<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to _________
COMMISSION FILE NUMBER 33-93068
WFS FINANCIAL INC
---------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0291646
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
-----------------------------------------
(Address of principal executive offices)
(949) 727-1002
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ].
As of October 31, 2000 the registrant had 28,425,011 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 32.
<PAGE> 2
WFS FINANCIAL INC AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity
for the Periods Ended September 30, 2000 and December 31, 1999 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and short-term investments $ 28,710 $ 7,120
Investment securities available for sale 6,996 7,829
Contracts receivable 2,228,922 71,757
Contracts held for sale 1,423,960
Allowance for credit losses (62,666) (36,682)
----------- -----------
Contracts receivable, net 2,166,256 1,459,035
Amounts due from trusts 383,002 439,022
Retained interest in securitized assets 124,676 167,277
Premises and equipment, net 37,346 38,038
Accrued interest receivable 15,424 10,521
Other assets 16,150 2,085
----------- -----------
TOTAL ASSETS $ 2,778,560 $ 2,130,927
=========== ===========
LIABILITIES
Notes payable - parent $ 146,219 $ 178,908
Notes payable 1,379,352
Secured lines of credit 295,351 1,012,293
Amounts held on behalf of trustee 636,002 687,274
Other liabilities 22,814 40,264
----------- -----------
TOTAL LIABILITIES 2,479,738 1,918,739
SHAREHOLDERS' EQUITY
Common stock, (no par value; authorized 50,000,000 shares;
issued and outstanding 28,425,011 shares in 2000
and 25,771,956 shares in 1998 and in 1999) 111,920 74,010
Paid-in capital 4,337 4,327
Retained earnings 182,911 134,690
Accumulated other comprehensive loss, net of tax (346) (839)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 298,822 212,188
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,778,560 $ 2,130,927
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES
Interest income $ 80,609 $ 34,324 $ 217,923 $ 96,575
Interest expense 34,068 8,873 89,232 26,033
----------- ----------- ----------- -----------
Net interest income 46,541 25,451 128,691 70,542
Servicing income 45,463 37,016 129,281 105,511
Gain on sale of contracts 6,004 20,251 13,723 48,506
----------- ----------- ----------- -----------
TOTAL REVENUES 98,008 82,718 271,695 224,559
EXPENSES
Provision for credit losses 21,359 15,347 47,893 31,304
Operating expenses:
Salaries and associate benefits 28,455 28,975 89,023 83,901
Credit and collections 5,327 4,983 15,496 16,239
Occupancy 2,648 2,323 7,912 6,644
Data processing 4,117 3,525 11,786 10,339
Telephone 1,218 1,597 4,182 4,531
Miscellaneous 5,396 3,978 13,660 8,601
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 47,161 45,381 142,059 130,255
----------- ----------- ----------- -----------
TOTAL EXPENSES 68,520 60,728 189,952 161,559
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 29,488 21,990 81,743 63,000
Income tax 12,180 9,278 33,522 26,552
----------- ----------- ----------- -----------
NET INCOME $ 17,308 $ 12,712 $ 48,221 $ 36,448
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.61 $ 0.49 $ 1.72 $ 1.42
=========== =========== =========== ===========
Diluted $ 0.61 $ 0.49 $ 1.71 $ 1.41
=========== =========== =========== ===========
Weighed average number of common shares outstanding:
Basic 28,424,147 25,737,786 28,091,886 25,721,295
Diluted 28,535,218 25,881,676 28,211,248 25,822,197
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME (LOSS),
SHARES STOCK CAPITAL EARNINGS NET OF TAX TOTAL
---------- -------- ------- -------- ------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 25,708,611 $ 73,564 $4,000 $ 85,315 $ 1,462 $ 164,341
Net income 49,375 49,375
Unrealized losses on retained
interest in securitized assets,
net of tax (1)
(2,301) (2,301)
---------
Comprehensive income 47,074
Stock options exercised 63,345 446 327 773
----------- -------- ------ -------- ------- ---------
Balance at December 31, 1999 25,771,956 74,010 4,327 134,690 (839) 212,188
Net income 48,221 48,221
Unrealized gains on retained interest
in securitized assets, net of tax (1)
493 493
---------
Comprehensive income 48,714
Stock issuance 2,650,000 37,889 10 37,899
Stock options exercised 3,055 21 21
----------- -------- ------ -------- ------- ---------
Balance at September 30, 2000 28,425,011 $111,920 $4,337 $182,911 $ (346) $ 298,822
=========== ======== ====== ======== ======= =========
</TABLE>
(1) Includes retained interest in securitized assets. The pre-tax decrease
in unrealized losses on retained interest in securitized assets was $0.9
million for the period ended September 30, 2000 compared with a $4.0
million pre-tax increase for the period ended December 31, 1999.
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 48,221 $ 36,448
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses 47,893 31,304
Depreciation 7,250 4,670
Amortization of retained interest in securitized assets 62,669 86,983
Gain on disposal of assets (173)
Increase in other assets (18,469) (2,995)
(Decrease) increase in liabilities (17,450) 2,162
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 130,114 158,399
INVESTING ACTIVITIES
Automobile contracts:
Purchase of contracts (3,222,888) (2,528,415)
Proceeds from whole loan sale 1,431,231
Proceeds from contract securitizations 660,000 2,000,000
Other change in contracts 376,542 154,111
Increase in retained interest in securitized assets (19,240) (93,541)
Decrease (increase) in amounts due from trust 56,020 (87,076)
Purchase of premises and equipment (6,558) (13,769)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (724,893) (568,690)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 37,920 328
Proceeds from notes payable 1,346,663 524,008
Payments on secured lines of credit (716,942) (221,058)
(Decrease) increase in amounts held on behalf of trustee (51,272) 131,314
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 616,369 434,592
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 21,590 24,301
Cash and cash equivalents at beginning of period 7,120 15,020
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,710 $ 39,321
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 84,320 $ 21,504
Income taxes $ 46,402 $ 30,616
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
thereto for the year ended December 31, 1999 included in the WFS Financial Inc
Form 10-K.
Certain amounts from the 1999 consolidated financial statement amounts have been
reclassified to conform to the 2000 presentation.
In June 1998, the Financial Accounting Standards Board, also known as FASB,
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, also known as SFAS No. 133, as amended by Statements No. 137 and No.
138, in June 1999 and June 2000, respectively. These statements provide guidance
for the way enterprises report information about derivatives and hedging in
annual financial statements and in interim financial reports. These statements
require all derivatives to be recognized on the balance sheet at fair value.
Changes in the fair value of derivatives that are not hedges must be adjusted
directly through income. Changes in the fair value of derivatives that are
hedges will be either offset against the change in the fair value of the hedged
assets, liabilities or firm commitments directly through income or recognized
through other comprehensive income on the balance sheet until the hedged item is
recognized in earnings, depending on the nature of the hedges. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings if the derivative is a fair value hedge as defined by SFAS No. 133. The
ineffective portion of a derivative's change in fair value for a cash flow hedge
as defined by SFAS No. 133 will be either recognized in comprehensive income on
the balance sheet if the hedge is less than 100% effective or in earnings if the
hedge is greater than 100% effective.
To protect against potential changes in interest rates affecting future
securitization transactions, we enter into two-year Treasury securities forward
agreements and Euro-dollar swap agreements. Gains and losses relative to these
agreements are deferred until the completion of the securitization transaction.
Once the transaction is complete, the deferred amount is then amortized into
earnings over the duration of the securities. We expect to classify these
derivatives as cash flow hedges under SFAS No. 133. Upon adoption of SFAS No.
133 on January 1, 2001, we expect to record a cumulative effect adjustment to
other comprehensive income in the amount of the deferred gain or loss on
agreements outstanding as of January 1, 2001. We do not expect that the adoption
of SFAS No. 133 for these agreements will have a material effect on our earnings
or financial position.
7
<PAGE> 8
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
NOTE 2 - NET CONTRACTS RECEIVABLE
Our contract portfolio consists of contracts purchased from automobile dealers
on a non-recourse basis and contracts financed directly with the consumer. If
pre-computed finance charges are added to a contract, they are added to the
contract balance and carried as an offset against the contract balance as
unearned discounts. Amounts paid to dealers are capitalized as dealer
participation and amortized over the life of the contract.
Net contracts receivable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts $ 2,241,584 $ 1,518,433
Unearned discounts (56,009) (54,248)
----------- -----------
Net contracts 2,185,575 1,464,185
Allowance for credit losses (62,666) (36,682)
Dealer participation, net of deferred contract fees 43,347 31,532
----------- -----------
Net contracts receivable $ 2,166,256 $ 1,459,035
=========== ===========
</TABLE>
Contracts serviced by us for the benefit of others totaled approximately $4.4
billion at September 30, 2000 and $3.9 billion at December 31, 1999.
NOTE 3 - ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 51,528 $ 21,957 $ 36,682 $ 11,246
Provision for credit losses 21,359 15,347 47,893 31,304
Charged off contracts (14,089) (4,257) (31,618) (13,169)
Recoveries 3,868 1,819 9,709 5,485
-------- -------- -------- --------
Balance at end of period $ 62,666 $ 34,866 $ 62,666 $ 34,866
======== ======== ======== ========
</TABLE>
The increase in the allowance for credit losses is the result of the company
holding more contracts on our balance sheet as our securitization transactions
are now accounted for as secured financings.
8
<PAGE> 9
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
NOTE 4 - RETAINED INTEREST IN SECURITIZED ASSETS
Retained interest in securitized assets, also known as RISA, is capitalized upon
the sale of contracts to securitization trusts. RISA represents the present
value of the estimated future earnings to be received by us from the excess
spread created in securitization transactions. Excess spread is calculated by
taking the coupon rate of the contracts securitized less the interest rate paid
to the investors less contractually specified servicing fees and guarantor fees,
after giving effect to estimated credit losses and prepayments.
Prepayment and credit loss assumptions are also utilized to estimate future
excess spread. We currently use a prepayment rate of 1.6% Absolute Prepayment
Model, also known as ABS. Credit losses are estimated using a cumulative loss
rate estimated by management to reduce the likelihood of impairment to the value
of the RISA. We determine the cumulative loss rate based upon our review of
historical cumulative loss experience, collection and repossession data,
estimates of the value of the underlying collateral, economic conditions and
trends, the mix of prime and non-prime contracts and other information.
Cumulative net credit loss assumptions utilized during 2000 and 1999 ranged from
6% to 7%. Future earnings are discounted at a rate we believe to be
representative of the market at the time of securitization. Currently, we use a
discount rate of 425 basis points over the two-year Treasury rate. All
assumptions used are evaluated each quarter and adjusted, if appropriate, to
reflect actual performance of the contracts.
The balance of the RISA is amortized on a monthly basis over the expected
repayment life of the underlying contracts. Actual cash flows in excess of the
amortization of the RISA are shown in our income statement as retained interest
income. RISA is classified in a manner similar to available for sale securities
and as such is marked to market each quarter. Market value changes are
calculated by discounting the excess spread using a current market discount
rate. Any changes in the market value of the RISA are reported as a separate
component of shareholders' equity on our consolidated statements of financial
condition as accumulated other comprehensive income (loss), net of applicable
taxes.
9
<PAGE> 10
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
The following table presents the activity of the RISA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning balance $ 140,639 $ 164,891 $ 167,277 $ 171,230
Additions 43,582 19,240 93,541
Amortization (17,341) (33,847) (62,669) (86,983)
Change in unrealized gain/loss on RISA (1) 1,378 (154) 828 (3,316)
--------- --------- --------- ---------
Ending balance $ 124,676 $ 174,472 $ 124,676 $ 174,472
========= ========= ========= =========
</TABLE>
(1) Change in unrealized gain/loss on RISA represents the effect that
current changes in interest rates have on the valuation of the RISA.
Such amount will not be realized unless the RISA is sold.
Estimated future undiscounted RISA earnings are calculated by taking the
difference between the coupon rate of the contracts securitized and the interest
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 probable future losses that can be reasonably
estimated and by discounting to present value.
The following table presents the estimated future undiscounted retained interest
earnings to be received from securitizations:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 293,977 $ 410,066
Off balance sheet allowance for credit losses (153,383) (220,838)
Discount to present value (15,918) (21,951)
----------- -----------
Retained interest in securitized assets $ 124,676 $ 167,277
=========== ===========
Outstanding balance of contracts sold through
securitizations $ 3,028,819 $ 3,890,685
Off balance sheet allowance for losses as a percent
of contracts sold through securitizations 5.06% 5.68%
</TABLE>
We believe that the off balance sheet allowance for losses is currently adequate
to absorb probable losses in the underlying portfolio that can be reasonably
estimated.
10
<PAGE> 11
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land $ 2,017 $ 2,017
Buildings 13,624 13,519
Computers and software 36,613 31,502
Furniture, fixtures and leasehold improvements 4,598 3,638
Equipment 4,395 4,093
Automobiles 284 274
------- -------
61,531 55,043
Less: accumulated depreciation 24,185 17,005
------- -------
$37,346 $38,038
======= =======
</TABLE>
NOTE 6 - INTERCOMPANY AGREEMENTS
We borrowed $125 million from our parent company, Western Financial Bank, also
known as the Bank, under the terms of the senior note. The senior note provides
for principal payments of $25 million per year, commencing on April 30, 1999 and
continuing through its final maturity, April 30, 2003. Interest payments on the
senior note are due quarterly, in arrears, calculated at the rate of 7.25% per
annum. During 1999, we made paydowns of $66.1 million without prepayment
penalties. For the nine months ended September 30, 2000, we made paydowns of
$32.7 million without prepayment penalties. There was $11.2 million and $43.9
million outstanding on the senior note at September 30, 2000 and December 31,
1999, respectively. Interest expense totaled $0.2 million and $1.3 million for
the three and nine months ended September 30, 2000, respectively, compared with
$0.9 million and $4.6 million for the same respective periods in 1999.
Additionally, we borrowed $135 million under the terms of the promissory note
from the Bank. The promissory note provides for principal payments of $67.5
million per year, commencing July 31, 2001 and continuing through its final
maturity, July 31, 2002. Interest payments on the senior note are due quarterly,
in arrears, calculated at the rate of 9.42% per annum. Pursuant to the terms of
the promissory note, we may not incur any other indebtedness which is senior to
the obligations evidenced by the promissory note except for (i) indebtedness
under the senior note, (ii) indebtedness collateralized or secured under the
line of credit and (iii) indebtedness for similar types of warehouse lines of
credit. There was $135 million outstanding on the promissory note at September
30, 2000 and December 31, 1999. Interest expense totaled $3.2 million and $9.5
million for the three and nine months ended September 30, 2000, respectively,
compared with $2.8 million and $6.1 million for the same respective periods in
1999.
11
<PAGE> 12
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
We also have a line of credit extended by the Bank permitting us to draw up to
$1.8 billion as needed to be used in our operations. The amount of this line was
increased from $1.3 billion effective May 23, 2000. We do not pay a commitment
fee for the line of credit. The line of credit terminates on December 31, 2004
although the term may be extended by us 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, also known as LIBOR, plus 75 basis points. When
unsecured, the line of credit carries an interest rate equal to one-month LIBOR
plus 125 basis points. The margins on this line were increased from 62.5 basis
points when secured and 112.5 basis points when unsecured effective May 23,
2000. Interest on the amount outstanding under the line of credit is paid
monthly, in arrears, and is calculated on the average amount outstanding that
month. The Bank has the right under the line of credit to refuse to permit
additional amounts to be drawn on the line of credit if, in the Bank's
discretion, the amount sought to be drawn will not be used to finance our
purchase of contracts or other working capital requirements. There was $295
million and $551 million outstanding at September 30, 2000 and December 31,
1999, respectively. Interest expense totaled $8.2 million and $33.4 million for
the three and nine months ended September 30, 2000, respectively, compared with
$8.4 million and $20.4 million for the same respective periods in 1999.
NOTE 7 - SECURED FINANCINGS
For the nine months ended September 30, 2000, we securitized $2.2 billion of
automobile receivables in the asset-backed securities market. Of the $2.2
billion securitized by us for the year, $1.5 billion was treated as secured
financings. The amount outstanding on these secured financings at September 30,
2000 was $1.3 billion. For these transactions, the Class A-1 Notes were rated
A-1+ by Standard & Poor's Rating Services, also known as S&P, and P-1 by Moody's
Investor Service, Inc., also known as Moody's. The Class A-2, A-3 and A-4 Notes
were rated AAA by S&P and Aaa by Moody's. Timely principal and interest payments
on the Notes are guaranteed by insurance policies. Interest payments on the
Notes are due quarterly, in arrears, based on the respective Note's interest
rate. Interest expense totaled $27.9 million and $51.9 million for the three and
nine months ended September 30, 2000, respectively.
NOTE 8 - WHOLE LOAN SALE
For the three months ended September 30, 2000, we sold $1.4 billion of
automobile receivables to WFS Receivables Corporation 2, also known as WFSRC2, a
subsidiary of our ultimate parent, Westcorp, in a whole loan sale. For this
transaction, we received cash for the amount of the principal outstanding on the
contracts plus a premium of $41.2 million. This premium was recorded as a cash
gain on sale, net of the write-off of outstanding dealer participation balances.
These receivables were subsequently securitized by WFSRC2 and continue to be
serviced by us under the terms of the transaction.
12
<PAGE> 13
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
NOTE 9 - EARNING 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 calculated by dividing net income by
the weighted average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Basic:
Net income $ 17,308 $ 12,712 $ 48,221 $ 36,448
Average basic common shares outstanding 28,424,147 25,737,786 28,091,886 25,721,295
Net income per common share - basic $ 0.61 $ 0.49 $ 1.72 $ 1.42
Diluted:
Net income $ 17,308 $ 12,712 $ 48,221 $ 36,448
Average basic common shares outstanding 28,424,147 25,737,786 28,091,886 25,721,295
Stock option adjustment 111,071 143,890 119,362 100,902
Average diluted common shares outstanding 28,535,218 25,881,676 28,211,248 25,822,197
Net income per common share - diluted $ 0.61 $ 0.49 $ 1.71 $ 1.41
</TABLE>
All options outstanding at September 30, 2000 were included in the computation
of diluted earnings per share because the options' exercise prices were less
than the average market price of the common shares. Options to purchase 19,875
shares at prices ranging from $13.00 to $18.00 per share were outstanding at
September 30, 1999, but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares, and therefore, the effect would be
antidilutive.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are one of the nation's largest independent automobile finance companies with
over 27 years of experience in the auto finance industry. We originate,
securitize and service new and used retail automobile installment sales
contracts generated through our relationships with over 8,500 franchised and
select independent automobile dealers nationwide. At September 30, 2000, we
serviced a portfolio of $6.5 billion.
Our primary sources of revenue are net interest income, servicing income, and
gain on sale of contracts. Net interest income is the difference between the
income earned on interest earning assets and the interest paid on interest
bearing liabilities. The primary components of servicing income include retained
interest income on contracts sold, contractually specified servicing fees for
the servicing of contracts, late charges and other miscellaneous servicing fee
income.
14
<PAGE> 15
The following chart represents selected key events in the purchase and servicing
of contracts and their respective financial statement impact:
<TABLE>
<CAPTION>
EVENT FINANCIAL STATEMENT IMPACT
----- --------------------------
<S> <C>
Purchase and fund contract from dealer - Pay principal amount of contract to dealer and record
contract receivable
- Pay dealer participation to dealer and record dealer
participation as part of contract receivable
- Establish allowance for credit losses
- Fund purchase using line of credit and operating cash flows
- Retain contract on balance sheet
Transfer contract to a securitization trust (on balance - Record securities as liabilities of the company
sheet)
- Retain contract on balance sheet
- Pay down line of credit with securitization proceeds
Sell contract to a securitization trust or to a third party
through a whole loan sale (off balance sheet) - Pay down line of credit with securitization proceeds
- Remove contract receivable from balance sheet
- If sold to a securitization trust, capitalize RISA, which
represents the present value of the estimated future retained
interest earnings net of credit losses and adjusted for
prepayments
- Record gain on sale which is equal to the RISA or cash
premium less dealer participation, issuance costs and the
effect of hedging activities
- Reduce the allowance for credit losses
Collect payment for on balance sheet contract - Recognize net interest income
(whether or not pledged to a securitization trust)
- Reduce line of credit unless pledged to a securitization
trust, in which case the payment is used to reduce the
outstanding amount of the respective notes to the
asset-backed securities investor
- Collect late charges and other fees
Collect payment for off balance sheet contract - Amortize the RISA asset (Actual cash flows in excess of the
amortization of the RISA are shown in our income statement as
retained interest income.)
- Reduce the outstanding amount of the respective
securitization transaction by the amount of principal
received which is paid through to the asset-backed securities
investor
- Receive contractual servicing fees, late charges and other
fees
Charge off on balance sheet contract - Reduce the allowance for credit losses
Charge off off balance sheet contract - Reduce the actual cash flows recognized from securitization
trusts thereby increasing the amortization of the RISA
</TABLE>
15
<PAGE> 16
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is affected by the difference between the rate earned on
interest earning assets and the rate paid on our interest bearing liabilities
(interest rate spread) and the relative amounts of our interest earning assets
and interest bearing liabilities. Net interest income totaled $46.5 million and
$129 million for the three and nine months ended September 30, 2000,
respectively, compared with $25.5 million and $70.5 million for the same
respective periods in 1999. The increase in net interest income is the result of
holding a greater percentage of contracts on balance sheet as we utilized the
liquidity sources provided by our parent and completed $1.5 billion of secured
financings. The increase in net interest income is also a result of an increase
in contract originations.
The following table shows the average rate earned on contracts and the average
rate paid on borrowings together with the corresponding net interest rate spread
for the periods indicated. The average cost of borrowings represents the average
combined rate of the senior note, promissory note, line of credit, conduit
facility, and secured financings.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
------ ----- ------ ------
<S> <C> <C> <C> <C>
Yield on interest earning assets 14.19% 14.71% 13.94% 14.51%
Cost of borrowings 6.60 6.19 6.77 6.13
----- ----- ----- -----
Net interest rate spread 7.59% 8.52% 7.17% 8.38%
===== ===== ===== =====
</TABLE>
The decrease in the yield on interest earning assets is the result of a greater
percentage of prime contracts held on the balance sheet. The increase in the
cost of borrowings is the result of an increase in the rate on our lines of
credit as well as the issuance of $1.5 billion in notes in secured financing
securitization transactions with all-in borrowing cost of 7.23% for the nine
months ended September 30, 2000. Higher borrowing costs for these products are
due to a higher interest rate environment.
16
<PAGE> 17
SERVICING INCOME
The components of servicing income were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
2000 1999 2000 1999
------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Retained interest income $12,453 $12,308 $ 43,385 $ 37,888
Contractual servicing income 16,518 12,434 39,644 34,443
Other fee income 16,492 12,274 46,252 33,180
------- ------- -------- --------
Total servicing income $45,463 $37,016 $129,281 $105,511
======= ======= ======== ========
</TABLE>
Total servicing income totaled $45.5 million and $129 million for the three and
nine months ended September 30, 2000, respectively, compared with $37.0 million
and $106 million for the same respective periods in 1999. Servicing income
increased as a result of a higher level of contracts serviced.
According to the terms of each securitization transaction, contractual servicing
income is earned at rates ranging from 1.0% to 1.25% per annum on the
outstanding balance of contracts securitized. According to terms of our $1.4
billion whole loan sale, we may earn additional servicing fee income if
cumulative static pool losses on the contracts sold are 4.00% or lower. The fees
are reduced by .00795% for each basis point that the actual cumulative static
pool losses exceeds 4.00%. Other fee income consists primarily of documentation
fees, late charges and deferment fees and has increased as a direct result of
the increase in the number of contracts originated and outstanding. Our average
serviced portfolio was $6.3 billion and $5.9 billion for the three and nine
months ended September 30, 2000, respectively, compared with $5.0 billion and
$4.7 billion for the same respective periods in 1999.
GAIN ON SALE OF CONTRACTS
On a regular basis, we securitize automobile contracts in the asset-backed
securities market and retain the servicing rights. Such transactions are treated
as sales to a securitization trust or financings for accounting purposes. For
transactions treated as sales to a securitization trust, we record a noncash
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 contract portfolios are recognized over the life of the
securitization transactions as contractual servicing income, retained interest
income and other fee income.
During the three months ended September 30, 2000, we entered into a whole loan
sale with WFSRC2. These loans were subsequently securitized by WFSRC2. For this
transaction, we received cash for the amount of the principal outstanding on the
contracts plus a premium of $41.2 million. This premium was recorded as a cash
gain on sale, net of the writeoff of outstanding dealer participation balances.
We will continue to service these contracts for which we will receive
contractual servicing fee income and other ancilliary servicing fee income. We
expect securitization transactions in the foreseeable future to be structured
and accounted for as secured financings.
Contract sales and securitizations totaled $1.4 billion and $3.6 billion for the
three and nine months ended September 30, 2000, respectively, compared with $1.5
billion and $2.5 billion for the same respective periods in
17
<PAGE> 18
1999. We recorded a cash gain of $6.0 million during the three months ended
September 30, 2000 resulting from the $1.4 billion whole loan sale of automobile
contracts compared with a $20.3 million non-cash gain on sale of contracts
recorded during the same period in 1999. For the nine months ended September 30,
2000, cash and non-cash gains totaled $13.7 million compared with $48.5 million
of non-cash gain during the same period in 1999. Total gain on sale of contracts
represented only 5% of total revenues for the nine months ended September 30,
2000 compared with 22% for the same period in 1999.
PROVISION FOR CREDIT LOSSES
We maintain an allowance for credit losses on the contracts held on the balance
sheet to cover probable losses which can be reasonably estimated. The allowance
for credit losses is increased by charging the provision for credit losses and
decreased by actual losses on such contracts held on balance sheet or by the
reduction of the amount of contracts held on balance sheet from securitization
transactions treated as sales and from whole loans sales. 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. We believe
that the allowance for credit losses is currently adequate to absorb probable
losses in our owned portfolio which can be reasonably estimated.
The provision for credit losses was $21.4 million and $47.9 million for the
three and nine months ended September 30, 2000, respectively compared with $15.3
million and $31.3 million for the same respective periods in 1999. The increase
in provision for credit losses is the result of a higher level of contracts held
on the balance sheet as our securitization transactions are now accounted for as
secured financings. The allowance of credit losses as a percentage of owned
contracts outstanding totaled 2.8% and 2.5% at September 30, 2000 and December
31, 1999, respectively.
OPERATING EXPENSES
Total operating expenses were $47.2 million and $142 million for the three and
nine months ended September 30, 2000, respectively, compared with $45.4 million
and $130 million for the same respective periods in 1999. Operating expenses as
a percentage of average serviced contracts for the three months ended September
30, 2000 declined to 3.0% compared with 3.6% for the same period a year earlier.
Operating expenses as a percentage of average serviced contracts for the nine
months ended September 30, 2000 declined to 3.2% compared with 3.7% for the same
period in 1999.
INCOME TAXES
We file federal and certain state tax returns as part of a consolidated group
that includes the Bank and Westcorp, the holding company parent of the Bank. We
file other state tax returns as a separate entity. Tax liabilities from the
consolidated returns are allocated in accordance with a tax sharing agreement
based on the relative income or loss of each entity on a stand-alone basis. Our
effective tax rate for the nine months ended September 30, 2000 and 1999 was 41%
and 42%, respectively.
18
<PAGE> 19
PRO-FORMA STATEMENTS OF INCOME
The following pro-forma statements of income present our results under the
assumption that the whole loan sale completed for the three months ended
September 30, 2000 and all our securitization transactions are treated as
secured financings rather than sales. We believe that such a presentation is an
important performance measure of our operations. If treated as secured
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 contracts. We refer to these pro-forma results as "portfolio
basis" statements of income since the contracts would have remained in our on
balance sheet contract portfolio if we accounted for the transactions as secured
financings. We monitor the periodic portfolio basis earnings of our serviced
contract portfolio and believe these portfolio basis statements assist in better
understanding our business.
The following tables presents the portfolio basis statements of income,
portfolio basis yield and reconciliation to net income as reflected in our
consolidated statements of income:
WFS FINANCIAL INC AND SUBSIDIARIES
PORTFOLIO BASIS STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income $210,049 $166,675 $585,400 $467,450
Interest expense 107,927 76,820 292,523 216,787
-------- -------- -------- --------
Net interest income 102,122 89,855 292,877 250,663
Net chargeoffs (1) 30,381 22,606 77,607 70,956
Provision for growth (2) 6,122 5,396 18,711 14,615
-------- -------- -------- --------
Provision for credit losses 36,503 28,002 96,318 85,571
-------- -------- -------- --------
Net interest income after provision for credit losses 65,619 61,853 196,559 165,092
Other income 16,491 12,267 46,251 33,173
Operating expenses 47,312 46,964 142,920 135,114
-------- -------- -------- --------
Income before income tax 34,798 27,156 99,890 63,151
Income tax (3) 14,373 11,457 40,853 26,615
-------- -------- -------- --------
Portfolio basis net income $ 20,425 $ 15,699 $ 59,037 $ 36,536
======== ======== ======== ========
Portfolio basis net income per common share - diluted $ 0.72 $ 0.61 $ 2.09 $ 1.41
======== ======== ======== ========
</TABLE>
(1) Represents actual chargeoffs incurred during the period, net of
recoveries.
(2) Represents additional allowance for credit losses we would set aside due
to an increase in the serviced portfolio.
(3) Such tax effect is based upon our tax rate for the respective period.
19
<PAGE> 20
WFS FINANCIAL INC AND SUBSIDIARIES
PORTFOLIO BASIS YIELD TABLE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2000 (1) 1999(1) 2000 (1) 1999(1)
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income 13.4% 13.4% 13.3% 13.3%
Interest expense 6.9 6.2 6.6 6.1
------------ ------------ ------------ ------------
Net interest income 6.5 7.2 6.7 7.2
Net chargeoffs (2) 1.9 1.8 1.8 2.0
Provision for growth (3) 0.4 0.4 0.4 0.4
------------ ------------ ------------ ------------
Provision for credit losses 2.3 2.2 2.2 2.4
------------ ------------ ------------ ------------
Net interest income after provision for
credit losses 4.2 5.0 4.5 4.8
Other income 1.0 1.0 1.1 0.9
Operating expenses 3.0 3.8 3.4 3.9
------------ ------------ ------------ ------------
Income before income tax 2.2 2.2 2.2 1.8
Income tax (4) 0.9 0.9 0.9 0.8
------------ ------------ ------------ ------------
Portfolio basis net income 1.3% 1.3% 1.3% 1.0%
============ ============ ============ ============
Average serviced contracts $ 6,286,588 $ 4,981,876 $ 5,869,816 $ 4,702,009
============ ============ ============ ============
</TABLE>
(1) Rates are calculated by dividing amounts by average serviced contracts
for the respective periods.
(2) Represents actual chargeoffs incurred during the period.
(3) Represents additional allowance for credit losses we would set aside due
to an increase in the serviced portfolio.
(4) Such tax effect is based upon our tax rate for the respective period.
20
<PAGE> 21
WFS FINANCIAL INC AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS NET INCOME TO PORTFOLIO BASIS NET INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- --------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP net income $ 17,308 $ 12,712 $ 48,221 $ 36,448
Portfolio basis adjustments:
Gain on sales of contracts (6,004) (20,251) (13,723) (48,506)
Retained interest income (12,453) (12,308) (39,644) (37,888)
Contractual servicing income (16,518) (12,434) (43,385) (34,443)
Net interest income 55,581 64,404 164,186 180,121
Provision for credit losses (15,144) (12,655) (48,424) (54,268)
Operating expenses (152) (1,590) (863) (4,864)
-------- -------- --------- ---------
Total portfolio basis adjustments 5,310 5,166 18,147 152
Net tax effect (1) 2,193 2,179 7,331 64
-------- -------- --------- ---------
Portfolio basis net income $ 20,425 $ 15,699 $ 59,037 $ 36,536
======== ======== ========= =========
</TABLE>
(1) Such tax is based on our tax rate for the respective period.
21
<PAGE> 22
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
We held a portfolio of contracts on balance sheet for investment that totaled
$2.2 billion at September 30, 2000 and $71.8 million at December 31, 1999. This
increase is due to treating $540 million of the 2000-A securitization and the
entire $1.0 billion 2000-B securitization as secured financings. There were no
contracts held for sale at September 30, 2000 compared with $1.4 billion at
December 31, 1999. We do not expect to hold contracts for sale in the
foreseeable future.
The following table presents a summary of our automobile contracts purchased:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
2000 1999 2000 1999
---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
New vehicles $ 306,301 $362,595 $ 780,848 $ 598,997
Used vehicles 864,241 543,756 2,442,040 1,929,418
---------- -------- ---------- ----------
Total volume $1,170,542 $906,351 $3,222,888 $2,528,415
========== ======== ========== ==========
</TABLE>
AMOUNTS DUE FROM TRUSTS
The excess cash flow generated by contracts sold to each of the securitization
trusts is deposited into spread accounts by the trustee under the terms of the
securitization transactions. In addition, at the time a securitization
transaction closed, we advanced additional monies to our subsidiary which
originated the securitization trust to initially fund these spread accounts. We
establish a liability associated with the use of the spread account funds which
is reduced as such funds reach predetermined funding levels. We are released
from these obligations after the spread account reaches a predetermined funding
level. Amounts due from trusts represent amounts due to us that are still under
obligation to be held in the spread accounts. The amounts due from trusts at
September 30, 2000 was $383 million compared with $439 million at December 31,
1999. The decrease is result of a reduction in the outstanding amount of
securitization transactions treated as sales for accounting purposes.
22
<PAGE> 23
ASSET QUALITY
We provide financing in a market where there is a risk of default by borrowers.
Chargeoffs directly impact our earnings and cash flows. To minimize the amount
of losses we incur, we monitor delinquent accounts, promptly repossess and
remarket vehicles and seek to collect on deficiency balances.
At September 30, 2000, the percentage of accounts delinquent 30 days or greater
was 2.40% compared with 2.84% at December 31, 1999. Delinquency is calculated by
us based on the contractual due date. Net chargeoffs on average contracts
outstanding for the three months ended September 30, 2000 were 1.93% compared
with 1.82% for the same period in 1999. Net chargeoffs on average contracts
outstanding for the nine months ended September 30, 2000 were 1.76% compared
with 2.01% for the same period a year earlier. Stricter underwriting guidelines,
the successful implementation of our multiple credit scoring models, a greater
concentration of prime automobile contracts in our portfolio and an improved
servicing platform have all contributed to better asset quality.
The following table sets forth information with respect to the delinquency of
our portfolio of contracts serviced which includes delinquency information
relating to contracts which are owned by us and contracts which have been sold
and securitized but are serviced by us:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------ ----------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- -------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced at end of period $6,535,690 $ 5,354,385
========== =============
Period of delinquency (1)
30-59 days $ 111,841 1.71% $ 107,416 2.01%
60 days or more 44,890 0.69 44,610 0.83
---------- ------------- ------------- -----------
Total contracts delinquent
and delinquencies as a
percentage of contracts serviced $ 156,731 2.40% $ 152,026 2.84%
========== ============= ============= ===========
</TABLE>
(1) The period of delinquency is based on the number of days payments are
contractually past due.
23
<PAGE> 24
The following table sets forth information with respect to repossessions in our
portfolio of serviced contracts:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------- -------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced 597,906 $6,535,690 524,709 $5,354,385
======= ========== ======= ==========
Repossessed vehicles 710 4,012 559 3,374
======= ========== ======= ==========
Repossessed vehicles as a percentage
of number and amount of
contracts outstanding 0.12% 0.06% 0.11% 0.06%
</TABLE>
The following table sets forth information with respect to actual credit loss
experience on our portfolio of contracts serviced:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced $6,535,690 $5,152,194 $6,535,690 $5,152,194
========== ========== ========== ==========
Average contracts serviced during period $6,286,588 $4,981,876 $5,869,816 $4,702,009
========== ========== ========== ==========
Gross chargeoffs of contracts during period $ 42,788 $ 33,260 $ 115,487 $ 106,661
Recoveries of contracts charged off in prior periods 12,407 10,654 37,881 35,705
---------- ---------- ---------- ----------
Net chargeoffs $ 30,381 $ 22,606 $ 77,606 $ 70,956
========== ========== ========== ==========
Net chargeoffs as a percentage of average contracts
outstanding during period 1.93% 1.82% 1.76% 2.01%
========== ========== ========== ==========
</TABLE>
24
<PAGE> 25
The following table sets forth the cumulative static pool losses by month for
all outstanding securitized pools:
WFS FINANCIAL INC AND SUBSIDIARIES
CUMULATIVE STATIC POOL LOSS CURVES (1) (UNAUDITED)
AT SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
MONTH (2) 1996-A 1996-B 1996-C 1996-D 1997-A 1997-B 1997-C 1997-D 1998-A
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.01% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.06% 0.09% 0.09% 0.10% 0.08% 0.06% 0.05% 0.05% 0.04%
3 0.17% 0.20% 0.22% 0.24% 0.20% 0.15% 0.12% 0.14% 0.11%
4 0.29% 0.35% 0.52% 0.44% 0.36% 0.33% 0.29% 0.31% 0.25%
5 0.48% 0.61% 0.74% 0.71% 0.62% 0.56% 0.46% 0.56% 0.44%
6 0.63% 0.88% 0.98% 0.93% 0.85% 0.77% 0.67% 0.75% 0.66%
7 0.81% 1.14% 1.27% 1.16% 1.12% 1.10% 0.93% 0.99% 0.95%
8 1.08% 1.42% 1.52% 1.43% 1.45% 1.40% 1.16% 1.24% 1.23%
9 1.35% 1.67% 1.77% 1.72% 1.70% 1.70% 1.37% 1.47% 1.50%
10 1.63% 1.91% 1.98% 2.03% 2.02% 2.00% 1.66% 1.75% 1.79%
11 1.87% 2.18% 2.21% 2.34% 2.32% 2.22% 1.94% 2.06% 2.03%
12 2.06% 2.38% 2.49% 2.62% 2.61% 2.43% 2.16% 2.35% 2.21%
13 2.28% 2.58% 2.73% 2.97% 2.92% 2.66% 2.40% 2.63% 2.39%
14 2.47% 2.79% 2.99% 3.27% 3.14% 2.91% 2.65% 2.86% 2.49%
15 2.63% 2.95% 3.21% 3.53% 3.30% 3.15% 2.90% 3.05% 2.60%
16 2.79% 3.14% 3.47% 3.79% 3.55% 3.47% 3.15% 3.19% 2.72%
17 2.97% 3.38% 3.70% 4.02% 3.77% 3.77% 3.36% 3.32% 2.85%
18 3.12% 3.55% 3.94% 4.19% 3.94% 3.97% 3.55% 3.42% 2.98%
19 3.31% 3.80% 4.18% 4.43% 4.21% 4.20% 3.70% 3.50% 3.11%
20 3.49% 3.98% 4.36% 4.65% 4.40% 4.39% 3.81% 3.60% 3.25%
21 3.63% 4.14% 4.53% 4.80% 4.59% 4.53% 3.91% 3.69% 3.35%
22 3.80% 4.31% 4.67% 5.07% 4.81% 4.67% 4.00% 3.81% 3.48%
23 3.95% 4.46% 4.84% 5.27% 5.00% 4.75% 4.11% 3.96% 3.62%
24 4.10% 4.58% 5.01% 5.47% 5.14% 4.81% 4.21% 4.10% 3.70%
25 4.22% 4.74% 5.17% 5.65% 5.24% 4.88% 4.30% 4.23% 3.75%
26 4.33% 4.87% 5.34% 5.80% 5.33% 4.94% 4.44% 4.34% 3.80%
27 4.41% 4.98% 5.50% 5.91% 5.39% 5.04% 4.56% 4.44% 3.87%
28 4.51% 5.11% 5.67% 5.98% 5.44% 5.11% 4.66% 4.51% 3.92%
29 4.60% 5.21% 5.78% 6.06% 5.50% 5.21% 4.77% 4.54% 3.98%
30 4.70% 5.31% 5.89% 6.12% 5.56% 5.31% 4.79% 4.56% 4.06%
31 4.79% 5.42% 5.98% 6.17% 5.65% 5.40% 4.83% 4.57% 4.11%
32 4.85% 5.50% 6.02% 6.24% 5.71% 5.48% 4.86% 4.63%
33 4.91% 5.55% 6.06% 6.29% 5.79% 5.52% 4.88% 4.67%
34 4.99% 5.58% 6.11% 6.34% 5.85% 5.54% 4.90% 4.71%
35 5.03% 5.60% 6.14% 6.39% 5.89% 5.56% 4.92%
36 5.07% 5.62% 6.16% 6.44% 5.93% 5.58% 4.98%
37 5.11% 5.65% 6.17% 6.47% 5.96% 5.61% 5.01%
38 5.11% 5.68% 6.22% 6.53% 5.98% 5.64%
39 5.12% 5.70% 6.27% 6.56% 6.01% 5.66%
40 5.12% 5.71% 6.30% 6.58% 6.01% 5.67%
41 5.13% 5.74% 6.34% 6.58% 6.02%
42 5.13% 5.76% 6.35% 6.59% 6.04%
43 5.13% 5.77% 6.37% 6.60% 6.06%
44 5.13% 5.79% 6.37% 6.60%
45 5.14% 5.79% 6.36% 6.61%
46 5.14% 5.79% 6.36% 6.62%
47 5.15% 5.78% 6.36%
48 5.15% 5.78% 6.36%
49 5.15% 5.77% 6.36%
50 5.15% 5.75%
51 5.15% 5.75%
52 5.14% 5.74%
53 5.13%
54 5.12%
PRIME MIX (3) 59% 58% 55% 51% 54% 55% 53% 49% 57%
</TABLE>
25
<PAGE> 26
WFS FINANCIAL AND SUBSIDIARIES
CUMULATIVE STATIC POOL LOSS CURVES (1) (UNAUDITED)
AT SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
MONTH (2) 1998-B 1998-C 1999-A 1999-B 1999-C 2000-A 2000-B 2000-C (4)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.02% 0.04% 0.04% 0.04% 0.02% 0.03% 0.02% 0.04%
3 0.08% 0.11% 0.11% 0.11% 0.10% 0.10% 0.09%
4 0.18% 0.23% 0.20% 0.26% 0.25% 0.20% 0.24%
5 0.38% 0.39% 0.33% 0.47% 0.40% 0.36% 0.39%
6 0.59% 0.50% 0.46% 0.66% 0.56% 0.55%
7 0.83% 0.61% 0.62% 0.87% 0.71% 0.71%
8 1.03% 0.75% 0.76% 1.00% 0.86%
9 1.21% 0.86% 0.92% 1.13% 1.01%
10 1.40% 1.00% 1.11% 1.24% 1.14%
11 1.53% 1.17% 1.30% 1.35% 1.34%
12 1.62% 1.32% 1.47% 1.44% 1.52%
13 1.74% 1.48% 1.61% 1.58%
14 1.84% 1.66% 1.73% 1.74%
15 1.96% 1.79% 1.81% 1.85%
16 2.10% 1.91% 1.89%
17 2.22% 2.01% 2.00%
18 2.40% 2.07% 2.10%
19 2.55% 2.11% 2.24%
20 2.69% 2.17% 2.35%
21 2.79% 2.24%
22 2.85% 2.34%
23 2.89% 2.43%
24 2.92%
25 2.97%
26 3.04%
27 3.13%
28 3.18%
PRIME MIX (3) 67% 70% 70% 70% 67% 69% 69% 68%
</TABLE>
(1) Cumulative static pool losses are equal to the cumulative amount of
losses actually recognized up to and including a given month divided by
the original principal balance of the securitization transaction.
(2) Represents the number of months since the inception of the
securitization transaction.
(3) Represents the original percentage of prime contacts included within
each pool.
(4) Represents loans sold to WFSRC2 in a whole loan sale in August 2000 and
subsequently securitized by WFSRC2.
26
<PAGE> 27
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
We require substantial capital resources and cash to support our business. Our
ability to maintain positive cash flows from operations is the result of our
consistent managed growth, favorable loss experience and efficient operations.
In addition to our indirect statement of cash flows as presented under GAAP, we
also analyze the key cash flows from our operations on a direct basis excluding
certain items such as the purchase or sale of contracts. The following table
shows our operating cash flows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
-------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from trusts $106,053 $124,871
Contractual servicing income 39,644 34,443
Cash flows from owned loans 130,220 75,118
Other fee income 46,252 33,180
Less:
Dealer participation 76,281 63,934
Operating costs 142,059 130,255
-------- --------
Operating cash flows $103,829 $ 73,423
======== ========
</TABLE>
Operating cash flows have improved for the nine months ended September 30, 2000
compared with the same period a year earlier as a result of the improving credit
quality of our portfolio as well as improved operating efficiency and declining
dealer participation rates.
PRINCIPAL SOURCES OF CASH
Collections of Principal and Interest from Contracts
Our primary source of funds is the collection of principal and interest from
contracts originated. These monies are deposited into collection accounts
established in connection with each securitization transaction or into our
accounts for contracts not in a securitization. Pursuant to reinvestment
contracts entered into in connection with each securitization transaction, our
parent entity, the Bank, and our subsidiary, WFS Financial Auto Loans 2, Inc.,
also known as WFAL2, receive access to the amounts deposited into each
collection account and the amounts held in the spread account for each
securitization transaction. The Bank and WFAL2 then make those funds available
to us, in the case of the Bank pursuant to our reinvestment contract with the
Bank and in the case of WFAL2 through its purchase of contracts from us. We are
then permitted to use those amounts so received in our daily operations to fund
the purchase of contracts or to cover the day to day costs of our operations.
Principal and interest collections totaled $2.8 billion for the nine months
ended September 30, 2000 compared with $2.2 billion for the same period in 1999.
Contract Sales and Securitizations
Since 1985, we have securitized or sold $18.0 billion of automobile receivables
in 49 public offerings, making us the fourth largest issuer of such securities
in the nation. On November 6, 2000, we priced a $1.0 billion securitization
transaction. This transaction is expected to close on November 14, 2000. We have
received $1.4 billion and $3.6 billion in funds from contract sales and
securitizations for the three and nine months ended September 30, 2000,
respectively, compared to $1.5 billion and $2.5 billion for the same respective
periods in 1999. We expect to continue to use sales and securitization
transactions as part of our liquidity strategy when appropriate market
conditions exist.
27
<PAGE> 28
Borrowings from Parent
Our parent company is a federally insured savings institution. It has the
ability to raise significant amounts of liquidity by attracting both short-term
and long-term deposits from the general public, commercial enterprises and
institutions by offering a variety of accounts and rates. The Bank may also
raise funds by issuing commercial paper, obtaining advances from the Federal
Home Loan Bank, selling securities under agreements to repurchase and utilizing
other borrowings. We are able to utilize these liquidity sources through
agreements entered into by our parent and us. These include the senior note,
promissory note, line of credit and the WFS reinvestment contract.
These financing arrangements provide us with another source of liquidity beyond
the secondary markets, thereby affording us a greater ability to choose the
timing of our securitization transactions.
PRINCIPAL USES OF CASH
Purchase of Automobile Contracts
Our most significant use of cash is the purchase of automobile contracts. We
acquire these contracts through our nationwide relationship with franchised and
select independent automobile dealers. Payments for such contracts are sent to
our dealers either via an electronic funds transfer or check. We purchased $1.2
billion and $3.2 billion of contracts for the three and nine months ended
September 30, 2000, respectively, compared to $906 million and $2.5 billion for
the same respective periods in 1999.
Payments of Principal and Interest on Securitization Transactions
Under the terms of our reinvestment contract, we make quarterly payments of
interest and principal to noteholders and certificateholders. Payment of
principal and interest to noteholders and certificateholders totaled $2.5
billion for nine months ended September 30, 2000 compared with $1.7 billion for
the same period in 1999.
Dealer Participation
Consistent with industry practice, we generally pay an up-front dealer
participation to the originating dealer for each contract purchased.
Participation paid by us to dealers for the three and nine months ended
September 30, 2000 totaled $27.9 million and $76.3 million compared with $21.9
million and $63.9 million for the same respective periods in 1999. Typically,
the acquisition of prime quality contracts higher up the prime credit quality
spectrum requires a higher amount of participation paid to the dealer due to the
increased level of competition for such contracts.
Advances to Spread Accounts
At the time a securitization transaction closes, we are required to advance
monies to initially fund the spread account. Additionally, these spread accounts
are required to increase beyond the initial spread account funding to
predetermined levels. These spread accounts increase through receipt of excess
cash flow until these predetermined levels are met. The amounts due from trust
represent funds due to us that have not yet been disbursed from the spread
accounts. The amounts due from trusts at September 30, 2000, including initial
advances not yet returned was $383 million compared with $439 million at
December 31, 1999.
Operating Our Business
28
<PAGE> 29
Our largest operating expenditure is salaries and benefits paid to our
associates. Other amounts include occupancy costs, costs associated with
collection and repossession, telephone and data processing costs. We also use
substantial amounts of cash in capital expenditures for automation and new
technologies to remain competitive and to become more efficient.
FORWARD-LOOKING STATEMENTS
Included in our Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this 10-Q are 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 expressions. 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 that 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;
- the 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;
- the level of secured financings, as the level will impact the
timing of revenue recognition;
- the level of operating costs, as an increase in those costs will
reduce our net earnings; and
- a change in general economic conditions.
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.
29
<PAGE> 30
ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Fluctuations in interest rates and early prepayment of our contracts are the
primary market risks facing our company. The Credit and Pricing Committee is
responsible for setting credit and pricing policies and for monitoring credit
quality. Our Asset/Liability Committee is responsible for the management of
interest rate and prepayment risks. Asset/liability management is the process of
measuring and controlling interest rate risk through matching the maturity and
repricing characteristics of interest earning assets with those of interest
bearing liabilities.
The Asset/Liability Committee closely monitors interest rate and prepayment
risks and recommends policies for managing such risks. The primary measurement
tool for evaluating this risk is the use of interest rate shock analysis. This
analysis simulates the effects of an instantaneous and sustained change in
interest rates (in increments of 100 basis points) on our assets and liabilities
and measures the resulting increase or decrease to the net present value, also
known as NPV, of our assets and liabilities. It should be noted that shock
analysis is objective but not entirely realistic in that it assumes an
instantaneous and isolated set of events.
The contracts originated and held by us are all fixed rate and, accordingly, we
have exposure to changes in interest rates. Our prepayment experience on
contracts has not been historically sensitive to changes in interest rates and
we, therefore, believe that we are not exposed to significant prepayment risk
relative to changes in interest rates.
To protect against changes in interest rates, we hedge contracts purchased with
two-year Treasury securities forward agreements, also known as forwards, or
Eurodollar swaps, also known as swaps, until they are securitized. Generally, we
enter into forwards or swaps in amounts that correspond to the principal amount
of the contracts originated. The market value of these forwards or swaps is
designed to respond inversely to potential changes in interest rates. Because of
this inverse relationship, we can effectively lock in a gross interest rate
spread at the time of entering into the hedge transaction. We enter into these
forwards or swaps either with highly rated counterparties or the Bank, which
further reduces our 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. We currently hedge
substantially all of our pending securitization transactions.
We then sell or transfer contracts to securitization trusts that in turn sell
asset-backed securities to investors. By securitizing our contracts, we are able
to lock in the gross interest rate spread between the yield on such contracts
and the interest rate on the asset-backed securities. For transactions treated
as secured financings, gain and losses relative to the forward agreements are
deferred until the time of securitization and then amortized as an adjustment to
interest expense over the term of the notes issued.
The Asset/Liability Committee monitors our 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 our senior
management based upon the monitoring activities of the Asset/Liability
Committee. As a result of this approach to interest rate management and our
hedging strategies, we do not anticipate that changes in interest rates will
materially affect our results of operations or liquidity, although we can
provide no assurance in this regard.
30
<PAGE> 31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We or our subsidiaries are involved as parties to certain legal
proceedings incidental to our businesses, including consumer class
action lawsuits pertaining to our automobile finance activities. We are
vigorously defending these actions and do not believe that the outcome
of these proceedings will have a material effect upon our financial
condition, results of operations and cash flows.
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
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WFS FINANCIAL INC
--------------------------------------------------------------------------------
(Registrant)
Date: November 13, 2000 By: /s/JOY SCHAEFER
-------------------------- ------------------------------------
Joy Schaefer
Vice Chairman, Director, and
Chief Executive Officer
Date: November 13, 2000 By: /s/LEE A. WHATCOTT
-------------------------- --------------------------------------
Lee A. Whatcott
Senior Executive Vice President
(Principal Financial and Accounting
Officer) and Chief Financial Officer
32
<PAGE> 33
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule
