<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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)
CALIFORNIA 33-0291646
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
-----------------------------------------
(Address of principal executive offices)
(949) 727-1000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ----
As of April 30, 1999, the registrant had 25,710,440 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
MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity at
March 31, 1999 and December 31, 1998 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 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>
MARCH 31, DECEMBER 31,
----------------------------
1999 1998
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Short term investments $ 484 $ 15,020
Contracts receivable 45,876 70,814
Contracts held for sale 551,155 825,257
Allowance for credit losses (18,695) (11,246)
----------- -----------
Contracts receivable, net 578,336 884,825
Amounts due from trusts 379,129 332,732
Retained interest in securitized assets 189,929 171,230
Property, plant and equipment 31,173 26,482
Accrued interest receivable 3,778 5,859
Other assets 7,987 8,192
----------- -----------
$ 1,190,816 $ 1,444,340
=========== ===========
LIABILITIES
Notes payable - parent $ 190,000 $ 160,000
Line of credit - parent 157,573 554,836
Amounts held on behalf of trustee 626,060 528,092
Other liabilities 42,387 37,071
----------- -----------
1,016,020 1,279,999
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding 25,709,459 shares in 1999 and 25,708,611 shares and
in 1998 73,569 73,564
Additional paid-in capital 4,000 4,000
Retained earnings 96,900 85,315
Accumulated other comprehensive income, net of tax 327 1,462
----------- -----------
174,796 164,341
----------- -----------
$ 1,190,816 $ 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
MARCH 31,
-----------------------------
1999 1998
------------ --------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES
Interest income $ 23,744 $ 15,290
Interest expense - parent 6,087 3,270
------------ ------------
Net interest income 17,657 12,020
Servicing income 28,741 17,425
Gain on sale of contracts 28,255 8,086
------------ ------------
TOTAL REVENUES 74,653 37,531
EXPENSES
Provision for credit losses 11,198 5,741
Operating expenses:
Salaries and employee benefits 28,246 27,570
Credit and collections 6,126 4,620
Miscellaneous 9,082 12,168
------------ ------------
TOTAL OPERATING EXPENSES 54,652 50,099
Restructuring charge 10,500
------------ ------------
TOTAL EXPENSES 54,652 60,599
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 20,001 (23,068)
Income taxes (benefit) 8,416 (9,727)
------------ ------------
NET INCOME (LOSS) $ 11,585 $ (13,341)
============ ============
NET INCOME (LOSS) PER COMMON SHARE-BASIC AND DILUTED $ 0.45 $ (0.52)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING-BASIC AND DILUTED 25,708,762 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
Additional Comprehensive
Common Paid-in Income 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 (losses) on
retained interest in
securitized
assets, net of tax 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 11,585 11,585
Unrealized gains (losses) on
retained interest in
securitized
assets, net of tax (1,135) (1,135)
-----------
Comprehensive income 10,450
Stock options exercised 848 5 5
---------- ----------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 1999 25,709,459 $ 73,569 $ 4,000 $ 327 $ 96,900 $ 174,796
========== =========== =========== =========== =========== ===========
</TABLE>
(1) The pre-tax decrease and increase in unrealized gains (losses) on retained
interest in securitized assets were $2.0 million and $1.8 million for the
three month period ended March 31, 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>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 11,585 $ (13,341)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Provision for credit losses 11,198 5,741
Depreciation 1,575 2,212
Amortization of retained interest in securitized assets 29,306 27,195
Loss on disposal of assets 3,811
(Increase) decrease in assets:
Automobile contracts:
Purchase of contracts (752,932) (605,304)
Proceeds from sale of contracts 1,000,000 525,000
Other change in contracts 48,237 19,479
Other assets 2,271 (737)
Increase in liabilities:
Other liabilities 6,138 2,764
----------- -----------
NET CASH PROVIDED BY (USED) IN OPERATING ACTIVITIES 357,378 (33,180)
INVESTING ACTIVITIES
Purchase of property, plant and equipment (6,265) (4,872)
Increase in trust receivable (46,397) (36,222)
Increase in retained interest in securitized asset (49,961) (23,388)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (102,623) (64,482)
FINANCING ACTIVITIES
Proceeds from issuance from Common Stock 5
Proceeds from note payable 30,000
Decrease in line of credit (397,264)
Increase in trustee accounts 97,968 29,572
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (269,291) 29,572
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (14,536) (68,090)
Cash and cash equivalents at beginning of period 15,020 143,805
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 484 $ 75,715
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 7,709 $ 2,715
</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 months ended March 31, 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 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This Statement provides guidance for the
way public enterprises report information about derivatives and hedging in
annual financial statements and in interim financial reports. The derivatives
and hedging disclosure is required for financial statements for fiscal years
beginning after June 15, 1999. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in 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 Statement 133, if any, will have on the earnings an financial
position of the Company.
NOTE 2 - NET CONTRACTS RECEIVABLE
- ----------------------------------
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts $ 616,409 $ 923,662
Unearned discounts (32,943) (48,015)
--------- ---------
Net contracts 583,466 875,647
Allowance for credit losses (18,695) (11,246)
Dealer participation, net of deferred contract fees 13,565 20,424
--------- ---------
Net contracts receivable $ 578,336 $ 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
MARCH 31,
---------------------
1999 1998
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 20,424 $ 4,896
New deferrals 17,311 16,203
Amortization (1,031) (965)
Sales (23,139) (13,470)
-------- --------
Balance at end of period $ 13,565 $ 6,664
======== ========
</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 March 31, 1999, the Company had forward agreements with a notional face
amount outstanding of $550 million. The fair value of these forward agreements
would result in an increase in the underlying basis of the contracts by $0.9
million.
Contracts serviced by the Company for the benefit of others totaled
approximately $4.0 billion at March 31, 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
MARCH 31,
---------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 11,246 $ 6,787
Provision for credit losses 11,198 5,741
Charged off contracts (5,502) (3,381)
Recoveries 1,753 640
-------- --------
Balance at end of period $ 18,695 $ 9,787
======== ========
</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 is reported as a separate component of
shareholders' equity as an unrealized gain or loss, net of applicable taxes.
Two methods have arisen in practice to determine the fair value of credit
enhancements assets; the cash-in method and the cash-out method. The Securities
and Exchange Commission ("SEC") has set forth specific guidance that the
cash-out method is the only appropriate method to be used in determining the
fair value of such assets as defined by Statement of Financial Accounting
Standards No.125 ("SFAS 125"). The cash-out method discounts expected cash flows
from the period in which the transferor expects to receive the cash, thereby
taking into consideration the period of time that the cash is received from
obligators but restricted from distribution to the transferor. WFS has
historically used the cash-out method in measuring such assets.
9
<PAGE> 10
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 March 31, 1999.
The following table presents the activity of the RISA.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $ 171,230 $ 181,177
Additions 49,961 23,388
Amortization (29,306) (27,195)
Change in unrealized gain/loss on securities available for sale (1,956) (63)
--------- ---------
Ending balance $ 189,929 $ 177,307
========= =========
</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>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 417,586 $ 361,209
Off balance sheet allowance for losses (204,433) (170,664)
Discount to present value (23,224) (19,315)
----------- -----------
Retained interest in securitized assets $ 189,929 $ 171,230
=========== ===========
Outstanding balance of contracts sold through securitizations $ 3,968,534 $ 3,491,452
Off balance sheet allowance for losses as a percent of contracts sold
through securitizations 5.15% 4.89%
</TABLE>
10
<PAGE> 11
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company believes that the off balance sheet allowance for losses is
currently adequate to absorb potential losses in the sold portfolio.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Property, plant and equipment consisted of the following at:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land $ 2,017 $ 2,017
Construction in progress 4,183 3,085
Buildings 8,230 8,230
Computers and software 21,485 16,707
Furniture, fixtures and leasehold improvements 3,315 3,069
Equipment 3,575 3,415
Automobiles 244 259
------- -------
43,049 36,782
Less accumulated depreciation 11,876 10,300
------- -------
$31,173 $26,482
======= =======
</TABLE>
The increase in computers and software is primarily due to computer systems
upgrades.
NOTE 6 - 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
MARCH 31,
----------------------------
1999 1998
------------ -------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
BASIC AND DILUTED
Net income (loss) $ 11,585 $ (13,341)
Average common shares outstanding 25,708,762 25,708,611
Net income (loss) per common share - basic and diluted 0.45 (0.52)
</TABLE>
11
<PAGE> 12
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options to purchase 293,727 shares of common stock at a range of $6.94 to $18.00
per share were outstanding at March 31, 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 748,257 shares of common
stock at a range of $9.00 to $18.00 were outstanding at March 31, 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 $753 million of contracts for the three months ended March 31,
1999 compared with $605 million of contracts for the same period in 1998. This
represents a 25% increase in production for the respective period. WFS
securitized $1.0 billion of contracts for the three months ended March 31, 1999
compared with $525 million for the same period in 1998. The increase in the
securitization for the three months ended March 31, 1999 compared with the same
period in 1998 is the result of the Company's decision not to securitize
contracts during the third quarter last year when asset-backed securities were
adversely affected by wider spreads, as well as higher originations during the
first 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
MARCH 31,
---------------------------
1999 1998
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $ 875,647 $ 231,229
Originations 752,932 605,304
Sales (1,000,000) (525,000)
Principal reductions (1) (45,113) (23,954)
----------- -----------
Ending balance $ 583,466 $ 287,579
=========== ===========
</TABLE>
- ----------------
(1) Includes scheduled payments, prepayments and charge offs.
13
<PAGE> 14
RESULTS OF OPERATIONS
SERVICING INCOME
- ----------------
Total servicing income was $28.7 million for the three months ended March 31,
1999 compared with $17.4 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 in the first quarter of 1999 compared with the same quarter a year
earlier 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% 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
MARCH 31,
--------------------
1999 1998
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Retained interest income $ 7,496 $ (748)
Contractual servicing income 11,226 8,588
Other fee income 10,019 9,585
-------- --------
Total servicing income $ 28,741 $ 17,425
======== ========
</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 $17.7 million for the three months ended March 31, 1999
compared with $12.0 million for the same period in 1998. Net interest income
increased as average contracts held on balance sheet increased compared with the
first quarter of 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
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
----- -----
Yield on interest earning assets 14.63% 13.28%
Cost of borrowings 6.46% 8.93%
----- -----
Net interest rate spread 8.17% 4.35%
===== =====
The increase in the net interest rate spread for the three months ended March
31, 1999 compared with the same period 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 of $28.3 million for the three months
ended March 31, 1999 compared with $8.1 million for the same period of 1998. The
higher gain on sale of contracts is the result of a $475 million increase in the
amount of contracts securitized for the first quarter ($1.0 billion) compared
with the same period a year earlier ($525 million), as well as improving net
spreads after estimated credit losses. Gain on sale as a percent of contracts
securitized increased to 2.8% for the first quarter of 1999 compared with 1.5%
for the same period a year earlier.
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 $11.2 million for the three months ended March 31, 1999
compared with $5.7 million for the same period in 1998. The increase for the
three months ended March 31, 1999, compared with the same period last year, is
the result of an increased level of contracts held on balance sheet compared
with a year earlier and because the Company may be holding a greater percentage
of contracts on the balance sheet.
OPERATING EXPENSES
- ------------------
Operating expenses, excluding provision for credit losses, were $43.5 million
for the three months ended March 31, 1999 compared with $44.4 for the same
period 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, excluding provision for credit losses, as a percentage of
average serviced contracts declined 71 basis points to 3.9% for the first
quarter of 1999 compared with 4.7% 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 rates for the
three months ended March 31, 1999 and 1998 were 42.1% and 42.2%, respectively.
PRO-FORMA STATEMENTS OF INCOME
- ------------------------------
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, retained interest income and other fee income. The
difference between "cash basis" income and reported income under GAAP for the
three months ended March 31, 1999 is due to a $300 million increase in
contracts securitized compared with the previous quarter. 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 income present the Company's results of
operations 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 "cash
basis" statements of income. Management monitors the periodic "cash basis"
earnings of the Company's managed contract portfolio and believes these "cash
basis" statements assist in a better understanding of the Company's business.
The following tables presents the "cash basis" statements of income, a
reconciliation to net income as reflected in the Company's consolidated
statements of income, and the cash basis results as a percentage of average
managed contracts.
16
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
"CASH BASIS" STATEMENTS OF OPERATIONS
Interest income $ 145,746 $ 125,455
Interest expense 68,246 61,272
--------- ---------
Net interest income 77,500 64,183
Provision for credit losses (1) 31,383 46,173
--------- ---------
Net interest income after provision for losses 46,117 18,010
Other income 10,019 9,585
Operating costs 45,168 45,786
Restructuring charge 10,500
--------- ---------
Income (loss) before income taxes 10,698 (28,691)
Income tax (benefit) (2) 4,606 (12,050)
--------- ---------
"Cash basis" net income (loss) $ 6,362 $ (16,641)
========= =========
"Cash basis" net income (loss) per common share - diluted $ 0.25 $ (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 marginal tax rate for the
respective period.
17
<PAGE> 18
RECONCILIATION OF GAAP BASIS NET INCOME
TO "CASH BASIS" NET INCOME:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GAAP net income (loss) $ 11,585 $(13,341)
"Cash basis" adjustments:
Gain on sales of
contracts (28,255) (8,086)
Retained interest income (7,496) 748
Contractual servicing income (11,226) (8,588)
Net interest income 59,843 52,163
Provision for credit
losses (20,184) (40,432)
Operating expenses (1,714) (1,428)
-------- --------
Total "Cash basis" adjustments (9,032) (5,623)
Net tax effect (1) 3,809 2,323
-------- --------
"Cash basis" net income $ 6,362 $(16,641)
======== ========
</TABLE>
(1) Such tax effect is based upon the Company's marginal tax rate for the
respective period.
"CASH BASIS" YIELD TABLE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Interest income 13.1% 13.4%
Interest expense 6.1 6.6
------------ -------------
Net interest income 7.0 6.8
Provision for credit losses 2.8 4.9
------------ -------------
Net interest income after provision for losses 4.2 1.9
Other income 0.9 1.0
Operating expenses 4.1 4.9
Restructuring charge 1.1
------------ -------------
Income (loss) before taxes 1.0 (3.10)
Income tax (benefit) 0.4 (1.30)
------------ -------------
"Cash basis" net income (loss) 0.6% (1.8%)
============ =============
Average serviced contracts $ 4,447,784 $ 3,739,041
============ =============
</TABLE>
18
<PAGE> 19
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
- ------------------------------------------------
WFS holds a portfolio of contracts on balance sheet for investment that totaled
$45.9 million at March 31, 1999 and $70.8 million at December 31, 1998.
Contracts held for sale totaled $551 million at March 31, 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. WFS completed a securitization transaction of $1.0 billion during the
first three months 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Prime contracts $539,297 $361,870
Non-prime contracts 213,635 243,434
-------- --------
Total volume $752,932 $605,304
======== ========
New vehicles $166,580 $ 96,737
Used vehicles 586,352 508,567
-------- --------
Total volume $752,932 $605,304
======== ========
</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 March 31, 1999 were $379 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.
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.
19
<PAGE> 20
Loss experience for the first quarter of 1999 declined 100 basis points to 2.7%
of average serviced contracts compared with 3.7% a year earlier. Contracts
delinquent 30 days or more improved 41% or $65.1 million to 2.1% of serviced
contracts at March 31, 1999 compared with 3.6% at December 31, 1998.
The improvement in credit loss experience and delinquency is the result of
stricter underwriting guidelines, the successful implementation of the Company's
multiple credit scoring models, and other system-controlled underwriting
policies initiated over the past two years as well as a higher percentage of
prime contracts being purchased since 1997. Additionally, the Company is no
longer experiencing the negative impacts of the disruption in collection efforts
felt during the Company's restructuring programs completed last year.
The following table reflects WFS' delinquency on a total serviced basis.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
--------------------- ---------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Automobile loans serviced (1) 476,335 $4,552,009 464,257 $4,367,099
======= ========== ======= ==========
Period of delinquency (2)
31-59 days 7,708 61,773 13,885 112,208
60-89 days 2,718 21,935 3,966 32,100
90 days or more 1,275 9,934 1,768 14,441
------- ---------- ------- ----------
Total contracts delinquent 11,701 $ 93,642 19,619 $ 158,749
======= ========== ======= ==========
Delinquencies as a percentage of
number and amount of contracts
outstanding 2.46% 2.06% 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.
20
<PAGE> 21
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------ --------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts owned 49,771 $583,466 76,474 $875,642
====== ======== ====== ========
Period of delinquency (1)
31-59 days 4,272 4,758 7,579 12,743
60-89 days 1,603 1,832 2,442 3,622
90 days or more 819 1,601 1,129 1,868
------ -------- ------ --------
Total loans delinquent 6,694 $ 8,191 11,150 $ 18,233
====== ======== ====== ========
Delinquencies as a percentage of number and
amount of contracts outstanding 13.45% 1.40% 14.58% 2.08%
====== ======== ====== ========
</TABLE>
The following table reflects repossessed assets on a serviced basis The
following table reflects repossessed assets on a serviced basis
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
------------------ --------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SERVICING PORTFOLIO (1) 476,355 $4,552,009 464,257 $4,367,099
======= ========== ======= ==========
Repossessed Assets 837 $ 4,801 1,232 $ 7,790
======= ========== ======= ==========
Repossessed assets as a percentage of
number and amount of contracts
outstanding 0.18% 0.11% 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.
21
<PAGE> 22
The following table reflects net chargeoff experience on a serviced contract
basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts serviced at end of period (1) $4,552,009 $3,824,193
========== ==========
Average during period $4,447,784 $3,739,041
========== ==========
Gross chargeoffs of contracts during period $ 42,489 $ 41,772
Recoveries of contracts charged off in prior periods 12,506 7,137
---------- ----------
Net chargeoffs $ 29,983 $ 34,635
========== ==========
Net chargeoffs as a percentage of contracts
outstanding during period (2) 2.70% 3.71%
========== ==========
</TABLE>
- -------------------------
(1) Includes loan loss information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced
by WFS, and is net of unearned add-on interest.
(2) Annualized based on net chargeoffs as a percentage of average contracts
outstanding during the three months ended March 31, 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
CUMULATIVE STATIC POOL LOSS CURVES (UNAUDITED)
AT MARCH 31, 1999
<TABLE>
<CAPTION>
PERIOD 1995-2 1995-3 1995-4 1995-5 1996-A 1996-B 1996-C 1996-D 1997-A 1997-B
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.03% 0.00% 0.00% 0.01% 0.00% 0.01% 0.00% 0.02% 0.00% 0.00%
2 0.15% 0.09% 0.06% 0.09% 0.06% 0.09% 0.09% 0.10% 0.08% 0.07%
3 0.23% 0.20% 0.16% 0.16% 0.17% 0.20% 0.22% 0.24% 0.20% 0.18%
4 0.43% 0.36% 0.31% 0.32% 0.29% 0.35% 0.52% 0.44% 0.36% 0.33%
5 0.58% 0.58% 0.52% 0.48% 0.48% 0.61% 0.74% 0.71% 0.62% 0.56%
6 0.77% 0.80% 0.70% 0.62% 0.63% 0.88% 0.98% 0.93% 0.85% 0.77%
7 0.95% 1.04% 0.86% 0.78% 0.81% 1.14% 1.27% 1.16% 1.12% 1.10%
8 1.09% 1.27% 1.02% 0.98% 1.08% 1.42% 1.52% 1.43% 1.45% 1.40%
9 1.28% 1.46% 1.13% 1.16% 1.35% 1.67% 1.77% 1.72% 1.70% 1.70%
10 1.49% 1.62% 1.26% 1.32% 1.63% 1.91% 1.98% 2.03% 2.02% 2.00%
11 1.64% 1.79% 1.41% 1.54% 1.87% 2.18% 2.21% 2.34% 2.32% 2.22%
12 1.81% 1.92% 1.52% 2.01% 2.06% 2.38% 2.49% 2.62% 2.61% 2.43%
13 1.94% 2.01% 1.66% 2.03% 2.28% 2.58% 2.73% 2.97% 2.92% 2.66%
14 2.09% 2.17% 1.86% 2.25% 2.47% 2.79% 2.99% 3.27% 3.14% 2.91%
15 2.16% 2.28% 2.07% 2.41% 2.63% 2.95% 3.21% 3.53% 3.30% 3.15%
16 2.24% 2.42% 2.26% 2.59% 2.79% 3.14% 3.47% 3.79% 3.55% 3.56%
17 2.36% 2.57% 2.47% 2.77% 2.97% 3.38% 3.70% 4.02% 3.77% 3.77%
18 2.46% 2.86% 2.59% 2.88% 3.12% 3.55% 3.94% 4.19% 3.94% 3.97%
19 2.55% 3.08% 2.72% 3.00% 3.31% 3.80% 4.18% 4.43% 4.21% 4.20%
20 2.69% 3.23% 2.88% 3.12% 3.49% 3.98% 4.36% 4.65% 4.40% 4.39%
21 2.83% 3.38% 2.95% 3.24% 3.63% 4.14% 4.53% 4.80% 4.59% 4.53%
22 2.96% 3.49% 3.04% 3.39% 3.80% 4.31% 4.67% 5.07% 4.81% 4.67%
23 3.06% 3.59% 3.13% 3.53% 3.95% 4.46% 4.84% 5.27% 5.00%
24 3.17% 3.68% 3.22% 3.64% 4.10% 4.58% 5.01% 5.47% 5.14%
25 3.24% 3.74% 3.30% 3.72% 4.22% 4.74% 5.17% 5.65% 5.24%
26 3.28% 3.81% 3.37% 3.83% 4.33% 4.87% 5.34% 5.80%
27 3.33% 3.88% 3.47% 3.95% 4.41% 4.98% 5.50% 5.91%
28 3.42% 3.97% 3.50% 4.08% 4.51% 5.11% 5.67% 5.98%
29 3.46% 4.01% 3.58% 4.16% 4.60% 5.21% 5.78%
30 3.49% 4.06% 3.65% 4.25% 4.70% 5.31% 5.89%
31 3.52% 4.07% 3.75% 4.31% 4.79% 5.42% 5.98%
32 3.56% 4.14% 3.80% 4.35% 4.85% 5.50%
33 3.55% 4.20% 3.83% 4.40% 4.91% 5.55%
34 3.60% 4.26% 3.87% 4.46% 4.99% 5.58%
35 3.62% 4.31% 3.91% 4.54% 5.03%
36 3.67% 4.34% 3.94% 4.58% 5.07%
37 3.70% 4.38% 3.96% 4.61% 5.11%
38 3.73% 4.40% 3.99% 4.64%
39 3.74% 4.41% 4.01% 4.66%
40 3.76% 4.44% 4.04% 4.69%
41 3.77% 4.48% 4.06%
42 3.80% 4.49% 4.07%
43 3.80% 4.51% 4.07%
44 3.82% 4.52%
45 3.84% 4.53%
46 3.83% 4.54%
47 3.84%
48 3.84%
</TABLE>
<PAGE> 24
WFS FINANCIAL INC AND SUBSIDIARIES
CUMULATIVE STATIC POOL LOSS CURVES (UNAUDITED)
AT MARCH 31, 1999
<TABLE>
<CAPTION>
PERIOD 1997-C 1997-D 1998-A 1998-B 1998-C 1999-A
- ---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.06% 0.05% 0.04% 0.02% 0.04% 0.05%
3 0.15% 0.14% 0.11% 0.08% 0.11%
4 0.29% 0.31% 0.25% 0.18% 0.23%
5 0.46% 0.56% 0.44% 0.38% 0.39%
6 0.67% 0.75% 0.66% 0.59%
7 0.93% 0.99% 0.95% 0.83%
8 1.16% 1.24% 1.23% 1.03%
9 1.37% 1.47% 1.50% 1.21%
10 1.66% 1.75% 1.79% 1.40%
11 1.94% 2.06% 2.03%
12 2.16% 2.35% 2.21%
13 2.40% 2.63% 2.39%
14 2.65% 2.86%
15 2.90% 3.05%
16 3.15% 3.19%
17 3.36%
18 3.55%
19 3.70%
</TABLE>
24
<PAGE> 25
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 $753 million of contracts for the three months ended March 31,
1999 compared with $605 million for the same period in 1998.
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 months ended March 31, 1999 was $20.1 million
compared with $17.2 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 three months at March 31, 1999, including initial
advances not yet returned, was $379 million compared with $333 million at
December 31, 1998. WFS securitized $1.0 billion in contracts during the first
quarter of 1999 compared with $525 million the same period a year earlier.
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.
25
<PAGE> 26
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.
Other Sources
WFS also obtains other cash sources from its parent, the Bank. 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.
YEAR 2000
- ---------
During 1997, the Company began a formal risk evaluation of potential Year 2000
issues. The Year 2000 issues arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail and create
erroneous results. The outcome of the risk evaluation was the formation of a
Year 2000 Committee that consists of officers and employees of the Company. The
outcome of the risk evaluation was the formation of a Year 2000 Committee. In
addition, there is a committee that consists of directors that provide oversight
and direction to the Year 2000 Committee. The purpose of this committee is to
assess all risks, analyze current systems, coordinate upgrades and replacements,
and report current and projected status of all known Year 2000 compliance
issues.
As a subsidiary of a federally chartered savings bank, WFS is subject to
supervision and regulation by the Office of Thrift Supervision ("OTS"). As such,
WFS and the Bank's compliance to Year 2000 issues are subject to the examination
of the OTS.
The Company has initiated a five-phase program to address the issues related to
the Year 2000 and the impact on the Company's information and non-information
technology systems. In addition, as part of the program, the Company is in
contact with its principal vendors to assess whether their Year 2000 issues, if
any, will affect the Company.
The Company, in phase one, identified Year 2000 issues and created a plan. In
phase two, the Company took inventory of the systems and programs affected by
the Year 2000 issues. In the third and fourth phases, the Company will test for
Year 2000 compliance. The Company has completed phase one through three and is
in the fourth phase of its Year 2000 plan. Phase four is anticipated to be
completed by May 31, 1999. The final phase implements the tested Year 2000
compliant systems. This phase has begun and is estimated to be completed by June
30, 1999.
26
<PAGE> 27
The Company's replacement or remedied costs for Year 2000 compliance issues is
estimated at approximately $0.9 million, which the Company will expense as
incurred. This estimated cost consists primarily of software upgrades that
include new features which are combined with Year 2000 corrections. The
Company's inception to date Year 2000 cost is approximately $0.8 million.
Due to the uncertainty by the electrical utility industry regarding Year 2000
compliance, the Company estimates that the worst case Year 2000 issue scenario
would be a possible discontinuance of electrical power. In the event of an
electrical power failure, the Company has the capability to run its information
systems at its servicing locations on diesel powered generators. There is no
guarantee, however, that all issues will be foreseen and corrected, or that no
material disruption of our business will occur.
FORWARD-LOOKING STATEMENTS
The preceding Management 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:
- the level of chargeoffs, as an increase in the level of chargeoffs
will decrease our earnings;
- 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;
- 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;
- 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;
- maintaining the level of operating costs; as an increase in those
costs will reduce our net earnings; and
- 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 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.
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
On April 27, 1999, the Company held its annual shareholders'
meeting. There were 25,708,611 shares of the Company's common
stock issued, outstanding and entitled to vote as of the record
date, March 8, 1999, and a total of 24,914,642 share (97%) were
represented at the meeting in person or by proxy. The following
summarizes vote results of proposals submitted to the Company's
shareholders.
1. Proposal to elect directors, each for a two-year term.
<TABLE>
<CAPTION>
FOR Withheld
--- --------
<S> <C> <C>
Ernest S. Rady 24,903,396 11,246
Howard C. Reese 24,897,426 17,216
James R. Dowlan 24,901,526 13,116
Joy Schaefer 24,903,176 11,466
</TABLE>
2. Proposal to ratify the appointment of Ernest & Young LLP as
independent auditors for the fiscal year ending December 31,
1999
FOR AGAINST WITHHELD
--- ------- --------
24,903,747 10,270 575
ITEM 5. OTHER INFORMATION
None
29
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on April 9, 1999 by the Company to
announce that Thomas Wolfe, Executive Vice President and National
Production Manager of the Company was promoted to President and
Chief Operating Officer. Joy Schaefer will continue to serve as
Vice Chairman and Chief Executive Officer of the Company. In
addition, Joy Schaefer was appointed to the position of President
of Westcorp, the ultimate parent company of WFS.
<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: May 14, 1999 By: /s/ JOY SCHAEFER
-----------------------------------
Joy Schaefer
Vice Chairman, Chief Executive
Officer
By: /s/ LEE A. WHATCOTT
Date: May 14, 1999 -----------------------------------
Lee A. Whatcott
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
<PAGE> 32
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 484
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 583,466
<ALLOWANCE> 18,695
<TOTAL-ASSETS> 1,190,816
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 668,447
<LONG-TERM> 347,753
0
0
<COMMON> 73,569
<OTHER-SE> 101,227
<TOTAL-LIABILITIES-AND-EQUITY> 1,190,816
<INTEREST-LOAN> 23,744
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,744
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 6,087
<INTEREST-INCOME-NET> 17,657
<LOAN-LOSSES> 11,198
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 43,454
<INCOME-PRETAX> 20,001
<INCOME-PRE-EXTRAORDINARY> 20,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,585
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 14.63
<LOANS-NON> 0
<LOANS-PAST> 1,601
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,246
<CHARGE-OFFS> 5,502
<RECOVERIES> 1,753
<ALLOWANCE-CLOSE> 18,695
<ALLOWANCE-DOMESTIC> 18,695
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
