Just a year ago, WFS Financial Inc. of Irvine, Calif., was struggling. After a disastrous plunge into the high-risk, subprime market, WFS was on its way to a $16.6 million loss in 1998 - this after earning $31.3 million in 1997 and $38.6 million in 1996.
But changes were in the works. WFS put tighter controls on its loans, stopped offering subprime loans and even cut back on loans to so-called nonprime customers, just below prime. WFS also cut 400 employees, nearly 20 percent of its work force, and consolidated its field offices.
The turnaround also came with new blood. WFS CEO Joy Schaefer, who has been with the company for 10 years, hired Tom Wolfe from Key Corp.'s auto finance, mortgage and consumer credit business in April 1998 to be president and COO.
The tandem, both 40, have led the changes at WFS, a unit of Western Financial Bank, which is part of Westcorp, also of Irvine.
Those changes are reflected in the bottom line.
Today, 70 percent of WFS Financial's originations in the third quarter of 1999 were prime-caliber loans. That was about the same as a year ago, but a sharp contrast when compared with only 52 percent prime loans in the third quarter of 1997.
Credit losses for the third quarter of 1999 dropped to 1.8 percent of average serviced automobile contracts, vs. 3.3 percent a year earlier. Including a record third-quarter profit of $12.7 million, net income through the first three quarters of 1999 was $36.4 million. And although WFS has such big customers as AutoNation Inc., FirstAmerica Automotive Inc. and Norm Reeves Honda Superstore in Cerritos, Calif., no dealer group represents more than 2 percent of originations.
In an interview this month with Staff Reporter Mark Rechtin, Schaefer and Wolfe discussed WFS's struggles and its prospects. Edited excerpts follow.
Describe your turnaround.
Schaefer: 1997 was a small step backward to take a big leap forward. We had 2,150 employees 18 months ago, and now we have 1,750. But we've grown by $1 billion. We reinvented ourselves, kept the best people and brought in some new talent. We've just put in a new front-end system, whereas before we had one each for prime and nonprime. We've balanced our centralized operations with regionalized field operations because we want to have high touch with the dealers. The auto industry being strong has helped us reach our goal sooner. But other companies aren't doing so well, so the industry is not the only factor here.
How would you describe your business now?
Wolfe: The border between prime and nonprime is the niche for us. WFS has a history of profitable lending in that area, even in 1996, 1997 and 1998. As we've brought in new tools and technology, we are better able to buy that type of paper and further segment that market out. There are other players, but most of the competition is regionalized, and it's only part of their business, not their day-to-day business.
We market to dealers with second-tier customers (with credit scores) in the high-500 to mid-600 score range. We're in 42 states. The other states are not enough volume to justify physical locations, but we'll go there if they call us. We may do some further expanding in the states where we're already located. We have a 25 percent annual growth rate in originations volumes over the past five years. We've upgraded all our systems, the front end, the score cards, the behavioral judging, the warehousing. We have a $5 billion portfolio that requires technology and expertise. We've invested a lot, but we're not finished.
Schaefer: We're consistent. People go into this middle niche, get their fingers burnt and then go away. Then they come back again when the spreads widen. In 1996 and 1997 we saw this sort of hypercompetition.
What about relying on securitization to get more capital?
Schaefer: WFS has been in business since 1973. Being part of a bank, we have flexibility for how we want to fund the business, be it for liquid sources or capital. We can pick and choose when we go to the securitization market. Securitiza-tion has been a regular part of our funding since 1985. We do it most every quarter, and Wall Street loves us because we pay off. We trade in the same spread range as Ford Credit, Chrysler Credit and GMAC. Investment banking opens the doors to let us grow. But it's important for the bank to continue to own WFS. We give them almost 90 percent of their net income and they give us a diverse array of liquidity. The bank has complemented our ability to raise funds. The bank provides short-term warehousing funding for three to nine months, whereas securitization is more long-term. The danger is in the assumption of how you assess cash flows. You want to have a predictable, consistent earnings stream.
What about the subprime market? Can anyone stay profitable doing it?
Wolfe: We learned our lesson through our own originations, some of which was subprime. It was 10 percent of our overall business, at scores well below what we do now. We don't believe it was possible for us to make money at the spreads available at the time. Time has changed on what companies can charge, but I still don't think anyone can make a profit doing it. All of our subprime will be off our books by the end of the year.
Schaefer: We were being judgmental. Back then, we didn't have the early warning indicators or tools that would lock out the subprime loans. The new score cards we got in 1998 help our underwriting discipline. But back then (when WFS posted losses) there was no, 'I told you so,' from the bank. Auto finance is the gem of the corporation. We worked it out together.
Which industry has more of a glass ceiling, finance or automotive?
Schaefer: I don't look at it as gender or race. It's all about the talent and who complements whom. If I thought about white-male glass ceilings, I wouldn't be where I am today.
What does the future hold for WFS?
Wolfe: We need to stay current in our systems, technology and processes. We need to improve our back-office operations, make them better, faster and cheaper. There are opportunities in our newer markets serving the Northeast and Southeast, but also in the markets we've been serving for the long term. We need to improve our relations with dealers relative to profitability.
Schaefer: Because our parent, Western Financial Bank, is a federally chartered savings and loan, pre-emption is available to us as we continue to expand our reach into new states. This means we are under a national regulation instead of state law. So if you take our nationwide footprint and our pre-emption rights, we are a great partner for ever-consolidating and changing dealer groups. This also enhances our ability to be successful on the Internet. It's our site's strategy to drive consumers back to the dealerships.
We also want to make it easier for dealers to do business with us. We want to have sustainable and rational growth, especially in markets where we've expanded but that haven't reached their potential. We have the tools to help the dealer sell the car. But it's a people business. All the score cards, technology, liquidity and manuals don't mean anything unless the people are doing the right things.