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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 33-93068
WFS FINANCIAL INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 727-1000
------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, no par value ON WHICH REGISTERED
Nasdaq National Market
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 last 90 days. Yes [X] No [ ] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1997:
COMMON STOCK, NO PAR VALUE -- $64,464,698
The number of shares outstanding of the issuer's class of common stock as
of February 28, 1997:
COMMON STOCK, NO PAR VALUE -- 25,684,168
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1997 Annual Meeting of
Shareholders to be held April 28, 1997, are incorporated by reference into Part
III.
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WFS FINANCIAL INC AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 16
Item 3. Legal Proceedings........................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders...................... 17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 17
Item 6. Selected Financial Data.................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 19
Item 8. Financial Statements and Supplementary Data.............................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 27
Item 11. Executive Compensation................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 27
Item 13. Certain Relationships and Related Transactions........................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......... 27
2
3
PART I
ITEM 1. BUSINESS
GENERAL
WFS Financial Inc, a California corporation ("WFS" or the "Company"),
originates and purchases fixed rate consumer auto loans ("contracts") from over
9,300 new and used car dealers ("Dealers"). On a regular basis, WFS securitizes
its contracts through underwritten public sales of AAA/Aaa rated securities and
retains the right to service those contracts. Since 1992, WFS has undertaken a
geographic expansion plan growing from 34 offices serving California and one
other state to 136 offices serving a total of 31 states at December 31, 1996. As
a result, WFS has increased its volume of contracts purchased from $632 million
in 1992 to $2.1 billion in 1996, representing a 35% compounded annual growth
rate. WFS serviced a total of $3.0 billion, $2.2 billion and $1.6 billion at
December 31, 1996, 1995 and 1994, respectively.
The following table shows a rollforward of contract activity for 1996, 1995
and 1994.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Beginning Balance....................... $ 316,430,020 $ 425,957,378 $ 224,372,914
Originations............................ 2,121,689,461 1,527,648,718 1,177,031,272
Sales................................... 2,090,000,000 1,480,000,000 842,000,000
Principal reductions(1)................. 114,171,717 157,176,076 133,446,808
-------------- -------------- --------------
Ending Balance................ $ 233,947,764 $ 316,430,020 $ 425,957,378
============== ============== ==============
- - ---------------
(1) Includes scheduled payments, prepayments and chargeoffs.
The auto finance industry, which WFS estimates exceeded $410 billion in
1996, is the second largest consumer finance market in the United States. The
Company's contract purchase and securitization activities have made it one of
the largest sellers, in aggregate dollar amount, of auto receivable backed
securities in the United States after the captive auto finance companies,
Chrysler Credit Corporation ("Chrysler Credit"), General Motors Acceptance
Corporation ("GMAC") and Ford Motor Credit Company ("Ford Credit"). Although WFS
believes that these companies account for up to 25% of the auto finance market,
the balance of the market is highly fragmented among the captive auto finance
companies of automobile manufacturers, banks, credit unions, savings
associations and independent auto finance companies.
WFS has two divisions, the Dealer Center Division and the Branch Division,
to compete in the prime and non-prime segments of the auto finance industry
("prime credit quality spectrum"). The Dealer Center Division, which provides
auto financing for the upper tier of the prime credit quality spectrum or the
"prime" segment, operated through 17 dealer centers located primarily in larger
metropolitan areas, and accounted for approximately 55% of total contracts
purchased in 1996. The Dealer Center Division purchases its contracts almost
exclusively from franchised new car Dealers, with contracts for new and used
cars representing approximately 29% and 71%, respectively, of its total contract
purchases in 1996.
The Branch Division, which provides auto financing for the lower tier of
the prime credit quality spectrum or the "non-prime" segment, operated through
119 branch offices located in smaller cities or suburbs of larger metropolitan
cities, and accounted for the remaining 45% of total contracts purchased in
1996. The Branch Division purchased 61% of its contracts from franchised new car
Dealers, 33% from independent used car Dealers and originated 6% directly from
consumers during 1996. During that same period, contracts for new and used autos
represented 11% and 89%, respectively, of the Branch Division's volume of
contracts purchased. References herein to "purchase" and "contracts" refers to
both the purchase of contracts by WFS from new and used car Dealers and the
origination of auto loans directly from consumers.
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4
The following table presents a summary of the Company's production volumes.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
New autos............................... $ 441,529,072 $ 367,638,010 $ 354,787,195
Used autos.............................. 1,680,160,389 1,160,010,708 822,244,077
-------------- -------------- --------------
Total volume.................. $2,121,689,461 $1,527,648,718 $1,177,031,272
============== ============== ==============
Dealer Center Division contract
purchases............................. $1,171,277,265 $ 936,428,532 $ 848,485,947
Branch Division contract purchases...... 950,412,196 591,220,186 328,545,325
-------------- -------------- --------------
Total volume.................. $2,121,689,461 $1,527,648,718 $1,177,031,272
============== ============== ==============
As reflected in the table above, the mix of new and used cars financed by
WFS has changed over the past three years. While WFS has had similar credit loss
experience with respect to new and used auto contracts, used auto contracts
typically provide for higher yields than new auto contracts. As part of WFS'
overall strategy to reach a 50%-50% product mix by division, the percentage of
contracts purchased by the Branch Division versus the Dealer Center Division has
increased to 45%-55% in 1996 compared with 28%-72% in 1994. This shift in
product mix to higher yielding contracts is providing WFS with higher returns
and higher default rates.
THE HISTORY OF WFS
Westcorp, the ultimate parent of WFS, was formed in 1974 as the holding
company for Western Thrift & Loan Association ("Western Thrift"), a California
licensed thrift and loan association founded in 1972. Western Thrift was
involved in auto finance activities from its incorporation until its merger with
Western Financial Bank, F.S.B. ("the Bank") in 1982, at which time the auto
finance activities of Western Thrift were continued by the Bank. In 1988,
Westcorp Financial Services, Inc. ("Westcorp Financial") was incorporated as a
wholly-owned consumer finance subsidiary of the Bank to provide auto finance
services to a market not serviced by the Bank's auto finance division ("Dealer
Center Division").
On May 1, 1995, the Bank transferred its Dealer Center Division to Westcorp
Financial and changed the name of Westcorp Financial to WFS Financial Inc. The
preexisting business activities of Westcorp Financial became the Branch Division
of WFS upon the acquisition of the Dealer Center Division from the Bank. In
connection with that acquisition, the Bank transferred to WFS, among other
assets, the entire Dealer Center Division, including the contracts held on
balance sheet and all interests of the Bank in the excess spread payable from
outstanding securitization transactions. The Bank also transferred all of the
outstanding stock of WFS Financial Auto Loans, Inc. ("WFAL") and WFS Financial
Auto Loans 2, Inc. ("WFAL2"), the securitization entities of the Bank, thereby
making these companies subsidiaries of WFS.
BUSINESS STRATEGIES
WFS pursues its business objective of maximizing earnings through the
profitable purchase, securitization and servicing of contracts using five
strategies: (i) employ a dual market approach through its Dealer Center Division
and Branch Division, (ii) develop strong relationships with its network of over
9,300 Dealers, (iii) expand geographically, (iv) maintain solid asset quality,
and (v) hedge and securitize all contracts purchased.
Dual Market Approach
The Company operates its business through two divisions, the Dealer Center
Division and the Branch Division. This maximizes WFS' ability to purchase
contracts and form pools of contracts falling within the full spectrum of the
prime credit quality contract market. WFS segregates the market by credit
quality and tailors the operations of its divisions to best serve Dealers while
maximizing its ability to collect such contracts from obligors.
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5
The obligors of the contracts purchased by the Dealer Center Division are
generally characterized by strong credit profiles. As these contracts require
less intensive underwriting and collection procedures, the Dealer Center
Division focuses on purchasing large volumes of contracts secured by new and
late model used automobiles through regionalized underwriting and collection
operation centers.
By contrast, the Branch Division focuses its activities on purchasing
contracts of obligors who generally have certain adverse credit histories
relative to the Dealer Center Division's obligors. Therefore, these contracts
require a more intensive credit underwriting and collection process. In order to
best serve this segment of the market while attempting to minimize delinquencies
and losses, WFS uses a decentralized approach and purchases fewer contracts
through each branch office compared with each dealer center.
Relationship with Dealers
WFS and its predecessors have provided a consistent source of auto
financing since 1972 and is dedicated to continuing to provide a stable source
of financing to its growing network of over 9,300 Dealers. While other lenders
have retreated from time to time, WFS has consistently and continuously expanded
its operations in the auto finance market. As a result, WFS can readily identify
the needs of its Dealers and design programs which meet those needs without
sacrificing the integrity of the Company's credit underwriting standards. Such
programs may include extended payment terms, over-advances or lower down payment
requirements.
In order to react to changes in its markets and to more effectively serve
its Dealers, WFS emphasizes the need for its personnel to have frequent and
substantial personal interaction with the Dealers within their markets. Managers
seek to foster a close working relationship by providing personal attention and
quickly responding to potential problems. As a result, WFS has a greater ability
to review and purchase those contracts which are consistent with its
underwriting standards. In addition, due to the combination within WFS of both
the Dealer Center Division and the Branch Division, the relationship of one
division with a Dealer provides enhanced access to that Dealer by the other
division.
Dealer centers are strategically located, frequently in or near large auto
malls, to permit the sales managers to readily service the Dealers located in
its marketing area. While the Branch Division follows the same general approach
to dealer relationships as the Dealer Center Division, its branch offices are
generally located in the smaller cities or suburbs where its target Dealers are
located.
Substantially all contracts are purchased without recourse to the Dealer.
WFS pays an upfront dealer participation to the originating Dealer for each
contract purchased. In the case of contracts secured by new autos, the original
amount of the contract generally does not exceed the sum of the Dealer's cost,
taxes, license fees, service warranty cost and, if applicable, premium for
credit life or credit disability insurance, and in some cases, miscellaneous
costs. Any additional costs are considered over-advances which may be made under
certain circumstances to assist a Dealer in selling an auto by permitting a
lower down payment, and in some circumstances no down payment, based on the
creditworthiness of the applicant. Over-advances are included as a part of the
contract balance and are subject to various limitations depending on the
creditworthiness of the applicant. For used autos, the original contract does
not exceed the wholesale value of the auto plus the related expenses and
over-advances.
While the branch offices and many of the dealer centers also enter into
contracts directly with consumers, those contracts are not currently a primary
focus of the business of either division. Direct contracts accounted for 5% of
total 1996 contract purchases. The characteristics of such contracts and the
underwriting standards applied by both divisions are consistent with those of
the contracts purchased from Dealers.
Geographic Expansion
WFS had an aggressive geographic expansion plan in 1996 and intends to
continue to expand nationwide. WFS conducts extensive market research, including
interviews with Dealers in a new area to determine their views as to the
adequacy of existing auto finance sources and their receptiveness to a new
entrant. The decision of whether to expand into a new area is made based upon
the extent to which the Company believes the area is under served by existing
auto finance companies and meets its economic and demographic profile. During
5
6
1996, WFS opened 3 dealer centers and 44 branch offices increasing its
geographic coverage to 31 states. During 1997, the Company intends to open 3
additional dealer centers and 10 more branch offices, further increasing its
geographic coverage to a total of 35 states. As of February 28, 1997 WFS has 139
offices servicing 32 states.
The Dealer Center Division generally opens new dealer centers in those
areas with high concentrations of new car Dealers and a large volume of auto
sales, generally larger metropolitan locations. To insure maintenance of WFS'
credit underwriting and collection procedures, the Dealer Center Division
generally promotes an existing senior officer to be in charge of the new dealer
center. That senior officer will then have primary responsibility to hire sales
managers and credit officers who have existing dealer relationships in the local
area.
The Branch Division opens branches in areas which are located in smaller
cities or in suburbs of metropolitan areas. Because of the importance of
existing dealer relationships in these areas, the Branch Division generally
hires personnel with significant and long standing ties to the local area into
which WFS is seeking to expand. Once hired by WFS, that individual works closely
with the senior officers of WFS to learn the Company's philosophy, underwriting
standards and methods of operation. That individual will then have primary
responsibility to hire the branch managers for the branch offices to be opened
within the area.
The following table reflects the growth in the volume, by the states in
which WFS purchases contracts, in terms of the total dollar amount and
percentage.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
NO. OF YEAR % OF % OF % OF
STATE OFFICES BEGUN DOLLARS ORIGINATION DOLLARS ORIGINATION DOLLARS ORIGINATIONS
- - --------------- -------- ----- -------------- ------------ -------------- ------------ -------------- ------------
California..... 41 1972 $1,098,366,673 51.6% $1,042,259,179 68.4% $ 996,447,361 84.6%
Oregon......... 5 1992 113,651,209 5.4% 101,445,079 6.7% 55,127,069 4.7%
Arizona........ 4 1993 126,699,247 6.0% 57,214,841 3.7% 22,774,065 1.9%
Nevada......... 3 1993 112,123,835 5.3% 91,925,215 6.0% 54,862,049 4.7%
Texas.......... 18 1994 210,236,974 9.9% 138,181,906 9.0% 45,416,519 3.9%
Washington..... 4 1994 84,408,704 4.0% 30,303,647 2.0% 1,065,183 0.1%
New Mexico..... 1 1994 33,543,153 1.6% 9,659,328 0.6% 1,339,026 0.1%
Idaho.......... 1 1994 23,308,255 1.1% 4,591,354 0.3%
Colorado....... 4 1995 54,301,970 2.6% 22,495,510 1.5%
Missouri....... 4 1995 47,963,817 2.3% 12,642,629 0.8%
Florida........ 6 1995 35,594,134 1.7% 3,502,852 0.2%
North
Carolina..... 3 1995 22,180,053 1.0% 743,134 0.0%
Oklahoma....... 2 1995 19,121,674 0.9% 1,148,034 0.1%
Utah........... 2 1995 18,984,999 0.9% 6,575,618 0.4%
Georgia........ 2 1995 15,689,816 0.7% 3,426,504 0.2%
Kansas......... 1 1995 11,874,261 0.6% 1,533,888 0.1%
Illinois....... 6 1996 25,597,199 1.2%
Tennessee...... 4 1996 14,769,088 0.7%
Ohio........... 6 1996 11,650,553 0.5%
Indiana........ 3 1996 9,879,365 0.5%
Virginia....... 3 1996 7,567,468 0.4%
Ten Other
States....... 13 1996 24,177,014 1.1%
--- -------------- ----- -------------- ----- -------------- -----
Total... 136 $2,121,689,461 100.0% $1,527,648,718 100.0% $1,177,031,272 100.0%
=== ============== ===== ============== ===== ============== =====
Maintain Solid Asset Quality
Consistent and Expeditious Underwriting -- WFS services the full spectrum
of prime credit quality contracts by offering competitive rates commensurate
with the risks inherent in its obligors' ability to make payments under their
contracts. WFS personnel are trained to obtain, examine and verify all relevant
underwriting information quickly in order to make timely credit decisions. The
Dealer Center Division generally makes such decisions within two hours of
receipt of a loan application. In the Branch Division where
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the front-end application processing system has been implemented, such decisions
may also be made within two hours of receipt of application otherwise, decisions
are made within one day.
The applications for contracts received by both divisions of WFS share
certain general characteristics. Neither division has minimum or maximum
maturity requirements; however, contracts with terms to maturity of less than
three or more than seven years have seldom been purchased due to low customer
demand. The Company relies on the judgment of its trained credit specialists who
evaluate the applicant's credit and stability, including income, employment and
housing, in the context of the Company's well established and time tested
underwriting guidelines. The Company's credit specialists are closely monitored
by management and internal quality control professionals to insure adherence to
the Company's underwriting guidelines. Neither division of WFS currently employs
a rigid credit scoring system to determine whether an application should be
approved. During 1997, however, WFS plans on implementing a credit scoring
system to be used as an additional tool in conjunction with the underwriting
process of its credit specialists. The goal of both divisions in underwriting
contracts is to correctly determine whether an applicant has the ability and
intention to perform on his or her obligations under the contract.
In the Dealer Center Division, the formal underwriting process begins when
an application is received. The application and credit history are reviewed by
the credit officer for approval or denial. If the contract amount exceeds the
credit officer's approval authority, a senior vice president with the requisite
credit approval authority then reviews the application. When an application is
approved, the submitting Dealer is notified. Upon the customer's acceptance of
WFS' approval, the Dealer Center Division purchases the contract.
Underwriting for Branch Division contracts also begins upon receipt of an
application. Due to the credit history of the typical Branch Division applicant,
the branch manager frequently speaks with the applicant to verify information or
to seek clarification of information learned during the review of the
applicant's credit history. Often, items in a credit history which may seem
significant to a captive auto finance company or a bank will not, upon
investigation, preclude the applicant from possessing the requisite ability and
intent to perform his or her obligations. If a contract application or its terms
exceeds the branch manager's approval authority, the application is further
reviewed by a regional vice president or in some circumstances by a senior vice
president. When an application is approved, the submitting Dealer is notified.
Upon verification of information on the application and customer's acceptance,
the Branch Division purchases the contract.
A large percentage of all contracts purchased, including all contracts
purchased in new locations, are reviewed and quality graded by WFS' quality
control department to insure adherence to established guidelines and compliance
with proper documentation requirements.
Automation and Centralization -- WFS is developing two regional servicing
centers located in California and Texas. As part of these centers, WFS is
expanding the use of technology in connection with its application processing
activities. Applications for both divisions will be faxed to the relevant
processing center where the system will collect credit data on applicants and
other information used in the underwriting process. The front-end application
processing system will arrange that information for review and analysis by
either a Dealer Center Division credit officer or a Branch Division branch
manager or assistant branch manager to whom the information will be
automatically queued. The credit officer or branch manager will review the
application based upon the Company's established underwriting criteria. WFS
believes that this front-end application processing system will further increase
its efficiency in processing and approving applications at a lower cost.
WFS has centralized customer service activities at these processing centers
as well, particularly with respect to providing responses to routine account
inquiries, pay-off information inquiries and title information processing. The
Company began to implement these new systems during 1996 and will continue
through 1997. As a result of the combination of the Dealer Center Division and
the Branch Division into WFS, other administrative functions will be centralized
and combined as defined in the following section. The Company continuously
evaluates its operations and centralizes those activities which will result in
greater efficiencies or overall reduced costs of operation without adversely
affecting the quality or quantity of contracts purchased throughout the Company
or the financial performance of the Company.
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8
Delinquency, Collection, Repossession, and Asset Recovery Activities -- WFS
services all of the contracts it purchases, both those held by the Company and
those sold in securitization transactions. The servicing process includes the
routine collection and allocation of payments to WFS or to the appropriate
securitization transaction into which the contract has been sold. During 1996,
WFS substantially increased its servicing and collections staff in response to
the increased number of contracts serviced from the non-prime credit quality
market and the overall increase in the servicing portfolio from expansion.
WFS has developed procedures for the early identification and cure of
delinquent contracts. A reminder notice is sent to all obligors ten days before
the payment is due. On the fifth day of delinquency, WFS sends a late notice,
which includes the potential late charge to be assessed if payment is not
received before the tenth day of delinquency. The Branch Division begins its
collection process during the underwriting phase when it interviews most
obligors before purchasing their contracts in an attempt to personalize the
relationship with the obligor. The collection activities of the Branch Division
are primarily conducted by collectors and the branch manager of each of the
Branch Division's offices.
During the early stages of delinquency, WFS utilizes an automated telephone
dialing system ("autodialer") to aid in the service and collection process. WFS
substantially increased the capacity of its autodialers during 1996. WFS
utilizes the auto dialer to initiate contact with delinquent obligors. The
autodialer telephones delinquent obligor accounts. Once the call is answered,
the auto dialer will immediately transfer the call to an available collector
located at one of the two regional service centers and will automatically
display the obligor's loan information on the collector's computer screen. If
the collection effort during the first 21 days after a past due date does not
result in a satisfactory resolution of the delinquent account, then the account
is forwarded to a collection specialist located either in one of the six dealer
centers at which collection centers are located or directly to the appropriate
branch office for the Branch Division. In addition, if contact is not made with
the customer within 48 hours of being on the autodialer, the account is
automatically sent to a collection specialist for review.
If satisfactory arrangements are not made or complied with as to the
payments due, the automobile is generally repossessed within 60 to 90 days of
the date of delinquency, subject to compliance with the applicable law. WFS uses
independent contractors to perform repossessions. The automobile remains in the
custody of WFS for 15 days (or longer if required by local law) to provide the
obligor the opportunity to redeem the contract. If after the redemption period
the delinquency is not cured, WFS writes down the vehicle to fair value. After
the redemption period expires, WFS prepares the automobile for sale. WFS sells
substantially all of its automobiles through wholesale auto auctions at the best
price possible, subject to applicable law. WFS rarely provides the financing on
repossessions sold. During 1996, WFS began its centralization of all its
remarketing function into one remarketing department. Full integration of
functions is expected to be completed during 1997. The remarketing department is
responsible for transportation of the vehicle to wholesale auction houses,
reconditioning and repairs when necessary and tracking vehicles until they are
sold. Once the vehicle is sold, any deficiency balances are then charged off. At
December 31, 1996, the total amount of repossessed autos managed by WFS was $6.1
million or 0.20% of the total serviced portfolio compared with $2.4 million or
0.11% of the total serviced portfolio at December 31, 1995.
After chargeoff, WFS will seek collection on deficiency balances through
its centralized asset recovery center ("ARC") established during 1996. The ARC
will first attempt to collect directly from the obligor with its in-house
collection staff. If efforts are not successful, the ARC will seek a deficiency
judgment through a small claims court procedure, where available, or an attorney
employed by WFS takes more formal judicial action against customers with
deficiency balances in excess of that which may be brought in a small claims
court proceeding. In some cases, particularly when the likelihood of recovery is
believed to be remote, the account is assigned to a collection agency for final
resolution. ARC will attempt to obtain vehicles that could not be found for
repossession by skip tracing to locate the vehicle. The ARC also monitors
payment plans on those obligors that have filed for bankruptcy. If the obligor
is not following the payment plan stipulated by the courts, then the ARC will
seek a judgement for dismissal or discharge, or will seek to repossess the
vehicle.
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9
The following tables reflect the delinquency, repossession and loss
experience that WFS has achieved as a result of its collection efforts. It is
the Company's policy to charge off all contracts once they become 120 days past
due, including those that are in bankruptcy whether or not the automobile has
been repossessed or sold by that date. WFS continues to accrue interest on a
contract until it is charged off. At the time a contract is charged off, all
accrued but unpaid interest which has been previously included as income is
reversed by charging the allowance for credit losses. No assurance can be given
that the future performance of the contracts purchased by the Company will be
similar to the delinquency, repossessions and loss rates disclosed in the
following tables.
The following table sets forth information with respect to the delinquency
of WFS' portfolio of contracts serviced.
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
--------------------- --------------------- --------------------- --------------------- ---------------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Contracts
serviced(1)..341,486 $3,046,585 258,665 $2,209,594 201,957 $1,633,177 164,516 $1,233,732 148,467 $1,058,267
======= ========== ======= ========== ======= ========== ======= ========== ======= ==========
Period of
delinquency(2)
31-59
days... 4,511 $ 38,173 2,180 $ 18,557 1,136 $ 8,510 818 $ 5,239 1,112 $ 7,311
60-89
days... 1,305 11,470 690 6,143 336 2,616 254 1,849 435 2,803
90 days
or
more... 567 5,144 308 2,701 145 998 138 983 349 2,504
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
Total
contracts
delinquent... 6,383 $ 54,787 3,178 $ 27,401 1,617 $ 12,124 1,210 $ 8,071 1,896 $ 12,618
======= ========== ======= ========== ======= ========== ======= ========== ======= ==========
Delinquencies
as a
percentage
of
number
and
amount
of
contracts
outstanding...1.87% 1.80% 1.23% 1.24% 0.80% 0.74% 0.74% 0.65% 1.28% 1.19%
======= ========== ======= ========== ======= ========== ======= ========== ======= ==========
- - ---------------
(1) Includes delinquency information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced by
WFS.
(2) The period of delinquency is based on the number of days payments are
contractually past due.
The following table sets forth information with respect to repossessions in
WFS' portfolio of serviced contracts.
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------
NUMBER OF NUMBER OF
CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
Servicing portfolio (1)...................... 341,486 $3,046,585 258,665 $2,209,594
======= ========== ======= ==========
Repossessed assets........................... 1,133 $ 6,135 462 $ 2,356
======= ========== ======= ==========
Repossessed assets as a percentage of number
and amount of contracts outstanding........ 0.33% 0.20% 0.18% 0.11%
======= ========== ======= ==========
Even though a contract may have been charged off, collection efforts
continue, including obtaining a deficiency judgment, if necessary. The following
table sets forth information with respect to actual loss experience of WFS'
portfolio of contracts serviced and includes contract loss information relating
to contracts which are owned by WFS and contracts which have been sold and
securitized but are serviced by WFS.
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FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Contracts serviced at end of
period............................. $3,046,585 $2,209,594 $1,633,177 $1,233,732 $1,058,267
========== ========== ========== ========== ==========
Average serviced portfolio during the
period............................. $2,627,622 $1,886,359 $1,438,582 $1,132,538 $1,025,682
========== ========== ========== ========== ==========
Gross chargeoffs of contracts during
the period......................... $ 86,464 $ 48,999 $ 27,620 $ 24,612 $ 20,950
Recoveries of contracts charged off
in prior periods................... 25,946 18,715 11,927 7,308 3,226
---------- ---------- ---------- ---------- ----------
Net chargeoffs....................... $ 60,518 $ 30,284 $ 15,693 $ 17,304 $ 17,724
========== ========== ========== ========== ==========
Net chargeoffs as a percentage of
average contracts outstanding
during period...................... 2.30% 1.61% 1.09% 1.53% 1.73%
Hedging and Securitization
The Company employs a hedging and securitization strategy to leverage its
capital efficiently, lock in interest rate spreads and materially reduce its
interest rate risk while also limiting its credit loss exposure on contracts
sold. Securitization enables the Company to sell contracts on a regular basis,
while continuing to receive servicing fees, and to use the proceeds from such
sales to purchase additional contracts.
Between December 1985 and December 1996, WFS sold, in 36 transactions,
approximately $7.8 billion of contracts in publicly underwritten securitization
transactions. The first issue was rated AA by Standard & Poor's Rating Service,
a division of McGraw-Hill, Inc. ("S&P") and Aa by Moody's Investor Service, Inc.
("Moody's") and all 35 issues since that time were rated AAA by S&P and Aaa by
Moody's, their highest rating categories, as a result of the structure of the
transactions and the quality of the contracts securitized or the credit
enhancement provided by Financial Security Assurance Inc. ("FSA"). In all of its
securitization transactions, WFS continues to service the contracts sold. Each
transaction is independent of all others, with no cross-collateralization or
cross-default provisions applicable. Each securitization transaction with a
maturity date prior to the date hereof has been paid in full on or before its
contractual final maturity date and no recourse has been made to FSA on any
transaction.
In 1990, WFS began to securitize its contracts using an off balance sheet
structure which utilizes a separate grantor trust for each transaction. These
securitizations are structured to be treated as sales without recourse, thereby
removing the contracts sold from the balance sheet of WFS. WFS retains a
residual interest in the excess interest which represents the excess amount of
the underlying interest on the pool of contracts sold over the amount of
interest payable on the securities and the amount of credit losses,
administrative expenses and contractual servicing fees. WFS securitized $1.5
billion and $842 million of contracts using this structure during 1995 and 1994,
respectively.
In 1996, WFS began using an owner trust structure, issuing both
collateralized notes and pass-through certificates. Securitizations using the
owner trust structure are also treated as sales without recourse. WFS retains
the servicing of the contracts sold to the owner trust and receives excess
interest from the contracts sold. The owner trust structure enables WFS to
maximize the residual return from a securitization transaction by more closely
matching the yield paid to the investor to the yield curve existing at the time
the securitization transaction is consummated. WFS securitized $2.1 billion of
contracts using this structure during 1996.
WFS derives multiple benefits from the securitization of contracts,
including a stable source of low cost funding, reduction of interest rate and
credit risk for sold contracts, enhanced return on assets and regulatory
compliance.
Low Cost of Funds -- All of the securitization transactions completed by
WFS to the date hereof have been rated in the highest credit categories by
both S&P and Moody's, other than the first transaction. Accordingly, WFS
has been able to sell these securities at attractive yields relative to its
cost of alternative funding sources at the time of pricing.
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Reduction of Interest Rate and Credit Risk -- Since these transactions are
structured as asset sales, interest rate and credit risk are largely
transferred to the third party buyers of the related asset backed
securities and FSA. The interest rate and maturity of the pool of contracts
have durations that are matched with the securities, thereby locking-in the
excess spread of the contracts securitized. The risk of credit losses, to
the extent that credit losses exceed the excess cash flows of a given pool,
is also transferred to the third party purchasers of the securities and
FSA.
Enhanced Return on Assets -- These securitizations reduce the level of
average assets on balance sheet while providing WFS with ongoing excess
servicing income and contractual servicing fee income.
Regulatory Compliance -- As a Federal savings bank, the Bank may not have
more than 30% of its consolidated assets invested in consumer loans,
including contracts, purchased from Dealers. Contracts securitized are not
included in the numerator or denominator of that calculation.
SUBSIDIARIES
WFS Financial Auto Loans, Inc.
WFAL is a wholly-owned, limited purpose subsidiary of WFS. WFAL was
organized primarily for the purpose of purchasing contracts, originated by WFS,
and securitizing such contracts in the asset-backed market. A total of four
securitization transactions totalling $2.1 billion were completed during 1996.
WFS Financial Auto Loans 2, Inc.
WFAL2 is a wholly-owned, limited purpose subsidiary of WFS. WFAL2 was
organized primarily for the purpose of purchasing contracts, originated by WFS,
and securitizing such contracts in the asset-backed market and engaging in other
asset-backed financing transactions.
WFS Investments, Inc.
WFS Investments, Inc. ("WFSII") is a limited-purpose, wholly owned
subsidiary of WFS. WFSII was incorporated in California on June 11, 1996 for the
purpose of purchasing an ownership interest in owner trusts in connection with
securitization transactions. WFSII is limited by its Articles of Incorporation
from engaging in any business activities not incidental or necessary to its
stated purpose.
TRANSACTIONS WITH AFFILIATES
Senior Note
The principal amount due under the Senior Note payable to the Bank is $125
million. 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. The Senior Note is not
secured. Pursuant to the terms of the Senior Note, WFS agreed that until the
Senior Note is paid in full, WFS will not incur any other indebtedness which is
senior to the obligations evidenced by the Senior Note except for (i)
indebtedness collateralized or secured under the Line of Credit described below
and (ii) indebtedness for similar types of warehouse lines of credit.
Line of Credit
The Line of Credit extended by the Bank permits WFS to draw up to $400
million as needed to be used in its operations. WFS does not pay a commitment
fee for the Line of Credit. The term of the Line of Credit commenced on May 1,
1995 and terminates on December 31, 1999 except that such term may be extended
by WFS for additional periods up to 56 months under certain conditions. When
secured, the Line of Credit carries an interest rate equal to the Federal
composite commercial paper rate plus 10 basis points, with the margin increasing
to 50 basis points to the extent the obligation is not secured. 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
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be used to finance the Company's purchase of contracts or other working capital
requirements. At December 31, 1996, no amounts were outstanding on the Line of
Credit. The average amount outstanding during 1996 was $3.8 million.
Short Term Investments-Parent
WFS also invests its excess cash at the Bank under an Investment Agreement.
The Bank pays WFS an interest rate equal to the Federal composite commercial
paper rate on this excess cash. The weighted average interest rate was 5.53% and
5.80% for 1996 and 1995, respectively. The average balance of the excess cash
was $14.5 million and $4.0 million, and the interest income earned was $0.8
million and $0.2 million during 1996 and 1995, respectively. At December 31,
1996, WFS held $102 million of excess cash with the Bank under the Investment
Agreement.
WFS Reinvestment Contract
The Bank has entered into the WFS Reinvestment Contract ("RIC") pursuant to
which WFS receives all of the cash flows from the trusts of the securitization
transactions undertaken by WFS and the cash in each spread account for such
transactions to further invest as WFS determines, including to use in its
business activities. Under the terms of the RIC, WFS is obligated to pay to the
Bank all sums due from the Bank, when due by the Bank, under the terms of the
various reinvestment contracts to which the Bank is a party as to each
securitization transaction. The Bank is obligated pursuant to an agreement
between the Bank and FSA to provide collateral as a condition of the various
reinvestment contracts of the Bank being deemed eligible investments for the
trusts' cash flows and the spread account funds. As consideration to the Bank
for providing that collateral, WFS pays to the Bank a fee equal to 12.5 basis
points of the amount of collateral pledged by the Bank. During 1996, WFS paid to
the Bank $0.5 million for its use of collateral. Unless earlier terminated, the
term of the RIC is perpetual for so long as the RIC constitutes an eligible
investment as defined in any pooling and servicing agreement or similar
agreement related to the securitization trusts. During 1996, the average amount
outstanding on the RIC was $384 million. At December 31, 1996, the outstanding
balance was $393 million.
Tax Sharing Agreement
WFS and its subsidiaries (WFAL, WFAL2 and WFSII) are parties to a tax
sharing agreement with Westcorp, the Bank and other subsidiaries of Westcorp,
pursuant to which a consolidated federal tax return is filed for all of the
parties to the agreement. Under the agreement, the tax due by the group is
allocated to each member based upon the relative percentage of each member's
taxable income to that of all members. Each member pays to Westcorp its
estimated share of that tax liability when otherwise due, but in no event may
the amount paid exceed the amount of tax which would have been due if a member
were to file a separate return. A similar process is used with respect to state
income taxes, for those states which permit the filing of a consolidated or
combined return. Tax liabilities to states which require the filing of separate
tax returns for each company are paid by each separate company. The term of the
tax sharing agreement commenced on the first day of the consolidated return year
beginning January 1, 1994 and continues in effect until the parties to the tax
sharing agreement agree in writing to terminate it. See "Note K -- Income Taxes"
to WFS' Consolidated Financial Statements.
Management Agreements
WFS has entered into certain management agreements with the Bank and
Westcorp pursuant to which WFS pays its allocated portion of certain costs and
expenses incurred by the Bank and Westcorp with respect to services or
facilities of the Bank and Westcorp used by WFS or its subsidiaries, including
their principal office facilities, the dealer centers and branch offices of WFS
and overhead and employee benefits pertaining to Bank and Westcorp employees who
also provide services to WFS or its subsidiaries. The management agreements may
be terminated by any party upon 5 days prior written notice without cause, or
immediately in the event of the other party's breach of any covenant,
obligation, or duty contained in the applicable
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management agreement or for violation of law, ordinance, statute, rule or
regulation governing either party to the applicable management agreement.
WFS has entered into an agreement with Westran Services Corp. ("Westran"),
which is a subsidiary of Westcorp, to receive travel related services. WFS
believes that the services rendered by Westran are reasonable and representative
of what such costs would have been had WFS used an unaffiliated entity.
TRANSACTIONS WITH MANAGEMENT
WFS leases its office space for its Encino, California dealer center from
Insurance Company of the West ("ICW"), an affiliate of Mr. Rady, Chairman of
WFS, the Bank and Westcorp. The basic annual rent is adjusted annually and
includes a portion of direct operating expenses. The Encino lease expires in
1999. The Company paid approximately $104,345 in rent to ICW in 1996.
The Kearny Mesa Business Center is landlord to WFS' dealer center location
in San Diego. Kearny Mesa Business Center is an affiliate of Mr. Rady. The total
amount paid in 1996 pursuant to this lease, which expires in 2001, was
approximately $55,144.
RELATIONSHIP WITH THE BANK AND ITS AFFILIATES
In the opinion of the Company, the transactions described herein under the
caption "Transactions with Affiliates" have been on terms no less favorable to
WFS than could be obtained from unaffiliated parties, notwithstanding that the
transactions were not negotiated at arm's length. However, the transactions were
approved by the entire Boards of Directors of WFS, the Bank and Westcorp,
including all of their respective independent directors. Furthermore, any future
transactions with the Bank or affiliated persons will continue to be approved by
a majority of disinterested directors of the Company. See "Supervision and
Regulation -- Westcorp".
SUPERVISION AND REGULATION
THE COMPANY
The Company is an operating subsidiary of the Bank and a second tier
subsidiary of Westcorp. The Company is also licensed in each state in which it
operates as a consumer finance lender by a state licensing agency in each such
state. WFS maintained offices in 29 states at December 31, 1996. As such the
Company is subject to audit and examination by the applicable state agencies for
these states, as well as being subject to examination and supervision by the
Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC"), the Federal entity which provides insurance of deposits to
the Bank. WFS engages local counsel familiar with the applicable consumer
finance and auto finance, licensing and titling laws and regulations of each of
the states in which it has offices and from which it purchases contracts to the
extent it purchases contracts out of states in which it has no office. WFS will
continue to do so as to each of the states into which WFS intends to expand. At
December 31, 1996, and as of the date hereof, WFS believes that it is in
compliance with the licensing and operation laws and regulations applicable to
each of its offices in these states.
Numerous federal and state consumer protection laws and regulations impose
requirements applicable to the contracts originated and serviced by WFS. Among
these enactments are the federal Truth-in-Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, The Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
California Rees-Levering Act and similar retail installment sales laws and
similar laws of other states in which WFS originates contracts. Most of the
states in which WFS is originating contracts have statutes or regulations
pertaining to the repossession and sale process the Company must follow when
seeking to recover on defaulted contracts. Generally, the Company must follow
those requirements with precision to ensure its ability to maximize its recovery
on a defaulted contract. In addition, some states, such as Texas and Washington,
have consumer
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protection laws which limit the assets WFS may reach in order to recover on any
deficiency following repossession and sale of the vehicle which secures a
defaulted contract.
As an operating subsidiary of the Bank, WFS is precluded by regulations of
the OTS from engaging in any business activity which the Bank could not itself
undertake. All of its current business activities are permitted activities for
the Bank. Also, as WFS is an operating subsidiary of the Bank, the Bank is
required to retain ownership of at least a majority of the voting stock of WFS.
WFS may not engage in any new business activity nor may it acquire a business
from a third party, even if such business activities are permitted to the Bank
and thereby to WFS, until the Bank has first given notice thereof to the FDIC
and to the OTS.
WESTCORP
Westcorp, by virtue of its ownership of the Bank, is a savings and loan
holding company within the meaning of the Home Owners' Loan Act, as amended
("HOLA"). Savings and loan holding companies, their savings association
subsidiaries and subsidiaries thereof are extensively regulated under federal
laws.
Under the HOLA, the OTS is permitted to take substantive action when it
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of that holding
company's subsidiary savings association. Specifically, the OTS may, as
necessary: (i) limit the payment of dividends by the Bank; (ii) limit
transactions between the Bank, Westcorp and the subsidiaries or affiliates of
either; and (iii) limit any activities of Westcorp that might create a serious
risk that the liabilities of Westcorp and its affiliates may be imposed on the
Bank or subsidiaries of the Bank. Any such limits may be issued in the form of
regulations, or a directive having the effect of a cease and desist order.
Savings association subsidiaries of a savings and loan holding company, and
subsidiaries of such savings associations, are limited by HOLA in the type of
activities and investments in which they may participate if the investment
and/or activity involves an affiliate. In general, savings association
subsidiaries of a savings and loan holding company, and the subsidiaries of such
savings association, are subject to Sections 23A and 23B of the Federal Reserve
Act ("FRA") in the same manner and to the same extent as if the savings
association or its subsidiary were a member bank of the Federal Reserve System,
as well as being subject to similar regulations adopted by the OTS. Section 23A
of the FRA puts certain quantitative limitations, based upon a percentage of a
bank's capital stock and surplus, on certain transactions between a bank or its
subsidiary and an affiliate, including transactions involving (i) loans or
extensions of credit to the affiliate; (ii) the purchase of or investment in
securities issued by an affiliate; (iii) purchase of certain assets from an
affiliate; (iv) the acceptance of securities issued by an affiliate as security
for a loan or extension of credit to any person; or (v) the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate. The Board
of Governors of the Federal Reserve System (the "Board") has revised the
definition of capital stock and surplus for purposes of Section 23A to conform
that definition to that used by the Board in calculating the limits in
Regulation O for insider lending and by the Office of the Comptroller of the
Currency ("OCC") in calculating the limit on loans by a national bank to a
single borrower. The revised definition will permit subordinated debt that
qualifies for inclusion in Tier 2 capital to be included.
In addition, under Section 23B, transactions between a bank or its
subsidiary and an affiliate must meet certain qualitative limitations. Such
transactions must be on terms at least as favorable to the bank or its
subsidiary as transactions with unaffiliated companies.
Section 11 of the HOLA also specifically prohibits a savings association
subsidiary of the savings and loan holding company, or a subsidiary of that
savings association, from making a loan or extension of credit to an affiliate
unless that affiliate is engaged only in activities permitted to bank holding
companies under Section 4(c) of the Bank Holding Company Act or from purchasing
or investing in the securities of any affiliate (other than a subsidiary of the
savings association). The OTS regulations, consistent with the provisions of
Sections 23A and 23B, exclude transactions between a savings association and its
subsidiaries from the limitations of those sections, but those regulations also
define certain subsidiaries to be affiliates and subject to the requirements of
those sections. At the present time, neither WFS nor any of its subsidiaries are
within the definition of an affiliate of the Bank for purposes of those
regulations.
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THE BANK
The Bank, as the parent of WFS, is extensively regulated in its activities
by the OTS and the FDIC. Were the Bank to become insolvent or otherwise become
subject to being placed in conservatorship or receivership by the OTS, the FDIC
is required to be appointed as the conservator or receiver of the Bank. As
conservator or receiver, the FDIC would not have the authority to treat the
assets of WFS as the assets of the Bank, and the assets of WFS would not be
subject to the authority of the FDIC as conservator or receiver. However, as
conservator or receiver of the Bank, the FDIC, through control of the majority
of shares of the Common Stock of WFS, would be permitted to exercise control
over those shares to the same extent as the Bank prior to that conservatorship
or receivership. In addition, the FDIC as receiver or conservator would have the
right to preclude the Bank from making further advances under the Line of
Credit.
An operating subsidiary, such as WFS, is permitted by the applicable
regulations of the OTS to only engage in such business activities as the Bank
itself is permitted to engage in for its own account. The investments of
operating subsidiaries are required to be consolidated with those of its parent
Federal savings bank for purposes of determining whether the parent Federal
savings bank, on a consolidated basis, is in full compliance with those
regulations limiting its activities to a percentage of its total consolidated
assets. In that regard, the Bank is permitted by the HOLA to invest up to 35% of
its consolidated assets in consumer loans, commercial paper and qualifying
corporate debt instruments; provided however, that all consumer loans in excess
of 30% of the Bank's consolidated assets must be made directly to the consumer.
Accordingly, not more than 30% of the Bank's consolidated assets may be invested
in contracts purchased from new and used car Dealers. At December 31, 1996 WFS
held $234 million of contracts, which represents 7.0% of the Bank's consolidated
assets, purchased from Dealers and was purchasing contracts at the average rate
of $177 million per month for the year then ended. However, WFS also securitized
$2.1 billion of such contracts in 1996, and intends to regularly securitize
contracts purchased from Dealers to insure that the Bank will remain in
compliance with this regulatory limitation on its consolidated activities.
In addition, the regulations governing operating subsidiaries also require
that operating subsidiaries be subject to examination and supervision by the OTS
to the same extent as their parent Federal savings bank. The OTS may, following
such an examination, direct the parent savings association to take remedial
action to cure any violation of law, regulation or OTS policy, including
disposing of all or part of the subsidiary. In addition, the OTS may at any time
limit a savings association's investment in an operating subsidiary, limit any
operating subsidiary's activities or refuse to permit activities, for
supervisory, legal or safety and soundness reasons. WFS is not aware of any
actions it has taken or is planning to take which it believes would be deemed by
the OTS to be unsafe or unsound.
COMPETITION
The auto finance business is highly competitive. WFS believes it is
competitive because it has successfully implemented its business strategies. WFS
strives to consistently apply established and time proven underwriting
standards, thus providing new and used car Dealers a dependable source of auto
financing for contracts falling within the full spectrum of prime credit quality
contracts. WFS then securitizes contracts to lock in excess spread and enhance
liquidity. Lastly, WFS has expanded into new geographic areas while
consolidating those activities which promote efficiency and reduce costs without
detracting from its ability to provide service to its network of Dealers.
Strong competition in the purchase of contracts is provided by Chrysler
Credit, GMAC, Ford Credit and other captive auto finance companies, commercial
banks, other consumer auto finance companies and credit unions. WFS competes for
the purchase of contracts on the basis of price and the level of service
provided to the Dealers. The entity financing a Dealer's inventory is ordinarily
that Dealer's primary source of financing for auto sales. WFS does not finance
Dealers' inventories. WFS depends on its share of a particular Dealer's
contracts through the Company's strong personal relationship with that Dealer
and its personnel responsible for submitting contracts to the Company. That
relationship is fostered by the promptness with which WFS can process and
approve an application submitted by a Dealer and by the Company's expressed
willingness to work with its network of Dealers to give them the confidence that
WFS will get the job done.
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WFS must also compete with Dealer interest rate subsidy programs offered by
the captive auto finance companies. However, frequently those programs are
limited to certain models or to certain loan terms which may not be attractive
to many new auto purchasers. WFS is able to be more flexible in that it may
offer longer terms or be willing to accept a lower down payment than the captive
auto finance companies require. As a result, the Company is able to compete and
to continue to expand its operations in the face of that competition.
The competition for contracts available within the prime and non-prime
credit quality contract spectrum is more intense when the rate of sales of autos
declines such as during periods of economic recession. While WFS has experienced
consistent growth for five years, even during periods of recession, it can give
no assurance that it will be able to continue to do so during similar periods in
the future. While auto leasing has increased significantly in recent years, WFS
has no present intention of offering leases. WFS believes that many of such
leases are for relatively short terms of two or three years; therefore, the
number of used auto contracts available will continue to increase. WFS believes
that this will continue to provide opportunities to purchase used auto
contracts.
EMPLOYEES
At December 31, 1996, WFS had 1,848 full-time and 24 part-time employees.
None of these employees is represented by a collective bargaining unit or union,
and WFS and its subsidiaries believe they have good relations with their
personnel.
FORWARD-LOOKING STATEMENTS
The preceding Business section contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a new "safe harbor" for these types of statements. This
Annual Report on Form 10-K contains forward-looking statements which reflect
WFS' current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The forward-looking
terminology such as "believe," "expect," "anticipate," "intend," "may," "will,"
"should," "estimate," "continue," and/or the negative thereof or other
comparable expressions which indicate future events and trends identify forward-
looking statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. WFS undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. The
following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the level of demand for auto
contracts, which is affected by such external factors as the level of interest
rates, the strength of the various segments of the economy, debt burden held by
the consumer and demographics of WFS' lending markets; (2) continued dealer
relationships; (3) fluctuations between auto interest rates and the cost of
funds; (4) federal and state regulation of the WFS' auto lending operations; (5)
competition within the auto lending industry and (6) the availability and cost
of securitization transactions.
ITEM 2. PROPERTIES
At December 31, 1996, WFS did not own any property, but leased 141
properties at various locations in several states.
The executive offices of WFS are located at 23 Pasteur, Irvine, California
and are leased from the Bank. The remaining leased properties are used as branch
offices and dealer centers. At December 31, 1996, the net book value of
leasehold improvements was approximately $1.3 million. WFS leases space at two
locations from companies controlled by the Chairman of the Company. For further
information see "Transactions with Management".
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ITEM 3. LEGAL PROCEEDINGS
WFS is involved as a party to certain legal proceedings incidental to its
business. Management of WFS believes that the outcome of such proceedings will
not have a material effect upon its business or combined financial condition.
See "Note G -- Commitments and Contingencies" to WFS' Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE BY QUARTER
The common stock of WFS Financial Inc has been publicly traded since August
8, 1995 on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") identified by the symbol, WFSI. The following table
illustrates the high and low sale prices by quarter in 1996 and 1995, as
reported by NASDAQ, which prices are believed to represent actual transactions.
Sale prices have been adjusted for a 10% stock dividend granted during 1996.
1996 1995
----------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter................................... $17.84 $14.55 N/A N/A
Second Quarter.................................. 20.69 16.81 N/A N/A
Third Quarter................................... 22.50 17.39 $22.05 $16.14
Fourth Quarter.................................. 24.75 19.38 21.02 12.27
There were approximately 870 shareholders of WFS Financial Inc common stock
at December 31, 1996. The number of shareholders was determined by the number of
record holders, including the number of individual participants, in security
position listings.
DIVIDENDS
WFS did not have public shareholders prior to August 8, 1995 and has not
declared or paid cash dividends to the Bank as its parent corporation since
1989. WFS has no current plan to declare or pay any dividends on its Common
Stock. WFS is not currently under any regulatory or contractual limitation on
its ability to declare or pay any dividends. WFS declared a 10% stock dividend
in 1996. There is no assurance that WFS will declare or pay any dividends in the
future.
ITEM 6. SELECTED FINANCIAL DATA
The balance sheet data at December 31, 1996, 1995, 1994 and 1993, and
statement of operations data for all years have been derived from the Company's
audited consolidated financial statements. The balance sheet data at December
31, 1992 has been derived from unaudited combined financial statements of the
Company. In the opinion of management, the unaudited combined financial
statements have been prepared on the same basis as the audited combined
financial statements and include all adjustments necessary for the fair
presentation of financial position and results of operations for those periods.
The operating data and servicing data have been derived from other unaudited
financial information of the Company. The financial data set forth below should
be read in conjunction with the Consolidated Financial Statements of the Company
and related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
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FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994(1) 1993(1) 1992(1)
-------------- -------------- -------------- -------------- --------------
INCOME STATEMENT DATA:
Servicing income........... $ 111,969,108 $ 71,824,095 $ 67,682,607 $ 46,545,646 $ 29,139,224
Net interest income........ 54,026,733 44,519,698 24,104,125 21,307,640 22,304,971
Gain on sale of
contracts................ 41,517,910 18,855,632 1,321,206 9,684,974 6,078,712
-------------- -------------- -------------- -------------- --------------
Total revenues........... 207,513,751 135,199,425 93,107,938 77,538,260 57,522,907
Provision for credit
losses................... 10,274,935 6,482,735 8,036,707 4,668,565 4,283,622
Operating expenses......... 130,819,292 77,586,680 52,628,104 41,970,174 34,249,576
-------------- -------------- -------------- -------------- --------------
Total expenses........... 141,094,227 84,069,415 60,664,811 46,638,739 38,533,198
-------------- -------------- -------------- -------------- --------------
Income before income
taxes.................... 66,419,524 51,130,010 32,443,127 30,899,521 18,989,709
Income taxes............... 27,778,545 20,962,876 13,950,545 13,286,794 8,165,575
-------------- -------------- -------------- -------------- --------------
Net income................. $ 38,640,979 $ 30,167,134 $ 18,492,582 $ 17,612,727 $ 10,824,134
============== ============== ============== ============== ==============
Net income per common
share(3)................. $ 1.50 $ 1.33 $ 0.90
============== ============== ==============
OPERATING DATA:
Dealer Center Division
contract purchases....... $1,171,277,265 $ 936,428,532 $ 848,485,947 $ 621,951,807 $ 452,528,997
Branch Division contract
purchases................ 950,412,196 591,220,186 328,545,325 198,266,691 179,647,333
-------------- -------------- -------------- -------------- --------------
Total contract
purchases.............. $2,121,689,461 $1,527,648,718 $1,177,031,272 $ 820,218,498 $ 632,176,330
============== ============== ============== ============== ==============
Contract securitizations... $2,090,000,000 $1,480,000,000 $ 842,000,000 $ 777,500,000 $ 450,000,000
Dealer center locations.... 17 14 11 9 5
Branch locations........... 119 75 53 38 29
-------------- -------------- -------------- -------------- --------------
Total office locations... 136 89 64 47 34
============== ============== ============== ============== ==============
Number of states in which
contracts were
purchased................ 31 16 7 4 2
Number of dealers from
which contracts were
acquired................. 9,372 6,247 4,491 3,470 2,975
SERVICING DATA:
Serviced portfolio at end
of period................ $3,046,584,858 $2,209,594,002 $1,633,176,861 $1,233,731,641 $1,058,267,004
Average serviced portfolio
during the period........ 2,627,621,577 1,886,359,119 1,438,582,400 1,132,537,500 1,025,682,000
Delinquencies as a
percentage of amount of
contracts outstanding at
end of period (2)........ 1.80% 1.24% 0.74% 0.65% 1.19%
Net chargeoffs as a
percentage of the average
amount of contracts
outstanding during the
period (2)............... 2.30% 1.61% 1.09% 1.53% 1.73%
DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Contracts receivable, net.......... $231,942,482 $316,036,192 $426,467,288 $223,199,162 $345,896,287
Total assets....................... 675,571,657 583,588,376 547,960,959 329,271,102 420,532,323
Note payable....................... 125,000,000 125,000,000 -- -- --
Bonds payable...................... -- -- -- 22,073,829 52,242,768
Intercompany advances.............. -- -- 320,792,182 120,406,807 220,796,000
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19
- - ---------------
(1) The data presented reflect the combined operations of both the auto finance
division of the Bank and its wholly-owned operating subsidiaries, WFS, WFAL
and WFAL2. See "Note A -- Summary of Significant Accounting Policies" to
WFS' Consolidated Financial Statements.
(2) Includes delinquency and loss information relating to contracts that were
sold, but which were originated and serviced by WFS. See
"Business -- Maintain Solid Asset Quality".
(3) Restated to reflect a 10% stock dividend in 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The primary sources of revenue for WFS are servicing income, net interest
income and gain on sale of contracts. Servicing income is primarily generated
following the securitization of contracts purchased by WFS and consists of: (i)
contractual servicing fees, (ii) excess servicing income and (iii) other fee
income such as late charges and documentation fees which are earned regardless
of whether or not a securitization has occurred. Contractual servicing is the
servicing fee contractually due from a trust for servicing contracts which have
been securitized. Excess servicing is the cash flow derived from the excess
spread remaining on contracts sold after contractual servicing fees have been
paid. Late charges, deferment fees, documentation fees and other fees are also
collected on contracts serviced and are retained by the Company. Net interest
income is the difference between the interest earned on contracts not yet sold
in securitization transactions and the interest paid on the liabilities used to
fund such contracts. Gain on sale of contracts is recognized based on the
estimated present value of excess future cash flows on securitized contracts at
the time of sale.
During 1996, WFS purchased $2.1 billion of contracts compared to $1.5
billion in 1995, an increase of 39%. After purchasing contracts, WFS generally
securitizes its contracts and earns servicing income. While contracts are held
on balance sheet, WFS earns net interest income.
The Company's securitization transactions during 1996, 1995 and 1994
involved the sale of contracts to a trust in exchange for asset-backed
securities issued by the trust which WFS sells to investors. WFS used an owner
trust structure in 1996. See "Business -- Hedging and Securitization". WFS
continues to service the contracts following their securitization and receives a
contractual servicing fee for such activities. In connection with the
securitization of contracts, WFS retains the right to receive excess spread
which is equal to the difference between the stated interest rate on the
contracts securitized and the interest rate on the asset-backed securities,
before adjustments for credit losses, administrative expenses and contractual
servicing fees. WFS securitized $2.1 billion, $1.5 billion and $842 million of
contracts during 1996, 1995 and 1994, respectively.
19
20
The following table lists each of the Company's securitization transactions
since March 1992. Each of these transactions was rated AAA by S&P, and Aaa by
Moody's, their respective highest ratings.
REMAINING
REMAINING BALANCE AS A
BALANCE AT PERCENT OF ORIGINAL GROSS
ISSUE ORIGINAL DECEMBER 31, ORIGINAL WEIGHTED SECURITIZATION INTEREST RATE
NUMBER CLOSE DATE BALANCE 1996 BALANCE AVERAGE APR RATE SPREAD (1)
- - ------ -------------------- -------------- -------------- ------------ ----------- -------------- --------------
1992-1 March, 1992 150,000,000 Paid in full 0.00% 14.49% 5.85% 8.64%
1992-2 June, 1992 165,000,000 2,357,332 1.43% 14.94% 5.50% 9.44%
1992-3 September, 1992 135,000,000 4,251,377 3.15% 14.45% 4.70% 9.75%
1993-1 March, 1993 250,000,000 16,501,214 6.60% 13.90% 4.45% 9.45%
1993-2 June, 1993 175,000,000 16,505,461 9.43% 13.90% 4.70% 9.20%
1993-3 September, 1993 187,500,000 23,146,026 12.34% 13.77% 4.25% 9.52%
1993-4 December, 1993 165,000,000 26,140,818 15.84% 13.97% 4.60% 9.37%
1994-1 March, 1994 200,000,000 37,816,298 18.91% 12.90% 5.10% 7.80%
1994-2 June, 1994 230,000,000 51,964,017 22.59% 13.67% 6.38% 7.29%
1994-3 August, 1994 200,000,000 57,520,491 28.76% 14.04% 6.65% 7.39%
1994-4 October, 1994 212,000,000 67,483,187 31.83% 14.59% 7.10% 7.49%
1995-1 January, 1995 190,000,000 66,183,064 34.83% 15.58% 8.05% 7.53%
1995-2 April, 1995 190,000,000 75,207,808 39.58% 15.71% 7.10% 8.61%
1995-3 June, 1995 300,000,000 136,635,092 45.55% 16.36% 6.05% 10.31%
1995-4 September, 1995 375,000,000 207,386,902 55.30% 15.05% 6.20% 8.85%
1995-5 December, 1995 425,000,000 264,748,141 62.29% 15.04% 5.88% 9.17%
1996-A March, 1996 485,000,000 338,304,700 69.75% 15.35% 6.13% 9.22%
1996-B June, 1996 525,000,000 417,361,520 79.50% 15.46% 6.75% 8.71%
1996-C September, 1996 535,000,000 474,555,620 88.70% 15.74% 6.66% 9.08%
1996-D December, 1996 545,000,000 528,580,651 96.99% 15.83% 6.17% 9.66%
-------------- --------------
Total $5,639,500,000 $2,812,649,719
============== ==============
- - ---------------
(1) Represents the difference between the original weighted average annual
percentage rate ("APR") and the securitization rate.
WFS computes a gain on sale with respect to contracts securitized based on
the present value of the estimated future excess cash flows to be received from
such contracts using a market discount rate. Gain on sale is recorded as excess
servicing receivable on the balance sheet and is amortized against servicing
income over the life of the contracts. The gain recorded in the income statement
is adjusted for prepaid dealer commissions, issuance costs and the effect of
hedging activities. See "Note A -- Summary of Significant Accounting Policies"
to WFS' Consolidated Financial Statements.
RESULTS OF OPERATIONS
Servicing Income
Servicing income increased to $112 million during 1996 compared to $71.8
million during 1995 and $67.7 million during 1994, representing increases of 56%
and 6.1%, respectively. The increase in servicing income is the result of an
increase in contracts serviced by WFS. WFS regularly evaluates the methods and
assumptions used to estimate the amounts due from trusts.
20
21
Contractual servicing is earned at a rate of 1.0% per annum on the
outstanding balance of contracts securitized and is consistent with industry
standards. Excess servicing income is dependent upon the average excess spread
on the contracts sold and the performance of the contracts. Servicing fee income
is related to the size of the serviced portfolio. During the past three years,
WFS increased its average serviced portfolio to $2.6 billion in 1996 from $1.9
billion and $1.4 billion in 1995 and 1994, respectively. Other fee income,
consisting primarily of documentation fees, late charges and deferment fees,
increased to $32.3 million during 1996 compared to $21.3 million and $12.5
million in 1995 and 1994, respectively, representing increases of 52% and 71%,
respectively. These increases in other fee income are related to the increase in
the number of contracts purchased.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
Excess servicing income.................... $ 55,219,208 $34,164,427 $42,886,523
Contractual servicing income............... 24,403,981 16,313,497 12,295,246
Other fee income........................... 32,345,919 21,346,171 12,500,838
------------ ----------- -----------
Total servicing income........... $111,969,108 $71,824,095 $67,682,607
============ =========== ===========
Servicing income may be impacted by changes in the amount of losses and
amount and timing of prepayments. Increased credit losses reduce the amount of
excess servicing income earned by WFS, although the extent of such losses is
dependent upon the timing as well as the amount of the increases of such losses,
if any. Furthermore, changes in the amount and timing of prepayments may also
affect the amount and timing of excess servicing income. The Company believes
that prepayments have not historically been affected by changes in interest
rates or general economic conditions. Increased competition may also affect the
amount of other fee income that WFS may earn when originating or servicing
contracts.
WFS has completed 36 securitization transactions to date since its first
transaction in December of 1985. Eleven of these transactions were on balance
sheet collateralized bond offerings and the remaining 25 were off balance sheet
trusts. Seventeen transactions have been paid in full, all of which were paid on
or before their contractual maturity dates.
Net Interest Income
Net interest income is the difference between the rate earned on contracts
held on balance sheet and the interest costs associated with the Company's
borrowings. Net interest income totalled $54.0 million in 1996 compared to $44.5
million and $24.1 million in 1995 and 1994, respectively. The following table
shows the average rate earned on contracts and the average rate paid on
borrowings, consisting primarily of advances from the Bank, together with the
corresponding net interest rate spread for years ended 1996, 1995 and 1994.
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1996 1995 1994
----- ----- -----
Yield on contracts........................................ 14.83% 14.05% 13.24%
Cost of borrowings........................................ 6.44 6.30 5.15
----- ----- -----
Net interest rate spread.................................. 8.39% 7.75% 8.09%
===== ===== =====
As WFS securitizes its on balance sheet contracts, revenue previously
recognized as net interest income will, upon such securitization, be recognized
as servicing income. Prior to securitizing contracts, WFS earns interest income
on its contracts, pays interest expense to fund the contracts and absorbs any
credit losses. After securitization, the net cash flows are recorded as
servicing income. To protect against changes in interest rates, WFS hedges
contracts prior to their securitization with forward agreements. Gains or losses
on these forward agreements are deferred and included as part of the basis of
the underlying contracts and recognized when the contracts are securitized. See
"Capital Resources and Liquidity".
The Company's primary source of borrowings has been advances from its
parent. These advances were provided on an as-needed basis at a weighted average
rate equal to 6.44% in 1996, 6.30% in 1995 and 5.15% in
21
22
1994. The cost of borrowings reflects the Bank's actual cost of funds for 1994.
For 1996 and 1995, the cost of borrowings represents the average combined rate
of the Senior Note and the Line of Credit. See "Capital Resources and Liquidity"
and "Transactions with Affiliates".
Gain on Sale of Contracts
WFS recorded gain on sale of contracts of $41.5 million, $18.9 million and
$1.3 million in 1996, 1995 and 1994, respectively. The increase in gain on sale
reported in 1996 is the result of the increase in amount of securitized
contracts as well as higher gross interest rate spreads for securitization
transactions completed in 1996 as compared to those completed in 1995 and 1994.
While the assumptions used in determining gain on sale of contracts have
not changed significantly during the last three years, gain on sale of contracts
has fluctuated as a result of changes in the gross interest rate spread of
contracts securitized as shown in the table under "Overview". Gross interest
rate spread is affected by product mix, general market conditions and overall
market interest rates. The risks inherent in interest rate fluctuation are
substantially reduced through hedging activities.
Provision for Credit Losses
The Company maintains an allowance for credit losses to cover anticipated
losses on the contracts held on balance sheet. The allowance for credit losses
is increased by charging the provision for credit losses and decreased by actual
losses on the contracts held on balance sheet or by the reduction of contracts
held on balance sheet. The level of the allowance is determined based
principally on the outstanding balance of contracts held on balance sheet,
pending sales of contracts and historical loss trends. When WFS sells contracts
in a securitization transaction, it reduces its allowance for credit losses and
factors potential losses into its calculation of gain on sale. WFS believes that
the allowance for credit losses is currently adequate to absorb potential losses
in the owned portfolio. See "Note A -- Summary of Significant Accounting
Policies" to WFS' Consolidated Financial Statements.
During 1996, the provision for credit losses totalled $10.3 million
compared to $6.5 million and $8.0 million in 1995 and 1994, respectively. The
increase in provision for credit losses in 1996 was due to higher loss
experience as well as an increase in the level of allowance for credit losses.
Operating Expenses
Operating expenses consist of salaries and employee benefits, occupancy
expense, credit and collections expense, telephone expense, management fees and
other miscellaneous costs. Over the past three years, these expenses have
increased as WFS has expanded. At the end of 1993, WFS operated in four states
through 9 dealer centers and 38 branch offices. As of December 31, 1996, WFS
operated in 31 states through 17 dealer centers and 119 branch offices. As a new
branch or dealer center is established, the costs of additional personnel,
office space and other operating expenses of approximately $35,000 per month are
incurred. A new branch office or dealer center also typically incurs
approximately $75,000 in initial, nonrecurring costs. As the servicing portfolio
increases, costs related to credit, collection, telephone and other related
expenses increase as well. WFS has recently begun to implement additional
technology pertaining to its computerized front-end application processing
system designed to improve its operating efficiency by electronically collecting
credit data on applicants and other information used in the underwriting of
applications for contracts and arranging that information for review and
analysis by either a Dealer Center Division credit officer or a Branch Division
branch manager.
Total operating expenses in 1996 were $131 million, up 69% from $77.6
million in 1995. Total operating expenses in 1995 increased 47% from $52.6
million in 1994. The increases in total operating expenses are primarily
attributable to expansion. Salaries and employee benefits expense increased to
$71.9 million in 1996 from $43.4 million and $27.9 million in 1995 and 1994,
respectively. This increase is largely due to an increase in the number of
employees necessary to open new dealer centers and branch offices and to service
the increased number of contracts purchased. As a result of the opening of new
dealer centers and branch offices,
22
23
occupancy expense, including depreciation expense, increased to $7.9 million in
1996 from $5.7 million and $3.7 million in 1995 and 1994, respectively.
Other operating expenses include credit and collections costs, telephone
and miscellaneous other expenses. Credit and collections expense increased to
$9.1 million in 1996 compared to $5.6 million and $3.7 million in 1995 and 1994,
respectively. Telephone expense totalled $4.3 million in 1996 compared to $2.2
million in 1995 and $1.7 million in 1994. Miscellaneous expenses, which include
travel, marketing, stationery, supplies, postage, legal and professional fees
and other ancillary costs, increased to $17.1 million in 1996 compared to $9.1
million and $6.3 million for 1995 and 1994, respectively. These expenses have
increased as a result of a 35% increase in the annual compounded growth rate of
contracts serviced since December 31, 1993 and as a result of WFS' expansion.
WFS pays a monthly management fee to the Bank and Westcorp which covers
various expenses, including data processing, accounting, payroll, legal, tax,
cash management, purchasing and auditing services and is shown on the income
statement as general and administrative costs paid to parent. The management fee
is based upon the actual costs incurred and estimates of actual usage. WFS
believes that the management fee approximates the cost to perform these services
on its own behalf or to acquire them from third parties. WFS has the option,
under the management agreements, to procure these services on its own should it
be more economically beneficial to WFS to do so. In 1996, management fee expense
was $20.5 million compared to $11.5 million in 1995 and $9.3 million in 1994.
See "Transactions with Affiliates--Management Agreements".
On January 1, 1997, various administrative departments of Westcorp were
transferred to the Bank and WFS as part of a restructuring plan to provide
greater focus and specialization within each company. As part of this plan,
Westcorp will only retain certain administrative operations including payroll,
human resources and certain treasury functions.
Income Taxes
WFS files 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. Other state tax returns are filed by WFS as a separate entity. Tax
liabilities from the consolidated returns are allocated in accordance with a tax
sharing agreement based on the relative income or loss of each entity on a
stand-alone basis. The effective tax rate for WFS was 42% for 1996 compared to
41% and 43% for 1995 and 1994, respectively. See "Transactions with
Affiliates--Tax Sharing Agreement".
FINANCIAL CONDITION
Contracts Receivable and Contracts Held for Sale
WFS holds a portfolio of contracts on balance sheet for investment that
totalled $53.3 million at December 31, 1996 and $104 million at December 31,
1995. Contracts held for sale totalled $186 million at December 31, 1996
compared to $220 million at December 31, 1995. The balance in the held for sale
portfolio is largely dependent upon the timing of the origination and
securitization of contracts. WFS completed securitization transactions of $2.1
billion during 1996. WFS plans to continue to securitize contracts on a regular
basis. See "Note A--Summary of Significant Accounting Policies" to WFS'
Consolidated Financial Statements.
Amounts Due From Trusts
The excess cash flow generated by contracts sold to trusts is deposited
into spread accounts by the trustee under the terms of the securitization
transactions. In addition, at the time a securitization transaction closes, WFS
advances additional monies to initially fund these spread accounts. These funds,
as well as the excess spread, are paid to WFS after the spread accounts reach a
predetermined funding level. Amounts due from trusts represent funds due to WFS
not yet disbursed from the spread accounts. The amounts due from trusts at
year-end 1996 was $191 million compared with $110 million at year-end 1995. The
increase is a result of the increase in total contracts securitized and
outstanding.
23
24
Excess Servicing Receivable
Excess servicing receivable consists of the present value of the estimated
future cash flows to be received by WFS from the excess spread created in
securitizations. The estimated future cash flows are determined by taking into
account certain assumptions principally regarding prepayments, credit losses and
servicing costs. These cash flows are then discounted at a rate management
believes to be at market. The balance of the excess servicing receivable is then
amortized against actual servicing income on a monthly basis. The assumptions
used are evaluated each quarter and adjusted, if appropriate, to reflect
performance of the contracts.
FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Beginning balance............................ $ 78,045,241 $ 43,425,826 $ 46,241,112
Additions.................................... 104,071,101 78,505,518 32,758,134
Amortization................................. (60,518,881) (43,886,103) (35,573,420)
------------ ------------ ------------
Ending balance............................... $121,597,461 $ 78,045,241 $ 43,425,826
============ ============ ============
The following table presents the estimated future undiscounted cash flows
to be received from securitizations, net of estimated costs to service and after
giving effect to estimated prepayments. To arrive at the excess servicing
receivable, this amount is reduced by the off balance sheet allowance
established for future losses and by discounting these cash flows to present
value.
DECEMBER 31,
1996
--------------
Estimated net undiscounted cash flows................................ $ 288,733,422
Off balance sheet allowance for losses............................... (152,796,759)
Discount to present value............................................ (14,339,202)
--------------
Excess servicing receivable.......................................... $ 121,597,461
==============
Outstanding balance of contracts sold through securitizations........ $2,812,649,719
Off balance sheet allowance for losses as a percent of contracts sold
through securitizations............................................ 5.43%
WFS believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio.
Additions to excess servicing receivable result from new securitizations
and reflect the estimated present value of the future cash flows of the
contracts securitized. The amortization of excess servicing receivable presented
above represents the scheduled amortization based upon the assumptions
underlying the calculation of the estimated present value of the remaining
future cash flows.
Asset Quality
Servicing income is affected by the quality of the underlying contracts
purchased and securitized by WFS. Servicing contracts includes managing
delinquent contracts, repossessing and selling autos, securing defaulted
contracts and recovering deficiency balances. A delinquent contract is one on
which payment has not been made by the delinquency date, generally 10 days,
following the due date on which such payment was contractually due. WFS monitors
and attempts to minimize delinquencies and losses through an online collections
system. At December 31, 1996, delinquencies for the serviced portfolio was 1.80%
based on the dollar amount of contracts outstanding compared to 1.24% and 0.74%
at December 31, 1995 and 1994. Net chargeoffs on average contracts outstanding
during the period totalled 2.30% at December 31, 1996 compared to 1.61% and
1.09% at December 31, 1995 and 1994, respectively. See "Business -- Maintain
Solid Asset Quality".
24
25
CAPITAL RESOURCES AND LIQUIDITY
WFS requires substantial capital resources to operate its business. The
resources available to WFS include contract securitizations, borrowings under
the Line of Credit and collections of principal and interest from contracts.
These sources provide capital to fund expanding purchases of contracts. WFS may
also enter into a commercial paper facility insured by FSA.
The primary source of funds for WFS is the securitization of contracts. WFS
has regularly securitized contracts through underwritten public sales of AAA/Aaa
rated securities since 1986. Although the underlying interest costs associated
with securitizations fluctuate, they are primarily market driven and not
necessarily related to the operations of WFS. WFS expects to continue to utilize
securitization transactions as part of its liquidity strategy, although no
assurance can be given due to changing market conditions.
The major components of cash flows related to operating activities are cash
needed to purchase contracts which totalled $2.1 billion in 1996 compared to
$1.5 billion in 1995 and $1.2 billion in 1994. It is anticipated that contracts
purchased will continue to be the major cash need of WFS. Operating activities
also generate cash flows through principal receipts on contracts. During 1996,
these cash flows totalled $106 million, compared to $152 million in 1995 and
$124 million in 1994.
The investing activities of WFS primarily relate to utilizing funds
collected on behalf of the trusts to assist in funding its operating activities.
These cash flows historically have provided a consistent source of cash for WFS.
WFS' financing is provided by the Bank under the terms of its $125 million
Senior Note and its $400 million Line of Credit. The Senior Note is unsecured
and has a fixed interest rate of 7.25% and a final maturity in 2003.
WFS uses the Line of Credit primarily to fund its purchase of contracts
from Dealers and from consumers, which contracts are held for sale until
securitized. WFS does not pay a commitment fee to the Bank for the Line of
Credit. When WFS consummates a securitization, it uses the proceeds to pay down
its warehouse line with the Bank, making the warehouse line available to
purchase new contracts. The rate of interest on the line is based upon a margin
over the federal composite commercial paper rate, with the margin increasing
from 10 to 50 basis points to the extent the borrowings are not secured. WFS has
the option of determining whether and to what extent the line will be secured.
It is anticipated that the line will generally be paid down following each
securitization transaction, although WFS is not required to do so. WFS believes
that the cost of the warehouse line with the Bank approximates the cost of
warehouse lines from third parties. See "Business Transactions with Affiliates".
These financing sources are expected to provide adequate funding of the
Company's operations and the Company believes that its sources of liquidity are
sufficient to meet its long and short term cash requirements.
Principal and interest collections on owned and securitized contracts
provide additional cash flow. WFS may use the collections on contracts not
securitized without limitations in its operations. WFS may also use collections
of principal and interest from securitized contracts as long as they are
deposited into a RIC at the Bank. See "BusinessTransactions with Affiliates". As
WFS increases the size of its servicing portfolio, the Company expects such
amounts to increase. Hence, WFS is able to utilize principal and interest
collections on contracts sold in its day to day operations until payments are
due to the investors, thus providing an additional source of cash flow.
ASSET/LIABILITY MANAGEMENT
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 contracts originated and held by WFS are all fixed rate and accordingly
WFS has exposure to changes in interest rates. WFS' prepayment experience on
contracts has not been historically sensitive to changes in interest rates and
WFS therefore believes it is not expected to be exposed to significant
prepayment
25
26
risk relative to changes in interest rates. As a result of this approach to
interest rate management, combined with the Company's hedging strategies, WFS
does not anticipate that changes in interest rates will materially affect the
Company's results of operations or liquidity, although no assurance can be given
in this regard.
The Company's hedging strategy includes the use of two-year Treasury
securities forward agreements. These agreements are entered into by the Company
in numbers and amounts which generally correspond to the principal amount of the
securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying contracts.
Because of this inverse relationship, WFS can effectively lock in its gross
interest rate spread at the time of the hedge transaction. Gains and losses
relative to these agreements are deferred and recognized in full at the time of
securitization as an adjustment to the gain or loss on the sale of the
contracts. WFS uses only highly rated counterparties and further reduces its
risk by avoiding any material concentration with a single counterparty. Credit
exposure is limited to those agreements with a positive fair value and only to
the extent of that fair value. See "Note B -- Net Contracts Receivable" to WFS'
Consolidated Financial Statements.
Management monitors the Company's hedging activities on a daily basis 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 senior management of WFS based upon the monitoring activities of the Company.
WFS hedges substantially all of its contracts pending securitization either
through outside parties or affiliated entities.
EFFECT OF INFLATION AND CHANGING PRICES
Unlike many industrial companies, substantially all of the assets and
liabilities of WFS are monetary in nature. As a result, interest rates have a
more significant effect on WFS's performance than the general level of
inflation. See "Asset/Liability Management".
FORWARD-LOOKING STATEMENTS
The preceding Management's Discussion and Analysis of Financial Condition
and Results of Operations section contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a new "safe harbor" for these types of statements. This Annual Report
on Form 10-K contains forward-looking statements which reflect WFS' current
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The forward-looking
terminology such as "believe," "expect," "anticipate," "intend," "may," "will,"
"should," "estimate," "continue," and/or the negative thereof or other
comparable expressions which indicate future events and trends identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. WFS
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following factors could cause actual results to differ materially from
historical results or those anticipated: (1) the level of demand for auto
contracts, which is affected by such external factors as the level of interest
rates, the strength of the various segments of the economy, debt burden held by
the consumer and demographics of WFS' lending markets; (2) continued dealer
relationships; (3) fluctuations between auto interest rates and the cost of
funds; (4) federal and state regulation of the WFS' auto lending operations; (5)
competition within the auto lending industry and (6) the availability and cost
of securitization transactions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WFS Consolidated Financial Statements begin on page F-3 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
26
27
PART III
Certain information required by Part III is omitted from this report, as
WFS will file a definitive proxy statement (the "Proxy Statement") within 120
days after the end of its fiscal year pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for its Annual Meeting of Stockholders to be
held April 28, 1997 and the information included therein is incorporated herein
by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference. Information regarding Section 16(a) Beneficial Ownership
Reporting Compliance appears under that caption in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appears under the caption
"Executive Compensation Summary" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
appears under the caption "Item 1. Business -- Transactions with Affiliates".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS
The following consolidated financial statements and report of
independent auditors of WFS Financial Inc and Subsidiaries are
included in this Report commencing on page F-2.
Report of Independent Auditors
Consolidated Statements of Financial Condition at the years ended
December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December 31,
1996, 1995, and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES
Schedules to the consolidated financial statements are omitted
because the required information is inapplicable or the information
is presented in WFS' consolidated financial statements or related
notes.
27
28
(3) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ----------- --------------------------------------------------------------------------------
1 Underwriting Agreement(1)
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
4 Specimen WFS Financial Inc Common Stock Certificate(5)
10.1 Westcorp Incentive Stock Option Plan(2)
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings Plan(3)
10.3 Westcorp 1991 Stock Option Plan(4)
10.4 1985 Executive Deferral Plan(1)
10.5 1988 Executive Deferral Plan II(1)
10.6 1992 Executive Deferral Plan III(1)
10.7 Transfer Agreement between WFS Financial Inc and Western Financial Bank, F.S.B.,
dated May 1, 1995(1)
10.8 Promissory Note of WFS Financial Inc in favor of Western Financial Bank, F.S.B.,
dated May 1, 1995(1)
10.9 Line of Credit Agreement between WFS Financial Inc and Western Financial Bank,
F.S.B., dated May 1, 1995(1)
10.10 Tax Sharing Agreement between WFS Financial Inc and Western Financial Bank,
F.S.B., dated January 1, 1994(1)
10.11 Master Reinvestment Contract between WFS Financial Inc and Western Financial
Bank, F.S.B., dated May 1, 1995(1)
10.12 Management Agreement between WFS Financial Inc and Western Financial Bank,
F.S.B., dated May 1, 1995(1)
10.13 Management Agreement among WFS Financial Inc, Western Financial Bank, F.S.B.,
WFS Financial Auto Loans, Inc. and WFS Financial Auto Loans 2, Inc. dated May 1,
1995(1)
10.14 Form of WFS Financial Inc Dealer Agreement(5)
10.15 Form of WFS Financial Inc Loan Application(5)
10.16 WFS 1996 Incentive Stock Option Plan(6)
10.17 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
21.1 Subsidiaries of WFS Financial Inc
23.1 Consent of Ernst & Young LLP
24 Power of Attorney(1)
- - ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration Statement on
Form S-1 (File No. 33-93068), filed August 8, 1995 incorporated herein by
reference under Exhibit Number indicated.
(2) Exhibits previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference under
Exhibit Number indicated.
(3) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
(4) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under Exhibit Number indicated.
(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration statement on Form S-1 (File No. 33-93068) incorporated herein
by reference under Exhibit Number indicated.
(6) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 33-07485), filed July 3, 1996 incorporated herein by reference under the
Exhibit Number indicated. Amendment No. 1 dated as of July 26, 1996 to the
WFS Registration Statement on Form S-8 (File No. 33-07485) incorporated
herein by reference under Exhibit number indicated.
(7) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039), filed August 29, 1996 incorporated herein by reference
under Exhibit Number indicated.
(B) REPORT ON FORM 8-K
None
28
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: March 11, 1997 By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
Vice Chairman, President
and Chief Operating Officer
SIGNATURE TITLE DATE
- - ------------------------------------------ ------------------------------- ---------------
/s/ ERNEST S. RADY Chairman of the Board and Chief March 11, 1997
- - ------------------------------------------ Executive Officer
Ernest S. Rady
/s/ JOY SCHAEFER Vice Chairman, Director, March 11, 1997
- - ------------------------------------------ President and Chief Operating
Joy Schaefer Officer
/s/ JAMES R. DOWLAN Vice Chairman, Director and March 11, 1997
- - ------------------------------------------ Senior Executive Vice President
James R. Dowlan
/s/ W. LEE THYER Director and Senior Executive March 11, 1997
- - ------------------------------------------ Vice President
W. Lee Thyer
/s/ HOWARD C. REESE Vice Chairman and Director March 11, 1997
- - ------------------------------------------
Howard C. Reese
Director
- - ------------------------------------------
Bernard E. Fipp
/s/ DUANE A. NELLES Director March 11, 1997
- - ------------------------------------------
Duane A. Nelles
Director
- - ------------------------------------------
Robert S. Waligore
/s/ LEE A. WHATCOTT Executive Vice President March 11, 1997
- - ------------------------------------------ (Principal Financial and
Lee A. Whatcott Accounting Officer) and Chief
Financial Officer
29
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WFS FINANCIAL INC
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS
PAGE
----
REPORT OF INDEPENDENT AUDITORS....................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at the years ended December 31, 1996
and 1995........................................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994............................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994............................................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
F-1
31
REPORT OF INDEPENDENT AUDITORS
Board of Directors
WFS Financial Inc
We have audited the accompanying consolidated statements of financial
condition of WFS Financial Inc and Subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of WFS
Financial Inc's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WFS Financial Inc and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
January 28, 1997
F-2
32
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
ASSETS
Short term investments - parent................................ $109,237,133 $ 65,019,858
Contracts receivable........................................... 53,287,645 103,914,277
Contracts held for sale........................................ 186,302,823 219,916,889
Allowance for credit losses.................................... (7,647,986) (7,794,974)
------------ ------------
Contracts receivable, net............................ 231,942,482 316,036,192
Amounts due from trusts........................................ 191,469,153 110,230,750
Excess servicing receivable.................................... 121,597,461 78,045,241
Furniture, fixtures and equipment.............................. 16,904,239 4,282,614
Accrued interest receivable.................................... 1,517,682 1,927,979
Other assets................................................... 2,903,507 8,045,742
------------ ------------
$675,571,657 $583,588,376
============ ============
LIABILITIES
Senior note payable - parent................................... $125,000,000 $125,000,000
Amounts held on behalf of trustee.............................. 393,449,007 341,692,369
Other liabilities.............................................. 9,431,124 7,845,324
------------ ------------
527,880,131 474,537,693
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 25,684,168 shares in 1996 and
23,349,250 in 1995........................................... 73,123,054 73,123,190
Additional paid-in capital..................................... 4,000,000 4,000,000
Retained earnings.............................................. 70,568,472 31,927,493
------------ ------------
147,691,526 109,050,683
------------ ------------
$675,571,657 $583,588,376
============ ============
See accompanying notes to consolidated financial statements.
F-3
33
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------ ------------ -----------
REVENUES:
Interest income................................ $ 63,300,266 $ 61,104,888 $37,783,299
Interest expense............................... 359,781
Interest expense - parent...................... 9,273,533 16,585,190 13,319,393
------------ ------------ -----------
Net interest income.............................. 54,026,733 44,519,698 24,104,125
Servicing income................................. 111,969,108 71,824,095 67,682,607
Gain on sale of contracts........................ 41,517,910 18,855,632 1,321,206
------------ ------------ -----------
TOTAL REVENUES................................... 207,513,751 135,199,425 93,107,938
EXPENSES:
Provision for credit losses.................... 10,274,935 6,482,735 8,036,707
Operating expenses:
Salaries and employee benefits.............. 71,896,750 43,435,842 27,857,328
General and administrative costs paid to
parent.................................... 20,512,660 11,514,703 9,274,394
Occupancy................................... 7,204,407 4,351,142 3,029,826
Credit and collections...................... 9,064,706 5,597,932 3,696,439
Telephone................................... 4,265,960 2,200,575 1,739,795
Depreciation................................ 739,105 1,342,106 713,319
Miscellaneous............................... 17,135,704 9,144,380 6,317,003
------------ ------------ -----------
TOTAL OPERATING EXPENSES......................... 130,819,292 77,586,680 52,628,104
------------ ------------ -----------
TOTAL EXPENSES................................... 141,094,227 84,069,415 60,664,811
------------ ------------ -----------
INCOME BEFORE INCOME TAXES....................... 66,419,524 51,130,010 32,443,127
Income taxes................................... 27,778,545 20,962,876 13,950,545
------------ ------------ -----------
NET INCOME....................................... $ 38,640,979 $ 30,167,134 $18,492,582
============ ============ ===========
Net income per common share...................... $ 1.50 $ 1.33 $ 0.90
============ ============ ===========
Weighted average number of shares outstanding.... 25,723,378 22,732,509 20,624,175
============ ============ ===========
See accompanying notes to consolidated financial statements.
F-4
34
WFS FINANCIAL AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ---------- ------------ ------------
Balance, January 1, 1994........ 18,749,250 $ 3,013,135 $ (1,215,028) $ 1,798,107
Net income...................... 18,492,582 18,492,582
Additional capital contribution
by parent..................... $4,000,000 4,000,000
Amounts retained by parent...... (15,517,195) (15,517,195)
---------- ----------- ---------- ------------ ------------
Balance, December 31, 1994...... 18,749,250 3,013,135 4,000,000 1,760,359 8,773,494
Net income...................... 30,167,134 30,167,134
Sale of 4,600,000 shares of no
par value common stock........ 4,600,000 70,110,055 70,110,055
---------- ----------- ---------- ------------ ------------
Balance, December 31, 1995...... 23,349,250 73,123,190 4,000,000 31,927,493 109,050,683
Net income...................... 38,640,979 38,640,979
10% stock dividend.............. 2,334,918 (136) (136)
---------- ----------- ---------- ------------ ------------
Balance, December 31, 1996...... 25,684,168 $73,123,054 $4,000,000 $ 70,568,472 $147,691,526
========== =========== ========== ============ ============
See accompanying notes to consolidated financial statements.
F-5
35
WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
OPERATING ACTIVITIES
Net income................................... $ 38,640,979 $ 30,167,134 $ 18,492,582
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for credit losses................ 10,274,935 6,482,735 8,036,707
Depreciation............................... 739,105 1,342,107 713,319
Amortization of deferred fees.............. (249,137) (286,357) (166,906)
Amortization of excess servicing fee
receivable.............................. 60,518,881 43,886,103 35,573,420
Decrease (increase) in interest
receivable.............................. 410,297 (649,792) (509,228)
Deferred income tax expense (benefit)...... 12,452,895 (4,710,919) 689,188
Net change in other assets................... (7,310,659) 2,422,299 147,804
Net change in other liabilities.............. 1,585,663 5,654,448 103,756
Origination of contracts..................... (2,121,689,461) (1,527,648,718) (1,177,031,272)
Proceeds from sale of contracts.............. 2,090,000,000 1,480,000,000 842,000,000
Other change in contracts.................... 105,757,373 151,883,437 123,893,345
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. 191,130,871 188,542,477 (148,057,285)
INVESTING ACTIVITIES
Purchase of furniture, fixtures and
equipment.................................. (13,360,730) (2,763,089) (1,878,650)
Net increase in trust receivable............. (185,309,504) (120,565,364) (50,157,584)
--------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES........ (198,670,234) (123,328,453) (52,036,234)
FINANCING ACTIVITIES
Capital contribution from parent............. 4,000,000
Amounts retained by parent................... (15,517,195)
Repayment of bonds payable................... (22,073,829)
Issuance of common stock..................... 70,110,055
Increase in trustee accounts................. 51,756,638 125,487,960 33,299,168
Net (decrease) increase in borrowing from
parent..................................... (195,792,181) 200,385,375
--------------- --------------- ---------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES................................. 51,756,638 (194,166) 200,093,519
--------------- --------------- ---------------
INCREASE IN CASH AND CASH EQUIVALENTS........ 44,217,275 65,019,858
Cash and cash equivalents at beginning of
period..................................... 65,019,858 -- --
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 109,237,133 $ 65,019,858 $ --
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Interest................................... $ 9,541,592 $ 18,773,481 $ 75,078,106
Income taxes............................... 17,293,737 18,642,966 4,708,857
See accompanying notes to consolidated financial statements.
F-6
36
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
include the accounts of WFS Financial Inc ("WFS") and its subsidiaries, WFS
Financial Auto Loans, Inc. ("WFAL"), WFS Financial Auto Loans 2, Inc. ("WFAL2")
and WFS Investments, Inc. ("WFSII"). Certain amounts have been reclassified to
conform to the 1996 presentation. After the initial public offering (see
discussion in Note N -- Public Offering) on August 8, 1995, WFS became a
majority owned subsidiary of Western Financial Bank, F.S.B. ("the Bank") which
is a wholly owned subsidiary of Westcorp.
Amounts for the 1994 consolidated financial statements have been derived
from the audited combined financial statements presented in the Form S-1
Registration Statement and reflect the following: (i) WFS, a wholly-owned
consumer finance subsidiary of the Bank, (ii) The Auto Finance Division of the
Bank, and (iii) the Bank's special purpose finance subsidiaries, WFAL and WFAL2.
The equity of WFS is presented as the equity position of the combined entity.
Earnings of the combined entity are presented as amounts retained by parent.
The accompanying consolidated financial statements include an allocation of
expenses for various administrative services provided by Westcorp including, but
not limited to, payroll, data processing, accounting, legal, tax, cash
management, purchasing and auditing. Such expenses are allocated based on actual
usage or using other allocation methods which, in the opinion of management,
approximate actual usage. Management believes that the allocation methods are
reasonable and representative of what such allocated expenses would have been
had WFS operated as an unaffiliated entity. These allocated expenses are
included in general and administrative costs paid to parent in the Consolidated
Statements of Income. (See discussion in Note F -- Intercompany Agreements)
On January 1, 1997, various administrative departments of Westcorp were
transferred to the Bank and WFS as part of a restructuring plan to align
administrative services with the corresponding operations. As part of this plan,
Westcorp will only retain certain functions including payroll, human resources
and certain treasury functions.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Nature of Operations: WFS is a consumer finance company that specializes in
the purchase, securitization and service of fixed rate consumer auto loans
("contracts"). WFS purchases contracts from Dealers on a nonrecourse basis and
originates loans directly with the consumer which are collectively known as
contracts.
Cash and Cash Equivalents: Cash and cash equivalents includes short term
investments with the Bank. There are no material restrictions as to the
withdrawal or usage of this amount.
Allowance for Credit Losses: The allowance for credit losses is maintained
at a level believed adequate by management to absorb potential losses in the
on-balance sheet contract portfolio. Management's determination of the adequacy
of the allowance is based on an evaluation of the portfolio, past contract loss
experience, current economic conditions, volume, pending contract sales, growth
and composition of the contract portfolio, and other relevant factors. The
allowance is increased by provisions for credit losses charged against income.
Sales of Contracts: Contracts are originated and sold to investors with
servicing rights retained by WFS. WFS does not retain any recourse with respect
to the contracts securitized. Gain on sale of contracts are determined by the
difference between sales proceeds and the cost of the contracts adjusted for the
present value of the difference, if any, between the estimated future servicing
revenues and normal servicing revenues
F-7
37
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
for those contracts where servicing is retained by WFS. These excess servicing
rights are capitalized and amortized over the expected repayment life of the
underlying contracts.
WFS evaluates quarterly the carrying value of its capitalized servicing
rights in light of the actual repayment experience of the underlying contracts
and makes adjustments to reduce the carrying value, if appropriate. Servicing
income and amortization of excess servicing rights are included in servicing
income in the Consolidated Statements of Income.
As servicer of these contracts, WFS holds and remits funds collected from
the borrowers on behalf of the trustee pursuant to a reinvestment contract that
WFS has entered into with the Bank. These amounts are reported as amounts held
on behalf of trustee. WFS retains servicing rights and is entitled to servicing
income. Amounts due from trusts represents servicing income earned by WFS for
which WFS has not yet received repayment from the trust.
Nonaccrual Contracts: WFS continues to accrue interest income on contracts
until the contract is charged off, which occurs automatically after the contract
is past due 120 days. At the time that the contract is charged off, all accrued
interest is also charged off.
Contracts Held for Sale: Contracts held for sale are stated at the lower of
aggregate amortized cost or market. The carrying amount of the specific contract
pools sold is used to compute gains or losses. Market value is based on
discounted cash flow calculations, which approximates the amounts realized upon
securitization of the contracts.
WFS' hedging strategy includes the use of two-year Treasury securities
forward agreements. These agreements are entered into by the Company in numbers
and amounts which generally correspond to the principal amount of the
securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying contracts.
Because of this inverse relationship, WFS can effectively lock in its gross
interest rate spread at the time of the hedge transaction. Gains and losses
relative to these agreements are deferred and recognized in full at the time of
securitization as an adjustment to the gain or loss on the sale of the
contracts. WFS uses only highly rated counterparties and further reduces its
risk by avoiding any material concentration with a single counterparty. Credit
exposure is limited to those agreements with a positive fair value and only to
the extent of that fair value.
Furniture, Fixtures and Equipment: Furniture, fixtures and equipment are
recorded at cost less accumulated depreciation and amortization and are
depreciated over their estimated useful lives principally using the straight
line method for financial reporting and accelerated methods for tax purposes.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter. As part of
Westcorp's efforts to more closely align administrative services with those
operations they support Westcorp transferred computers and software to WFS
during 1996.
Interest Income and Fee Income: Interest income is earned in accordance
with the terms of the contracts. For precomputed contracts, interest is earned
monthly and for simple interest contracts, interest is earned daily. Interest
income on certain contracts is earned using the effective yield method and
classified on the balance sheet as interest receivable to the extent not
collected. Other contracts use the sum of the months digits method, which
approximates the effective yield method.
WFS defers contract origination fees and premiums paid to dealers. The net
amount is amortized as an adjustment to the related contract's yield, over the
contractual life of the related contract or until the contract is sold at which
time any remaining amounts are included as part of the gain on sale of
contracts. Fees for other services are recorded as income when earned.
F-8
38
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Income Taxes: WFS files consolidated federal and state tax returns as part
of a consolidated group that includes the Bank and Westcorp. WFS taxes are paid
in accordance with a tax sharing agreement that allocates taxes based on the
relative income or loss of each entity on a stand-alone basis.
Fair Value of Financial Instruments: WFS' financial instruments as defined
by Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," including short term investments, excess
servicing receivable, forward agreements and senior note payable are accounted
for on a historical cost basis which, due to the nature of these financial
instruments, approximates fair value. Contracts receivable are accounted for at
the lower of amortized cost or market value.
Current Accounting Pronouncements: Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS 123") was
issued by the Financial Accounting Standards Board in October 1995 and is
effective for fiscal years beginning after December 15, 1995. SFAS 123 provides
for companies to recognize compensation expense associated with stock based
compensation plans over the anticipated service period based on the fair value
of the award on the date of grant. As allowed by SFAS 123, however, WFS has
elected to continue to measure compensation costs as prescribed by APB Opinion
No. 25 "Accounting for Stock Issued to Employees" with pro forma disclosures of
net income and earnings per share, if material.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
("SFAS 125") was issued by the Financial Accounting Standards Board in June
1996. SFAS 125 established standards for the recognition and measurement of
transactions involving transfers of financial assets. SFAS 125 adopts a
financial components approach which, after a transfer of financial assets,
requires recognition of assets which continue to be controlled by the transferor
and derecognition of assets for which control has been surrendered. SFAS 125 is
to be applied prospectively to transactions occurring after January 1, 1997.
Transactions prior to adoption are not affected. The adoption of SFAS 125 is not
expected to have a material impact on the financial condition or results of
operations of WFS.
NOTE B -- NET CONTRACTS RECEIVABLE
WFS' contract portfolio consists of contracts purchased from new and used
automobile Dealers ("Indirect contracts") on a nonrecourse basis and contracts
financed directly with the consumer ("Direct contracts"). If precomputed finance
charges are added to an Indirect 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.
F-9
39
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Net contracts receivable consisted of the following:
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
Consumer:
Indirect contracts.................................... $252,598,389 $329,863,227
Direct contracts...................................... 15,117,565 25,194,734
Less unearned discounts............................... 33,768,190 38,627,941
------------ ------------
233,947,764 316,430,020
Allowance for credit losses............................. (7,647,986) (7,794,974)
Dealer participation, net of deferred contract fees..... 5,642,704 7,401,146
------------ ------------
231,942,482 316,036,192
Less contracts held for sale............................ 186,302,823 219,916,889
------------ ------------
$ 45,639,659 $ 96,119,303
============ ============
The following table presents the changes in amounts deferred and carried as
adjustments to the contract balance including deferred contract fees and dealer
participation.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
Balance at beginning of period........... $ 7,401,146 $ 10,085,951 $ 4,397,581
New deferrals............................ 62,584,566 44,279,917 38,129,400
Amortization............................. (4,616,948) (4,318,883) (3,404,164)
Sales.................................... (59,726,060) (42,645,839) (29,036,866)
------------ ------------ ------------
Balance at end of period................. $ 5,642,704 $ 7,401,146 $ 10,085,951
============ ============ ============
At December 31, 1996, WFS held two-year Treasury securities forward
agreements with a notional amount outstanding of $80 million. The fair value of
these forward agreements was a gain of $56 thousand.
Contracts serviced by WFS for the benefit of others totalled approximately
$2.8 billion at December 31, 1996 and $1.9 billion at December 31, 1995.
NOTE C -- ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses were as follows:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
Balance at beginning of year............ $ 7,794,974 $ 9,576,041 $ 5,571,333
Provision for credit losses............. 10,274,935 6,482,735 8,036,707
Charged off contracts................... (15,579,962) (12,828,961) (10,918,707)
Recoveries.............................. 5,158,039 4,565,159 6,886,708
------------- ------------ ------------
Balance at end of year.................. $ 7,647,986 $ 7,794,974 $ 9,576,041
============= ============ ============
NOTE D -- EXCESS SERVICING RECEIVABLE
Excess servicing receivable consists of the present value of the estimated
future cash flows to be received by WFS from the excess spread created in
securitizations. The estimated future cash flows are determined by taking into
account certain assumptions principally regarding prepayments, credit losses and
servicing costs. These cash flows are then discounted at a rate management
believes to be at market. The balance of the
F-10
40
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
excess servicing receivable is then amortized against actual servicing income on
a monthly basis. The assumptions used are evaluated each quarter and adjusted,
if appropriate, to reflect performance of the contracts.
The following table shows the activity of the excess servicing receivable:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------ ------------
Beginning balance.............................. $ 78,045,241 $ 43,425,826 $ 46,241,112
Additions...................................... 104,071,101 78,505,518 32,758,134
Amortization................................... (60,518,881) (43,886,103) (35,573,420)
------------ ------------ ------------
Ending balance................................. $ 121,597,461 $ 78,045,241 $ 43,425,826
============ ============ ============
Additions to excess servicing receivable result from new securitizations
and reflect the initial estimate of the present value of the future cash flows
of the contracts securitized. The amortization of excess servicing receivable
represents the decline in the excess servicing receivable for the respective
periods based upon the present value of the remaining estimated future cash
flows as of period end.
In initially valuing its excess servicing receivable, WFS establishes an
off balance sheet allowance for expected losses under the spread account
provisions of the securitization transactions and this allowance is included as
a component in calculating the excess servicing receivable. The allowance is
based upon historical experience and management's estimate of future performance
regarding primarily prepayments, credit losses, and servicing costs. The amount
is reviewed periodically and adjustments are made if actual experience or other
factors indicate that future performance may differ from management's prior
expectations.
The following table presents the estimated future undiscounted cash flows
to be received from securitizations, net of estimated costs to service and after
giving effect to estimated prepayments. To arrive at the excess servicing
receivable, this amount is reduced by the off balance sheet allowance
established for future losses and by discounting these cash flows to present
value.
DECEMBER 31,
1996
--------------
Estimated net undiscounted cash flows........................ $ 288,733,422
Off balance sheet allowance for losses....................... (152,796,759)
Discount to present value.................................... (14,339,202)
--------------
Excess servicing receivable.................................. $ 121,597,461
==============
Outstanding balance of contracts sold through
securitizations............................................ $2,812,649,719
Off balance sheet allowance for losses as a percent of
contracts sold through securitizations..................... 5.43%
WFS believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio.
F-11
41
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE E -- FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following at:
DECEMBER 31,
--------------------------
1996 1995
----------- ----------
Computers and software.................................... $22,432,667 $4,620,278
Furniture, fixtures and leasehold improvements............ 2,951,804 1,327,706
Equipment................................................. 2,082,573 1,352,362
Automobiles............................................... 209,399 168,866
----------- ----------
27,676,443 7,469,212
Less accumulated depreciation............................. 10,772,204 3,186,598
----------- ----------
$16,904,239 $4,282,614
=========== ==========
As part of WFS' efforts to more closely align administrative services with
corresponding operations, WFS transferred computers and software from Westcorp
during 1996.
NOTE F -- INTERCOMPANY AGREEMENTS
In 1995, WFS entered into a Line of Credit agreement and a Senior Note with
the Bank. The Line of Credit agreement permits WFS to draw up to $400 million to
be used in its operations. The Line of Credit terminates on December 31, 1999
although the term may be extended by WFS for additional periods up to 56 months.
When secured by contracts, the Line of Credit carries an interest rate equal to
the Federal composite commercial paper rate plus 10 basis points, with the
margin increasing to 50 basis points to the extent the obligation is not
secured. The average balance of the Line of Credit was $3.8 million and $72.0
million for 1996 and 1995, respectively. The weighted average interest rate was
5.56% and 5.96% and the interest expense was $0.2 million and $4.3 million for
1996 and 1995, respectively. No amount was outstanding at December 31, 1996.
WFS also borrowed $125 million from the Bank under the terms of the Senior
Note. The Senior Note provides for principal payments of $25 million per year,
commencing on April 30, 1999 and continuing through its final maturity, April
30, 2003. Interest payments on the Senior Note are due quarterly, in arrears,
calculated at the rate of 7.25% per annum. The Senior Note is not secured.
Pursuant to the terms of the Senior Note, WFS may not incur any other
indebtedness which is senior to the obligations evidenced by the Senior Note
except for (i) indebtedness collateralized or secured under the Line of Credit
and (ii) indebtedness for similar types of warehouse lines of credit. The Senior
Note had interest expense of $9.1 million and $6.0 million for 1996 and 1995,
respectively.
WFS also invests its excess cash at the Bank under an Investment Agreement.
The Bank pays WFS an interest rate equal to the Federal composite commercial
paper rate on this excess cash. The weighted average interest rate was 5.53% and
5.80% for 1996 and 1995, respectively. The average balance of the excess cash
was $14.5 million and $4.0 million, and the interest income earned was $0.8
million and $0.2 million during 1996 and 1995, respectively. At December 31,
1996, WFS held $102 million of excess cash with the Bank under the investment
agreement.
WFS has entered into management agreements for certain services including
data processing, legal, accounting, payroll, purchasing, compliance and audit.
These agreements may be terminated at any time provided notice is given within 5
days. General and administrative costs paid to parent are based upon allocation
methods that include the contracts serviced as well as the total number of
personnel employed. Management believes that the allocation methods used are
reasonable and representative of what such expenses would have been had WFS
operated as an unaffiliated entity.
F-12
42
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The Bank has entered into the WFS Reinvestment Contract ("RIC") pursuant to
which WFS receives all of the cash flows from the trusts of the securitization
transactions undertaken by WFS and holds the cash in a spread account for each
of the securitization transactions to further invest as WFS determines,
including to use in its business activities. Under the terms of the RIC, the
Company is obligated to pay to the Bank all sums due from the Bank, when due by
the Bank, under the terms of the various reinvestment contracts to which the
Bank is a party as to each securitization transaction. The Bank is obligated
pursuant to an agreement between the Bank and FSA to provide collateral as a
condition of the various reinvestment contracts of the Bank being deemed
eligible investments for the trusts' cash flows and the spread account funds. As
consideration to the Bank for providing that collateral, WFS pays to the Bank a
fee equal to 12.5 basis points of the amount of collateral pledged by the Bank.
During 1996, WFS paid to the Bank $0.5 million for its use of collateral. Unless
earlier terminated, the term of the RIC is perpetual for so long as the RIC
constitutes an eligible investment as defined in any pooling and servicing
agreement or similar agreement related to the securitization trusts. During
1996, the average amount outstanding on the RIC was $384 million. At December
31, 1996, the outstanding balance was $393 million.
WFS has entered into an agreement with Westran Services Corp. ("Westran"),
which is a subsidiary of Westcorp to receive travel related services. WFS
believes that the services rendered by Westran are reasonable and representative
of what such costs would have been had WFS used an unaffiliated entity.
NOTE G -- COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more as of December 31, 1996 are as
follows:
1997.................................................... $ 5,262,687
1998.................................................... 4,970,762
1999.................................................... 4,101,919
2000.................................................... 3,250,930
2001.................................................... 1,856,485
Thereafter.............................................. 1,440,717
-----------
$20,883,500
===========
These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense for premises and equipment amounted
to $5.3 million, $3.4 million and $2.5 million for the years ended December 31,
1996, 1995 and 1994, respectively.
WFS is involved as a party to certain legal proceedings incidental to its
business. Management of WFS believes that the outcome of such proceedings will
not have a material effect upon its business or financial condition.
NOTE H -- SERVICING INCOME
Servicing income consists of the following components:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------ ----------- -----------
Excess servicing income........................... $ 55,219,208 $34,164,427 $42,886,523
Contractual servicing income...................... 24,403,981 16,313,497 12,295,246
Other fee income.................................. 32,345,919 21,346,171 12,500,838
------------ ----------- -----------
Total servicing income..................... $111,969,108 $71,824,095 $67,682,607
============ =========== ===========
F-13
43
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE I -- PENSION PLAN
WFS participates in the Westcorp Employee Stock Ownership and Salary
Savings Plan ("the Plan"), which covers essentially all full-time employees who
have completed one year of service. Contributions to the Plan are discretionary
and determined by the Board of Directors of Westcorp within limits set forth
under the Employee Retirement Income Security Act of 1974. Contributions to the
Plan are fully expensed in the year in which the contribution is made.
Westcorp's contributions to the Plan amounted to $3.4 million, $2.4 million
and $1.2 million in 1996, 1995 and 1994, respectively.
NOTE J -- STOCK APPRECIATION RIGHTS AND STOCK OPTIONS
In June 1996, WFS replaced the Stock Appreciation Rights plan (SARs) with
an Incentive Stock Option Plan which is subject to the approval of the
shareholders at the April 28, 1997 meeting. The new plan was implemented to
eliminate the quarterly volatility in earnings per share.
Under the plan, WFS reserved 550,000 shares of common stock for future
issuance to certain employees under an incentive stock option plan. Reserved,
unissued shares totalled 30,431 at December 31, 1996. The options may be
exercised at a price of $18.00 per share after the first year, in whole or in
part, within 5 years after the date of grant. Additionally, the weighted average
life of the options at December 31, 1996 was 4.6 years and the weighted average
price of the options is $18.00 per share.
At December 31, 1996, there were no exercisable stock options.
Stock option activity is summarized as follows:
PRICE PER
SHARES SHARE
------- ---------
Outstanding at January 1, 1996.......................... -- --
Issued................................................ 519,569 $18.00
Exercised............................................. -- --
------- ------
Outstanding at December 31, 1996........................ 519,569 $18.00
======= ======
Effective January 1, 1996, WFS adopted Statement of Financial Accounting
Standards, "Accounting for Stock-Based Compensation", ("SFAS 123"). SFAS 123
provides for companies to recognize compensation expense associated with stock
based compensation plans over the anticipated service period based on the fair
value of the award on the date of grant. However, SFAS 123 allows companies to
continue to measure compensation costs prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25").
Companies electing to continue accounting for stock based compensation plans
under APB 25 must make pro forma disclosures of net income and earnings per
share as if SFAS 123 has been adopted if the fair value of the options has a
material impact on earnings. WFS has continued to account for stock based
compensation plans under APB 25.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because WFS' employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for both 1995
and 1996; risk-free interest rate of 6.2%; volatility factor
F-14
44
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
of the expected market price of WFS' common stock of 0.30 and an expected life
of the options of 5 years. The weighted-average fair value of options granted
during 1996 was $6.82. The impact of applying SFAS 123 in 1996 and 1995 is
immaterial to the financial statements of WFS.
NOTE K -- INCOME TAXES
Income tax expense consisted of the following:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Current:
Federal.................................. $12,036,257 $18,475,348 $10,040,183
State franchise.......................... 3,289,393 7,198,447 3,221,174
----------- ----------- -----------
15,325,650 25,673,795 13,261,357
Deferred:
Federal.................................. 9,455,551 (3,377,085) 189,135
State franchise.......................... 2,997,344 (1,333,834) 500,053
----------- ----------- -----------
12,452,895 (4,710,919) 689,188
----------- ----------- -----------
$27,778,545 $20,962,876 $13,950,545
=========== =========== ===========
The difference between total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
due to:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Tax at statutory rate....................... $23,246,834 $17,895,504 $11,355,094
California franchise tax (net of Federal tax
benefit).................................. 4,086,379 3,067,372 2,418,797
Other....................................... 445,332 -- 176,654
----------- ----------- -----------
$27,778,545 $20,962,876 $13,950,545
=========== =========== ===========
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Amounts previously reported as
current and deferred income tax expense have been restated. Such changes to the
components of the expense occur because all tax alternatives available to WFS
are not known for a number of months subsequent to year end.
F-15
45
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Significant components of WFS' deferred tax liabilities and assets are as
follows:
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
Deferred tax assets:
Loan loss reserves..................................... $ 3,516,544 $ 3,623,337
Accelerated securitization income recognized for tax
purposes............................................ -- 6,357,502
State tax deferred benefit............................. 2,227,042 2,128,051
Other assets........................................... 877,549 1,233,826
----------- -----------
Total deferred tax assets................................ 6,621,135 13,342,716
Deferred tax liabilities:
Accelerated depreciation for tax purposes.............. (347,729) (153,799)
Asset securitization income recognized for book
purposes............................................ (6,242,419) --
Other liabilities...................................... (2,773,820) (3,478,855)
----------- -----------
Total deferred tax liabilities........................... (9,363,968) (3,632,654)
----------- -----------
Net deferred tax (liability) asset....................... $(2,742,833) $ 9,710,062
=========== ===========
NOTE L -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value information about financial instruments whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value, are reported using quoted market prices. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instrument. Fair values for certain financial
instruments and all non-financial instruments are not required to be disclosed.
Accordingly, the aggregate fair value of amounts presented do not represent the
underlying value of WFS.
The following methods and assumptions were used by WFS in estimating its
fair value disclosures for financial instruments:
Short term investments -- parent: The carrying amount reported in the
balance sheet approximates fair value.
Contracts receivable: The fair values for fixed rate contracts are
based on quoted market prices of similar contracts sold in conjunction with
securitization transactions, adjusted for differences in contract
characteristics.
Excess servicing receivable: The fair value for excess servicing
receivable is based on discounted cash flow calculations.
Forward agreements: The fair value is estimated by obtaining market
quotes from brokers.
Senior note payable -- parent: The fair value of the senior note is
estimated using discounted cash flow analysis, based on current incremental
borrowing rates for similar instruments.
F-16
46
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The estimated fair values of WFS' financial instruments are as follows at
December 31:
1996 1995
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
------------ ------------ ------------ ------------
FINANCIAL ASSETS:
Short term investments -
parent................. $109,237,133 $109,237,133 $ 65,019,858 $ 65,019,858
Contracts receivable..... 239,590,468 250,365,124 323,831,166 340,132,246
Excess servicing
receivable............. 121,597,461 126,335,000 78,045,241 78,992,698
FINANCIAL INSTRUMENT
AGREEMENTS HELD FOR
PURPOSES OTHER THAN
TRADING:
Forward agreements....... -- 56,250 -- (1,418,926)
FINANCIAL LIABILITIES:
Senior note payable -
parent................. 125,000,000 125,154,254 125,000,000 125,336,346
NOTE M -- FINANCIAL INSTRUMENTS AGREEMENTS
WFS uses two-year Treasury securities forward agreements to minimize its
exposure to interest rate risk. The fair value of these instruments may vary
with changes in interest rates. At December 31, 1996, WFS' portfolio consisted
of forward agreements with a notional amount of $80 million and credit exposure
of $56 thousand.
Notional amounts do not represent amounts exchanged with other parties and,
thus are not a measure of WFS' exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.
NOTE N -- PUBLIC OFFERING
On June 5, 1995, contracts, amounts due from trusts, excess servicing
receivable and other assets with a book value on May 1, 1995 of $549 million
were transferred from the Bank to WFS net of other liabilities of $190 million
as of the same date at their book value using financing provided by the Bank in
the form of a long-term note and an advance under a line of credit agreement.
On August 8, 1995, WFS sold to the public 5.1 million shares of common
stock at a price of $15.00 per share raising $70.1 million in additional
capital. The number of shares and per share information have been adjusted for
the 10% stock dividend which occurred in 1996. The Bank retained an ownership
interest in WFS of 80.3%.
F-17
47
WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE O -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1996 and 1995. Certain quarterly amounts have been
adjusted to conform with the year end presentation.
THREE MONTHS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ----------- ----------- -----------
1996
Interest income..................... $14,336,920 $16,326,560 $16,152,610 $16,484,176
Interest expense.................... 2,696,016 2,493,036 1,911,450 2,173,031
Net interest income................. 11,640,904 13,833,524 14,241,160 14,311,145
Provision for credit losses......... 5,187,000 827,622 1,918,481 2,341,832
Income before income taxes.......... 16,155,412 16,739,528 17,816,987 15,707,597
Income taxes........................ 6,835,791 7,026,505 7,623,793 6,292,456
Net income.......................... 9,319,621 9,713,023 10,193,194 9,415,141
Net income per common share......... 0.36 0.38 0.40 0.37
1995
Interest income..................... $14,071,661 $15,157,832 $15,504,623 $16,370,772
Interest expense.................... 4,379,855 4,656,315 3,942,199 3,606,821
Net interest income................. 9,691,806 10,501,517 11,562,424 12,763,951
Provision for credit losses......... 131,518 1,939,695 2,459,568 1,951,954
Income before income taxes.......... 9,658,769 11,711,923 14,029,677 15,729,641
Income taxes........................ 4,056,683 4,826,728 5,778,596 6,300,869
Net income.......................... 5,602,086 6,885,195 8,251,081 9,428,772
Net income per common share......... 0.27 0.33 0.34 0.37
F-18
48
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS PAGE #
- - -------- ------------------------------------------------------------------------- -----------
1 Underwriting Agreement(1)................................................
3.1 Articles of Incorporation(1).............................................
3.2 Bylaws(1)................................................................
4 Specimen WFS Financial Inc. Common Stock Certificate(5)..................
10.1 Westcorp Incentive Stock Option Plan(2)..................................
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings Plan(3).......
10.3 Westcorp 1991 Stock Option Plan(4).......................................
10.4 1985 Executive Deferral Plan(1)..........................................
10.5 1988 Executive Deferral Plan II(1).......................................
10.6 1992 Executive Deferral Plan III(1)......................................
10.7 Transfer Agreement between WFS Financial Inc and Western Financial Bank,
F.S.B., dated May 1, 1995(1).............................................
10.8 Promissory Note of WFS Financial Inc in favor of Western Financial Bank,
F.S.B., dated May 1, 1995(1).............................................
10.9 Line of Credit Agreement between WFS Financial Inc and Western Financial
Bank, F.S.B., dated May 1, 1995(1).......................................
10.10 Tax Sharing Agreement between WFS Financial Inc and Western Financial
Bank, F.S.B., dated January 1, 1994(1)...................................
10.11 Master Reinvestment Contract between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1).............................
10.12 Management Agreement between WFS Financial Inc and Western Financial
Bank, F.S.B., dated May 1, 1995(1).......................................
10.13 Management Agreement among WFS Financial Inc, Western Financial Bank,
F.S.B., WFS Financial Auto Loans, Inc. and WFS Financial Auto Loans 2,
Inc. dated May 1, 1995(1)................................................
10.14 Form of WFS Financial Inc Dealer Agreement(5)............................
10.15 Form of WFS Financial Inc Loan Application(5)............................
10.16 WFS 1996 Incentive Stock Option Plan(6)..................................
10.17 Westcorp Employee Stock Ownership and Salary Savings Plan(7).............
21.1 Subsidiaries of WFS Financial Inc........................................ F-21
23.1 Consent of Ernst & Young LLP............................................. F-22
24 Power of Attorney(1).....................................................
- - ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration Statement on
Form S-1 (File No. 33-93068), filed August 8, 1995 incorporated herein by
reference under Exhibit Number indicated.
(2) Exhibits previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference under
Exhibit Number indicated.
(3) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.
(4) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under Exhibit Number indicated.
F-19
49
(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration statement on Form S-1 (File No. 33-93068) incorporated herein
by reference under Exhibit Number indicated.
(6) Exhibit previously filed with WFS Registration Statement of Form S-8 (File
No. 33-07485), filed July 3, 1996 incorporated herein by reference under the
Exhibit Number indicated. Amendment No. 1 dated as of July 26, 1996 to the
WFS Registration Statement on Form S-8 (File No. 33-07485) incorporated
herein by reference under Exhibit number indicated.
(7) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039), filed August 29, 1996 incorporated herein by reference
under Exhibit Number indicated.
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