TABLE>
- -------------------
(1) Includes scheduled payments, prepayments and charge offs.
11
<PAGE> 12
RESULTS OF OPERATIONS
SERVICING INCOME
- ----------------
Total servicing income was $38.6 million for the three months ended March 31,
1997 compared to $23.6 million for the same period in 1996. WFS' serviced
portfolio, including contracts held on balance sheet, increased to $3.2 billion
at March 31, 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
MARCH 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Retained interest income $22,769,517 $11,209,897
Contractual servicing income 6,679,067 5,226,607
Other fee income 9,198,391 7,154,235
----------- -----------
Total servicing income $38,646,975 $23,590,739
=========== ===========
</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 $12.8 million for the three months ended March 31, 1997
compared to $11.6 million for the same period in 1996. The increase for the
three months ended March 31, 1997 compared to the same period in 1996 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.
12
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------ ------
<S> <C> <C>
Yield on interest earning assets 14.46% 13.99%
Cost of borrowings 6.63 6.47
------ ------
Net interest rate spread 7.83% 7.52%
====== ======
</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 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 $7.3 million for the three months
ended March 31, 1997 compared to $12.3 million for the same period 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 first quarter of 1997
totalled $500 million compared to $485 million during the same period of 1996.
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 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 $3.3 million
for the three months ended March 31, 1997 compared to $5.2 million for the same
period in 1996. The decline
13
<PAGE> 14
for the three months ended March 31, 1997, compared to the same period last
year, is the result of a $45 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 0.70% to 3.1% from 2.4% a year earlier.
OPERATING EXPENSES
- ------------------
Total operating expenses were $40.5 million for the three months ended March 31,
1997 compared to $26.2 million for the same period in 1996. 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 March 31, 1997, WFS purchased contracts in 32 states
from 141 office locations compared to 18 states and 97 offices at March 31,
1996.
Salaries and employee benefits expense increased to $23.8 million for the three
months ended March 31, 1997 compared to $14.6 million for the same period 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 $3.0
million for the three months ended March 31, 1997 compared to $1.6 million for
the same period 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 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
will retain 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 $0.8 million for the
three months ended March 31, 1997 compared to $2.1 million for the same period
in 1996. Data processing expense decreased to $1.4 million for the three months
ended March 31, 1997 compared to $2.3 million for the same period in 1996.
Other operating expenses include credit and collections costs, telephone and
other miscellaneous expenses. Credit and collections expense increased to $3.1
million for the three months ended March 31, 1997 compared to $2.0 million for
the same period in 1996. Telephone expense totalled $1.9 million for the three
months ended March 31, 1997 compared to $0.8 million for the same period in
1996. Miscellaneous expenses, which include travel, marketing, stationery,
supplies, postage, legal, professional fees and other ancillary costs, increased
to $6.3 million for the three months ended March 31, 1997 compared to $2.7
million for the same period in 1996.
INCOME TAXES
- ------------
WFS files federal and certain state tax returns as part of a consolidated group
that includes the Bank and Westcorp, the holding company parent of the Bank.
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
14
<PAGE> 15
agreement that is based on the relative income or loss of each entity on a
stand-alone basis. The effective tax rates for the three months ended March 31,
1997 and 1996 were 42.5% and 42.3%, 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 March 31, 1997 and $53.3 million at December 31, 1996.
Contracts held for sale totalled $223 million at March 31, 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 $500 million during the
first three 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
MARCH 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
New vehicles $ 100,683,210 $ 113,655,265
Used vehicles 451,622,673 390,467,191
------------- -------------
Total volume $ 552,305,883 $ 504,122,456
============= =============
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
CONTRACTS ORIGINATED
---------------------------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
----------------------------- ------------------------------
# OF YEAR % OF % OF
STATE OFFICES BEGUN DOLLARS ORIGINATIONS DOLLARS ORIGINATIONS
- ----------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
California 42 1972 $260,810,235 47.3% $298,068,127 59.1%
Oregon 5 1992 25,131,835 4.6% 28,918,565 5.7%
Arizona 4 1993 28,717,631 5.2% 24,849,368 4.9%
Nevada 3 1993 24,298,191 4.4% 28,945,373 5.7%
Texas 18 1994 27,277,130 4.9% 47,904,218 9.5%
Washington 4 1994 24,382,050 4.4% 17,434,980 3.5%
New Mexico 1 1994 9,152,627 1.7% 5,366,172 1.1%
Idaho 1 1994 6,292,540 1.1% 5,034,588 1.0%
Missouri 4 1995 18,942,352 3.4% 9,490,685 1.9%
Colorado 4 1995 16,721,011 3.0% 12,926,644 2.6%
Florida 6 1995 9,188,531 1.7% 5,892,980 1.2%
North Carolina 3 1995 6,806,315 1.2% 3,282,024 0.7%
Utah 2 1995 6,387,825 1.2% 4,142,121 0.8%
Kansas 2 1995 3,941,771 0.7% 1,717,382 0.3%
Oklahoma 2 1995 4,683,035 0.9% 2,417,280 0.5%
Georgia 1 1995 3,252,313 0.6% 3,097,850 0.6%
Ohio 7 1996 15,108,402 2.7%
Illinois 6 1996 10,627,942 1.9% 2,119,628 0.4%
Tennessee 4 1996 7,997,315 1.5%
Virginia 3 1996 6,267,409 1.1%
Indiana 4 1996 5,656,694 1.0% 905,433 0.2%
Pennsylvania 3 1996 5,553,025 1.0%
South Carolina 3 1996 5,110,823 0.9%
Nine Other States 9 1996 19,998,881 3.6% 1,609,038 0.3%
----------- ------------ ------ ------------ ------
Total 141 $552,305,883 100.0% $504,122,456 100.0%
=========== ============ ====== ============ ======
</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 twelve months, WFS
increased its network of dealers from 6,722 to over 10,000, a 49% 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 paid 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 March
31, 1997 were $217 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. This system has been
completely implemented and is enhancing the productivity of the collection staff
by reaching far more problem accounts earlier in the delinquency cycle.
If satisfactory arrangements are not made to cure the past due account, the
automobile is repossessed within 60 to 90 days of the date of delinquency. WFS
writes down the vehicle to fair value and reclassifies the loan as a repossessed
asset. WFS sells substantially all of its automobiles through wholesale auto
auctions and rarely provides the financing for repossessions sold. 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 collection 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 employed by WFS takes more formal
judicial action against customers with deficiency balances in excess of that
which may be brought in small claims court proceedings.
WFS has substantially 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, through
reunderwriting, for the entire organization and will oversee the development and
implementation of a computerized credit scoring system. 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
that WFS has achieved as a result of its collection efforts.
17
<PAGE> 18
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
------------------------------- -------------------------------
NUMBER NUMBER
OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Contracts serviced (1) 358,659 $3,215,105,123 341,486 $3,046,584,858
======= ============== ======= ==============
Period of delinquency (2)
31-59 days 3,409 $ 29,211,256 4,511 $ 38,173,395
60-89 days 1,248 11,025,201 1,305 11,469,637
90 days or more 667 5,954,619 567 5,144,451
------- -------------- ------- --------------
Total contracts delinquent 5,324 $ 46,191,076 6,383 $ 54,787,483
======= ============== ======= ==============
Delinquencies as a percentage of
number and amount of contracts outstanding 1.48% 1.44% 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>
MARCH 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
NUMBER AMOUNT NUMBER AMOUNT
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO (1) 358,659 $3,215,105,123 341,486 $3,046,584,858
======= ============== ======= ==============
Repossessed Assets 1,068 5,875,746 1,133 6,135,120
======= ============== ======= ==============
Repossessed assets as a percentage
of number and amount of
contracts outstanding 0.30% 0.18% 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
MARCH 31,
-----------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Contracts serviced
at end of period (1) $3,215,105,123 $2,426,638,209
============== ==============
Average during period $3,111,682,315 $2,297,590,290
============== ==============
Gross chargeoffs of contracts during period $ 31,421,963 $ 18,424,666
Recoveries of contracts charged off in prior periods 7,798,167 5,942,772
-------------- --------------
Net chargeoffs $ 23,623,796 $ 12,481,894
============== ==============
Net chargeoffs as a percentage of contracts outstanding during period (2) 3.04% 2.17%
</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 months ended March 31, 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. 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.
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.
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: May 15, 1997 By: /s/JOY SCHAEFER
--------------- --------------------------------------------
Joy Schaefer
Vice Chairman, President
and Chief Operating Officer
Date: May 15, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 134,240
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 269,382
<ALLOWANCE> 8,261
<TOTAL-ASSETS> 771,120
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 490,415
<LONG-TERM> 125,000
0
0
<COMMON> 73,123
<OTHER-SE> 82,582
<TOTAL-LIABILITIES-AND-EQUITY> 771,120
<INTEREST-LOAN> 14,292
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,292
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 1,465
<INTEREST-INCOME-NET> 12,827
<LOAN-LOSSES> 3,304
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 40,505
<INCOME-PRETAX> 15,009
<INCOME-PRE-EXTRAORDINARY> 15,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,632
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 12.91
<LOANS-NON> 0
<LOANS-PAST> 622
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,648
<CHARGE-OFFS> 3,785
<RECOVERIES> 1,094
<ALLOWANCE-CLOSE> 8,261
<ALLOWANCE-DOMESTIC> 8,261
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
