<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ________ 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) 727-1002
(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, 1999, the registrant had 25,758,533 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 30.
<PAGE> 2
WFS FINANCIAL INC AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity at
September 30, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</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,
1999 1998
----------- -----------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Short term investments $ 39,321 $ 15,020
Contracts receivable 67,929 70,814
Contracts held for sale 1,194,820 825,257
Allowance for credit losses (34,866) (11,246)
----------- -----------
Contracts receivable, net 1,227,883 884,825
Amounts due from trusts 419,808 332,732
Retained interest in securitized assets 174,472 171,230
Premises and equipment, net 35,755 26,482
Accrued interest receivable 8,481 5,859
Other assets 8,506 8,192
----------- -----------
$ 1,914,226 $ 1,444,340
=========== ===========
LIABILITIES
Notes payable - parent $ 184,008 $ 160,000
Warehouse lines 833,778 554,836
Amounts held on behalf of trustee 659,406 528,092
Other liabilities 37,840 37,071
----------- -----------
1,715,032 1,279,999
SHAREHOLDERS' EQUITY
Common stock, (no par value; authorized 50,000,000 shares; issued and
outstanding 25,756,054 shares in 1999 and 25,708,611 in 1998) 73,892 73,564
Paid-in capital 4,000 4,000
Retained earnings 121,763 85,315
Accumulated other comprehensive (loss) income, net of tax (461) 1,462
----------- -----------
199,194 164,341
----------- -----------
$ 1,914,226 $ 1,444,340
=========== ===========
</TABLE>
- --------------------
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 34,324 $ 25,809 $ 96,575 $ 59,002
Interest expense 8,873 7,666 26,033 14,928
------------ ------------ ------------ ------------
Net interest income 25,451 18,143 70,542 44,074
Servicing income 37,009 21,342 105,503 57,490
Gain on sale of contracts 20,251 48,506 18,949
------------ ------------ ------------ ------------
TOTAL REVENUES 82,711 39,485 224,551 120,513
EXPENSES
Provision for credit losses 15,347 2,291 31,304 9,389
Operating expenses:
Salaries and employee benefits 28,975 22,902 83,901 74,152
Credit and collections 4,983 5,404 16,239 15,007
Miscellaneous 11,416 11,223 30,107 36,342
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 45,374 39,529 130,247 125,501
Restructuring charge 4,500 15,000
------------ ------------ ------------ ------------
TOTAL EXPENSES 60,721 46,320 161,551 149,890
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)
21,990 (6,835) 63,000 (29,377)
Income tax (benefit) 9,278 (2,887) 26,552 (12,379)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 12,712 $ (3,948) $ 36,448 $ (16,998)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ 0.49 $ (0.15) $ 1.42 $ (0.66)
============ ============ ============ ============
DILUTED $ 0.49 $ (0.15) $ 1.41 $ (0.66)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 25,737,786 25,708,611 25,721,295 25,708,611
DILUTED 25,881,676 25,708,611 25,822,197 25,708,611
</TABLE>
- ------------------------
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WFS FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Paid-in Income (loss) Retained
Shares Stock Capital Net of Tax Earnings Total
---------- --------- --------- ------------- -------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 25,708,611 $ 73,564 $ 4,000 $ 447 $101,882 $ 179,893
Net loss (16,567) (16,567)
Unrealized gains on retained
interest in securitized assets,
net of tax (1) 1,015 1,015
-----------
Comprehensive loss (15,552)
---------- --------- --------- --------- -------- -----------
BALANCE, DECEMBER 31, 1998 25,708,611 $ 73,564 $ 4,000 $ 1,462 $ 85,315 $ 164,341
Net income 36,448 36,448
Unrealized losses on retained
interest in securitized assets,
net of tax (1) (1,923) (1,923)
---------
Comprehensive income 34,525
Stock options exercised 47,443 328 328
---------- --------- --------- --------- -------- -----------
BALANCE, SEPTEMBER 30, 1999 25,756,054 $ 73,892 $ 4,000 $ (461) $121,763 $ 199,194
========== ========= ========= ========= ======== ==========
</TABLE>
(1) The pre-tax decrease and increase in unrealized gains (losses) on retained
interest in securitized assets was $3.3 million and $1.8 million for the
nine month period ended September 30, 1999 and for the year ended December
31, 1998, Respectively.
------------------
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 1998
----------- ------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 36,448 $ (16,998)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Provision for credit losses 31,304 9,389
Depreciation 4,670 5,888
Amortization of retained interest in securitized assets 86,983 81,421
(Gain) loss on disposal of assets (173) 6,847
(Increase) decrease in assets:
Automobile contracts:
Purchase of contracts (2,528,415) (2,022,798)
Proceeds from sale of contracts 2,000,000 1,185,000
Other change in contracts 154,111 59,619
Other assets (2,994) (5,890)
Increase in liabilities:
Other liabilities 2,162 1,175
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (215,904) (696,347)
INVESTING ACTIVITIES
Purchase of premises and equipment (13,769) (13,530)
Increase in trust receivable (87,076) (17,625)
Increase in retained interest in securitized asset (93,541) (55,058)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (194,387) (86,213)
FINANCING ACTIVITIES
Proceeds from issuance from common stock 328
Proceeds from notes payable - parent 24,008
Increase in warehouse lines 278,942 611,512
Increase in trustee accounts 131,314 29,426
----------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 434,592 640,938
----------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,301 (141,622)
Cash and cash equivalents at beginning of period 15,020 143,805
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,321 $ 2,183
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 21,504 $ 13,276
Income taxes 30,616
</TABLE>
- --------------------------------
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - 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, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. These consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and footnotes thereto for the year ended December 31, 1998
included in the WFS Financial Inc ("WFS" or the "Company") Form 10-K.
Certain amounts from the 1998 consolidated financial statement amounts have
been reclassified to conform to the 1999 presentation.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 ("SFAS 137"). This Statement defers for one
year the effective date of FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). These
statements provide 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 of all fiscal quarters of all fiscal
years beginning after June 15, 2000. These Statements 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 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 is in the process of evaluating the effect that SFAS
137, if any, will have on the earnings and financial position of the
Company.
NOTE 2 - NET CONTRACTS RECEIVABLE
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ------------
(Dollars in thousands)
<S> <C> <C>
Contracts $ 1,287,262 $ 923,953
Unearned discounts (51,888) (48,015)
--------------- ------------
Net contracts 1,235,374 875,938
Allowance for credit losses (34,866) (11,246)
Dealer participation, net of deferred contract fees 27,375 20,133
--------------- -----------
Net contracts receivable $ 1,227,883 $ 884,825
=============== ===========
</TABLE>
7
<PAGE> 8
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the changes in amounts deferred and carried as
adjustments to the contract balance including contract fees and dealer
participation.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 31,683 $ 7,791 $ 20,133 $ 4,896
New deferrals 19,426 19,036 55,112 55,137
Amortization (524) (1,859) (1,521) (3,999)
Sales (23,210) (46,349) (31,066)
-------- -------- -------- ---------
Balance at end of period $ 27,375 $ 24,968 $ 27,375 $ 24,968
======== ======== ======== ========
</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 the
Company in amounts that correspond to the principal amount of the contracts
originated. 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, the Company 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 on the sale of the
contracts. The Company enters into these forward agreements either with highly
rated counterparties or its parent, Western Financial Bank (the "Bank") 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. The Company hedges
substantially all of its contracts pending securitization.
At September 30, 1999, the Company had forward agreements with a notional face
amount outstanding of $1.3 billion. The fair value of these forward agreements
would result in a decrease in the underlying basis of the contracts by $0.8
million.
Contracts serviced by the Company for the benefit of others totaled $3.9 billion
at September 30, 1999 and $3.5 billion at December 31, 1998.
8
<PAGE> 9
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - 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,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 21,957 $ 9,217 $ 11,246 $ 6,787
Provision for credit losses 15,347 2,291 31,304 9,389
Charged off contracts (4,257) (3,338) (13,169) (9,790)
Recoveries 1,819 1,050 5,485 2,834
-------- -------- -------- --------
Balance at end of period $ 34,866 $ 9,220 $ 34,866 $ 9,220
======== ======== ======== ========
</TABLE>
NOTE 4- RETAINED INTEREST IN 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 interest 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. RISA is classified
in a manner similar to available for sale securities and as such is 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.
9
<PAGE> 10
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the activity of the RISA.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 164,891 $ 179,069 $ 171,230 $ 181,177
Additions 43,582 93,541 55,058
Amortization (33,847) (24,318) (86,983) (81,421)
Change in accumulated other comprehensive
Income (loss) (154) 2,355 (3,316) 2,292
--------- --------- --------- ---------
Balance at end of period $ 174,472 $ 157,106 $ 174,472 $ 157,106
========= ========= ========= =========
</TABLE>
At the time of securitization, the Company utilizes prepayment speed, net credit
loss and discount rate assumptions to initially compute the value of the RISA.
These assumptions may change periodically based on actual performance or other
factors. During 1999 and 1998, the Company utilized prepayment rates of 1.6% ABS
in computing RISA. Original cumulative net credit loss assumptions utilized for
1999 and 1998 securitization transactions ranged from 6% to 7%. The Company used
a discount rate during 1999 and 1998 of 425 basis points over the two-year
Treasury rate at the time of securitization in discounting future earnings.
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 by discounting to present value.
The following table sets forth the components of the RISA:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 410,530 $ 361,209
Off balance sheet allowance for losses (212,253) (170,664)
Discount to present value (23,805) (19,315)
----------- -----------
Retained interest in securitized assets $ 174,472 $ 171,230
=========== ===========
Outstanding balance of contracts sold through securitizations $ 3,917,964 $ 3,491,452
Off balance sheet allowance for losses as a percent of contracts sold
through securitizations 5.42% 4.89%
</TABLE>
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 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Land $ 2,017 $ 2,017
Construction in progress 3,085
Buildings 13,074 8,230
Computers and software 27,234 16,707
Furniture, fixtures and leasehold improvements 3,819 3,069
Equipment 4,313 3,415
Automobiles 260 259
------- -------
50,717 36,782
Less accumulated depreciation 14,962 10,300
------- -------
$35,755 $26,482
======= =======
</TABLE>
NOTE 6 - INTERCOMPANY AGREEMENTS
WFS borrowed $125 million from the Bank under the terms of the senior note. The
senior note provides for principal payments of $25 million per year, commencing
on April 30, 1999 and continuing through its final maturity, April 30, 2003.
During 1999, the Company made a paydowns of $61.0 million without prepayment
penalties. Interest payments on senior note are due quarterly, in arrears,
calculated at the rate of 7.25% per annum. The senior note had interest expense
of $4.6 million and $6.8 million for the nine months ended September 30, 1999
and 1998.
Additionally, WFS has borrowed $135 million under the terms of the promissory
note from the Bank. The promissory note provides for principal payments of $67.5
million per year, commending July 31, 2001 and continuing through its final
maturity, July 31, 2002. Interest payments on the senior note are due quarterly,
in arrears, calculated at the rate of 9.42% per annum. Pursuant to the terms of
the promissory note, WFS may not incur any other indebtedness which is senior to
the obligations evidenced by the promissory note except for (i) indebtedness
under the senior note (ii) indebtedness collateralized or secured under the line
of credit and (iii) indebtedness for similar types of warehouse lines of credit.
The promissory note had interest expense of $6.1 million and $3.5 million for
the nine months ended September 30, 1999 and 1998.
WFS also has a line of credit extended by the Bank permitting the Company us to
draw up to $1.3 billion at September 30, 1999 on as needed to be used in its
operations. WFS does not pay a commitment fee for the line of credit. The line
of credit terminates on December 31, 2004 although the term may be extended by
WFS for additional periods up to 60 months. When secured, the line of credit
carries an interest rate equal to one-month London Interbank Offer Rate
("LIBOR") plus 0.625%. When unsecured, the line of credit carries an interest
rate equal to one-month LIBOR plus 1.13%. Interest on the amount outstanding
under the line of credit is paid monthly, in arrears, and is calculated on the
average amount outstanding that month. The Bank has the right under the line of
credit to refuse to permit additional amounts to be drawn on the line of credit
if, in the Bank's discretion, the amount sought to be drawn will not be used to
finance the Company's purchase of contracts or other
11
<PAGE> 12
WFS FINANCIAL INC AND
SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
working capital requirements. There was $334 million and $555 million
outstanding at September 30, 1999 and December 31, 1999. The average amount
outstanding during the nine months ended September 30, 1999 was $638 million.
Interest expense totaled $14.6 million and $3.3 million for the nine months
ended September 30, 1999 and 1998.
NOTE 7 - NOTE PAYABLE
On September 30, 1999, the Company established a $500 million conduit facility
in a private placement. The Notes are rated AAA by Standard & Poor's and Aaa by
Moody's. Timely principal and interest payments on the Notes are guaranteed by
an insurance policy. Interest payments are due quarterly, in arrears, calculated
at a commercial paper index rate plus 30 basis points.
NOTE 8 - 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,
------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
BASIC
Net income (loss) $ 12,712 $ (3,948) $ 36,448 $ (16,998)
Average common shares outstanding 25,737,786 25,708,611 25,721,295 25,708,611
Net income (loss) per common share $ 0.49 $ (0.15) $ 1.42 $ (0.66)
DILUTED
Net income (loss) $ 12,712 $ (3,948) $ 36,448 $ (16,998)
Average common shares outstanding 25,737,786 25,708,611 25,721,295 25,708,611
Stock option adjustment 143,890 100,902
Average common shares outstanding 25,881,676 25,708,611 25,822,197 25,708,611
Net income (loss) per common share $ 0.49 $ (0.15) $ 1.41 $ (0.66)
</TABLE>
Options to purchase 685,006 shares of common stock at a range of $9.00 to $18.00
were outstanding at September 30, 1998, but were not included in the computation
of diluted earnings per share because the Company had a loss, and therefore, the
effect would be antidilutive.
12
<PAGE> 13
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
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.
Retained interest in securitized asset ("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 $906 million and $2.5 billion of contracts for the three and nine
months ended September 30, 1999 compared with $700 million and $2.0 billion of
contracts for the same period in 1998. This represents a 29.4% and 25.0%
increase in production for the respective periods. WFS executed a $1.0 billion
securitization transaction during the three months ended September 30, 1999.
There was no securitization transaction for the same period in 1998. WFS
securitized $2.0 billion for the nine months ended September 30, 1999 compared
with $1.2 billion for the same period in 1998.
RESULTS OF OPERATIONS
SERVICING INCOME
Total servicing income was $37.0 million and $106 million for the three and nine
months ended September 30, 1999 compared with $21.3 million and $57.5 million
for the same period in 1998. Servicing income increased as a result of a decline
in credit loss experience and a higher level of securitized contracts.
Retained interest income represents excess spread earned on securitized loans
less any losses not absorbed by the off balance sheet allowance for losses.
Retained interest income is dependent upon the average excess spread on the
contracts sold and the size of the serviced portfolio. Retained interest income
increased during the three and nine months ended September 30, 1999 compared
with the same period in 1998 due to a decline in credit losses (which increased
the amount of excess spread and reduced the amortization of the RISA as
expectations of future income increased) and because of an increase in the
amount of securitized contracts.
13
<PAGE> 14
Contractual servicing income is earned at rates ranging from 1.0% to 1.25% 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.
Servicing income consists of the following components:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Retained interest income $ 12,308 $ 2,658 $ 37,888 $ 2,228
Contractual servicing income 12,434 9,608 34,443 27,482
Other fee income 12,267 9,076 33,172 27,780
-------- -------- -------- --------
Total servicing income $ 37,009 $ 21,342 $105,503 $ 57,490
======== ======== ======== ========
</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 $25.5 million and $70.5 million for the three and nine
months ended September 30, 1999 compared with $18.1 million and $44.1 million
for the same respective periods in 1998. The following table shows the average
rate earned on contracts and the average rate paid on borrowings together with
the corresponding net interest rate spread for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
1999 1998 1999 1998
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Yield on interest earning assets 14.71% 14.09% 14.51% 13.90%
Cost of borrowings 6.19 6.81 6.13 7.47
----- ----- ----- -----
Net interest rate spread 8.52% 7.28% 8.38% 6.43%
===== ===== ===== =====
</TABLE>
The increase in the net interest rate spread for the three and nine months ended
September 30, 1999 compared with the same periods a year earlier is the result
of lower overall financing costs as WFS utilized the line of credit in order to
retain contracts on its balance sheet rather than securitizing contracts, while
obtaining higher yields on those contracts retained.
GAIN ON SALE OF CONTRACTS
WFS recorded a gain on sale of contracts in the third quarter of $20.3 million.
The Company did not record a gain on sale of contracts in the third quarter of
1998. For the nine months ended September 30, 1999, gain on sale was $48.5
million compared with $18.9 million for the same period of 1998. Gain on sale on
contracts increased compared to prior year due to the amount and timing of
securitizations, and as a result of changes in the gross interest rate spread on
contracts securitized, the amount of dealer participation paid, changes in
credit loss
14
<PAGE> 15
assumptions, and the effect of hedging activities. 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 increased to $15.3 million and $31.3 million for the three and
nine months ended September 30, 1999 compared with $2.3 million and $9.4 million
for the same respective periods in 1998. The increase is the result of a higher
level of contracts held on the balance sheet.
OPERATING EXPENSES
Operating expenses were $45.4 million and $130 million for the three and nine
months ended September 30, 1999 compared with $39.5 million and $126 million for
the same respective periods in 1998. However, operating expenses as a percentage
of average serviced contracts declined 17.5 basis points to 3.6% for the third
quarter of 1999 compared with 3.8% for the same period a year earlier. For the
nine months ended September 30, 1999 operating expenses as a percentage of
average serviced contracts declined to 3.7% compared with 4.3% for the same
period a year earlier.
INCOME TAXES
WFS files federal and certain state tax returns as part of a consolidated group
that includes the Bank and Westcorp. Other state tax returns are filed by WFS as
a separate entity. Tax liabilities from the consolidated returns are allocated
in accordance with a tax sharing agreement that is based on the relative income
or loss of each entity on a stand-alone basis. The effective tax rate for the
nine months ended September 30, 1999 and 1998 was 42% .
PRO-FORMA STATEMENTS OF OPERATIONS
Under generally accepted accounting principles ("GAAP"), the Company's
securitization transactions have been treated as sales. At the time of sale, in
accordance with SFAS 125, the Company records a gain equal to the present value
of the estimated future earnings from the portfolio of contracts sold. Net
interest earned on such contracts and fees earned for servicing the loan
portfolios are recognized over the life of the securitization transaction as
contractual servicing and retained interest income and other fee income. Under
SFAS 125, income recognition is effectively accelerated through the recognition
of a gain at the time of sale while the ultimate realization of such income
remains dependent on the actual performance, over time, of the loans that were
securitized.
15
<PAGE> 16
The following pro-forma statements of operations present the Company's results
under the assumption that the securitization transactions are treated as
financings as opposed to sales. Management believes that such a presentation is
an important performance measure of the Company's operations. If treated as
financings, no gain on sale or subsequent contractual servicing and retained
interest income is recognized. Instead, the earnings of the contracts in the
trusts and the related financing costs are reflected over the life of the
underlying pool of loans. Management refers to these pro-forma results as
"portfolio based" statements of operations. Management monitors the periodic
"portfolio based" earnings of the Company's serviced contract portfolio and
believes these "portfolio based" statements assist in a better understanding of
the Company's business.
The following tables presents the "portfolio based" statements of operations, a
reconciliation to net income (loss) as reflected in the Company's consolidated
statements of operations, and the "portfolio based" results as a percentage of
average serviced contracts.
16
<PAGE> 17
WFS FINANCIAL AND SUBSIDIARIES
PORTFOLIO BASED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $ 166,675 $ 137,849 $ 467,450 $ 392,763
Interest expense 76,820 66,568 216,787 191,847
--------- --------- --------- ---------
Net interest income 89,855 71,281 250,663 200,916
Provision for growth(1) 5,396 2,872 14,615 17,169
Net chargeoffs(2) 22,606 34,186 70,956 98,705
--------- --------- --------- ---------
Provision for credit losses 28,002 37,058 85,571 115,874
--------- --------- --------- ---------
Net interest income after provision for credit losses 61,853 34,223 165,092 85,042
Other income 12,267 9,076 33,173 27,780
Operating expenses 46,964 40,638 135,114 129,715
Restructuring charge 4,500 15,000
--------- --------- --------- ---------
Income (loss) before income tax (benefit) 27,156 (1,839) 63,151 (31,893)
Income tax (benefit)(3) 11,457 (777) 26,615 (13,439)
========= ========= ========= =========
Portfolio based net income (loss) $ 15,699 $ (1,062) $ 36,536 $ (18,454)
========= ========= ========= =========
Portfolio based net income (loss) per common share -
Diluted $ 0.61 $ (0.04) $ 1.41 $ (0.72)
========= ========= ========= =========
</TABLE>
(1) Provision for growth represents additional allowance for credit losses
the Company would set aside due to an Increase in the serviced contract
portfolio.
(2) Represents actual chargeoffs incurred during the period.
(3) Such tax effect is based upon the Company's tax rate for the respective
period.
17
<PAGE> 18
WFS FINANCIAL AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS NET INCOME TO PORTFOLIO BASED NET INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
GAAP net income (loss) $ 12,712 $ (3,948) $ 36,448 $ (16,998)
Portfolio based adjustments:
Gain on sales of contracts (20,251) (48,506) (18,949)
Retained interest income (12,308) (2,658) (37,888) (2,228)
Contractual servicing income (12,434) (9,608) (34,443) (27,482)
Net interest income 64,404 53,138 180,121 156,842
Provision for growth 7,513 (2,870) 9,005 (14,737)
Net chargeoffs (20,168) (31,897) (63,273) (91,748)
Operating expenses (1,590) (1,109) (4,864) (4,214)
--------- --------- --------- ---------
Total Portfolio based adjustments 5,166 4,996 152 (2,516)
Net tax effect(1) 2,179 2,110 64 (1,060)
--------- --------- --------- ---------
Portfolio based net income (loss) $ 15,699 $ (1,062) $ 36,536 $ (18,454)
========= ========= ========= =========
</TABLE>
(1) Such tax effect is based upon the Company's tax rate for the respective
period.
18
<PAGE> 19
WFS FINANCIAL AND SUBSIDIARIES
PORTFOLIO BASED YIELD TABLE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1999 (1) 1998 (1) 1999 (1) 1998 (1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income 13.4% 13.3% 13.3% 13.3%
Interest expense 6.2% 6.4% 6.1% 6.5%
------------ ------------ ------------ ------------
Net interest income 7.2% 6.9% 7.2% 6.8%
Provision for growth(2) 0.4% 0.3% 0.4% 0.6%
Net chargeoffs(3) 1.8% 3.3% 2.0% 3.3%
------------ ------------ ------------ ------------
Provision for credit losses 2.2% 3.6% 2.4% 3.9%
------------ ------------ ------------ ------------
Net interest income after provision for credit losses 5.0% 3.3% 4.8% 2.9%
Other income 1.0% 0.9% 0.9% 0.9%
Operating expenses 3.8% 4.0% 3.9% 4.4%
Restructuring charge 0.4% 0.5%
------------ ------------ ------------ ------------
Income (loss) before tax (benefit) 2.2% (0.2%) 1.8% (1.1%)
Income tax (benefit)(4) 0.9% (0.1%) 0.8% (0.5%)
------------ ------------ ------------ ------------
Portfolio based net income (loss) 1.3% (0.1%) 1.0% (0.6%)
============ ============ ============ ============
Average serviced contracts $ 4,981,641 $ 4,144,618 $ 4,701,213 $ 3,935,742
============ ============ ============ ============
</TABLE>
(1) Rates are calculated by annualizing income statement amounts and dividing
by average serviced contracts.
(2) Provision for growth represents additional allowance for credit losses the
Company would set aside due to an increase in the serviced contract
portfolio.
(3) Represents actual chargeoffs incurred during the period.
(4) Such tax effect is based upon the Company's tax rate for the respective
period.
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
WFS holds a portfolio of contracts on balance sheet for investment that totaled
$67.9 million at September 30, 1999 and $70.8 million at December 31, 1998.
Contracts held for sale totaled $1.2 billion at September 30, 1999 compared with
$825 million at December 31, 1998. 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 was attributable to more
contracts being held on the balance sheet as the Company utilized the liquidity
sources provided by its parent company and privately placed conduit financings.
The following table presents information on the volume of prime and non-prime
contracts and those secured by new and used autos during the periods indicated
below:
19
<PAGE> 20
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Prime contracts $ 615,471 $ 490,873 $1,768,389 $1,350,819
Non-prime contracts 290,880 209,385 760,026 671,979
---------- ---------- ---------- ----------
Total volume $ 906,351 $ 700,258 $2,528,415 $2,022,798
========== ========== ========== ==========
New vehicles $ 362,595 $ 161,164 $ 598,997 $ 397,566
Used vehicles 543,756 539,094 1,929,418 1,625,232
---------- ---------- ---------- ----------
Total volume $ 906,351 $ 700,258 $2,528,415 $2,022,798
========== ========== ========== ==========
</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, 1999 were $420 million as compared with $333 million at
year-end 1998. The increase in amounts due from trusts is the result of an
increase in the amount of contracts securitized and was also effected by the
timing of releases from the spread account.
ASSET QUALITY
Servicing income is affected by the quality of underlying contracts purchased
and securitized by WFS. Servicing contracts includes payment processing,
customer service, managing delinquent contracts, repossessing and selling autos,
securing defaulted contracts and recovering deficiency balances.
Credit loss experience for the third quarter of 1999 declined 148 basis points
to 1.8% of average serviced automobile contracts compared with 3.3% a year
earlier. For the nine months ended September 30, 1999, credit loss experience
was 2.0% compared with 3.3% for the same period a year earlier. Contracts 30
days or more delinquent also improved 17.5% or $27.9 million to 2.5% at
September 30, 1999 compared with 3.6% at December 31, 1998.
The decline in credit loss experience and delinquency is the result of improved
underwriting and servicing. Stricter underwriting guidelines, the successful
implementation of the Company's multiple credit scoring models, and a greater
concentration of prime automobile contracts in the portfolio have all
contributed to better asset quality. Collection and recovery efforts have also
improved as the Company is no longer feeling the effects of the disruption
created by the restructuring program completed in 1998.
20
<PAGE> 21
The following table reflects WFS' delinquency on a total serviced contract
basis.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ -----------------------
Number of Number of
Contracts Amount Contracts Amount
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Contracts serviced (1) 513,488 $5,152,194 464,257 $4,367,099
======= ========== ======= ===========
Period of delinquency (2)
31-59 days 11,283 $ 90,800 13,885 $ 112,208
60-89 days 3,482 28,879 3,966 32,100
90 days or more 1,419 11,220 1,768 14,441
------- ---------- ------- ----------
Total contracts delinquent 16,184 $ 130,899 19,619 $ 158,749
======= ========== ======= ==========
Delinquencies as a percentage of
number and amount of contracts
outstanding 3.15% 2.54% 4.23% 3.64%
======= ========== ====== ==========
</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.
The following table sets forth information with respect to the delinquency of
the Company's portfolio of contracts owned. Due to the timing of
securitizations, owned delinquency statistics may, from time to time, experience
wide fluctuations as a result of the amount of newly originated contracts held
pending securitization.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------- -------------------------
Number of Number of
Contracts Amount Contracts Amount
---------- ---------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Contracts owned 92,715 $1,235,374 76,474 $ 875,938
====== ========== ====== ==========
Period of delinquency (1)
31-59 days 6,234 $ 9,620 7,579 $ 12,743
60-89 days 2,044 3,186 2,442 3,622
90 days or more 837 1,082 1,129 1,868
------ ---------- ------ -----------
Total loans delinquent 9,115 $ 13,888 11,150 $ 18,233
====== ========== ====== ==========
Delinquencies as a percentage of number and amount of
contracts outstanding 9.83% 1.12% 14.58% 2.08%
====== ========== ====== ==========
</TABLE>
21
<PAGE> 22
The following table reflects repossessed assets on a serviced contract basis.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------------- ---------------------------
Number of Number of
Contracts Amount Contracts Amount
---------- ---------- --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Contracts serviced (1) $ 513,488 $5,152,194 464,257 $4,367,099
========= ========== ======= ==========
Repossessed assets 472 $ 2,988 1,232 $ 7,790
========= ========== ======= ==========
Repossessed assets as a percentage of number and amount
of contracts outstanding 0.09% 0.06% 0.27% 0.18%
========= ========== ======= ==========
</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.
The following table reflects net chargeoff experience on a serviced contract
basis.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Contracts serviced (1) $5,152,194 $4,246,814 $5,152,194 $4,246,814
========== ========== ========== ==========
Average contracts serviced during period $4,981,641 $4,144,618 $4,701,213 $3,935,742
========== ========== ========== ==========
Gross chargeoffs of contracts during period $ 33,260 $ 43,989 $ 106,661 $ 124,901
Recoveries of contracts charged off in prior periods 10,654 9,803 35,705 26,196
---------- ---------- ---------- ----------
Net chargeoffs $ 22,606 $ 34,186 $ 70,956 $ 98,705
========== ========== ========== ==========
Net chargeoffs as a percentage of contracts
outstanding during period (2) 1.82% 3.30% 2.01% 3.34%
========== ========== ========== ==========
</TABLE>
- -------------------
(1) Includes loan loss information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced
by WFS, and is net of unearned add-on interest.
(2) Annualized based on net chargeoffs as a percentage of average contracts
outstanding during the three and nine months ended September 30, 1999 and
1998.
The following table sets forth the cumulative static pool losses for all
outstanding securitized pools.
22
<PAGE> 23
CUMULATIVE STATIC POOL LOSS CURVES
AT SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PERIOD 1995-4 1995-5 1996-A 1996-B 1996-C 1996-D 1997-A 1997-B 1997-C
- ----------- ---------- ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.01% 0.00% 0.01% 0.00% 0.02% 0.00% 0.00% 0.00%
2 0.06% 0.09% 0.06% 0.09% 0.09% 0.10% 0.08% 0.06% 0.05%
3 0.16% 0.16% 0.17% 0.20% 0.22% 0.24% 0.20% 0.15% 0.12%
4 0.31% 0.32% 0.29% 0.35% 0.52% 0.44% 0.36% 0.33% 0.29%
5 0.52% 0.48% 0.48% 0.61% 0.74% 0.71% 0.62% 0.56% 0.46%
6 0.70% 0.62% 0.63% 0.88% 0.98% 0.93% 0.85% 0.77% 0.67%
7 0.86% 0.78% 0.81% 1.14% 1.27% 1.16% 1.12% 1.10% 0.93%
8 1.02% 0.98% 1.08% 1.42% 1.52% 1.43% 1.45% 1.40% 1.16%
9 1.13% 1.16% 1.35% 1.67% 1.77% 1.72% 1.70% 1.70% 1.37%
10 1.26% 1.32% 1.63% 1.91% 1.98% 2.03% 2.02% 2.00% 1.66%
11 1.41% 1.54% 1.87% 2.18% 2.21% 2.34% 2.32% 2.22% 1.94%
12 1.52% 2.01% 2.06% 2.38% 2.49% 2.62% 2.61% 2.43% 2.16%
13 1.66% 2.03% 2.28% 2.58% 2.73% 2.97% 2.92% 2.66% 2.40%
14 1.86% 2.25% 2.47% 2.79% 2.99% 3.27% 3.14% 2.91% 2.65%
15 2.07% 2.41% 2.63% 2.95% 3.21% 3.53% 3.30% 3.15% 2.90%
16 2.26% 2.59% 2.79% 3.14% 3.47% 3.79% 3.55% 3.47% 3.15%
17 2.47% 2.77% 2.97% 3.38% 3.70% 4.02% 3.77% 3.77% 3.36%
18 2.59% 2.88% 3.12% 3.55% 3.94% 4.19% 3.94% 3.97% 3.55%
19 2.72% 3.00% 3.31% 3.80% 4.18% 4.43% 4.21% 4.20% 3.70%
20 2.88% 3.12% 3.49% 3.98% 4.36% 4.65% 4.40% 4.39% 3.81%
21 2.95% 3.24% 3.63% 4.14% 4.53% 4.80% 4.59% 4.53% 3.91%
22 3.04% 3.39% 3.80% 4.31% 4.67% 5.07% 4.81% 4.67% 4.00%
23 3.13% 3.53% 3.95% 4.46% 4.84% 5.27% 5.00% 4.75% 4.11%
24 3.22% 3.64% 4.10% 4.58% 5.01% 5.47% 5.14% 4.81% 4.21%
25 3.30% 3.72% 4.22% 4.74% 5.17% 5.65% 5.24% 4.88% 4.30%
26 3.37% 3.83% 4.33% 4.87% 5.34% 5.80% 5.33% 4.94%
27 3.47% 3.95% 4.41% 4.98% 5.50% 5.91% 5.39% 5.04%
28 3.50% 4.08% 4.51% 5.11% 5.67% 5.98% 5.44% 5.11%
29 3.58% 4.16% 4.60% 5.21% 5.78% 6.06% 5.50%
30 3.65% 4.25% 4.70% 5.31% 5.89% 6.12% 5.56%
31 3.75% 4.31% 4.79% 5.42% 5.98% 6.17% 5.64%
32 3.80% 4.35% 4.85% 5.50% 6.02% 6.24%
33 3.83% 4.40% 4.91% 5.55% 6.06% 6.29%
34 3.87% 4.46% 4.99% 5.58% 6.11% 6.34%
35 3.91% 4.54% 5.03% 5.60% 6.14%
36 3.94% 4.58% 5.07% 5.62% 6.16%
37 3.96% 4.61% 5.11% 5.65% 6.17%
38 3.99% 4.64% 5.11% 5.68%
39 4.01% 4.66% 5.12% 5.70%
40 4.04% 4.69% 5.12% 5.71%
41 4.06% 4.69% 5.13%
42 4.07% 4.69% 5.13%
43 4.07% 4.68% 5.13%
44 4.07% 4.68%
45 4.06% 4.68%
46 4.05% 4.68%
47 4.05%
48 4.05%
49 4.03%
PRIME MIX (1) 65% 64% 59% 58% 55% 51% 54% 55% 53%
</TABLE>
23
<PAGE> 24
CUMULATIVE STATIC POOL LOSS CURVES
AT SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PERIOD 1997-D 1998-A 1998-B 1998-C 1999-A 1999-B
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.05% 0.04% 0.02% 0.04% 0.04% 0.04%
3 0.14% 0.11% 0.08% 0.11% 0.11% 0.11%
4 0.31% 0.25% 0.18% 0.23% 0.20%
5 0.56% 0.44% 0.38% 0.39% 0.33%
6 0.75% 0.66% 0.59% 0.50% 0.46%
7 0.99% 0.95% 0.83% 0.61% 0.62%
8 1.24% 1.23% 1.03% 0.75% 0.76%
9 1.47% 1.50% 1.21% 0.86%
10 1.75% 1.79% 1.40% 1.00%
11 2.06% 2.03% 1.53% 1.17%
12 2.35% 2.21% 1.62%
13 2.63% 2.39% 1.74%
14 2.86% 2.49% 1.84%
15 3.05% 2.60% 1.96%
16 3.19% 2.72% 2.10%
17 3.32% 2.85%
18 3.42% 2.98%
19 3.50% 3.11%
20 3.60%
21 3.69%
22 3.81%
PRIME
MIX (1) 49% 57% 67% 70% 70% 70%
</TABLE>
(1) Represents the original percentage of prime contracts sold within each pool.
Capital Resources and Liquidity
WFS requires substantial capital resources to support its business. The primary
cash requirements related to operating activities include (i) amounts needed to
purchase contracts, (ii) dealer participation, (iii) securitization costs
including spread account advances, (iv) interest advances to trusts and (v)
operating WFS' business. Sources of cash available to WFS include (i)
collections of principal and interest from contracts, (ii) contract
securitizations, (iii) borrowings with parent and (iv) conduit financing. These
sources provide the liquidity needed to fund the purchase of contracts and
operate Company business.
PRINCIPAL USES OF CASH
Purchase of Contracts
The most significant cash flow requirement is for the purchase of contracts. WFS
acquires these contracts through our nationwide relationship of franchised and
select independent automobile dealers. Monies to acquire such contracts are sent
to dealers either via an electronic funds transfer or check. For the nine months
ended September 30, 1999 contracts purchased totaled $2.5 billion compared with
$2.0 billion for the same period a year earlier.
24
<PAGE> 25
Dealer Participation
Consistent with industry practice, WFS generally pays an up-front dealer
participation to the originating dealer for each contract purchased. Dealer
participation paid for the nine months ended September 30, 1999 was $63.9
million compared with $58.4 million for the same paid a year earlier.
Contract Securitizations
At the time a securitization transaction closes, WFS is required to advance
monies to initially fund spread accounts. Additionally, these spreads accounts
are required to increase beyond the initial spread account funding to
predetermined levels. These spread accounts increase through receipt of excess
cash flow until predetermined levels are met. The amounts due from trust
represent funds due to WFS that have not yet been disbursed from the spread
accounts. The amounts due from trusts at September 30, 1999, including initial
advances not yet returned, was $420 million compared with $333 at December 31,
1998.
Advances Due to Servicer
As the servicer of contracts sold into securitization trusts and in accordance
with servicing agreements related to such transactions, WFS periodically makes
advances to the securitization trusts to provide for temporary delays in the
receipt of required payments from obligors. WFS receives reimbursement of these
advances through payments from the obligor on the contracts or from the trustee
at the time a contract liquidates from excess spread held in spread accounts.
Operating WFS Business
WFS business requires substantial cash to run its operations. The largest
operating expenditure is salaries and benefits paid to WFS associates. Other
amounts include occupancy costs, costs associated with collection and
repossession, telephone and data processing costs. WFS also uses substantial
amounts of cash in capital expenditures for automation and new technologies to
remain competitive and to become more efficient.
PRINCIPAL SOURCES OF CASH
Collections of principal and interest from contracts
The primary source of funds for WFS is the collection of principal and interest
from contracts originated. As the servicer of contracts owned by the Company and
for those sold into securitization trusts, WFS receives monthly principal and
interest payments from borrowers. These monies are deposited into a general cash
accounts and used to fund additional contracts or used in running day to day
operations. For the nine months ended September 30, 1999 WFS received $2.4
billion in cash from the collections of principal and interest from contracts
compared with $1.9 billion for the same period a year earlier.
Contract Securitizations
Another important source of funds is the securitization of contracts. WFS has
regularly securitized contracts through underwritten public sales of securities
since 1985. Although the underlying interest costs associated with
securitization fluctuate, they are primarily market driven and not necessarily
related to the operations of our company. WFS expects to continue to utilize
securitization transactions as part of our liquidity strategy when the
appropriate market conditions exist.
Borrowings from Parent
WFS' parent, the Bank, is a federally insured savings institution. It has the
ability to raise significant amounts of liquidity by attracting both short-term
and long-term deposits from the general public, commercial enterprises and
institutions by offering a variety of accounts and rates. The Bank may also
raise funds through issuing commercial paper, obtaining advances from the
Federal Home Loan Bank, selling securities under agreements to repurchase and
other borrowings.
25
<PAGE> 26
WFS is able to utilize these liquidity sources through agreements entered into
by WFS and the Bank. These include the Senior Note, Promissory Note, Line of
Credit and WFS Reinvestment.
These financing arrangements that WFS has entered into with the Bank provide
another source of liquidity beyond the secondary markets, thereby affording us
the ability to securitize when the appropriate market conditions exist.
Conduit Financing
On September 30, 1999, WFS issued $500 million in notes to a conduit facility in
a private placement through its wholly-owned subsidiary, WFS Funding, Inc. This
arrangement provides us with another source of liquidity.
YEAR 2000
The Year 2000 issue arose because many existing computer programs use only the
last two digits to refer to a year. Therefore, these computer programs may not
properly recognize a year that begins with "20" instead of the familiar "19".
This problem is pervasive and complex. If not corrected, the potential impact is
that date sensitive calculations would be based on erroneous data or could cause
a system failure. This affects all forms of financial accounting (including
interest computation, due dates, pensions, personnel benefits, investments, and
legal commitments). It can also affect record keeping, such as inventory,
maintenance, and file retention. Reliable information is necessary for financial
institutions to conduct business.
In July 1997, the Company initiated a five-phase program to address Year 2000
related issues. These phases were awareness, assessment, remedition, validation
and implementation.
The Board of Directors provides oversight and direction through the Year 2000
Committee. The Year 2000 Committee is responsible for assessing all risks,
evaluating current systems, coordinating system upgrades and replacements, and
building facility management and reporting Year 2000 status. The Year 2000
Committee reports monthly to Executive Management and quarterly to the Board of
Directors on their Year 2000 efforts.
The Company has completed all five phases on our Year 2000 program. Nonetheless,
the Company is engaged in an ongoing due diligence process that includes
monitoring procedures to verify that key service providers are taking
appropriate Year 2000 action.
The Company recognizes that its business and operations could be adversely
affected if key service providers fail to achieve timely Year 2000 compliance.
Although the Company is establishing reasonable safeguards, there is no
assurance that all key service providers will adequately address their
respective Year 2000 issues.
The Company has incurred direct costs of $0.4 million in 1998 and $0.8 million
in 1999 and currently estimates that the Company will incur additional direct
costs of approximately $0.1 million to address the Year 2000 issues. The costs
incurred include conducting individual and integrated systems testing,
developing contingency plans, and monitoring the Year 2000 compliance
preparations of our key service providers. The estimated costs include the cost
of consultants to supplement our staff and management assigned to the project.
Any potential additional costs to implement contingency plans that address
possible Year 2000 failures of third-party systems or the Company's systems are
not included in the estimate. These estimated Year 2000 costs for 1999 have been
26
<PAGE> 27
incorporated into the Company's 1999 operating expense budget. The costs
incurred in 1998 did not have a material effect on net income for 1998, and it
is not expected that costs currently estimated to be in incurred in 1999 will
have a material impact on net income for 1999.
This is a Year 2000 readiness disclosure, subject to the provisions of The Year
2000 Information and Readiness Disclosure Act. Please note that Year 2000
planning, assessment, renovation, validation, and implementation are iterative
processes. All statements made in this document are based on the Company's
reasonable belief, knowledge and investigation, and the Company believes it is
taking reasonable steps to address the Year 2000 issues within its control.
However, the Company makes no representation that all of its systems or those of
its service providers will be Year 2000-compliant or the Year 2000 issues will
not adversely affect the Company.
This document may contain forward-looking statements regarding the expectations,
intentions, and estimations of, among other things, the cost of remediations,
the timing of projects, the testing of systems, and plans for projections of
future events. These forward-looking statements involve risks or uncertainties,
and actual results may differ from anticipated results. These risks and
uncertainties may involve, among other things, unanticipated problems in
computer systems and applications and unexpected events or delays.
FORWARD-LOOKING STATEMENTS
The preceding Management Discussion and Analysis of Financial Condition and
Results of Operations section contains several "forward-looking statements".
Forward-looking statements are those which use words such as "believe",
"expect", "anticipate", "intend", "plan", "may", "will", "should", "estimate",
"continue" or other comparable expression. These words indicate future events
and trends. Forward-looking statements are our current views with respect to
future events and financial performance. These forward-looking statements are
subject to many risks and uncertainties which could cause actual results to
differ significantly from historical results or from those anticipated by us.
The most significant risks and uncertainties we face are:
o the level of chargeoffs, as an increase in the level of chargeoffs
will decrease our earnings;
o our ability to originate new contracts in a sufficient amount to reach
our needs, as a decrease in the amount of contracts we originate will
decrease our earnings;
o a decrease in the difference between the average interest rate we
receive on the contracts we originate and the rate of interest we must
pay to fund our cost of originating those contracts; as a decrease
will reduce our earnings;
o the continued availability of sources of funding for our operations,
as a reduction in the availability of funding will reduce our ability
to originate contracts;
o maintaining the level of operating costs; as an increase in those
costs will reduce our net earnings; and
o the Year 2000 issues; as a disruption of our collection efforts as a
result of Year 2000 problems or an increase in our costs to correct
Year 2000 issues will reduce earnings.
There are other risks and uncertainties we face, including the effect of changes
in general economic conditions and the effect of new laws, regulations and court
decisions. You are cautioned not to place undue reliance on our forward-looking
statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
27
<PAGE> 28
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Credit risk and interest rate risk are the primary risks facing the Company. The
Company relies upon sound underwriting practices, credit scoring and adequate
loan loss reserves in order to address credit risk.
The Company's Asset/Liability Committee is responsible for the management of
interest rate risk. This committee closely monitors interest rate risk and
recommends policy for managing this risk. The primary measurement tool for
evaluating this risk is the use of interest rate shock analysis. It should be
noted that shock analysis is objective but not entirely realistic in that it
assumes an instantaneous and isolated set of events.
Contracts originated and held by WFS are all fixed rate and accordingly have
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.
The Company's hedging strategy includes the use of two-year Treasury securities
forward agreements. Generally, these agreements are entered into by the Company
in amounts that correspond to the principal amount of the originations. 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.
Management monitors the Company's hedging activities to ensure that the value of
hedges, their correlation to the contracts being hedged and the amounts being
hedged continue to provide effective protection against interest rate risk. The
amount and timing of hedging transactions are determined by the senior
management of WFS based upon the monitoring activities of the Company.
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.
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
WFS is involved as a party to certain legal
proceedings incidental to its business. WFS
believes that the outcome of such proceedings
will not have a material effect upon its business
or financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WFS FINANCIAL INC
- -------------------------------------------------------------------------------
(Registrant)
Date: November 12, 1999 By: /s/ JOY SCHAEFER
--------------------------------------------
Joy Schaefer
Vice Chairman, Chief Executive Officer
Date: November 12, 1999 By: /s/ LEE A. WHATCOTT
--------------------------------------------
Lee A. Whatcott
Senior Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
30
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
0
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