<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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)
(949) 727-1000
-------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 1998, the registrant had 25,708,611 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 28.
<PAGE> 2
WFS FINANCIAL INC AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
--------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) for the Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,183 $ 143,815
Contracts receivable 60,319 52,596
Contracts held for sale 947,117 183,529
Allowance for credit losses (9,220) (6,787)
----------- -----------
Contracts receivable, net 998,216 229,338
Amounts due from trusts 312,748 295,123
Retained interest in securitized assets 157,106 181,177
Property, plant and equipment, net 22,200 21,406
Accrued interest receivable 5,716 1,867
Other assets 7,398 5,434
----------- -----------
$ 1,505,567 $ 878,160
=========== ===========
LIABILITIES
Notes payable - parent $ 175,000 $ 175,000
Line of credit - parent 611,512 --
Amounts held on behalf of trustee 518,080 488,654
Other liabilities 36,750 34,613
----------- -----------
1,341,342 698,267
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 25,708,611 shares in 1998 and
in 1997 73,564 73,564
Additional paid-in capital 4,000 4,000
Retained earnings 84,884 101,882
Unrealized gain on retained interest in securitized assets,
net of tax 1,777 447
----------- -----------
164,225 179,893
----------- -----------
$ 1,505,567 $ 878,160
=========== ===========
</TABLE>
- --------------------
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 25,809 $ 17,044 $ 59,002 $ 47,636
Interest expense - parent 7,666 2,677 14,928 6,888
------------ ------------ ------------ ------------
Net interest income 18,143 14,367 44,074 40,748
Servicing income 21,342 29,120 57,490 110,349
Gain on sale of contracts -- 11,594 18,949 25,429
------------ ------------ ------------ ------------
TOTAL REVENUES 39,485 55,081 120,513 176,526
EXPENSES
Provision for credit losses 2,291 1,211 9,389 5,748
Operating expenses:
Salaries and employee benefits 22,902 25,216 74,152 75,392
Occupancy 1,931 3,195 7,189 9,537
Credit and collections 5,404 3,569 15,007 10,218
Telephone 1,977 1,972 6,506 5,671
Data processing 2,024 4,077 6,540 10,738
Miscellaneous 5,291 5,100 16,107 16,159
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 39,529 43,129 125,501 127,715
Restructuring charge 4,500 -- 15,000 --
------------ ------------ ------------ ------------
TOTAL EXPENSES 46,320 44,340 149,890 133,463
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (6,835) 10,741 (29,377) 43,063
Income tax expense (benefit) (2,887) 4,370 (12,379) 18,111
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (3,948) $ 6,371 $ (16,998) $ 24,952
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS), NET
OF INCOME TAXES
Change in unrealized gain/loss on
retained interest in securitized
assets 1,366 351 1,330 316
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (2,582) $ 6,722 $ (15,668) $ 25,268
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (0.15) $ 0.25 $ (0.66) $ 0.97
DILUTED (0.15) 0.25 (0.66) 0.97
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
BASIC 25,708,611 25,691,063 25,708,611 25,686,491
DILUTED 25,708,611 25,729,858 25,708,611 25,686,491
</TABLE>
- -----------------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (16,998) $ 24,952
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Provision for credit losses 9,389 5,748
Depreciation 5,888 6,946
Amortization of retained interest in securitized assets 81,421 33,165
Loss on disposal of assets, restructuring 6,847 --
(Increase) decrease in assets:
Automobile contracts:
Purchase of contracts (2,022,798) (1,762,340)
Proceeds from sale of contracts 1,185,000 1,690,000
Other change in contracts 59,619 71,042
Other assets (5,900) (2,291)
Increase in liabilities:
Other liabilities 1,175 21,232
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (696,357) 88,454
INVESTING ACTIVITIES
Purchase of property, plant and equipment (13,530) (9,450)
Increase in trust receivable (17,625) (67,630)
Increase in retained interest in securitized asset (55,058) (83,358)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (86,213) (160,438)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 346
Increase in borrowings from parent 611,512 50,000
Increase in trustee accounts 29,426 120,419
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 640,938 170,765
INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS (141,632) 98,781
Cash and cash equivalents at beginning of period 143,815 109,070
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,183 $ 207,851
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 13,276 $ 6,386
Income taxes -- 4,388
</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 (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 1997 included in the WFS Financial Inc
("WFS" or the "Company") Form 10-K.
Certain amounts from the 1997 consolidated financial statement amounts have been
reclassified to conform to the 1998 presentation.
In June 1998, the FASB issued SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities". This statement provides guidance for the way public
enterprises report information about derivatives and hedging in annual financial
statements and in interim financial reports. The derivatives and hedging
disclosure is required for financial statements for fiscal years beginning after
June 15, 1999. This Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
Statement 133 will be on the earnings and financial position of the Company.
6
<PAGE> 7
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - NET CONTRACTS RECEIVABLE
- ----------------------------------
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts $ 1,060,060 $ 253,455
Unearned discounts (77,592) (22,226)
----------- -----------
Net contracts 982,468 231,229
Allowance for credit losses (9,220) (6,787)
Dealer participation, net of deferred contract fees 24,968 4,896
----------- -----------
Net contracts receivable $ 998,216 $ 229,338
=========== ===========
</TABLE>
The increase in net contracts receivable is because the Company did not
securitize contracts in the third quarter of 1998.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 7,791 $ 6,205 $ 4,896 $ 5,643
New deferrals 19,036 15,871 55,137 49,188
Amortization (1,859) (1,030) (3,999) (3,197)
Sales -- (15,999) (31,066) (46,587)
-------- -------- -------- --------
Balance at end of period $ 24,968 $ 5,047 $ 24,968 $ 5,047
======== ======== ======== ========
</TABLE>
The contracts purchased by the Company are fixed-rate loans. The Company bears
the risk of interest-rate increases during the period between the setting of the
rate at which the contract will be acquired and their sale in a securitization
transaction. In order to mitigate this risk, the Company uses two-year Treasury
securities forward agreements to minimize its exposure to interest rate risk
during the relevant period. The fair value of these instruments may vary with
changes in interest rates. 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 is designed to
respond 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
7
<PAGE> 8
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 enters into these forward agreements either with its parent,
Western Financial Bank (the "Bank"), or 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.
At September 30, 1998, WFS had forward agreements with a notional face amount
outstanding of $928 million. The fair value of these forward agreements would
result in an increase in the underlying basis of the contracts by $12.9 million.
The increase in Treasury securities forward agreements outstanding is because
the Company elected to not complete a securitization transaction during the
third quarter of 1998.
Contracts serviced by WFS for the benefit of others totaled approximately $3.3
billion at September 30, 1998 and $3.4 billion at December 31, 1997.
NOTE C - ALLOWANCE FOR CREDIT LOSSES
- ------------------------------------
Changes in the allowance for credit losses for owned contracts were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 9,217 $ 7,513 $ 6,787 $ 7,648
Provision for credit losses 2,291 1,211 9,389 5,748
Charged off contracts (3,338) (3,138) (9,790) (9,947)
Recoveries 1,050 1,017 2,834 3,154
------- ------- ------- -------
Balance at end of period $ 9,220 $ 6,603 $ 9,220 $ 6,603
======= ======= ======= =======
</TABLE>
NOTE D - SECURITIZED ASSETS
- ---------------------------
Retained interest in securitized assets ("RISA") capitalized upon securitization
of contracts represents 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
8
<PAGE> 9
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 are reported as a separate component of other
comprehensive income (loss) on the Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) and shareholders' equity on the Consolidated
Statements of Financial Condition 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") 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 September 30, 1998.
The following table presents the activity of the RISA.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $ 179,069 $ 159,487 $ 181,177 $ 121,597
Additions -- 31,977 55,058 83,359
Amortization (24,318) (19,734) (81,421) (33,165)
Change in unrealized gain on retained
interest in securitized assets 2,355 605 2,292 544
--------- --------- --------- ---------
Ending balance $ 157,106 $ 172,335 $ 157,106 $ 172,335
========= ========= ========= =========
</TABLE>
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 RISA decreased to $157 million from
$172 million a year earlier due to higher amortization of RISA as a result of
higher losses in the three and nine months ended September 30, 1998.
9
<PAGE> 10
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 discounted to its present value.
The following table sets forth the components of the RISA:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 335,235 $ 438,190
Off balance sheet allowance for losses (160,733) (236,796)
Discount to present value (17,396) (20,217)
----------- -----------
Retained interest in securitized assets $ 157,106 $ 181,177
=========== ===========
Outstanding balance of contracts sold through securitizations $ 3,270,871 $ 3,449,590
Off balance sheet allowance for losses as a percent of contracts
sold through securitizations 4.91% 6.86%
</TABLE>
The decrease in the off balance sheet allowance is due to lower potential future
losses as a result of a declining sold portfolio because the Company did not
securitize contracts in the third quarter of 1998. The Company believes that the
off balance sheet allowance for losses is currently adequate to absorb potential
losses in the sold portfolio.
10
<PAGE> 11
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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land $ 2,017 $ 2,017
Construction in progress 2,657 2,749
Buildings 8,222 --
Computers and software 11,603 29,446
Furniture, fixtures and leasehold improvements 2,637 3,993
Equipment 3,181 3,617
Automobiles 245 214
------- -------
30,562 42,036
Less accumulated depreciation 8,362 20,630
------- -------
$22,200 $21,406
======= =======
</TABLE>
The decrease in Computer and Software is attributable to write-offs of equipment
as a result of the Company's restructuring and consolidation completed in the
first and third quarters of 1998.
NOTE F - INTERCOMPANY AGREEMENTS
- --------------------------------
WFS receives advances from the Bank in the form of a warehouse line of credit
("Line of Credit"). The Line of Credit agreement permits WFS to draw up to $900
million that can be extended to be used in its operations. The weighted average
interest rate was 5.71% and 5.66% for the nine months ended September 30, 1998
and 1997, respectively. Interest payments are calculated based on the average
amount outstanding. At September 30, 1998, WFS had $612 million outstanding on
the Line of Credit.
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 5.46% and 5.57%
for the nine months ended September 30, 1998 and 1997, respectively. At
September 30,1998, WFS did not hold excess cash with the Bank under the
investment agreement.
Under the terms of the WFS Reinvestment Contract ("RIC") with the Bank, WFS may
utilize principal and interest collections from contracts securitized. WFS may
use these collections without limitations in its operations until payments are
due to investors as long as they are initially invested in a reinvestment
contract at the Bank. Pursuant to the RIC, WFS pays the Bank a fee equal to 12.5
basis points of the amount of collateral pledged by the Bank. The fee paid to
the Bank for the third quarter of 1998 was $0.2 million. During the nine months
11
<PAGE> 12
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ended September 30, 1998, the average amount outstanding on the RIC was
$548 million. At September 30, 1998, the outstanding balance was $518 million.
NOTE G - COMPREHENSIVE INCOME
- -----------------------------
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"),"Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires unrealized gains
or losses on the Company's available for sale securities, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
For the three and nine months ended September 30, 1998, the Company had a
pre-tax change in unrealized gain on retained interest in securitized assets of
$2.4 million and $2.3 million, respectively, and for the three and nine months
ended September 30, 1997, a pre-tax gain of $0.6 million and $0.5 million,
respectively.
NOTE H - EARNINGS PER SHARE
- ---------------------------
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. Diluted earnings per share is arrived at by dividing net income by
the weighted average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BASIC
Net income (loss) $ (3,948) $ 6,371 $ (16,998) $ 24,952
Average common shares outstanding 25,708,611 25,691,063 25,708,611 25,686,491
Net income (loss) per common share - basic (0.15) 0.25 (0.66) 0.97
DILUTED
Net income (loss) $ (3,948) $ 6,371 $ (16,998) $ 24,952
Average common shares outstanding 25,708,611 25,729,858 25,708,611 25,686,491
Net income (loss) per common share - diluted (0.15) 0.25 (0.66) 0.97
</TABLE>
12
<PAGE> 13
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options to purchase 685,006 and 442,214 shares of common stock were outstanding
at September 30, 1998 and 1997, respectively, but were not included in the
computation of diluted earnings because the Company had a loss or the options'
exercise price was greater than the average market price of the common shares,
and therefore, the effect would be antidilutive. The weighted average exercise
price at September 30, 1998 and 1997 was $15.62 and $18.00 respectively, for the
options outstanding.
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 dealer acquisition
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 present value of estimated future 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 $700 million and $2.0 billion of contracts for the three and nine
months ended September 30, 1998 compared to $597 million and $1.8 billion of
contracts for the same periods in 1997. This represents a 17% and 11% increase
in production for the respective periods. WFS did not execute a securitization
transaction during the three months ended September 30, 1998, but had
securitizations of $1.2 billion for the nine months ended September 30, 1998
compared with $600 million and $1.7 billion for the same periods in 1997.
Because of the Company's liquidity position, the Company realized lower
financing costs and wider interest margins by
13
<PAGE> 14
retaining contracts on the balance sheet at a time when asset-backed
securitizations were adversely affected by wider spreads and higher pricing.
The following table sets forth the contract origination, sale and principal
reduction activity of WFS for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $ 321,119 $ 261,220 $ 231,229 $ 233,948
Originations 700,258 596,745 2,022,798 1,762,340
Sales -- (600,000) (1,185,000) (1,690,000)
Principal reductions (1) (38,909) (28,769) (86,559) (77,092)
----------- ----------- ----------- -----------
Ending balance $ 982,468 $ 229,196 $ 982,468 $ 229,196
=========== =========== =========== ===========
</TABLE>
- -----------
(1) Includes scheduled payments, prepayments and chargeoffs.
RESULTS OF OPERATIONS
SERVICING INCOME
- ----------------
Total servicing income was $21.3 million and $57.5 million for the three and
nine months ended September 30, 1998 compared to $29.1 million and $110 million
for the same periods in 1997. Servicing income declined due to (1) lower
retained interest income as a result of WFS not executing a securitization
transaction in the third quarter and (2) higher amortization of retained
interest in securitized assets as a result of higher losses in the three and
nine months ended September 30, 1998.
Retained interest income represents excess spread earned on securitized loans
less any losses not absorbed by the off balance sheet allowance for 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. The
decrease in retained interest income for the three and nine months ended
September 30, 1998 compared with the same periods a year earlier is a result of
WFS not executing a securitization transaction, increased losses which reduced
the amount of excess spread, as well as increased amortization of the RISA as
expectations of future income decreased. Contractual servicing income is earned
at rates ranging from 1% to 1.25% per annum on the outstanding balance of
contracts securitized. Other fee income consists primarily of documentation
fees, late charges and deferment fees. Increased competition may affect the
amount of other fee income that WFS may earn when originating or servicing
contracts.
14
<PAGE> 15
Servicing income consists of the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Retained interest income $ 2,658 $ 11,595 $ 2,228 $ 59,935
Contractual servicing income 9,608 7,953 27,482 22,458
Other fee income 9,076 9,572 27,780 27,956
-------- -------- -------- --------
Total servicing income $ 21,342 $ 29,120 $ 57,490 $110,349
======== ======== ======== ========
</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 totaled $18.1 million and $44.1 million for the three and nine
months ended September 30, 1998 compared to $14.4 million $40.7 million for the
same periods in 1997. The following table shows the average rate earned on
contracts and the average rate paid on borrowings, consisting primarily of
advances from the Bank, together with the corresponding net interest rate spread
for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Yield on interest earning assets 14.09% 13.76% 13.90% 14.09%
Cost of borrowings 6.81% 8.67% 7.47% 7.80%
----- ----- ----- -----
Net interest rate spread 7.28% 5.09% 6.43% 6.29%
===== ===== ===== =====
</TABLE>
The increase in the net interest rate spread for the three and nine months ended
September 30, 1998, compared to the same periods last year, is the result of
lower overall financing costs as WFS utilized the line of credit in order to
retain contracts on its balance sheet and higher yields on those contracts
retained.
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 retained interest income. To
protect against changes in interest rates, WFS hedges contracts prior to their
securitization with two-year Treasury securities 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.
GAIN ON SALE OF CONTRACTS
- -------------------------
WFS did not record a gain on sale in the third quarter as a result of not
executing a securitization transaction compared with an $11.6 million gain in
the third quarter of 1997. For the nine months ended September 30, 1998, gain on
15
<PAGE> 16
sale was $18.9 million compared to $25.4 million for the same period of 1997.
The decrease is because the Company elected not to complete a securitization
transaction during the third quarter which negatively impacted the timing of
revenue recognition. However, because of the Company's flexibility relative to
liquidity and the timing of securitizations, WFS utilized less expensive on
balance sheet funding sources on an interim basis. 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 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 the amount
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 on balance sheet portfolio. The provision for credit losses totaled $2.3
million and $9.4 million for the three and nine months ended September 30, 1998
compared to $1.2 million and $5.7 million for the same periods in 1997. The
increase for the nine months ended September 30, 1998, compared to the same
period last year, is the result of a $3.0 million increase in on balance sheet
allowance for loan losses as a result of the restructuring in the first quarter
of 1998.
OPERATING EXPENSES
- ------------------
Total operating expenses were $39.5 million and $126.0 million for the three and
nine months ended September 30, 1998 compared to $43.1 million and $128 million
for the same periods in 1997. The decrease in operating expenses for the three
and nine months ended September 30, 1998 compared with September 30, 1997 is
attributable to the first and third quarter restructuring of operations. As a
result, operating costs as a percentage of average serviced contracts declined
110 basis points to 3.8% for the third quarter of 1998 compared with 4.9% for
the same period a year earlier.
RESTRUCTURING
- -------------
During the third quarter of 1998, the Company completed the restructuring of its
operations in the Central and Eastern United States, patterned after the
restructuring of the Company's offices in the Western United States which
occurred in the first quarter of 1998. As part of the restructuring in the third
quarter, WFS recorded a pre-tax restructuring charge of $4.5 million , which
brings the total pre-tax restructuring charge for the nine months ended
September 30, 1998 to $15.0 million. Restructuring related costs included $1.8
million for employee severance and $13.2 million for lease termination fees and
asset disposition. This completes the Company's restructuring programs initiated
during 1998. As a result of these programs, a total of 400 positions, or 19% of
the Company's workforce were eliminated and 96 offices were closed. The
restructuring programs are designed to save up to $22.0 million annually in
expenses.
16
<PAGE> 17
INCOME TAXES
- ------------
WFS files federal and certain state tax returns as part of a consolidated group
that includes the Bank and its parent, 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
rate for the nine months ended September 30, 1998 and 1997 was 42.1%.
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
- ------------------------------------------------
WFS holds a portfolio of contracts on balance sheet for investment that totaled
$60.3 million at September 30, 1998 and $52.6 million at December 31, 1997.
Contracts held for sale totaled $947 million at September 30, 1998 compared to
$184 million at December 31, 1997. The balance in the held for sale portfolio is
largely dependent upon the timing of the origination and securitization of
contracts. The increase in contracts held for sale is because the Company did
not execute a securitization transaction in the third quarter of 1998. WFS
completed securitization transactions totaling $1.2 billion during the first
nine months of 1998. WFS plans to continue to securitize contracts on a regular
basis.
The following table presents information on the volume of prime and non-prime
contracts and those secured by new and used autos for the periods indicated
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Prime contracts $ 490,873 $ 321,721 $1,350,819 $ 958,779
Non-prime contracts 209,385 275,024 671,979 803,561
---------- ---------- ---------- ----------
Total volume $ 700,258 $ 596,745 $2,022,798 $1,762,340
========== ========== ========== ==========
New vehicles $ 161,164 $ 113,563 $ 397,566 $ 322,911
Used vehicles 539,094 483,182 1,625,232 1,439,429
---------- ---------- ---------- ----------
Total volume $ 700,258 $ 596,745 $2,022,798 $1,762,340
========== ========== ========== ==========
</TABLE>
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 September 30, 1998 were $313 million as compared with $295 million at
year-end 1997. As a result of increased delinquency and default rates on sold
loans, WFS has increased the amounts held in
17
<PAGE> 18
certain spread accounts in accordance with the requirements contained within the
respective securitization transaction documents which, in turn, has increased
the amounts due from trusts.
RETAINED INTEREST IN SECURITIZED ASSETS
- ---------------------------------------
Retained interest 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 are reported as a separate component of other
comprehensive income (loss) on the Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) and shareholders' equity on the Consolidated
Statements of Financial Condition 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") 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 September 30, 1998.
Retained interest in securitized assets as of September 30, 1998 were $157
million compared to $181 million at year end 1997.
LINE OF CREDIT
- --------------
WFS receives advances from the Bank in the form of a warehouse line of credit
("Line of Credit"). The Line of Credit agreement permits WFS to draw up to $900
million that can be extended to be used in its operations. The interest rate was
5.71% and 5.66% for the nine months ended September 30, 1998 and 1997,
respectively. Interest payments are calculated based on the average amount
outstanding. At September 30, 1998, WFS had $612 million outstanding on the Line
of Credit. The increase in the line of credit is attributable to the decision to
delay the third quarter securitization.
18
<PAGE> 19
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
obligor 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 office.
If satisfactory arrangements are not made to cure the past due account, the
automobile is generally repossessed within 60 to 90 days of the date of
delinquency. WFS writes down the value of the vehicle to fair value and
reclassifies the contract as a repossessed asset. WFS sells substantially all of
its repossessed 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 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 centralized its credit risk management functions. This centralized area
is responsible for setting and monitoring credit policy, through reunderwriting,
for the entire organization and oversees the development and implementation of
WFS' computerized credit scoring system. The credit scorecard system was fully
implemented in the third quarter of 1998. 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.
19
<PAGE> 20
The following tables reflect WFS' delinquency, repossession and loss experience.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------------- ----------------------------
NUMBER NUMBER
OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced (1) 456,353 $4,246,814 408,958 $3,680,817
========== ========== ========== ==========
Period of delinquency (2)
31-59 days 12,916 $ 106,810 6,605 $ 54,450
60-89 days 4,069 33,986 2,161 18,652
90 days or more 1,775 15,233 918 7,762
---------- ---------- ---------- ----------
Total contracts delinquent 18,760 $ 156,029 9,684 $ 80,864
========== ========== ========== ==========
Delinquencies as a percentage of
number and amount of contracts
outstanding 4.11% 3.67% 2.37% 2.20%
========== ========== ========== ==========
</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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------- -----------------------
NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO (1) 456,353 $4,246,814 408,958 $3,680,817
======= ========== ======= ==========
Repossessed Assets 760 $ 4,655 1,554 $ 9,672
======= ========== ======= ==========
Repossessed assets as a
percentage of number and
amount of contracts
outstanding 0.17% 0.11% 0.38% 0.26%
======= ========== ======= ==========
</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.
20
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced at end of period (1) $4,246,814 $3,588,659 $4,246,814 $3,588,659
========== ========== ========== ==========
Average during period $4,144,618 $3,490,019 $3,935,742 $3,301,774
========== ========== ========== ==========
Gross chargeoffs of contracts $ 43,989 $ 34,780 $ 124,901 $ 96,688
Recoveries of contracts 9,803 8,864 26,196 25,144
---------- ---------- ---------- ----------
Net chargeoffs $ 34,186 $ 25,916 $ 98,705 $ 71,544
========== ========== ========== ==========
Net chargeoffs as a percentage of
contracts outstanding during
period (2) 3.30% 2.97% 3.34% 2.89%
========== ========== ========== ==========
</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 September 30, 1998 and 1997.
Loss experience was impacted by the disruption in collection efforts during the
first and third quarters' restructuring, the shift to greater non-prime paper
during 1996 and 1997, slower loan growth and higher than expected bankruptcies.
The following table sets forth the cumulative static pool losses for all
outstanding securitized pools.
21
<PAGE> 22
CUMULATIVE STATIC POOL LOSS CURVES
AT SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PERIOD 1994-3 1994-4 1995-1 1995-2 1995-3 1995-4 1995-5 1996-A 1996-B 1996-C
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.03% 0.00% 0.00% 0.01% 0.00% 0.01% 0.00%
2 0.05% 0.06% 0.10% 0.15% 0.09% 0.06% 0.09% 0.06% 0.09% 0.09%
3 0.11% 0.18% 0.26% 0.23% 0.20% 0.16% 0.16% 0.17% 0.20% 0.22%
4 0.22% 0.34% 0.43% 0.43% 0.36% 0.31% 0.32% 0.29% 0.35% 0.52%
5 0.34% 0.49% 0.68% 0.58% 0.58% 0.52% 0.48% 0.48% 0.61% 0.74%
6 0.46% 0.66% 0.79% 0.77% 0.80% 0.70% 0.62% 0.63% 0.88% 0.98%
7 0.58% 0.77% 0.96% 0.95% 1.04% 0.86% 0.78% 0.81% 1.14% 1.27%
8 0.73% 0.95% 1.10% 1.09% 1.27% 1.02% 0.98% 1.08% 1.42% 1.52%
9 0.81% 1.10% 1.32% 1.28% 1.46% 1.13% 1.16% 1.35% 1.67% 1.77%
10 0.92% 1.21% 1.49% 1.49% 1.62% 1.26% 1.32% 1.63% 1.91% 1.98%
11 1.02% 1.37% 1.68% 1.64% 1.79% 1.41% 1.54% 1.87% 2.18% 2.21%
12 1.11% 1.50% 1.86% 1.81% 1.92% 1.52% 2.01% 2.06% 2.38% 2.49%
13 1.27% 1.64% 2.05% 1.94% 2.01% 1.66% 2.03% 2.28% 2.58% 2.73%
14 1.33% 1.74% 2.20% 2.09% 2.17% 1.86% 2.25% 2.47% 2.79% 2.99%
15 1.39% 1.91% 2.38% 2.16% 2.28% 2.07% 2.41% 2.63% 2.95% 3.21%
16 1.46% 2.06% 2.51% 2.24% 2.42% 2.26% 2.59% 2.79% 3.14% 3.47%
17 1.56% 2.13% 2.67% 2.36% 2.57% 2.47% 2.77% 2.97% 3.38% 3.70%
18 1.66% 2.26% 2.79% 2.46% 2.86% 2.59% 2.88% 3.12% 3.55% 3.94%
19 1.76% 2.34% 2.90% 2.55% 3.08% 2.72% 3.00% 3.31% 3.80% 4.18%
20 1.83% 2.43% 2.98% 2.69% 3.23% 2.88% 3.12% 3.49% 3.98% 4.36%
21 1.89% 2.49% 3.08% 2.83% 3.38% 2.95% 3.24% 3.63% 4.14% 4.53%
22 1.94% 2.56% 3.21% 2.96% 3.49% 3.04% 3.39% 3.80% 4.31% 4.67%
23 1.98% 2.61% 3.27% 3.06% 3.59% 3.13% 3.53% 3.95% 4.46% 4.84%
24 2.09% 2.68% 3.41% 3.17% 3.68% 3.22% 3.64% 4.10% 4.58% 5.01%
25 2.13% 2.78% 3.53% 3.24% 3.74% 3.30% 3.72% 4.22% 4.74% 5.17%
26 2.18% 2.89% 3.59% 3.28% 3.81% 3.37% 3.83% 4.33% 4.87%
27 2.26% 2.97% 3.68% 3.33% 3.88% 3.47% 3.95% 4.41% 4.98%
28 2.36% 3.05% 3.72% 3.42% 3.97% 3.50% 4.08% 4.51% 5.11%
29 2.41% 3.07% 3.77% 3.46% 4.01% 3.58% 4.16% 4.60%
30 2.46% 3.12% 3.82% 3.49% 4.06% 3.65% 4.25% 4.70%
31 2.50% 3.18% 3.87% 3.52% 4.07% 3.75% 4.31% 4.79%
32 2.54% 3.21% 3.91% 3.56% 4.14% 3.80% 4.35%
33 2.59% 3.25% 3.95% 3.55% 4.20% 3.83% 4.40%
34 2.61% 3.26% 3.99% 3.60% 4.26% 3.87% 4.46%
35 2.63% 3.28% 4.02% 3.62% 4.31% 3.91%
36 2.62% 3.29% 4.00% 3.67% 4.34% 3.94%
37 2.62% 3.31% 4.05% 3.70% 4.38% 3.96%
38 2.64% 3.33% 4.06% 3.73% 4.40%
39 2.66% 3.34% 4.10% 3.74% 4.41%
40 2.66% 3.35% 4.14% 3.76% 4.44%
41 2.64% 3.38% 4.15% 3.77%
42 2.66% 3.41% 4.16% 3.80%
43 2.68% 3.42% 4.16%
44 2.69% 3.44% 4.16%
45 2.69% 3.44% 4.16%
46 2.69% 3.44%
47 2.71% 3.42%
48 2.69% 3.42%
49 2.70%
50 2.69%
</TABLE>
22
<PAGE> 23
CUMULATIVE STATIC POOL LOSS CURVES
AT SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PERIOD 1996-D 1997-A 1997-B 1997-C 1997-D 1998-A 1998-B
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
1 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.10% 0.08% 0.07% 0.06% 0.05% 0.04% 0.02%
3 0.24% 0.20% 0.18% 0.15% 0.14% 0.11% 0.08%
4 0.44% 0.36% 0.33% 0.29% 0.31% 0.25% 0.18%
5 0.71% 0.62% 0.56% 0.46% 0.56% 0.44%
6 0.93% 0.85% 0.77% 0.67% 0.75% 0.66%
7 1.16% 1.12% 1.10% 0.93% 0.99% 0.99%
8 1.43% 1.45% 1.40% 1.16% 1.24%
9 1.72% 1.70% 1.70% 1.37% 1.47%
10 2.03% 2.02% 2.00% 1.66% 1.75%
11 2.34% 2.32% 2.22% 1.94%
12 2.62% 2.61% 2.43% 2.16%
13 2.97% 2.92% 2.66% 2.40%
14 3.27% 3.14% 2.91%
15 3.53% 3.30% 3.15%
16 3.79% 3.55% 3.47%
17 4.02% 3.77%
18 4.19% 3.94%
19 4.43% 4.21%
20 4.65%
21 4.80%
22 5.07%
</TABLE>
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 expanding purchases of contracts. It is
anticipated that the purchase of contracts will continue to be the major use of
cash for WFS.
Although, WFS does not have publicly rated debt, its parent, Western Financial
Bank, receives long term deposit and subordinated debt ratings. In November
1998, Moody's downgraded the long term deposit (to Ba3 from Ba2), issuer (to B1
from Ba3) and subordinated debt (to B2 from B1) ratings of the Bank. This
downgrade could result in higher future financing costs for WFS.
The cash flows from operating activities of WFS primarily relates to the
purchase, securitization and principal receipts of contracts. The major
components of cash flows related to operating activities are cash needed to
purchase contracts which totaled $2.0 billion for the nine months ended
September 30, 1998, compared to $1.8 billion for the same period in 1997.
Operating activities also generated cash flows through securitizations and
principal receipts on contracts. WFS securitized $1.2 billion and $1.7 billion
for the nine months ended September 30, 1998 and 1997 respectively.
The cash flows from investing activities of WFS primarily relates to amounts due
from trusts and retained interest in securitized asset accounts. At the time a
securitization transaction closes, WFS is required to advance monies to
initially fund spread accounts. The Company funds these spread accounts by
foregoing receipt of excess cash flow until these accounts exceed predetermined
levels. The amounts due from trusts represent funds due to WFS which have not
yet been disbursed from the spread accounts. Retained interest in securitized
assets represents
23
<PAGE> 24
the present value of the estimated future cash flows to be received by WFS from
the excess spread created in securitizations. Excess spread is calculated by
taking the difference between the coupon rate of the contract sold and the
certificate rate paid to investors less contractually specified servicing and
guarantor fees.
The cash flows from financing activities primarily relates to amounts held on
behalf of trustee and borrowings from parent. These cash flows historically have
provided a consistent source of cash for WFS. Pursuant to the reinvestment
contract with the Bank, WFS is able to utilize principal and interest
collections on contracts sold in its day to day operations until payments are
due to the investors. These principal and interest collections represent amounts
held on behalf of trustee. As the Company continues to increase the size of its
servicing portfolio, WFS expects such amounts to increase.
During the third quarter, the Line of Credit extended by the Bank, was increased
to permit WFS to draw up to $900 million. This increase provides the Company
greater flexibility related to the timing of securitizations.
These financing sources are expected to provide adequate funding of the
Company's operations and, while no assurance can be given, the Company believes
that its sources of liquidity are sufficient to meet its short and long term
cash requirements.
ASSET/LIABILITY MANAGEMENT
- --------------------------
Asset/liability management is the process of measuring and controlling interest
rate risk through matching the maturity and repricing characteristics of
interest earning assets with those of interest bearing liabilities.
The contracts originated and held by WFS are all fixed rate and accordingly WFS
has exposure to changes in interest rates. WFS' prepayment experience on
contracts has not been historically sensitive to changes in interest rates and
WFS therefore believes it is not expected to be exposed to significant
prepayment risk relative to changes in interest rates. As a result of this
approach to interest rate management, combined with the Company's hedging
strategies, WFS does not anticipate that changes in interest rates will
materially affect the Company's results of operations or liquidity, although no
assurance can be given in this regard.
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 is designed to respond 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 enters into
these forward agreements either with the Bank or 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.
24
<PAGE> 25
YEAR 2000
- ---------
During 1997, the Company began a formal risk evaluation of potential Year 2000
issues. The Year 2000 issues arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail and create
erroneous results. The outcome of the risk evaluation was the formation of a
Year 2000 Committee that consists of officers and employees of the Company. In
addition, there is a committee that consists of directors that provide oversight
and direction to the Year 2000 Committee. The purpose of this committee is to
assess all risks, analyze current systems, coordinate upgrades and replacements,
and report current and projected status of all known Year 2000 compliance
issues.
As a subsidiary of a federally chartered savings bank, WFS is subject to
supervision and regulation by the Office of Thrift Supervision ("OTS"). As such,
WFS and the Bank's compliance to Year 2000 issues are subject to the examination
of the OTS.
The Company has initiated a five-phase program to address the issues related to
the Year 2000 and the impact on the Company's information and non-information
technology systems. In addition, as part of the program, the Company is in
contact with its principal vendors to assess whether their Year 2000 issues, if
any, will affect the Company.
The Company, in phase one, identified Year 2000 issues and created a plan. In
phase two, the Company took inventory of the systems and programs affected by
the Year 2000 issues. Currently, the Company is in the third and fourth phases
of its Year 2000 plan. In these phases, the Company is evaluating the systems
affected and will test these systems for Year 2000 readiness. It is estimated
the third and fourth phases will be completed by June 1999. The final phase
implements the tested Year 2000 compliant systems. This phase is estimated to
begin in June 1999 and be completed by September 1999.
The Company's replacement or remedied costs for Year 2000 compliance issues is
estimated at approximately $0.8 million, which the Company will expense as
incurred. This estimated cost consists primarily of software upgrades that
include new features which are combined with Year 2000 corrections. The
Company's inception to date Year 2000 cost is approximately $0.4 million.
Due to the uncertainty and the lack of current disclosure by the electrical
utility industry regarding the progress toward becoming Year 2000 compliant, the
Company estimates that the worst case Year 2000 issue scenario would be a
possible discontinuance of electrical power. In the event of an electrical power
failure, the Company has the capability to run its information systems at the
corporate location on diesel powered generators. There is no guarantee, however,
that all issues will be foreseen and corrected, or that no material disruption
of our business will occur.
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.
25
<PAGE> 26
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," "design," "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 most significant among these risks and uncertainties are (1) the level of
chargeoffs, (2) the Company's ability to achieve adequate volumes and interest
rate spreads, (3) the continued availability of liquidity sources, (4) the level
of operating costs and (5) the impact of the Year 2000.
26
<PAGE> 27
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
Exhibit 27 Financial Data Schedule for the Nine Months Ended
September 30, 1998
(B) REPORTS ON FORM 8-K
None
27
<PAGE> 28
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)
<TABLE>
<S> <C>
Date: November 11, 1998 By:/s/JOY SCHAEFER
---------------------------------- ------------------------------------------------
Joy Schaefer
Vice Chairman, President, Chief Executive
Officer and Chief Operating Officer
Date: November 11, 1998 By:/s/LEE A. WHATCOTT
---------------------------------- ------------------------------------------------
Lee A. Whatcott
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
28
<PAGE> 29
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule for the Nine Months Ended
September 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,183
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,007,436
<ALLOWANCE> 9,220
<TOTAL-ASSETS> 1,505,567
<DEPOSITS> 0
<SHORT-TERM> 611,512
<LIABILITIES-OTHER> 544,830
<LONG-TERM> 175,000
0
0
<COMMON> 73,564
<OTHER-SE> 90,611
<TOTAL-LIABILITIES-AND-EQUITY> 1,505,567
<INTEREST-LOAN> 59,002
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 59,002
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 14,928
<INTEREST-INCOME-NET> 44,074
<LOAN-LOSSES> 9,389
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 140,501
<INCOME-PRETAX> (29,377)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,998)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
<YIELD-ACTUAL> 13.90
<LOANS-NON> 0
<LOANS-PAST> 156
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,787
<CHARGE-OFFS> 9,790
<RECOVERIES> 2,834
<ALLOWANCE-CLOSE> 9,220
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
