Our dealer servicing and underwriting capabilities and systems enable us to compete effectively in the automobile finance market. Our ability to compete successfully depends largely upon our strong personal relationships with dealers and their willingness to offer us contracts that meet our underwriting criteria. These relationships are fostered by the promptness with which we process and fund contracts, as well as the flexibility and scope of the programs we offer. We purchase the full spectrum of prime and non-prime contracts secured by both new and pre-owned vehicles.
WFS Financial Inc. is one of the nation's largest independent auto finance companies, specializing in originating, securitizing, and servicing new and pre-owned prime and non-prime credit quality automobile contracts through its nationwide network of 8,000-odd car dealers. The company offers refinancing and end-of-term leasing options directly to consumers. WFS Financial has headquarters in Irvine, California, and operates 39 offices nationwide. As a subsidiary of Western Financial Bank, a federal savings bank exempt from state laws, it is the only independent automobile lender to enjoy federal preemption, or exemption from state licensing and laws governing lenders.
From a Statewide to a Nationwide Market: 1973-96
In 1973, Earnest S. Rady, chairman of Westcorp, the parent company of Western Financial Bank, founded an independent lending company to provide car and truck loans to consumers. The company, which provided an alternative to loans from manufacturers' lending arms, began operations with one dealer in California. It securitized its contracts through sales of investment-grade securities on Wall Street, with the company servicing its loans.
The company grew quickly for the remainder of the 1970s and throughout the 1980s, expanding its territory and making auto loans to consumers through automobile dealerships. In 1988, it incorporated as Western Consumer Service, a wholly owned consumer finance subsidiary of Western Financial Bank, to provide non-prime automobile finance services. This market was one not serviced by the bank's automobile finance division. In 1990, Western Consumer Service changed its name to Westcorp Financial Services.
During the first half of the 1990s, WFS underwent steady growth that almost doubled its size. By 1991, the company had 32 offices. Within the next few years, it was originating contracts in seven, primarily western, states. By 1995, WFS had a network of 14 dealer centers and 63 branch offices that covered 13 states, including two states in which the company did not have offices. That year, Western Financial Bank transferred its auto finance division to WFS, which changed its name again to WFS Financial Inc. and made an initial public offering.
Also in 1995, Joy Schaefer became president and chief operating officer of WFS Financial. An accounting major at Wesleyan University, Schaefer graduated magna cum laude in the early 1980s and had joined Westcorp in 1990 after working with Liberty National Bank and Illinois National Bank and as an audit manager with Ernst & Young LLP. At Westcorp, she rapidly worked her up in the company, occupying several positions at there and at Westcorp's subsidiary, Western Financial Bank.
As president and chief operating officer of WFS Financial, Schaefer was instrumental in orchestrating its growth and development. Competition with other lenders for borrowers increased in the mid-1990s, pushing loan rates downward, and WFS Financial, along with other auto financers, began to stretch its standards, taking on more risk for less return by making loans to people with tarnished credit. From 1996 to 1997, Schaefer enacted a strategy for aggressive expansion based on focusing more on the non-prime market.
During the second half of the 1990s, "WFS Financial continue[d] to experience increasing loan volumes due to its geographic expansion and continued growth in existing markets," according to Schaefer in a company release. By 1997, the company had issued loans in 32 states, with non-prime loans accounting for fully 50 percent of the loans issued.
Unfortunately, these non-prime loans resulted in a sharp rise in the company's loan losses and delinquencies in 1997. "Bankruptcies are at an all-time high," Lee Whatcott, the company's chief financial officer, remarked in a February 1998 Orange County Register article. "We are tightening our underwriting to make sure we get paid for the risks we take." At the end of 1997, loan losses at WFS Financial reached a record high of 3.4 percent, and the company's earnings took a beating. Profits decreased 19 percent to $31.3 million. At the end of 1998, the company posted losses of $16.6 million.
Other auto lenders that also specialized in non-prime loans were similarly struggling with rising delinquency rates and increased competition, and many did not survive. WFS Financial took stock of where it stood and made the decision to slow down its growth with fewer loan originations.
Corporate Restructuring: 1997-2000
In 1997, Schaefer, at the age of 38, succeeded Earnest S. Rady as chief financial officer of WFS Financial. That year, she also led the company on a corporate restructuring plan. Having added 15 states a year to its base of operations between 1994 and 1996, WFS Financial's operations were scattered, and the company was plagued by redundancies. Schaefer's plan aimed to reduce these overlaps, improve leadership, and reorganize operations.
In 1997 and 1998, WFS Financial spent $40 million on new technology and replaced all but two top-tier executives. Beginning in 1998, the company combined its 15 prime lending dealer centers and 44 non-prime lending branch offices in the western states into 12 regional business centers and 15 satellite offices. Later that same year, the company extended its organizational streamlining to WFS Financial's operations in the central and eastern United States. As part of this restructuring, WFS Financial cut about 20 percent of its workforce, or 400 positions, and eliminated 96 offices. Upon completion of the plan, the company operated through 21 regional business centers and 26 satellite offices nationwide. The intent of the streamlining was to provide dealers with a single point of contact, but it also had an unexpected side-effect. After the firings and office closings, droves of employees who were concerned about the company's financial problems quit, leaving behind a plethora of positions to be filled.
By 1999, WFS Financial's turnaround was complete, and the company filed to sell two million shares of common stock, leaving its parent, Western Financial Bank, with an 80 percent share of the company. Between 1985 and 1999, WFS Financial had securitized more than $14 billion of automobile contracts, becoming the fourth-largest issuer of automobile loans in the United States. In 1999, the company set a new mark when the automobile contracts it serviced totaled about $5 billion.
The year 2000 was a good one for WFS Financial. Rising non-prime loan volume triggered new records in sales and profits, and revenues increased 26 percent to $4.2 billion from $3.3 billion in 1999. Net income surged 42 percent to $75 million. The company securitized $16.6 billion of auto contracts. It also entered into agreements to provide lending services for two leading online auto buying services, CarsDirect.com and StoneAge.com. WFS Financial became the finance arm for the latter's newest program, the "StoneAge Driver."
Changes in 2002 and Beyond
By 2001, with nearly 6,000 franchised dealers in WFS Financial's portfolio, including five of the ten largest dealer groups, WFS was one of the five largest issuers of auto loans in the country. (The Big Three automakers were the top three.) That year, the company made $8.2 billion in car loans, and revenue was $602 million. This figure represented an almost 200 percent increase in sales over a three-year period. WFS Financial also acquired an interest in DealerTrack Holdings, Inc., an Internet business-to-business portal that brought together finance companies and dealers in 2001. However, WFS Financial's stock price continued to decline, leading Westcorp to decide in 2002, that it intended to acquire the outstanding 16 percent of common stock. The board later recanted this position when critics objecting, saying that such a move would be bad for the company's shareholders.
Schaefer resigned unexpectedly in 2002 and left its board scrambling to find her replacement. It settled on Tom Wolfe, who had been with the company since 1998 and was then WFS Financial's president. When, during the second half of 2002, consumers, encouraged by low loan rates, embarked on a credit-fueled spending spree, WFS experienced an increased demand for its auto loans. By this point, only 20 percent of the company's loans were non-prime. WFS Financial's customers, on average, earned $50,000 a year and borrowed $16,000 to buy a two-year old Honda or Toyota. Still, the company contracted with Balboa Life & Casualty in mid-2002 for creditor-placed insurance that transferred credit risk off of WFS Financial.
In 2003, industry experts estimated that the automobile finance group was the second-largest consumer finance industry in the country, with more than $684 billion of loan originations that year. However, there was some slowing in sales growth due to the weakening economy. WFS Financial, which still offered its services to a wide range of consumers, from those with excellent credit ratings to those with some credit challenges, announced that it had "seen an increase in non-performing loans in line with the weak economy and the drop in used car prices," according to a 2002 Knight Ridder Tribune Business News article.
In 2004, Westcorp and WFS Financial worked out the terms of an agreement whereby Westcorp would acquire the 16 percent of WFS Financial not already owned by its other subsidiary, Western Financial Bank. Before the acquisition, WFS Financial had to borrow from its parent company at third-party rates. However, once reabsorbed, the cost of funds would become the same as the cost to the bank. "We believe that this transaction makes sense for both companies and their shareholders," announced Rady, chairman of Westcorp, in a 2004 press release. The merger was unanimously approved by the boards of directors of both Westcorp and Western Financial Bank.
Although well-established throughout the country, WFS Financial continued to seek out opportunities to build its market share, especially in those states that it had entered since the mid-1990s. Its goals included increasing contract purchases from its current dealer base as well as developing new relationships with dealers, especially those doing a high volume business or ones with multiple locations. WFS Financial also sought to expand its market share of pre-owned automobile contracts.
Principal Subsidiaries: WFS Financial Auto Loans, Inc.; WFS Financial Auto Loans 2, Inc.; WFS Investments, Inc.; WFS Funding, Inc.; WFS Receivables Corporation; WFS Receivables Corporation 3; WFS Web Investments.
Principal Competitors: DaimlerChrysler Services; Ford Credit; General Motors Acceptance Corporation.
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