<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, 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 0-26458
WFS FINANCIAL INC
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0291646
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
(Address of principal executive offices)
(949) 727-1002
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ___ .
As of April 30, 2000 the registrant had 28,423,338 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, 2000
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, 2000 and December 31, 1999 3
Consolidated Statements of Income for the Three
Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity
for the Periods Ended March 31, 2000 and December 31, 1999 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 6
Notes to Unaudited 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 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Cash and short-term investments $ 8,502 $ 7,120
Contracts receivable 585,932 71,757
Contracts held for sale 1,086,946 1,423,960
Allowance for credit losses (42,813) (36,682)
----------- -----------
Contracts receivable, net 1,630,065 1,459,035
Amounts due from trusts 475,282 439,022
Retained interest in securitized assets 164,640 167,277
Premises and equipment, net 37,588 38,038
Accrued interest receivable 10,987 10,521
Other assets 18,001 9,914
----------- -----------
TOTAL ASSETS $ 2,345,065 $ 2,130,927
=========== ===========
LIABILITIES
Notes payable $ 711,902 $ 178,908
Secured lines of credit 586,266 1,012,293
Amounts held on behalf of trustee 725,783 687,274
Other liabilities 56,054 40,264
----------- -----------
TOTAL LIABILITIES 2,080,005 1,918,739
SHAREHOLDERS' EQUITY
Common stock, (no par value; authorized 50,000,000 shares;
issued and outstanding 28,423,338 shares in 2000 and 25,771,956
in 1999) 111,908 74,010
Paid-in capital 4,327 4,327
Retained earnings 149,456 134,690
Accumulated other comprehensive loss, net of tax (631) (839)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 265,060 212,188
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,345,065 $ 2,130,927
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES
Interest income $ 61,025 $ 23,744
Interest expense 23,066 6,087
----------- -----------
Net interest income 37,959 17,657
Servicing income 39,690 28,741
Gain on sale of contracts 7,719 28,255
----------- -----------
TOTAL REVENUES 85,368 74,653
EXPENSES
Provision for credit losses 11,677 11,198
Operating expenses:
Salaries and associate benefits 30,587 28,246
Credit and collections 5,410 6,126
Miscellaneous 12,344 9,082
----------- -----------
TOTAL OPERATING EXPENSES 48,341 43,454
----------- -----------
TOTAL EXPENSES 60,018 54,652
----------- -----------
INCOME BEFORE INCOME TAX 25,350 20,001
Income tax 10,584 8,416
=========== ===========
NET INCOME $ 14,766 $ 11,585
=========== ===========
Net income per common share:
Basic $ 0.54 $ 0.45
=========== ===========
Diluted $ 0.54 $ 0.45
=========== ===========
Weighed average number of common shares outstanding:
Basic 27,424,479 25,708,762
Diluted 27,547,335 25,708,762
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
WFS FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CHANGES IN OF 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 14,766 14,766
Unrealized gains on retained
interest in securitized assets,
net of tax (1) 208 208
----------
Comprehensive income 14,974
Stock issuance 2,650,000 37,889 37,889
Stock options exercised 1,382 9 9
----------- --------- ----------- ----------- --------- -----------
Balance at March 31, 2000 28,423,338 $ 111,908 $ 4,327 $ 149,456 $ (631) $ 265,060
=========== ========= =========== =========== ======== ==========
</TABLE>
(1) Includes securities available for sale and retained interest in securitized
assets. The pre-tax decrease in unrealized losses on securities available
for sale was $0.4 million for the period ended March 31, 2000 compared with
a pre-tax increase of $4.0 million for the period ended December 31, 1999.
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,
----------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,766 $ 11,585
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for credit losses 11,677 11,198
Depreciation 2,409 1,575
Amortization of retained interest in securitized assets 22,235 29,306
(Increase) decrease in other assets (8,574) 2,271
Increase in liabilities 15,643 6,138
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 58,156 62,073
INVESTING ACTIVITIES
Automobile contracts:
Purchase of contracts (970,481) (752,932)
Proceeds from sale of contracts 660,000 1,000,000
Other change in contracts 127,793 48,237
Increase in retained interest in securitized assets (19,240) (49,961)
Increase in amounts due from trust (36,259) (46,397)
Purchase of premises and equipment (1,959) (6,265)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (240,146) 192,682
FINANCING ACTIVITIES
Proceeds from issuance of common stock 37,898 5
Proceeds from notes payable 71,890 30,000
Proceeds (payments) from secured lines of credit 35,076 (397,264)
Increase in amounts held on behalf of trustee 38,508 97,968
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 183,372 (269,291)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,382 (14,536)
Cash and cash equivalents at beginning of period 7,120 15,020
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,502 $ 484
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 19,368 $ 7,709
Income taxes $ 9,169
</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, 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 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("SFAS 137"). This Statement defers for one year the effective date of FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). These statements provide guidance for the way public enterprises
report information about derivatives and hedging in annual financial statements
and in interim financial reports. The derivatives and hedging disclosure is
required for financial statements of all fiscal quarters of all fiscal years
beginning after June 15, 2000. These Statements will require us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. Changes in the fair value of
derivatives that are hedges will, depending on the nature of the hedges, be
either offset against the change in fair value of the hedged assets, liabilities
or firm commitments though earnings or recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings. We are in the process of evaluating the effect that SFAS 133, if any,
will have on our earnings and financial position.
7
<PAGE> 8
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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts $ 1,707,318 $ 1,518,433
Unearned discounts (57,664) (54,248)
----------- -----------
Net contracts 1,649,654 1,464,185
Allowance for credit losses (42,813) (36,682)
Dealer participation, net of deferred contract fees 23,224 31,532
----------- -----------
Net contracts receivable $ 1,630,065 $ 1,459,035
=========== ===========
</TABLE>
Contracts serviced by us for the benefit of others totaled approximately $4.0
billion at March 31, 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
MARCH 30,
---------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period $ 36,682 $ 11,246
Provision for credit losses 11,677 11,198
Charged off contracts (8,385) (5,502)
Recoveries 2,839 1,753
-------- --------
Balance at end of period $ 42,813 $ 18,695
======== ========
</TABLE>
8
<PAGE> 9
NOTE 4 - RETAINED INTEREST IN SECURITIZED ASSETS
Retained interest in securitized assets ("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 sold less the interest rate paid to the investors less
contractually specified servicing, guarantor fees, 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 ("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 stockholders' equity on our consolidated statements of financial
condition as accumulated other comprehensive income (loss), net of applicable
taxes.
9
<PAGE> 10
The following table presents the activity of the RISA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $ 167,277 $ 171,230
Additions 19,240 49,961
Amortization (22,235) (29,306)
Change in unrealized gain/loss on RISA (1) 358 (1,956)
--------- ---------
Ending balance $ 164,640 $ 189,929
========= =========
</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 earning are calculated by taking the
difference between the coupon rate of the contracts sold 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>
MARCH 30, DECEMBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earnings $ 402,638 $ 410,066
Off balance sheet allowance for credit losses (216,546) (220,838)
Discount to present value (21,452) (21,951)
----------- -----------
Retained interest in securitized assets $ 164,640 $ 167,277
=========== ===========
Outstanding balance of contracts sold through securitizations $ 4,011,579 $ 3,890,685
Off balance sheet allowance for losses as a percent of contracts sold
through securitizations 5.40% 5.68%
</TABLE>
We believe that the off balance sheet allowance for losses is currently adequate
to absorb probable losses in the sold portfolio that can be reasonably
estimated.
10
<PAGE> 11
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land $ 2,017 $ 2,017
Buildings 13,511 13,519
Computers and software 33,346 31,502
Furniture, fixtures and leasehold improvements 3,679 3,638
Equipment 4,155 4,093
Automobiles 260 274
------- -------
56,968 55,043
Less: accumulated depreciation 19,380 17,005
------- -------
$37,588 $38,038
======= =======
</TABLE>
NOTE 6 - INTERCOMPANY AGREEMENTS
We borrowed $125 million from our parent company, Western Financial Bank (the
"Bank"), under the terms of the senior note. The senior note provides for
principal payments of $25 million per year, commencing on April 30, 1999 and
continuing through its final maturity, April 30, 2003. During 1999, we made
paydowns of $66.1 million without prepayment penalties. For the three months
ended March 31, 2000, we made paydowns of $7.0 million without prepayment
penalties. Interest payments on senior note are due quarterly, in arrears,
calculated at the rate of 7.25% per annum. Interest expense totaled $0.8 million
for the three months ended March 2000 compared with $2.0 million for the three
months ended March 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.
Interest expense totaled $3.2 million and $1.5 million for the three months
ended March 31, 2000 and 1999, respectively.
We also have a line of credit extended by the Bank permitting us to draw up to
$1.3 billion as needed to be used in its operations. 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 ("LIBOR") plus 62.5 basis points. When unsecured,
the line of credit carries an interest rate equal to one-month LIBOR plus 112.5
basis points. 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 $586
million and $551 million outstanding at March 31, 2000 and December 31, 1999,
respectively. Interest expense totaled $12.8 million and $4.9 million for three
months ended March 31, 2000 and 1999, respectively.
11
<PAGE> 12
NOTE 7 - SECURED FINANCINGS
In March 2000, we securitized $1.2 billion of automobile receivables in the
asset-backed securities market. Of the $1.2 billion securitized, $540 million
was treated as a secured financing for accounting purposes. The amount
outstanding on the secured financing at March 31, 2000 was $540 million. The
Class A-1 Notes were rated A-1+ by Standard & Poor's Rating Services ("S&P") and
P-1 by Moody's Investor Service, Inc. ("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 an insurance policy. Interest payments
on the Notes are due quarterly, in arrears, based on the respective Note's
interest rate. Interest expense totaled $2.9 million for the three months ended
March 31, 2000.
NOTE 8 - CONDUIT FACILITY
In September 1999, we established a $500 million conduit facility secured by
automobile contracts in a private placement. The amount outstanding on the
credit facility at December 31, 1999 was $461 million. The Notes were rated AAA
by S&P and Aaa by Moody's. Timely principal and interest payments on the Notes
were guaranteed by an insurance policy. Interest payments on the Notes were due
quarterly, in arrears, calculated at a commercial paper index rate plus 30 basis
points. The conduit facility was paid off on March 15, 2000.
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.
12
<PAGE> 13
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Basic:
Net income $ 14,766 $ 11,585
Average basic common shares outstanding 27,424,479 25,708,762
Net income per common share - basis $ 0.54 $ 0.45
Diluted:
Net income $ 14,766 $ 11,585
Average basic common shares outstanding 27,424,479 25,708,762
Stock option adjustment 122,856
Average diluted common shares outstanding 27,547,335 25,708,762
Net income per common share - diluted $ 0.54 $ 0.45
</TABLE>
Options to purchase 293,727 and 6,600 shares of common stock ranging from $6.94
to $18.00 and at $18.00 per share were outstanding at March 31, 2000 and 1999,
respectively, 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.
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
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 in 43 states. At March 31, 2000, we serviced a portfolio of
$5.7 billion which consisted of approximately 67% prime and 33% non-prime
contracts.
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.
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
Sell contract to a securitization trust - Pay down line of credit with securitization proceeds
- Remove contract receivable from balance sheet
- 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 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
- 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>
14
<PAGE> 15
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 $38.0 million and
$17.7 million for the three months ended March 31, 2000 and 1999, respectively.
The increase in net interest income is the result of holding a greater
percentage of contracts on balance sheet and the increase in contract
originations. To the extent we sell our contracts, revenue previously recognized
as net interest income will, upon securitization, be recognized as gain on sale,
contractual servicing and retained interest income.
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>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Yield on interest earning assets 13.85% 14.63%
Cost of borrowings 6.83 6.46
------- -------
Net interest rate spread 7.02% 8.17%
======= =======
</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 higher interest rates on our secured lines
of credit as well as the issuance of $540 million in a secured financing
securitization transaction with an all-in borrowing cost of 6.94%. Higher
borrowing costs for these products are due to a higher interest rate
environment.
15
<PAGE> 16
SERVICING INCOME
The components of servicing income were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Retained interest income $13,316 $ 7,496
Contractual servicing income 11,682 11,226
Other fee income 14,692 10,019
------- -------
Total servicing income $39,690 $28,741
======= =======
</TABLE>
Total servicing income was $39.7 million for the three months ended March 31,
2000 compared with $28.7 million for the same period in 1999. Servicing income
increased as a result of a decline in credit loss experience and a higher level
of securitized contracts.
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. 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 $5.5 billion at
March 31, 2000 compared with $4.4 billion at March 31, 1999.
GAIN ON SALE OF CONTRACTS
On a regular basis, we securitize automobile contracts and retain the servicing
rights. Such transactions are either treated as sales or financings for
accounting purposes. For transactions treated as sales, we record 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 contract portfolios are recognized over the life of the
securitization transactions as contractual servicing income, retained interest
income and other fee income.
For the three months ended March 31, 2000, we securitized $1.2 billion of
automobile receivables. Of the $1.2 billion securitized, $660 million was
treated as a sale and $540 million was treated as a secured financing. For the
three months ended March 31, 1999, we securitized $1.0 billion of which the
entire amount was treated as a sale. We recorded a gain on sale of contracts of
$7.7 million for the three months ended March 31, 2000 compared with $28.3
million for the three months ended March 31, 1999. The amount of gain on sale
recorded in each period is dependent upon the amount of contracts securitized,
the structure of the securitization, as well as other factors including the
gross interest rate spread on contracts securitized, the amount of dealer
participation paid, changes in credit loss assumptions, and the effect of
hedging activities. Gross interest rate spread is affected by product mix,
general market conditions and overall market interest rates. The risks inherent
in interest rate fluctuations are reduced through hedging activities.
16
<PAGE> 17
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. 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 we sell contracts in a securitization
transaction, which is discounted for as a sale, we reduce our allowance for
credit losses and factor estimated future losses into our calculation of gain on
sale. 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 increased to $11.7 million for the three months
ended March 31, 2000 compared with $11.2 million for the same period in 1999.
The increase is the result of a higher level of contracts held on the balance
sheet.
OPERATING EXPENSES
Total operating expenses were $48.3 million for the three months ended March 31,
2000 compared with $43.5 million for the same period in 1999. Operating expenses
as a percentage of average serviced contracts declined to 3.5% for the first
quarter of 2000 compared with 3.9% for the same period a year earlier.
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 three months ended March 31, 2000 and 1999 was 41.8%
and 42.1%, respectively.
PRO-FORMA STATEMENTS OF INCOME
The following pro-forma statements of income present our results under the
assumption that all our securitization transactions are treated as financings
and no such transactions or portions thereof are treated as sales. We believe
that such a presentation is an important performance measure of our 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. 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 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.
17
<PAGE> 18
The following tables presents the portfolio basis statements of income and a
reconciliation to net income as reflected in our consolidated statements of
income:
WFS FINANCIAL AND SUBSIDIARIES
PORTFOLIO BASIS STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------------------------------
2000 2000(1) 1999 1999(1)
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest income $ 180,470 13.2% 146,074 13.1%
Interest expense 86,876 6.3 68,285 6.1
---------- ---------- ---------- -----------
Net interest income 93,594 6.9 77,789 7.0
Net chargeoffs (2) 27,466 2.0 29,983 2.7
Provision for growth (3) 5,165 0.4 1,663 0.1
---------- ---------- ---------- -----------
Provision for credit losses 32,631 2.4 31,646 2.8
---------- ---------- ---------- -----------
Net interest income after provision for credit losses 60,963 4.5 46,143 4.2
Other income 14,692 1.1 10,020 0.9
Operating expenses 50,112 3.7 45,168 4.1
---------- ---------- ---------- -----------
Income before income tax 25,543 1.9 10,995 1.0
Income tax (4) 10,665 0.8 4,627 0.4
---------- ---------- ---------- -----------
Portfolio basis net income $ 14,878 1.1% $ 6,368 0.6%
========== ========== ========== ===========
Portfolio basis net income per common share - diluted $ 0.54 $ 0.25 11
========== ==========
Average serviced contracts $ 5,476,007 $ 4,447,784
=========== ===========
</TABLE>
(1) Rates are calculated by dividing amounts by average serviced contracts for
the respective periods.
(2) Represents actual chargeoffs incurred during the period, net of recoveries.
(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.
18
<PAGE> 19
WFS FINANCIAL AND SUBSIDIARIES
RECONCILIATION OF GAAP BASIS NET INCOME TO PORTFOLIO BASIS NET INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
GAAP net income $ 14,766 $ 11,585
Portfolio basis adjustments:
Gain on sales of contracts (7,719) (28,255)
Retained interest income (13,316) (7,496)
Contractual servicing income (11,682) (11,226)
Net interest income 55,635 60,133
Provision for credit losses (20,954) (20,447)
Operating expenses (1,771) (1,714)
-------- --------
Total portfolio basis adjustments 193 (9,005)
Net tax effect (1) 81 (3,788)
-------- --------
Portfolio basis net income $ 14,878 $ 6,368
======== ========
</TABLE>
(1) Such tax is based on our tax rate for the respective period.
19
<PAGE> 20
FINANCIAL CONDITION
CONTRACTS RECEIVABLE AND CONTRACTS HELD FOR SALE
We held a portfolio of contracts on balance sheet for investment that totaled
$586 million at March 31, 2000 and $71.8 million at December 31, 1999. This
increase is due to treating $540 million of the total $1.2 billion
securitization transaction closed in March 2000 as a secured financing.
Contracts held for sale was $1.1 billion at March 31, 2000 compared with $1.4
billion at December 31, 1999. The balance of contracts held for sale is largely
dependent upon the timing of the origination and securitization of contracts.
The following table presents a summary of our automobile contracts purchased:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
New vehicles $215,386 $166,580
Used vehicles 755,095 586,352
-------- --------
Total volume $970,481 $752,932
======== ========
Prime $668,665 $539,297
Non-prime 301,816 213,635
-------- --------
Total volume $970,481 $752,932
======== ========
</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 closes, we advance additional monies to WFS Financial Auto Loans,
Inc. ("WFAL") 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 March 31, 2000 was $475
million compared with $439 million at December 31, 1999. The increase is a
result of the increase in the total contracts sold and outstanding.
20
<PAGE> 21
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 March 31, 2000, the percentage of accounts delinquent 30 days or greater was
1.79% 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 quarter ended March 31, 2000 were 2.01% compared with 2.70%
for the quarter ended March 31, 1999. Stricter underwriting guidelines, the
successful implementation of our multiple credit scoring models, and 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>
MARCH 31, 2000 DECEMBER 31, 1999
------------------------ ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Period of delinquency (1)
31-59 days $ 70,562 1.25% $107,416 2.01%
60 days or more 30,549 0.54 44,610 0.83
-------- ---- -------- ----
Total contracts delinquent and
delinquencies as a percentage
of contracts serviced $101,111 1.79% $152,026 2.84%
======== ==== ======== ====
</TABLE>
(1) 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 repossessions in our
portfolio of serviced contracts:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------------------- --------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Contracts serviced (1) 543,660 $5,664,144 524,709 $5,354,385
========== ========== ========== ==========
Repossessed vehicles 350 $ 2,205 559 $ 3,374
========== ========== ========== ==========
Repossessed vehicles as a percentage of number and
amount of contracts outstanding 0.06% 0.04% 0.11% 0.06%
</TABLE>
(1) Includes contracts which are have been sold and securitized but are serviced
by us.
The following table sets forth information with respect to actual credit loss
experience on our portfolio of contracts serviced:
21
<PAGE> 22
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts serviced at end of period (1) $5,664,144 $4,552,009
========== ==========
Average contracts serviced during period (1) $5,476,007 $4,447,784
========== ==========
Gross chargeoffs of contracts serviced during period $ 40,952 $ 42,489
Less: recoveries of contracts charged off in current and prior periods 13,484 12,506
---------- ----------
Net chargeoffs $ 27,468 $ 29,983
========== ==========
Net chargeoffs as a percentage of average contracts outstanding during
period 2.01% 2.70%
========== ==========
</TABLE>
- --------------
(1) Includes contracts which are owned by us and contracts which have been sold
and securitized but are serviced by us.
22
<PAGE> 23
The following table sets forth the cumulative static pool losses by month for
all outstanding securitized pools:
WFS FINANCIAL AND SUBSIDIARIES
CUMULATIVE STATIC POOL LOSS CURVES (1) (UNAUDITED)
AT MARCH 31, 2000
<TABLE>
<CAPTION>
MONTH (2) 1995-4 1995-5 1996-A 1996-B 1996-C 1996-D 1997-A 1997-B 1997-C 1997-D
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.01% 0.00% 0.01% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00%
2 0.06% 0.09% 0.06% 0.09% 0.09% 0.10% 0.08% 0.06% 0.05% 0.05%
3 0.16% 0.16% 0.17% 0.20% 0.22% 0.24% 0.20% 0.15% 0.12% 0.14%
4 0.31% 0.32% 0.29% 0.35% 0.52% 0.44% 0.36% 0.33% 0.29% 0.31%
5 0.52% 0.48% 0.48% 0.61% 0.74% 0.71% 0.62% 0.56% 0.46% 0.56%
6 0.70% 0.62% 0.63% 0.88% 0.98% 0.93% 0.85% 0.77% 0.67% 0.75%
7 0.86% 0.78% 0.81% 1.14% 1.27% 1.16% 1.12% 1.10% 0.93% 0.99%
8 1.02% 0.98% 1.08% 1.42% 1.52% 1.43% 1.45% 1.40% 1.16% 1.24%
9 1.13% 1.16% 1.35% 1.67% 1.77% 1.72% 1.70% 1.70% 1.37% 1.47%
10 1.26% 1.32% 1.63% 1.91% 1.98% 2.03% 2.02% 2.00% 1.66% 1.75%
11 1.41% 1.54% 1.87% 2.18% 2.21% 2.34% 2.32% 2.22% 1.94% 2.06%
12 1.52% 2.01% 2.06% 2.38% 2.49% 2.62% 2.61% 2.43% 2.16% 2.35%
13 1.66% 2.03% 2.28% 2.58% 2.73% 2.97% 2.92% 2.66% 2.40% 2.63%
14 1.86% 2.25% 2.47% 2.79% 2.99% 3.27% 3.14% 2.91% 2.65% 2.86%
15 2.07% 2.41% 2.63% 2.95% 3.21% 3.53% 3.30% 3.15% 2.90% 3.05%
16 2.26% 2.59% 2.79% 3.14% 3.47% 3.79% 3.55% 3.47% 3.15% 3.19%
17 2.47% 2.77% 2.97% 3.38% 3.70% 4.02% 3.77% 3.77% 3.36% 3.32%
18 2.59% 2.88% 3.12% 3.55% 3.94% 4.19% 3.94% 3.97% 3.55% 3.42%
19 2.72% 3.00% 3.31% 3.80% 4.18% 4.43% 4.21% 4.20% 3.70% 3.50%
20 2.88% 3.12% 3.49% 3.98% 4.36% 4.65% 4.40% 4.39% 3.81% 3.60%
21 2.95% 3.24% 3.63% 4.14% 4.53% 4.80% 4.59% 4.53% 3.91% 3.69%
22 3.04% 3.39% 3.80% 4.31% 4.67% 5.07% 4.81% 4.67% 4.00% 3.81%
23 3.13% 3.53% 3.95% 4.46% 4.84% 5.27% 5.00% 4.75% 4.11% 3.96%
24 3.22% 3.64% 4.10% 4.58% 5.01% 5.47% 5.14% 4.81% 4.21% 4.10%
25 3.30% 3.72% 4.22% 4.74% 5.17% 5.65% 5.24% 4.88% 4.30% 4.23%
26 3.37% 3.83% 4.33% 4.87% 5.34% 5.80% 5.33% 4.94% 4.44% 4.34%
27 3.47% 3.95% 4.41% 4.98% 5.50% 5.91% 5.39% 5.04% 4.56% 4.44%
28 3.50% 4.08% 4.51% 5.11% 5.67% 5.98% 5.44% 5.11% 4.66% 4.51%
29 3.58% 4.16% 4.60% 5.21% 5.78% 6.06% 5.50% 5.21% 4.77%
30 3.65% 4.25% 4.70% 5.31% 5.89% 6.12% 5.56% 5.31% 4.79%
31 3.75% 4.31% 4.79% 5.42% 5.98% 6.17% 5.65% 5.40% 4.83%
32 3.80% 4.35% 4.85% 5.50% 6.02% 6.24% 5.71% 5.48%
33 3.83% 4.40% 4.91% 5.55% 6.06% 6.29% 5.79% 5.52%
34 3.87% 4.46% 4.99% 5.58% 6.11% 6.34% 5.85% 5.54%
35 3.91% 4.54% 5.03% 5.60% 6.14% 6.39% 5.89%
36 3.94% 4.58% 5.07% 5.62% 6.16% 6.44% 5.93%
37 3.96% 4.61% 5.11% 5.65% 6.17% 6.47% 5.96%
38 3.99% 4.64% 5.11% 5.68% 6.22% 6.53%
39 4.01% 4.66% 5.12% 5.70% 6.27% 6.56%
40 4.04% 4.69% 5.12% 5.71% 6.30% 6.58%
41 4.06% 4.69% 5.13% 5.74% 6.34%
42 4.07% 4.69% 5.13% 5.76% 6.35%
43 4.07% 4.68% 5.13% 5.77% 6.37%
44 4.07% 4.68% 5.13% 5.79%
45 4.06% 4.68% 5.14% 5.79%
46 4.05% 4.68% 5.14% 5.79%
47 4.05% 4.66% 5.15%
48 4.05% 4.68% 5.15%
49 4.03% 4.67%
50 4.03% 4.68%
51 4.03% 4.68%
52 4.04% 4.67%
PRIME MIX (3) 65% 64% 59% 58% 55% 51% 54% 55% 53% 49%
</TABLE>
23
<PAGE> 24
WFS AND FINANCIAL AND SUBSIDIARIES
CUMULATIVE STATIC POOL LOSS CURVES (1)
AT MARCH 31, 2000
<TABLE>
<CAPTION>
MONTH (2) 1998-A 1998-B 1998-C 1999-A 1999-B 1999-C 2000-A
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.04% 0.02% 0.04% 0.04% 0.04% 0.02%
3 0.11% 0.08% 0.11% 0.11% 0.11% 0.10%
4 0.25% 0.18% 0.23% 0.20% 0.26% 0.25%
5 0.44% 0.38% 0.39% 0.33% 0.47% 0.40%
6 0.66% 0.59% 0.50% 0.46% 0.66% 0.56%
7 0.95% 0.83% 0.61% 0.62% 0.87%
8 1.23% 1.03% 0.75% 0.76% 1.00%
9 1.50% 1.21% 0.86% 0.92% 1.13%
10 1.79% 1.40% 1.00% 1.11%
11 2.03% 1.53% 1.17% 1.30%
12 2.21% 1.62% 1.32% 1.47%
13 2.39% 1.74% 1.48% 1.61%
14 2.49% 1.84% 1.66% 1.73%
15 2.60% 1.96% 1.79%
16 2.72% 2.10% 1.91%
17 2.85% 2.22% 2.01%
18 2.98% 2.40%
19 3.11% 2.55%
20 3.25% 2.69%
21 3.35% 2.79%
22 3.48% 2.85%
23 3.62% 2.85%
24 3.70% 2.85%
25 3.75% 2.85%
57% 67% 70% 70% 70% 67% 69%
</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 sold within each pool.
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.
24
<PAGE> 25
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>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash flows from trust $35,550 $36,800
Contractual servicing income 11,682 11,226
Cash flows from owned loans 38,970 18,409
Other fee income 14,692 10,019
Less:
Dealer participation 22,878 20,139
Operating costs 48,341 43,454
------- -------
Operating cash flows $29,675 $12,861
======= =======
</TABLE>
Operating cash flows have improved dramatically for the three months ended March
31, 2000 compared with the three months ended March 31, 1999 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.
("WFAL2"), receive access to the amounts deposited into each collection account
and the amounts held in the spread accounts 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 $863 million for the three months ended March 31,
2000 compared with $706 million for the three months ended March 31, 1999.
Contract Securitizations
Since 1985, we have securitized $15.6 billion of automobile receivables in 47
public offerings making us the fourth largest issuer of such securities in the
nation. For the quarter ended March 31, 2000, we securitized $1.2 billion
compared to $1.0 billion securitized a year earlier. We expect to continue to
use securitization transactions as part of our liquidity strategy when
appropriate market conditions exist.
25
<PAGE> 26
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 of 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 $970
million of contracts during the three months ended March 31, 2000 compared to
$753 million for the three months ended March 31, 1999.
Payments of Principal and Interest on Securitization Transactions
Under the terms of our reinvestment contract and the conduit financing
transactions, we are required to make quarterly payments of interest and
principal to noteholders and certificateholders. Payment of principal and
interest to noteholders and certificateholders was $1.1 billion during for the
three months ended March 31, 2000 compared with $0.5 billion for the three
months ended March 31, 1999. The increase was primarily the result of the
retirement of our conduit facility.
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 months ended March 31, 2000
totaled $22.9 million compared with $20.1 million for the same period in 1999.
Typically, the acquisition of prime quality contracts 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 spread accounts. 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 March 31, 2000, including initial
advances not yet returned, was $475 million compared with $439 million at
December 31, 1999.
26
<PAGE> 27
Operating Our Business
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 prospectus 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 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.
27
<PAGE> 28
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 ("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 until they are securitized.
Generally, we enter into forward agreements in amounts that correspond to the
principal amount of the contracts originated. The market value of these forward
agreements is designed to respond inversely to the market value changes of the
underlying contracts. Because of this inverse relationship, we can effectively
lock in a gross interest rate spread at the time of entering into the hedge
transaction. We enter into these forward agreements 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 contracts pending
securitization.
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 sales, gains and losses relative to these forward 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. 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.
28
<PAGE> 29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved as a party to certain legal
proceedings incidental to its business. We
believe that the outcome of such proceedings will
not have a material effect upon our business or
financial condition.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WFS FINANCIAL INC
- --------------------------------------------------------------------------------
(Registrant)
Date: May 15, 2000 By: /s/JOY SCHAEFER
------------------------ -----------------------------------------
Joy Schaefer
Vice Chairman, Director, and
Chief Executive Officer
Date: May 15, 2000 By: /s/LEE A. WHATCOTT
------------------------ -----------------------------------------
Lee A. Whatcott
Senior Executive Vice President
(Principal Financial and Accounting
Officer) and Chief Financial Officer
30
<PAGE> 31
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 8,502
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,672,878
<ALLOWANCE> 42,813
<TOTAL-ASSETS> 2,345,065
<DEPOSITS> 0
<SHORT-TERM> 586,266
<LIABILITIES-OTHER> 781,837
<LONG-TERM> 711,902
0
0
<COMMON> 111,908
<OTHER-SE> 153,152
<TOTAL-LIABILITIES-AND-EQUITY> 2,345,065
<INTEREST-LOAN> 61,025
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 61,025
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 23,066
<INTEREST-INCOME-NET> 37,959
<LOAN-LOSSES> 11,677
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 48,341
<INCOME-PRETAX> 25,350
<INCOME-PRE-EXTRAORDINARY> 14,766
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,766
<EPS-BASIC> 0.54
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 13.85
<LOANS-NON> 0
<LOANS-PAST> 2,658
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 36,682
<CHARGE-OFFS> 8,385
<RECOVERIES> 2,839
<ALLOWANCE-CLOSE> 42,813
<ALLOWANCE-DOMESTIC> 42,813
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
