<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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)
<TABLE>
<CAPTION>
CALIFORNIA (I.R.S. Employer
------------------------------- -------------------
<S> <C>
(State or other jurisdiction of Identification No.)
incorporation or organization) 33-0291646
</TABLE>
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 July 31, 1999, the registrant had 25,722,718 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 31.
<PAGE> 2
WFS FINANCIAL INC AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity at
June 30, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS
Short term investments $ $ 15,020
Contracts receivable 65,924 70,814
Contracts held for sale 1,333,820 825,257
Allowance for credit losses (21,957) (11,246)
---------- ----------
Contracts receivable, net 1,377,787 884,825
Amounts due from trusts 354,654 332,732
Retained interest in securitized assets 164,891 171,230
Property, plant and equipment 33,579 26,482
Accrued interest receivable 8,907 5,859
Other assets 8,650 8,192
---------- ----------
$1,948,468 $1,444,340
========== ==========
LIABILITIES
Notes payable--parent $ 136,300 $ 160,000
Line of credit--parent 1,037,914 554,836
Amounts held on behalf of trustee 550,664 528,092
Other liabilities 37,293 37,071
---------- ----------
1,762,171 1,279,999
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized
50,000,000 shares; issued and outstanding
25,716,539 shares in 1999 and 25,708,611
shares in 1998 and in 1998 73,618 73,564
Paid-in capital 4,000 4,000
Retained earnings 109,051 85,315
Accumulated other comprehensive (loss)
income, net of tax (372) 1,462
---------- ----------
186,297 164,341
---------- ----------
$1,948,468 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 38,507 $ 17,903 $ 62,251 $ 33,193
Interest expense--parent 11,073 3,992 17,160 7,262
----------- ----------- ---------- ----------
Net interest income 27,434 13,911 45,091 25,931
Servicing income 39,753 18,724 68,494 36,149
Gain on sale of contracts 10,863 28,255 18,949
----------- ----------- ----------- -----------
TOTAL REVENUES 67,187 43,498 141,840 81,029
EXPENSES
Provision for credit losses 4,758 1,357 15,957 7,098
Operating expenses:
Salaries and employee benefits 26,680 23,679 54,926 51,249
Credit and collections 5,129 5,022 11,256 9,603
Miscellaneous 9,611 12,914 18,691 25,121
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 41,420 41,615 84,873 85,973
Restructuring charge 10,500
----------- ----------- ----------- -----------
TOTAL EXPENSES 46,178 42,972 100,830 103,571
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 21,009 526 41,010 (22,542)
Income taxes (benefit) 8,858 234 17,274 (9,492)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 12,151 $ 292 $ 23,736 $ (13,050)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ 0.47 $ 0.01 $ 0.92 $ (0.51)
DILUTED $ 0.47 $ 0.01 $ 0.92 $ (0.51)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC 25,712,853 25,708,611 25,711,119 25,708,611
DILUTED 25,823,163 25,709,228 25,781,011 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 23,736 23,736
Unrealized losses on retained
interest in securitized assets,
net of tax (1) (1,834) (1,834)
--------
Comprehensive income 21,902
Stock options exercised 7,928 54 54
---------- ------- ------ ------- -------- --------
BALANCE, JUNE 30, 1999 25,716,539 $73,618 $4,000 $ (372) $109,051 $186,297
========== ======= ====== ======= ======== ========
</TABLE>
- ----------
(1) The pre-tax decrease and increase in unrealized gains (losses) on retained
interest in securitized assets were $3.2 million and $1.8 million for the
six month period ended June 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>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 23,736 $ (13,050)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provision for credit losses 15,957 7,098
Depreciation 3,194 4,307
Amortization of retained interest in securitized assets 53,138 57,103
(Gain) loss on disposal of assets (86) 4,479
(Increase) decrease in assets:
Automobile contracts:
Purchase of contracts (1,622,064) (1,322,540)
Proceeds from sale of contracts 1,000,000 1,185,000
Other change in contracts 113,182 40,149
Other assets (3,544) (604)
Increase in liabilities:
Other liabilities 1,550 1,023
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (414,937) (37,035)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (10,205) (11,756)
Increase in trust receivable (21,922) (31,629)
Increase in retained interest in securitized asset (49,961) (55,058)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (82,088) (98,443)
FINANCING ACTIVITIES
Proceeds from issuance from common stock 54
Paydown of notes payable (23,700)
Increase in line of credit 483,078
Increase in trustee accounts 22,572 19,968
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 482,004 19,968
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (15,021) (115,510)
Cash and cash equivalents at beginning of period 15 021 143,805
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ $ 28,295
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 15,311 $ 6,302
Income taxes $ 17,760
</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 six months ended June 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>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts $ 1,440,311 $ 923,953
Unearned discounts (72,250) (48,015)
----------- -----------
Net contracts 1,368,061 875,938
Allowance for credit losses (21,957) (11,246)
Dealer participation, net of deferred contract fees 31,683 20,133
----------- -----------
Net contracts receivable $ 1,377,787 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------
1999 1998 1999 1998
------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $13,565 $ 6,664 $ 20,133 $ 4,896
New deferrals 19,294 19,898 36,896 36,101
Amortization (1,176) (1,175) (2,207) (2,140)
Sales (17,596) (23,139) (31,066)
------- -------- -------- --------
Balance at end of period $31,683 $ 7,791 $ 31,683 $ 7,791
======= ======== ======== ========
</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 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, 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 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. The Company hedges
substantially all of its contracts pending securitization.
At June 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 an increase in the underlying basis of the contracts by $4.5 million.
Contracts serviced by the Company for the benefit of others totaled $3.5 billion
at June 30, 1999 and 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------
1999 1998 1999 1998
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $18,695 $ 9,787 $11,246 $ 6,787
Provision for credit losses 4,758 1,357 15,957 7,098
Charged off contracts (3,409) (3,071) (8,911) (6,452)
Recoveries 1,913 1,144 3,665 1,784
------- ------- ------- -------
Balance at end of period $21,957 $ 9,217 $21,957 $ 9,217
======= ======= ======= =======
</TABLE>
NOTE 4 -- 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 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. 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
shareholders' equity as an unrealized gain or loss, net of applicable taxes.
WFS retains the rights to service all contracts it securitizes. Consumer
servicing rights assets (CSR) represent the present value of the estimated
future earnings to be received from servicing securitized contracts. These
earnings are calculated by estimating future servicing revenues, including
contractually specified servicing fee, late charges, other ancillary income, and
float benefit and netting them against the actual cost to service contracts. WFS
has not capitalized any servicing rights as of June 30, 1999.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $189,929 $177,307 $171,230 $ 181,177
Additions 31,670 49,961 55,058
Amortization (23,832) (29,908) (53,138) (57,103)
Change in accumulated other
comprehensive income (loss) (1,206) (3,162) (63)
-------- --------- -------- ---------
Balance at end of period $164,891 $ 179,069 $164,891 $ 179,069
======== ========= ======== =========
</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>
JUNE 30, DECEMBER 31,
1999 1998
---------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 345,123 $ 361,209
Off balance sheet allowance for losses (159,392) (170,664)
Discount to present value (20,840) (19,315)
---------- ----------
Retained interest in securitized assets $ 164,891 $ 171,230
========== ==========
Outstanding balance of contracts sold through
securitizations $3,465,173 $3,491,452
Off balance sheet allowance for losses as a
percent of contracts sold through securitizations 4.60% 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--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land $ 2,017 $ 2,017
Construction in progress 4,261 3,085
Buildings 8,230 8,230
Computers and software 25,185 16,707
Furniture, fixtures and leasehold improvements 3,373 3,069
Equipment 3,745 3,415
Automobiles 244 259
------- -------
47,055 36,782
Less accumulated depreciation 13,476 10,300
------- -------
$33,579 $26,482
======= =======
</TABLE>
The increase in computers and software is primarily due to computer systems
upgrades.
NOTE 6--INTERCOMPANY AGREEMENTS
In June 1999, WFS amended its Line of Credit agreement with the Bank. The
amended Line of Credit agreement permits WFS to draw up to $1.3 billion to be
used in its operations. 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 38 basis points. When unsecured, the
Line of Credit carries an interest rate equal to one-month LIBOR plus 88 basis
points. The Line of Credit had $1.0 billion outstanding at June 30, 1999 and
$555 million outstanding at December 31, 1998.
NOTE 7--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.
11
<PAGE> 12
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- -------------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
BASIC
Net income (loss) $ 12,151 $ 292 $ 23,736 $ (13,050)
Average common shares outstanding 25,712,853 25,708,611 25,711,119 25,708,611
Net income (loss) per common share $ 0.47 $ 0.01 $ 0.92 $ (0.51)
DILUTED
Net income (loss) $ 12,151 $ 292 $ 23,736 $ (13,050)
Average common shares outstanding 25,712,853 25,708,611 25,711,119 25,708,611
Stock option adjustment 110,310 617 69,892
Average common shares outstanding 25,823,163 25,709,228 25,781,011 25,708,611
Net income (loss) per common share $ 0.47 $ 0.01 $ 0.92 $ (0.51)
</TABLE>
Options to purchase 21,000 shares of common stock at a range of $13.00 to $18.00
per share were outstanding at June 30, 1999 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares, and therefore,
the effect would be antidilutive. Options to purchase 785,718 shares of common
stock at a range of $11.00 to $18.00 were outstanding at June 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
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 $869 million and $1.6 billion of contracts for the three and six
months ended June 30, 1999 compared with $717 million and $1.3 billion of
contracts for the same period in 1998. This represents a 21% and 23% increase in
production for the respective periods. WFS did not execute a securitization
transaction during the three months ended June 30, 1999 compared with $660
million for the same period a year earlier. WFS securitized $1.0 billion for the
six months ended June 30, 1999 compared with $1.2 billion for the same period in
1998. Because of the Company's liquidity position, the Company realized lower
financing costs and wider interest margins by retaining contracts on the balance
sheet. WFS completed a securitization transaction totaling $1.0 billion
subsequent to the end of the second quarter.
The following table sets forth the loan origination, sale and principal
reduction activity of WFS for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 583,466 $ 287,579 $ 875,938 $ 231,229
Originations 869,132 717,236 1,622,064 1,322,540
Sales (660,000) (1,000,000) (1,185,000)
Principal reductions (1) (84,537) (23,696) (129,941) (47,650)
---------- ----------- ------------ -----------
Balance at end of period $1,368,061 $ 321,119 $ 1,368,061 $ 321,119
========== =========== ============ ===========
</TABLE>
- ----------
(1) Includes scheduled payments, prepayments and chargeoffs.
13
<PAGE> 14
RESULTS OF OPERATIONS
SERVICING INCOME
Total servicing income was $39.8 million and $68.5 million for the three and six
months ended June 30, 1999 compared with $18.7 million and $36.1 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 six months ended June 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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------
1999 1998 1999 1998
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Retained interest income $18,084 $ 319 $25,580 $ (429)
Contractual servicing income 10,784 9,286 22,009 17,874
Other fee income 10,885 9,119 20,905 18,704
------- ------- ------- -------
Total servicing income $39,753 $18,724 $68,494 $36,149
======= ======= ======= =======
</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 $27.4 million and $45.1 million for the three and six
months ended June 30, 1999 compared with $13.9 million and $25.9 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, consisting
primarily of advances from the Bank, together with the corresponding net
interest rate spread for the periods indicated.
14
<PAGE> 15
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------
1999 1998 1999 1998
----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Yield on interest earning assets 14.27% 14.19% 14.40% 13.75%
Cost of borrowings 5.99% 7.98% 6.14% 8.38%
----- ----- ----- -----
Net interest rate spread 8.28% 6.21% 8.26% 5.37%
===== ===== ===== =====
</TABLE>
The increase in the net interest rate spread for the three and six months ended
June 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 did not record a gain on sale in the second quarter as a result of not
executing a securitization transaction compared with a gain of $10.9 million in
the second quarter of 1998. For the six months ended June 30, 1999, gain on sale
was $28.3 million compared with $18.9 million for the same period of 1998.
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 $4.8 million and $16.0 million for the three and six
months ended June 30, 1999 compared with $1.4 million and $7.1 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 $41.4 million and $84.9 million for the three and six
months ended June 30, 1999 compared with $41.6 million and $86.0 million for the
same respective periods in 1998. The decline is primarily the result of lower
occupancy costs as a result of the restructuring programs initiated last year by
the Company. Operating expenses as a percentage of average serviced contracts
for the three months ended June 30, 1999 declined 70 basis points to 3.5%
compared with 4.2% for the same period a year earlier. Operating expenses as a
percentage of average serviced contracts for the six months ended June 30, 1999
declined 80 basis points to 3.7% compared with 4.5% for the same period a year
earlier.
15
<PAGE> 16
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
six months ended June 30, 1999 and 1998 remained constant at 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.
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 managed 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 managed contracts.
16
<PAGE> 17
WFS FINANCIAL AND SUBSIDIARIES
"PORTFOLIO BASED" STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ------------------------
1999 1998 1999 1998
--------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income $ 155,029 $131,396 $300,775 $ 256,278
Interest expense 71,796 63,889 139,466 125,220
--------- -------- -------- ---------
Net interest income 83,233 67,507 161,309 131,058
Provision for credit losses (1) 22,704 33,612 54,087 79,060
--------- -------- -------- ---------
Net interest income after provision
for credit losses 60,529 33,895 107,222 51,998
Other income 10,886 9,119 20,905 18,704
Operating costs 42,982 43,291 88,150 89,077
Restructuring charge 10,500
--------- -------- -------- ---------
Income (loss) before income taxes 28,433 (277) 39,977 (28,875)
Income tax (benefit) (2) 11,988 (123) 16,839 (12,159)
--------- -------- -------- ---------
"Portfolio based" net income (loss) $ 16,445 $ (154) $ 23,138 $ (16,716)
========= ======== ======== =========
"Portfolio based" net income (loss)
per common share -- diluted $ 0.64 $ (0.01) $ 0.90 $ (0.65)
========= ======== ======== =========
</TABLE>
- ----------
(1) Provision for credit losses is based upon actual chargeoffs and growth in
the servicing portfolio for the respective period.
(2) 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
1999 1998 1999 1998
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP net income (loss) $ 12,151 $ 292 $ 23,736 $(13,050)
"Portfolio based" adjustments:
Gain on sales of contracts (10,863) (28,255) (18,949)
Retained interest income (18,084) (319) (25,580) 429
Contractual servicing income (10,784) (9,286) (22,009) (17,874)
Net interest income 55,800 53,596 116,218 105,128
Provision for credit losses (17,946) (32,255) (38,130) (71,962)
Operating expenses (1,562) (1,676) (3,277) (3,105)
-------- -------- -------- --------
Total "Portfolio based" adjustments 7,424 (803) (1,033) (6,333)
Net tax effect (1) 3,130 (357) (435) (2,667)
-------- -------- -------- --------
"Portfolio based" net income (loss) $ 16,445 $ (154) $ 23,138 $(16,716)
======== ======== ======== ========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income 13.3% 13.4% 13.2% 13.4%
Interest expense 6.1% 6.5% 6.1% 6.5%
---------- ---------- ---------- ----------
Net interest income 7.2% 6.9% 7.1% 6.9%
Provision for credit losses 2.0% 3.4% 2.4% 4.1%
---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 5.2% 3.5% 4.7% 2.8%
Other income 0.9% 0.9% 0.9% 1.0%
Operating expenses 3.7% 4.4% 3.9% 4.8%
Restructuring charge 0.0% 0.0% 0.0% 0.5%
---------- ---------- ---------- ----------
Income (loss) before taxes 2.4% 0.0% 1.7% (1.5%)
Income taxes (benefit) 1.0% 0.0% 0.7% (0.6%)
---------- ---------- ---------- ----------
"Portfolio based" net income (loss) 1.4% 0.0% 1.0% (0.9%)
========== ========== ========== ==========
Average serviced contracts $4,674,214 $3,923,566 $4,560,999 $3,831,304
========== ========== ========== ==========
</TABLE>
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
WFS holds a portfolio of contracts on balance sheet for investment that totaled
$65.9 million at June 30, 1999 and $70.8 million at December 31, 1998. Contracts
held for sale totaled $1.3 billion at June 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 is due to the Company's decision to not
execute a securitization in the second quarter of 1999. WFS completed a
securitization transaction totaling $1.0 billion subsequent to the end of the
second quarter of 1999. 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:
19
<PAGE> 20
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Prime contracts $613,621 $498,075 $1,152,918 $ 859,945
Non-prime contracts 255,511 219,161 469,146 462,595
-------- -------- ---------- ----------
Total volume $869,132 $717,236 $1,622,064 $1,322,540
======== ======== ========== ==========
New vehicles $202,464 $139,664 $ 369,043 $ 236,402
Used vehicles 666,668 577,572 1,253,021 1,086,138
-------- -------- ---------- ----------
Total volume $869,132 $717,236 $1,622,064 $1,322,540
======== ======== ========== ==========
</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 June 30, 1999 were $355 million as compared with $333 million at year-end
1998. The increase is due to 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.
Loss experience for the second quarter of 1999 declined 150 basis points to 1.6%
of average serviced contracts compared with 3.1% a year earlier. Contracts
delinquent 30 days or more improved 36% or $57.0 million to 2.1% of serviced
contracts at June 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 basis.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
---------------------------- ----------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile loans serviced (1) 494,126 $4,841,750 464,257 $4,367,099
======= ========== ======= ==========
Period of delinquency (2)
31-59 days 8,698 $ 70,114 13,885 $ 112,208
60-89 days 2,850 22,791 3,966 32,100
90 days or more 1,118 8,832 1,768 14,441
------ ---------- ------ ----------
Total contracts delinquent 12,666 $ 101,737 19,619 $ 158,749
====== ========== ====== ==========
Delinquencies as a percentage of
number and amount of contracts
outstanding. 2.56% 2.10% 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 automobile loans 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>
JUNE 30, 1999 DECEMBER 31, 1998
------------------------- ----------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts owned 108,246 $1,368,061 76,474 $875,938
======= ========== ====== ========
Period of delinquency (1)
31-59 days 4,914 $ 9,006 7,579 $ 12,743
60-89 days 1,683 2,546 2,442 3,622
90 days or more 649 818 1,129 1,868
------- ---------- ------ --------
Total loans delinquent 7,246 $ 12,370 11,150 $ 18,233
======= ========== ====== ========
Delinquencies as a percentage of
number and amount of contracts
outstanding. 6.69% 0.90% 14.58% 2.08%
======= ========== ====== ========
</TABLE>
21
<PAGE> 22
The following table reflects repossessed assets on a serviced basis.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------------------- ----------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO (1) 494,126 $4,841,750 464,257 $4,367,099
======= ========== ======= ==========
Repossessed Assets 509 $ 2,955 1,232 $ 7,790
======= ========== ======= ==========
Repossessed assets as a percentage of
Number and amount of contracts
Outstanding. 0.10% 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced at end of period (1) $4,841,750 $4,051,134 $4,841,750 $4,051,134
========== ========== ========== ==========
Average during period $4,674,214 $3,923,566 $4,560,999 $3,831,304
========== ========== ========== ==========
Gross chargeoffs of contracts during period $ 30,912 $ 39,140 $ 73,401 $ 80,912
Recoveries of contracts charged off in prior periods 12,545 9,256 25,051 16,393
---------- ---------- ---------- ----------
Net chargeoffs $ 18,367 $ 29,884 $ 48,350 $ 64,519
========== ========== ========== ==========
Net chargeoffs as a percentage of contracts
Outstanding during period (2) 1.57% 3.05% 2.12% 3.37%
========== ========== ========== ==========
</TABLE>
- ----------
(1) Includes loan loss information relating to contracts which are owned by WFS
and contracts which have been sold and securitized but are serviced by WFS,
and is net of unearned add-on interest.
(2) Annualized based on net chargeoffs as a percentage of average contracts
outstanding during the three and six months ended June 30, 1999 and 1998.
The following table sets forth the cumulative static pool losses for all
outstanding securitized pools.
22
<PAGE> 23
WFS FINANCIAL INC AND SUBSIDIARIES
MONTHLY CUMULATIVE LOSS RATES
AT JUNE 30, 1999
<TABLE>
<CAPTION>
PERIOD 1995-3 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> <C>
1 0.00% 0.00% 0.01% 0.00% 0.01% 0.00% 0.02% 0.00% 0.00% 0.00%
2 0.09% 0.06% 0.09% 0.06% 0.09% 0.09% 0.10% 0.08% 0.06% 0.05%
3 0.20% 0.16% 0.16% 0.17% 0.20% 0.22% 0.24% 0.20% 0.15% 0.12%
4 0.36% 0.31% 0.32% 0.29% 0.35% 0.52% 0.44% 0.36% 0.33% 0.29%
5 0.58% 0.52% 0.48% 0.48% 0.61% 0.74% 0.71% 0.62% 0.56% 0.46%
6 0.80% 0.70% 0.62% 0.63% 0.88% 0.98% 0.93% 0.85% 0.77% 0.67%
7 1.04% 0.86% 0.78% 0.81% 1.14% 1.27% 1.16% 1.12% 1.10% 0.93%
8 1.27% 1.02% 0.98% 1.08% 1.42% 1.52% 1.43% 1.45% 1.40% 1.16%
9 1.46% 1.13% 1.16% 1.35% 1.67% 1.77% 1.72% 1.70% 1.70% 1.37%
10 1.62% 1.26% 1.32% 1.63% 1.91% 1.98% 2.03% 2.02% 2.00% 1.66%
11 1.79% 1.41% 1.54% 1.87% 2.18% 2.21% 2.34% 2.32% 2.22% 1.94%
12 1.92% 1.52% 2.01% 2.06% 2.38% 2.49% 2.62% 2.61% 2.43% 2.16%
13 2.01% 1.66% 2.03% 2.28% 2.58% 2.73% 2.97% 2.92% 2.66% 2.40%
14 2.17% 1.86% 2.25% 2.47% 2.79% 2.99% 3.27% 3.14% 2.91% 2.65%
15 2.28% 2.07% 2.41% 2.63% 2.95% 3.21% 3.53% 3.30% 3.15% 2.90%
16 2.42% 2.26% 2.59% 2.79% 3.14% 3.47% 3.79% 3.55% 3.47% 3.15%
17 2.57% 2.47% 2.77% 2.97% 3.38% 3.70% 4.02% 3.77% 3.77% 3.36%
18 2.86% 2.59% 2.88% 3.12% 3.55% 3.94% 4.19% 3.94% 3.97% 3.55%
19 3.08% 2.72% 3.00% 3.31% 3.80% 4.18% 4.43% 4.21% 4.20% 3.70%
20 3.23% 2.88% 3.12% 3.49% 3.98% 4.36% 4.65% 4.40% 4.39% 3.81%
21 3.38% 2.95% 3.24% 3.63% 4.14% 4.53% 4.80% 4.59% 4.53% 3.91%
22 3.49% 3.04% 3.39% 3.80% 4.31% 4.67% 5.07% 4.81% 4.67% 4.00%
23 3.59% 3.13% 3.53% 3.95% 4.46% 4.84% 5.27% 5.00% 4.75%
24 3.68% 3.22% 3.64% 4.10% 4.58% 5.01% 5.47% 5.14% 4.81%
25 3.74% 3.30% 3.72% 4.22% 4.74% 5.17% 5.65% 5.24% 4.88%
26 3.81% 3.37% 3.83% 4.33% 4.87% 5.34% 5.80% 5.33%
27 3.88% 3.47% 3.95% 4.41% 4.98% 5.50% 5.91% 5.39%
28 3.97% 3.50% 4.08% 4.51% 5.11% 5.67% 5.98% 5.44%
29 4.01% 3.58% 4.16% 4.60% 5.21% 5.78% 6.06%
30 4.06% 3.65% 4.25% 4.70% 5.31% 5.89% 6.12%
31 4.07% 3.75% 4.31% 4.79% 5.42% 5.98% 6.17%
32 4.14% 3.80% 4.35% 4.85% 5.50% 6.02%
33 4.20% 3.83% 4.40% 4.91% 5.55% 6.06%
34 4.26% 3.87% 4.46% 4.99% 5.58% 6.11%
35 4.31% 3.91% 4.54% 5.03% 5.60%
36 4.34% 3.94% 4.58% 5.07% 5.62%
37 4.38% 3.96% 4.61% 5.11% 5.65%
38 4.40% 3.99% 4.64% 5.11%
39 4.41% 4.01% 4.66% 5.12%
40 4.44% 4.04% 4.69% 5.12%
41 4.48% 4.06% 4.69%
42 4.49% 4.07% 4.69%
43 4.51% 4.07% 4.68%
44 4.52% 4.07%
45 4.53% 4.06%
46 4.54% 4.05%
47 4.53%
48 4.52%
49 4.52%
</TABLE>
23
<PAGE> 24
WFS FINANCIAL INC AND SUBSIDIARIES
MONTHLY CUMULATIVE LOSS RATES
AT JUNE 30, 1999
<TABLE>
<CAPTION>
PERIOD 1997-D 1998-A 1998-B 1998-C 1999-A
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.05% 0.04% 0.02% 0.04% 0.04%
3 0.14% 0.11% 0.08% 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%
7 0.99% 0.95% 0.83% 0.61%
8 1.24% 1.23% 1.03% 0.75%
9 1.47% 1.50% 1.21%
10 1.75% 1.79% 1.40%
11 2.06% 2.03% 1.53%
12 2.35% 2.21% 1.62%
13 2.63% 2.39% 1.74%
14 2.86% 2.49%
15 3.05% 2.60%
16 3.19% 2.72%
17 3.32%
18 3.42%
19 3.50%
</TABLE>
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, and (iv) principal and interest advances to
trusts. WFS also uses significant amounts of cash for operating. Sources of cash
available to WFS include contract securitizations, borrowing under the Line of
Credit and Notes payable and collections of principal and interest from
contracts. These sources provide the liquidity needed to fund the purchase of
contracts.
PRINCIPAL USES OF CASH
Purchase of Contracts
The most significant cash flow requirement is for the purchase of contracts. WFS
primarily uses the Line of Credit with the Bank to fund its purchase of
contracts from dealers and consumers, which are held for sale until securitized.
WFS purchased $869 million and $1.6 billion of contracts for the three and six
months ended June 30, 1999 compared with $717 million and $1.3 billion for the
same period in 1998.
24
<PAGE> 25
Dealer Participation
Consistent with industry practice, WFS pays up-front dealer participation to the
originating dealer for each contract purchased. Participation paid by the
Company to dealers for the three and six months ended June 30, 1999 was $21.9
million and $42.0 million compared with $21.0 million and $38.2 million during
the same period in 1998. The increase is the result of higher contract
originations.
Contract Securitization
At the time a securitization transaction closes, the Company is required to
advance monies to initially fund spread accounts. The Company funds these spread
accounts by foregoing receipts of excess cash flow until these accounts exceed
predetermined levels. The amounts due from trusts represent funds due to the
Company which have not yet been disbursed from the spread accounts. The amounts
due from trusts for the six months at June 30, 1999, including initial advances
not yet returned, was $355 million compared with $333 million at December 31,
1998. WFS did not execute a securitization transaction during the three months
ended June 30, 1999 compared with $660 million for the same period a year
earlier. WFS securitized $1.0 billion for the six months ended June 30, 1999
compared with $1.2 billion for the same period in 1998.
Advances Due to Servicer
As the servicer of contracts sold in securitizations and in accordance with
servicing agreements, 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.
PRINCIPAL SOURCES OF CASH
Contract Securitizations
The primary source of funds for WFS 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
securitizations fluctuate, they are primarily market driven and not necessarily
related to the operations of WFS. WFS expects to continue to utilize
securitization transactions as part of its liquidity strategy when the
appropriate market conditions exist. WFS completed a securitization transaction
totaling $1.0 billion subsequent to the end of the second quarter.
Other Sources
WFS also obtains other cash sources from its parent, the Bank. In June 1999, WFS
amended its Line of Credit agreement with the Bank. The amended Line of Credit
agreement permits WFS to draw up to $1.3 billion to be used in its operations.
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 38 basis points. When unsecured, the Line of Credit carries
an interest rate equal to one-month LIBOR plus 88 basis points. The Line of
Credit had $1.0 billion outstanding at June 30, 1999 and $555 million
outstanding at December 31, 1998. These financing sources, provided through the
Bank, are expected to provide adequate funding of the Company's operations, and
while no assurances can be given, the Company believes that its sources of
liquidity are sufficient to meet its long and short term cash requirements.
25
<PAGE> 26
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 do 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. This included contact with its principal service providers to
assess whether their Year 2000 issues will affect the Company, and the creation
by the Company of a Year 2000 Committee.
The Board of Director's provides oversight and direction to the Year 2000
Committee. The Year 2000 Committee is responsible for assessing all risks,
evaluating current systems, which include coordinating system upgrades and
replacements, building facility management and Year 2000 status reporting.
BUSINESS RELATIONSHIPS
The Company is engaged in an ongoing due diligence process that includes
identifying mission-critical services and products provided by key service
providers. The due diligence process includes monitoring procedures to verify
that key service providers are taking appropriate Year 2000 action and testing
of these services and products within the environment of the Company to the
extent possible.
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.
AWARENESS AND ASSESSMENT PHASES
The Company completed the Awareness and Assessment Phases for its computer
systems and Company facilities in 1997 and continues to update its assessment as
needed. The Company identified its mission-critical systems, assessed the state
of Year 2000 compliance of those systems, and implemented a plan to repair or
replace non-compliant systems. The Year 2000 Committee reports monthly to
Executive Management and quarterly to the Board of Directors on its Year 2000
efforts.
RENOVATION PHASE
The Company identified twelve mission-critical systems that were not Year 2000
compliant. Ten of the mission-critical systems are dependent upon third party
service providers, with the other two systems residing in-house. By October 30,
1998, the Company completed repairs, upgrades, or replacements of all
mission-critical components. In addition, the Company completed the renovation
of the less-critical systems on January 7, 1999.
VALIDATION AND IMPLEMENTATION PHASES
By April 21, 1999, the Company completed the systems integration testing between
in-house systems and service providers identified as mission-critical. Review
and validation of all third party service providers' proxy results for all
mission-critical systems were completed by April 22, 1999.
The Company completed the implementation of in-house renovated mission-critical
systems by September 30, 1998. The implementation of mission-critical service
provider systems was completed by February 26, 1999.
26
<PAGE> 27
The remaining less-critical renovated systems are expected to be implemented by
July 30, 1999.
CONTINGENCY PLANS
By June 30, 1999, the Company completed a Year 2000 business resumption plan
that is intended to provide alternative potential means for the Company to
continue to conduct its core business in the event of unexpected Year
2000-related failures of systems or services. Business resumption planning is a
dynamic process, and the Company intends to periodically test its business
resumption plan and update it as needed to enhance its effectiveness.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company incurred direct costs of $0.4 million in 1998 and currently
estimates that it will incur additional direct costs of approximately $0.8
million in 1999 to address the Year 2000 issues. This included conducting
individual and integrated systems testing, to developing contingency plans, and
to monitoring the Year 2000 compliance preparations of the Company's key service
providers. The estimated costs include the cost of consultants to supplement
Company 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 Company systems are not included in the estimate. These
estimated Year 2000 costs for 1999 have been incorporated into the Company's
1999 operating expense budget. The costs incurred in 1998 did not have a
material effect on the Company's net income for 1998, and the Company does not
expect the costs currently estimated to be in incurred in 1999 to have a
material impact on the Company's net income for 1999.
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.
27
<PAGE> 28
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.
28
<PAGE> 29
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 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.
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.
29
<PAGE> 30
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
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WFS FINANCIAL INC
- --------------------------------------------------------------------------------
(Registrant)
Date: August 10, 1999 By: /s/ JOY SCHAEFER
----------------------------- ---------------------------------
Joy Schaefer
Vice Chairman
Chief Executive Officer
Date: August 10, 1999 By: /s/ LEE A. WHATCOTT
----------------------------- ---------------------------------
Lee A. Whatcott
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,368,061
<ALLOWANCE> 21,957
<TOTAL-ASSETS> 1,948,468
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 587,957
<LONG-TERM> 1,174,214
0
0
<COMMON> 73,618
<OTHER-SE> 112,679
<TOTAL-LIABILITIES-AND-EQUITY> 1,948,468
<INTEREST-LOAN> 62,251
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 62,251
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 17,160
<INTEREST-INCOME-NET> 45,091
<LOAN-LOSSES> 15,957
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 84,873
<INCOME-PRETAX> 41,010
<INCOME-PRE-EXTRAORDINARY> 41,010
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,736
<EPS-BASIC> .92
<EPS-DILUTED> .92
<YIELD-ACTUAL> 14.40
<LOANS-NON> 0
<LOANS-PAST> 2,730,099
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,246
<CHARGE-OFFS> 8,912
<RECOVERIES> 3,667
<ALLOWANCE-CLOSE> 21,957
<ALLOWANCE-DOMESTIC> 21,957
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>