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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

For the transition period ________ to _________

Commission file number 33-93068

WFS Financial Inc
(Exact name of registrant as specified in its charter)

23 Pasteur, Irvine, California 92618-3816
(Address of principal executive offices)

(949) 727-1002
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      x        No              .

     As of October 31, 2002, the registrant had 41,020,033 shares outstanding of common stock, no par value. The shares of common stock represent the only class of common stock of the registrant.

     The total number of sequentially numbered pages is 29.

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WFS FINANCIAL INC AND SUBSIDIARIES

FORM 10-Q

September 30, 2002

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

See accompanying notes to consolidated financial statements.

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WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to consolidated financial statements.

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WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

See accompanying notes to consolidated financial statements.

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WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to consolidated financial statements.

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WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

     The accompanying unaudited consolidated financial statements include our accounts and the accounts of our subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year’s presentation. We are a majority owned subsidiary of Western Financial Bank, also known as the Bank, which is a wholly owned subsidiary of Westcorp, our ultimate parent company.

     In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2001 included in our Form 10-K.

     In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, also known as SFAS No. 143, in which retirement obligations would be recorded as a liability using the present value of the estimated cash flows and a corresponding amount would be capitalized as part of the asset’s carrying amount. The capitalized asset retirement cost would be amortized to expense over the asset’s useful life using a systematic and rational allocation method. The estimate of the asset retirement obligation will change and have to be revised over time. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. If applicable, an accounting change to adopt the standard would be made as of the beginning of the company’s fiscal year. We do not expect SFAS No. 143 to have a material effect on our earnings or financial position.

Note 2 – Net Contracts Receivable

     Our contract portfolio consists of contracts purchased from automobile dealers on a nonrecourse basis and contracts financed directly with the consumer. If pre-computed finance charges are added to a contract, they are added to the contract balance and carried as an offset against the contract balance as unearned discounts. Amounts paid to dealers are capitalized as dealer participation and amortized over the life of the contract.

     Net contracts receivable consisted of the following:

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     Contracts managed by us totaled $9.3 billion and $8.2 billion at September 30, 2002 and December 31, 2001, respectively. Of the $9.3 billion contracts managed at September 30, 2002, $7.4 billion were owned by us, $1.2 billion were owned by Westcorp, our ultimate parent, and $0.7 billion were owned by securitization trusts. Of the $8.2 billion contracts managed at December 31, 2001, $5.2 billion were owned by us, $1.8 billion were owned by Westcorp, and $1.2 billion were owned by securitization trusts.

Note 3 – Allowance for Credit Losses

     Changes in the allowance for credit losses were as follows:

Note 4 – Retained Interest in Securitized Assets

     The following table presents the activity of the retained interest in securitized assets, otherwise known as RISA:

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     The following table presents the estimated future undiscounted retained interest earnings to be received from securitizations:

     The decline in the off balance sheet allowance for credit losses on a dollar basis is the result of our securitization transactions no longer being treated as sales since the first quarter of 2000. We expect the RISA to be fully amortized or otherwise eliminated by the end of 2002. Older transactions treated as sales have lower losses each month after securitization as estimated future credit losses are realized. We believe that the off balance sheet allowance for credit losses is adequate to absorb probable losses in the sold portfolio that can be reasonably estimated.

Note 5 – Notes Payable on Automobile Secured Financing

     For the three and nine months ended September 30, 2002, we issued $1.3 billion and $5.6 billion of notes secured by automobile contracts, respectively, compared with $1.2 billion and $2.2 billion for the same respective periods in 2001. Of the $5.6 billion issued during 2002, $4.8 billion was through public transactions and $775 million was through a private placement. The private placement was through a conduit facility established in January 2002. There were $6.7 billion of notes payable on automobile secured financing outstanding at September 30, 2002 compared with $4.0 billion at December 31, 2001. Of these amounts, we had no amount outstanding on a conduit facility at September 30, 2002, compared to $650 million at December 31, 2001. We redeemed our $650 million and $775 million conduit facilities in March 2002 and May 2002, respectively.

     Interest payments on the public transactions are due monthly or quarterly, in arrears, based on the respective note’s interest rate. Interest payments on the conduit facilities were due monthly, in arrears, based on the respective note’s interest rate. For the three and nine months ended September 30, 2002, interest expense on all notes payable on automobile secured financing, including interest payments under interest rate swap agreements, totaled $84.1 million and $225 million, respectively, compared with $55.3 million and $158 million for the same respective periods in 2001.

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Note 6 – Notes Payable – Parent

     Our parent, the Bank, raised $300 million through an offering of subordinated capital debentures that closed on May 3, 2002. The debentures have a coupon of 9.625% and are expected to have a yield to maturity of 9.70%. The all-in cost of these debentures, including issue costs, is 10.0%. The debentures mature on May 15, 2012.

     In order to utilize the proceeds from the debentures to fund the growth in our automobile lending operations, we entered into a promissory note payable to the Bank for the sum of $300 million on May 3, 2002. Interest payments are due semi-annually in arrears at a fixed rate per annum of 10.25%. The promissory note is due on or before May 15, 2012.

Note 7 – Accumulated Other Comprehensive Loss, Net of Tax

     The following table summarizes the components of accumulated other comprehensive loss, net of tax:

Note 8 – Withdrawal of Merger Proposal

     On July 17, 2002, Westcorp had announced a merger proposal, authorized by a special committee of Westcorp’s independent directors, whereby the public holders of our common shares would receive 0.9204 of Westcorp common share for each outstanding WFS common share. On September 26, 2002, we received notice from Westcorp that the proposal to acquire our outstanding 16% minority interest ha d been withdrawn. In its notice, Westcorp indicated that it had withdrawn that proposal because the two special committees were unable to reach an agreement on a mutually acceptable exchange ratio for the proposed transaction.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are one of the nation’s largest independent automobile finance companies with 29 years of experience in the automobile finance industry. We believe that the automobile finance industry is the second largest consumer finance industry in the United States with over $553 billion of loan and lease originations during 2001. We originate, service and securitize new and pre-owned automobile installment contracts, which are generated through our relationships with approximately 7,800 franchised and independent automobile dealers in 44 states. We originated $1.4 billion and $4.2 billion of automobile contracts during the three and nine months ended September 30, 2002 and managed a portfolio of $9.3 billion at September 30, 2002.

Our primary sources of revenue are net interest income and servicing income. Net interest income is the difference between the income earned on interest earning assets and the interest paid on interest bearing liabilities. The primary components of servicing income include retained interest income on contracts sold, contractually specified servicing fees for the servicing of contracts, late charges and other miscellaneous servicing fee income.

Critical Accounting Policies

Management believes critical accounting policies are very important to the portrayal of our financial condition and results of operations. Critical accounting policies require difficult and complex judgments because they rely on estimates about the effect of matters that are inherently uncertain due to the impact of changing market conditions. The following is a summary of accounting policies we consider critical.

Retained Interest in Securitized Assets

Retained interest in securitized assets, also known as RISA, is capitalized upon the sale of automobile contracts to securitization trusts for transactions treated as sales for accounting purposes. RISA represents the present value of the estimated future cash flows to be received by us from the excess spread created in securitization transactions. Future cash flows are calculated by taking the coupon rate of the automobile contracts securitized less the interest rate paid to the investors less contractually specified servicing fees and guarantor fees, after giving effect to estimated credit losses and prepayments.

RISA is classified in a manner similar to available for sale securities and as such is marked to market each quarter. Market value changes are calculated by discounting the estimated cash flows using a current market discount rate. Any changes in the market value of the RISA are reported as a separate component of shareholders’ equity on our Consolidated Statements of Financial Condition as accumulated other comprehensive income (loss), net of applicable taxes. On a quarterly basis, we evaluate the carrying value of the RISA in light of the actual performance of the underlying automobile contracts and make adjustments to reduce the carrying value, if appropriate.

Allowance for Credit Losses

Management determines the amount of the allowance for credit losses based on a review of various quantitative and qualitative analyses. Quantitative analyses include the review of chargeoff trends by contract program and contract type on an owned and managed basis; evaluation of cumulative loss curves on both a managed and sold basis; and evaluation of credit loss experience by credit tier and geographic location. Other quantitative analyses include the evaluation of the size of any particular asset group; the concentration of any credit tier; the level of non-performance and the percentage of delinquency.

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Qualitative analyses include trends in chargeoffs over various time periods and at various statistical midpoints and high points; the severity of depreciated values of repossessions; trends in the number of days repossessions are held in inventory; trends in the number of loan modifications; trends in delinquency roll rates; trends in deficiency balance collections both internally and from collection agencies; trends in custom scores and the effectiveness of our custom scores; and trends in the economy generally or in specific geographic locations. Despite these analyses, we recognize that establishing allowance for credit losses is not an exact science and can be highly judgmental in nature.

The analysis of the adequacy of the allowance for credit losses is not only dependent upon effective quantitative and qualitative analyses, but also effective contract review and asset classification. We classify our assets in accordance with regulatory guidance into five categories: Pass, Special Mention, Substandard, Doubtful and Loss. Based upon our asset classifications, we establish general and specific valuation allowances.

General valuation allowances are established based on quantitative analysis of our portfolio and other qualitative factors. Specific valuation allowances are established based on analysis of our portfolio that is classified as Loss. General valuation allowances are determined by applying various factors to loan balances that are classified as Pass, Special Mention, Substandard or Doubtful. Specific valuation allowances represent contracts that are classified as Loss. Some assets may be split into more than one asset classification due to fair value or net realizable value calculations. This approach allows for enhanced analysis as it highlights the need for more allowance than would be generally allocated if held in one classification.

All contracts that are 60 to 90 days delinquent are automatically classified as Special Mention. Any contract that is 90 or more days delinquent is automatically classified as Substandard. Any contract where the borrower has filed for bankruptcy or the vehicle has been repossessed by us and is subject to a redemption period is classified as Substandard, with the difference between the wholesale book value and contract balance classified as Loss.

The allowance for credit losses is reduced by net chargeoffs as well as decreases in required allowances due to sales of contracts and by lowering the level of required reserves based upon improved contract performance. The allowance for credit losses is increased by recording amounts to the provision for credit losses.

Hedging Activities

The contracts originated and held by us are fixed rate and, accordingly, we have exposure to changes in interest rates. To protect against potential changes in interest rates affecting interest payments on future securitization transactions, we may enter into various hedge agreements. The market value of these hedge agreements is designed to respond inversely to changes in interest rates. Because of this inverse relationship, we can effectively lock in a gross interest rate spread at the time of entering into the hedge transaction. Gains and losses on these agreements are recorded in accumulated other comprehensive income (loss), net of tax on our Consolidated Statements of Financial Condition. Any ineffective portion is recognized in interest expense during that period if the hedge is greater than 100% effective. Upon completion of the securitization transaction, the gains or losses are recognized in full as an adjustment to the gain or loss on the sale of the contracts if the securitization transaction is treated as a sale or amortized on a level yield basis over the duration of the notes issued if the transaction is treated as a secured financing.

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As we issue certain variable rate notes payable, we may also enter into interest rate swap agreements in order to hedge our variable interest rate exposure on future interest payments. The fair value of the interest rate swap agreements is included in notes payable on automobile secured financing, and any change in the fair value is reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. Any ineffective portion is recorded in interest expense during that period if the hedge is greater than 100% effective. Related interest income or expense is settled on a quarterly basis and recognized as an adjustment to interest expense in our Consolidated Statements of Income.

Results of Operations

Net Interest Income

Net interest income is affected by the difference between the rate earned on our interest earning assets and the rate paid on our interest bearing liabilities (net interest rate spread) and the relative amounts of our interest earning assets and interest bearing liabilities. For the three and nine months ended September 30, 2002, net interest income totaled $124 million and $338 million, respectively, compared with $81.3 million and $216 million for the same respective periods in 2001. The increase in net interest income is the result of us holding more automobile contracts on the balance sheet as we utilized our own liquidity sources and completed $4.8 billion in public securitizations and $775 million in conduit financing, both of which were accounted for as secured financings during the year.

The following table shows the average rate earned on contracts and the average rate paid on borrowings together with the corresponding net interest rate spread for the periods indicated. The average cost of borrowings represents the average combined rate of the senior note, promissory note, line of credit, and notes payable on automobile secured financings.

The decline in net interest spread from prior periods is the result of the $300 million note payable to parent, which we entered into with the Bank in May 2002.

Servicing Income

We regularly securitize contracts in the public asset-backed securities market and retain the servicing rights. For accounting purposes, these transactions are treated as either secured financings or sales to a securitization trust. Since the first quarter of 2000, we have not completed a securitization in which we have recorded a non-cash gain on sale. For transactions treated as sales, we recorded a non-cash gain equal to the present value of the estimated future cash flows from the portfolio of contracts sold less the write-off of dealer participation balances and the effect of hedging activities. For these securitizations, net interest earned on the contracts sold and fees earned for servicing the automobile contract portfolios are recognized over the life of the transactions as contractual servicing income, retained interest income and other fee income.

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We occasionally sell contracts to Westcorp in whole loan sales. These sales are designed to utilize additional capital raised by Westcorp. These contracts are subsequently securitized by Westcorp and continue to be managed by us under the terms of such securitizations. We recognize a cash gain on a whole loan sale equal to the cash premium received adjusted for the write-off of dealer participation balances and the effect of hedging activities.

The components of servicing income were as follows:

For the three and nine months ended September 30, 2002, retained interest expense totaled $6.9 million and $25.6 million, respectively, compared with $17.9 million and $14.8 million for the same respective periods in 2001. The retained interest expense recognized in 2002 is the result of higher chargeoffs on our sold portfolio as well as revised estimates of future chargeoffs due to the slowdown in the economy.

Contractual servicing income earned by us from Westcorp relating to the whole loan sales totaled approximately $12.0 million and $41.2 million for the three and nine months ended September 30, 2002, respectively, compared with $19.7 million and $45.3 million for the same respective periods in 2001. Contractual servicing income earned by us relating to sales to securitization trusts totaled approximately $2.4 million and $8.8 million for the three and nine months ended September 30, 2002 and 2001, respectively, compared with $5.2 million and $18.7 million for the same respective periods in 2001. The decrease was a result of the decrease in the average balance of the sold portfolio.

Other fee income totaled $22.7 million and $66.5 million for the three and nine months ended September 30, 2002, respectively, compared with $18.3 million and $54.7 million for the same respective periods in 2001. Other fee income consists primarily of documentation fees, late charges, deferment fees on our managed portfolio, including contracts securitized in transactions accounted for as sales and secured financings, as well as contracts sold in whole loan sales and contracts not securitized. The increase in other fee income is due to the growth in our average managed portfolio to $9.1 billion and $8.7 billion for the three and nine months ended September 30, 2002, respectively, compared with $7.8 billion and $7.4 billion for the same periods in 2001.

Contract Sales and Securitizations

Contract sales and securitizations totaled $1.3 billion and $5.6 billion for the three and nine months ended September 30, 2002, respectively, compared to $1.2 billion and $3.6 billion for the same respective periods in 2001. The $5.6 billion in the current year was treated as secured financings compared with $2.2 billion treated as secured financings and $1.4 billion treated as a whole loan sale in the prior year. We recognized no cash gain on sale for both the three and nine months ended September 30, 2002 compared to no cash gain and a gain of $6.7 millon for the three and nine months ended September 30, 2001, respectively.

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Provision for Credit Losses

We maintain an allowance for credit losses to cover probable losses that can be reasonably estimated for 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 such contracts or by reversing the allowance for credit losses through the provision for credit losses when the amount of contracts held on balance sheet is reduced from securitization transactions treated as sales or whole loan sales. The level of the allowance is based principally on the outstanding balance of contracts held on balance sheet and historical loss trends. We believe that the allowance for credit losses is adequate to absorb probable losses in our owned portfolio that can be reasonably estimated.

The provision for credit losses was $63.1 million and $163 million for the three and nine months ended September 30, 2002, respectively, compared with $41.2 million and $93.3 million for the same respective periods in 2001. Net chargeoffs for the three and nine months ended September 30, 2002 were $62.2 million and $167 million, respectively, compared with $44.8 million and $113 million for the same respective periods in 2001. The increase in the provision for credit losses was primarily the result of our loans held on balance sheet increasing by approximately $2.3 billion or 44% from December 31, 2001 as well as an increase in chargeoffs due to the slowdown in the economy. We recorded $22.5 million in provisions for credit losses in excess of chargeoffs this quarter as a result of the transitional effects related to the elimination of off balance sheet accounting for securitizations. The allowance for credit losses as a percentage of owned contracts outstanding was 2.6% at September 30, 2002 compared to 2.5% at December 31, 2001.

Operating Expenses

Total operating expenses were $52.7 million and $161 million for the three and nine months ended September 30, 2002, respectively, compared with $50.1 million and $154 million for the same respective periods in 2001. Operating expenses as a percentage of average managed contracts declined to 2.3% and 2.5% for the three and nine months ended September 30, 2002, respectively, compared with 2.6% and 2.8% for the same respective periods in 2001. Operating costs as a percent of total revenues declined to 34% and 37% for the three and nine months ended September 30, 2002, respectively, compared with 47% for the same respective periods in 2001 as a result of improved operating efficiencies.

Income Taxes

We file federal and certain state tax returns as part of a consolidated group that includes the Bank and Westcorp. We file other state tax returns as a separate entity. Tax liabilities from the consolidated returns are allocated in accordance with a tax sharing agreement based on the relative income or loss of each entity on a stand-alone basis. Our effective tax rate for the three and nine months ended September 30, 2002 was 40% and 39%, respectively, compared with 39% and 40% for the same respective periods in 2001.

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Portfolio Basis Statements of Income

During the first quarter of 2000, we changed the structure of our securitizations so that they would no longer be accounted for as sales but rather be recorded as secured financings. This decision is consistent with our business strategy to record high quality earnings and to maintain a conservative, well-capitalized balance sheet. If treated as secured financings, no gain on sale or subsequent contractual servicing and retained interest income is recognized. Instead, the earnings of the contracts in the trust and the related financing costs are reflected over the life of the underlying pool of contracts as net interest income. Additionally, no RISA is recorded on the balance sheet, which must be written off over the life of a securitization. This asset is subject to impairment if assumptions made about the performance of a securitization are not realized.

Over time, our securitizations that were recorded as sales will mature and an increasing percentage of securitized contracts will be represented by securitizations that are accounted for as secured financings. In the interim, we will present portfolio basis statements of income that present our results under the assumption that all our outstanding securitizations and whole loan sales to Westcorp are treated as secured financings rather than as sales. During the fourth quarter of 2002, we will have substantially completed our transition to portfolio basis earnings and will no longer report portfolio basis earnings after the end of the year.

We believe that such a presentation is an important performance measure of our operations during this transitory period. Differences between portfolio basis earnings and reported earnings represent the transitional effect of treating securitizations as secured financings rather than sales. We refer to these results as “portfolio basis” statements of income since all contracts sold would have remained in our on balance sheet automobile contract portfolio if we had accounted for the transactions as secured financings.

The growth in our portfolio basis earnings reflects the growth in our managed contract portfolio to $9.3 billion at September 30, 2002 compared with $8.0 billion at September 30, 2001. We monitor the periodic portfolio basis earnings of our managed contract portfolio and believe these portfolio basis statements assist in better understanding our business.

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The following tables present the portfolio basis statements of income, portfolio basis yields and reconciliation to net income as reflected in our Consolidated Statements of Income presented in accordance with Generally Accepted Accounting Principles, also known as GAAP.

PORTFOLIO BASIS STATEMENTS OF INCOME
(Unaudited)