WFS FINANCIAL INC - 10-K Annual Report

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 þ No o

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. o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 18, 2003:

The number of shares outstanding of the issuer’s class of common stock as of March 18, 2003:

Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held April 29, 2003 are incorporated by reference into Part III.

This Form 10-K includes and incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These statements are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements.

These forward-looking statements are identified by use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” and similar terms and phrases, including references to assumptions.

The following factors are among those that may cause actual results to differ materially from the forward-looking statements:


	•	changes in general economic and business conditions;

	•	interest rate fluctuations, including hedging activities;

	•	our financial condition and liquidity, as well as future cash flows and earnings;

	•	competition;

	•	our level of operating expenses;

	•	the effect of new laws, regulations and court decisions;

	•	the availability of sources of funding;

	•	the level of chargeoffs on the automobile contracts that we originate; and

	•	significant litigation.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected.

We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

The company provides access to all filings with the Securities and Exchange Commission on its Web site at http:www.wfsfinancial.com free of charge on the same day as these reports are electronically filed with the Commission. The information contained in our Web site does not constitute part of this filing.

We are one of the nation’s largest independent automobile finance companies with 30 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 $895 billion of loan and lease originations during 2002. We originate new and pre-owned automobile installment contracts, otherwise known as contracts, through our relationships with over 7,800 franchised and independent automobile dealers nationwide. We originated $5.4 billion of contracts during 2002 and managed a portfolio of $9.4 billion contracts at December 31, 2002.

Approximately 29% of our contract originations are for the purchase of new automobiles and approximately 71% of our contract originations are for the purchase of pre-owned automobiles. Approximately 80% of our contract originations are with borrowers who have strong credit histories, otherwise generally known as prime borrowers, and approximately 20% of our contract originations are with borrowers who have overcome past credit difficulties, otherwise generally known as non-prime borrowers.

We underwrite contracts through a credit approval process that is supported and controlled by a centralized, automated front-end system. This system incorporates proprietary credit scoring models and industry credit scoring models and tools, which enhance our credit analysts’ ability to tailor each contract’s pricing and structure to maximize risk-adjusted returns. As a result of our sophisticated credit and underwriting systems, we are able to earn attractive risk-adjusted returns on our contracts. For the year ended December 31, 2002, the average net interest spread was 7.61% while net credit losses averaged 2.77% for the same period.

We structure our business to minimize operating costs while providing high quality service to our dealers. Those aspects of our business that require a local market presence are performed on a decentralized basis in our 41 offices. All other operations are centralized. We fund our purchases of contracts, on an interim basis, with deposits raised by our parent, Western Financial Bank, also known as the Bank, which are insured by the Federal Deposit Insurance Corporation, also known as the FDIC, and other borrowings of the Bank. For long-term financing, we issue automobile contract asset-backed securities. Since 1985, we have sold or securitized over $30 billion of contracts in 58 public offerings of asset-backed securities, making us the fourth largest issuer of such securities in the nation. Our relationship with the Bank gives us a competitive advantage relative to other independent automobile finance companies by providing a significant and stable source of liquidity at a low cost.

Western Thrift & Loan Association, a California-licensed thrift and loan association, was founded in 1972. In 1973, Western Thrift Financial Corporation was formed as the holding company for Western Thrift &

Loan Association. Western Thrift Financial Corporation later changed its name to Westcorp. In 1982, Westcorp acquired Evergreen Savings and Loan Association, a California-licensed savings and loan association, which became a wholly owned subsidiary of Westcorp. The activities of Western Thrift & Loan Association and Evergreen Savings and Loan Association were merged together in 1982, and Evergreen Savings and Loan Association’s name was changed ultimately to Western Financial Bank.

Western Thrift & Loan Association was involved in automobile finance activities from its incorporation until its merger with Evergreen Savings and Loan Association. At such time, the Bank continued the automobile finance activities of Western Thrift & Loan Association. In 1988, we were incorporated as a wholly owned consumer finance subsidiary of the Bank to provide non-prime automobile finance services, a market not serviced by the Bank’s automobile finance division.

In 1995, the Bank transferred its automobile finance division to us. In connection with that restructuring, the Bank transferred to us all assets relating to its automobile finance division, including the contracts held on balance sheet and all interests in the excess spread payable from outstanding securitization transactions. The Bank also transferred to us all of the outstanding stock of WFS Financial Auto Loans, Inc., also known as WFAL, and WFS Financial Auto Loans 2, Inc., also known as WFAL2, the securitization entities of the Bank, thereby making these companies our subsidiaries. In 1995, we sold approximately 20% of our shares in a public offering.

As an operating subsidiary of the Bank, we are subject to examination and comprehensive regulation by the Office of Thrift Supervision, also known as the OTS, the FDIC, and certain regulations by the Board of Governors of the Federal Reserve System, also known as the FRS.

The automobile finance industry is generally segmented according to the type of vehicle sold (new versus pre-owned) and the credit characteristics of the borrower (prime, non-prime or sub-prime). Based upon industry data, we believe that during 2002, prime, non-prime and sub-prime loan originations in the United States were $600 billion, $160 billion and $135 billion, respectively. The United States captive automobile finance companies, General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit Corporation account for approximately 39% of the automobile finance market. We believe that the balance of the market is highly fragmented and that no other market participant has greater than a 4% market share. Other market participants include the captive automobile finance companies of other manufacturers, banks, credit unions, independent automobile finance companies and other financial institutions.

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 to 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.

The competition for contracts available within the prime and non-prime credit quality contract spectrum is more intense when the rate of automobile sales declines. Although we have experienced consistent growth for many years, we can give no assurance that we will continue to do so. Several of our competitors have greater financial resources than we have and may have a lower cost of funds. Many of our competitors also have longstanding relationships with automobile dealers and may offer dealers or their customers other forms of financing or services not provided by us. The finance company that provides floor planning for the dealer’s inventory is also ordinarily one of the dealer’s primary sources of financing for automobile sales. We do not currently provide financing on dealers’ inventories. We must also compete with dealer interest rate subsidy programs offered by the captive automobile finance companies. However, these programs are not generally offered on pre-owned vehicles and are limited to certain models or loan terms that may not be attractive to many new automobile purchasers.

Our business objective is to maximize long-term profitability by efficiently purchasing and servicing prime and non-prime credit quality contracts that generate strong and consistent risk-adjusted returns. We achieve this objective by employing our business strategy, which includes the following key elements:


	•	produce consistent, measured growth through our strong dealer relationships;

	•	price contracts to maximize risk-adjusted returns by using advanced technology and experienced underwriters;

	•	create operating efficiencies through technology and best practices;

	•	generate low cost liquidity through diverse funding sources, including positive operating cash flows; and

	•	record high quality earnings and maintain a conservative, well-capitalized balance sheet.

Produce Consistent, Measured Growth Through Our Strong Dealer Relationships

Over the past five years, we have experienced a compounded annual growth rate in contract purchases of 19%. We provide a high degree of personalized service to our dealership base by marketing, underwriting and purchasing contracts on a local level. Our focus is to provide each dealer superior service by providing a single source of contact to meet the dealer’s prime and non-prime financing needs. We believe that the level of our service surpasses that of our competitors by making our business development representatives available any time a dealer is open, making prompt credit decisions, negotiating credit decisions within available programs by providing structural alternatives and funding promptly.

Growth of originations is primarily through increased dealer penetration. We intend to increase contract purchases from our current dealer base as well as develop new dealer relationships. Prior to 1995, we originated contracts in seven, primarily western states. Subsequently, we increased our geographic penetration nationwide. Although our presence is well-established throughout the country, we believe that we still have opportunities to build market share, especially in those states that we entered since 1994. In addition, we have improved our dealer education and delivery systems in order to increase the ratio of contracts purchased to the number of applications received from a dealer, thereby improving the efficiency of our dealer relationships. We are also seeking to increase contract purchases through new dealer programs targeting high volume, multiple location dealers. These programs focus on creating relationships with dealers to achieve higher contract originations and improving efficiencies. On a limited basis, we also originate loans directly from consumers and purchase loans from other finance companies. Additionally, we continue to explore other distribution channels, including the Internet. In 2001, we acquired an interest in DealerTrack Holdings, Inc., also known as DealerTrack, an Internet business-to-business portal that brings together finance companies and dealers. DealerTrack has signed up 30 finance companies and more than 19,600 dealers. As of December 31, 2002, we owned approximately 8.5% of DealerTrack. Currently, over half of our applications are received through DealerTrack.

Price Contracts to Maximize Risk-Adjusted Returns by Using Advanced Technology and Experienced Underwriters

Quality underwriting and servicing are essential to effectively assess and price for risk and to maximize risk-adjusted returns. We rely on a combination of credit scoring models, system-controlled underwriting policies and the judgment of our trained credit analysts to make risk-based credit and pricing decisions. We use credit scoring to differentiate applicants and to rank order credit risk in terms of expected default probability. Based upon this statistical assessment of credit risk, the underwriter is able to appropriately tailor contract pricing and structure.

To achieve the return anticipated at origination, we have developed a disciplined behavioral servicing process for the early identification and cure of delinquent contracts and for loss mitigation. In addition, we provide credit and profitability incentives to our associates to make decisions consistent with our underwriting policies by offering bonuses based both on individual and office-wide performance.

The following table shows the risk-adjusted margins on contracts originated over the past five years:


(1)	Represents the rate on contracts originated during the periods indicated.

(2)	Represents the rate on managed contracts during the periods indicated.

Since 1997, we have evaluated all aspects of our operations in order to streamline processes and employ best practices throughout the organization.


	•	automated front-end loan origination system that calculates borrower ratios, maintains lending parameters and approval limits, accepts electronic applications and directs applications to the appropriate credit analyst, all of which have reduced the cost of receiving, underwriting and funding contracts;

	•	custom designed proprietary scoring models that rank order the risk of loss occurring on a particular contract;

	•	behavioral delinquency management system, which improves our ability to queue accounts according to the level of risk, monitor collector performance and track delinquent accounts;

	•	centralized and upgraded borrower services department, which includes remittance processing, interactive voice response technology and direct debit services;

	•	centralized imaging system that provides for the electronic retention and retrieval of account records; and

	•	data warehouse that provides analytical tools necessary to evaluate performance of our portfolio by multiple dimensions.

As a result of these efforts, we have reduced our operating costs as a percent of managed contracts from a high of 4.2% during the second quarter of 1998 to 2.2% for the fourth quarter of 2002. We have substantially completed the implementation of our loan systems and major changes to business practices. We will, however, continue to evaluate new technology and best practices to further improve our operating efficiencies.

Generate Low Cost Liquidity Through Diverse Funding Sources, Including Positive Operating Cash Flows

The Bank provides us with over $2.5 billion in financing to fund our operations through notes and lines of credit. This source of liquidity is made available primarily as a result of the Bank’s ability to raise a significant amount of deposits through its retail and commercial banking divisions. The Bank can also obtain additional financing through other borrowing sources. These sources of funds provide us the liquidity to fund our contract purchases and allow us flexibility as to when we enter the automobile contract asset-backed securities market. Cash flows from operations provide an additional source of liquidity for us. For the year ended December 31, 2002, we generated $234 million in positive cash flows from our operations.

Record High Quality Earnings and Maintain a Conservative, Well-Capitalized Balance Sheet

Presenting high quality earnings and maintaining a conservative and well-capitalized balance sheet have been our focus since our founding in 1972. We believe that this strategy ensures success over the long-term rather than providing extraordinary short-term results. Components of this strategy include accounting for our automobile securitizations as secured financings, rather than sales, and maintaining appropriate allowances for credit losses.

Since March 2000, we have structured our automobile securitizations as secured financings. By accounting for our automobile contract securitizations as secured financings, the contracts and asset-backed notes issued remain on our balance sheet with the earnings of the contracts in the trust and the related financing costs reflected over the life of the underlying pool of contracts as net interest income in our Consolidated Statements of Income. Additionally, no retained interest in securitized assets, also known as RISA, is recorded on the balance sheet with a corresponding non-cash gain on sale. The RISA 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. At December 31, 2002, the RISA created from asset-backed securities issued prior to April 2000 had been fully amortized. This compares with a high of $181 million or 58% of equity, net of tax, in 1997.

Our allowance for credit losses increased $88 million, or 67%, to $220 million at December 31, 2002, compared with $132 million at December 31, 2001. This increase is the result of the increase in contracts held on the balance sheet as well as us increasing the percentage of allowance for credit losses to contracts to 2.8% at December 31, 2002, compared with 2.5% at December 31, 2001.

We currently originate contracts nationwide through our 41 offices. Each regional business center manager is accountable for the performance of contracts originated in that office throughout the life of the contracts, including acquisition, underwriting, funding and collection. We have two national service centers located in California and Texas with functions including data verification, records management, remittance processing, customer service call centers and automated dialers. We maintain three regional bankruptcy and remarketing centers and have a centralized asset recovery center located in California. Our corporate offices are located in Irvine, California.

Our business development representatives are responsible for improving our relationship with existing dealers and enrolling and educating new dealers to increase the number of contracts originated. Business development managers within each regional business center provide direct management oversight to each business development representative. In addition, the director of sales and marketing provides oversight management to ensure that all business development managers and representatives are following overall corporate guidelines.

Business development representatives target selected dealers within their territory based upon volume, potential for business, financing needs of the dealers, and competitors that are doing business with such dealers. Before we decide to do business with a new dealer, we perform a review process of the dealer and its business. If we then determine to proceed, we enter into a non-exclusive dealership agreement with the dealer. This agreement contains certain representations regarding the contracts the dealer will sell to us. Due to the non-exclusive nature of our relationship with dealers, the dealers retain discretion to determine whether to sell contracts to us or another financial institution. The business development representative is responsible for educating the dealers’ finance managers about the types of contracts that meet our underwriting standards. This education process helps to ensure that we minimize the number of applications we receive that are outside of our underwriting guidelines, thereby increasing our efficiency and lowering our overall cost to originate contracts.

After this relationship is established, the business development representative continues to actively monitor the relationship with the objective of maximizing the overall profitability of each dealer relationship within his or her territory. This includes ensuring that a significant number of approved applications received from each dealer are actually converted into contracts by us, ensuring that the type of contracts received meets our underwriting standards, monitoring the risk-based pricing of contracts acquired and reviewing the actual performance of the contracts purchased. To the extent that a dealer does not meet our minimum conversion ratio, lending volume standards or overall profitability, the dealer may be precluded from sending us applications in the future. During the year, our dealer base increased from approximately 7,500 to 7,800, primarily as a result of us expanding our nationwide presence. Our increase in volume is the result of funding more contracts from dealers that meet our standards and increasing our dealer base.

The underwriting process begins when an application is sent to us via the Internet or faxed to our data entry service provider. During 2002, we outsourced our data entry process to a third-party provider to maximize efficiencies and reduce costs due to the decreased volume of applications received via fax. Internet applications are automatically loaded into our front-end underwriting computer system. Our data entry service provider enters the applicant information from faxed applications into our front-end system. Once the application is in the front-end system, the system automatically obtains credit bureau information on the applicant and calculates our proprietary credit score.

We use credit scoring to differentiate credit applicants and to rank order credit risk in terms of expected default probabilities. This enables us to tailor contract pricing and structure according to our statistical assessment of credit risk. For example, a consumer with a lower score would indicate a higher probability of default; therefore, we would structure and price the transaction to compensate for this higher default risk. Multiple scorecards are used to accommodate the full spectrum of contracts we purchase. In addition to a credit score, the system highlights certain aspects of the credit application that have historically impacted the credit worthiness of the borrower.

Credit analysts are responsible for properly structuring and pricing deals to meet our risk-based criteria. They review the information, structure and price of an application and determine whether to approve, decline or make a counteroffer to the dealer. Each credit analyst’s lending levels and approval authorities are established based on the individual’s credit experience and portfolio performance, credit manager audit results and quality control review results. Higher levels of approvals are required for higher credit risk and are controlled by system driven parameters and limits. System driven controls include limits on interest rates, contract terms, contract advances, payment to income ratios, debt to income ratios, collateral values and low side overrides.

Once adequate approval has been received, the computer system automatically sends a response to the dealer through the Internet or via fax with our credit decision, specifying approval, denial or conditional approval. Conditional approval is based upon modification to the structure, such as an increase in the down payment, reduction of the term, or the addition of a co-signer. As part of the approval process, the system or the credit analyst may require that some of the information be verified, such as the applicant’s income, employment, residence or credit history. The system increases efficiency by automatically denying approval in certain circumstances without additional underwriting being performed. These automated notices are controlled by parameters set by us consistent with our credit policy.

If the dealer accepts the terms of the approval, the dealer is required to deliver the necessary documentation for such contract to us. Our funding group audits such documents for completeness and consistency with the application and provides final approval and funding of the contract. A direct deposit is made or a check is prepared and promptly sent to the dealer for payment. The dealer’s proceeds may include dealer participation for consideration of the acquisition of the contract. The completed contract file is then forwarded to our records center for imaging.

Under the direction of the Credit and Pricing Committee, the Chief Credit Officer oversees credit risk management, sets underwriting policy, monitors contract pricing, tracks compliance to underwriting policies

and re-underwrites select contracts. If re-underwriting statistics are unacceptable, a portion of quarterly incentives are forfeited by the office that originated the contracts. Our internal quality control group reviews contracts on a statistical sampling basis to ensure adherence to established lending guidelines and proper documentation requirements. Credit managers within each regional business center provide direct management oversight to each credit analyst. In addition, the Chief Credit Officer provides oversight management to ensure that all credit managers and analysts are following overall corporate guidelines.

The following table sets forth information for contracts originated, contracts managed and number of dealers in the states in which we operate our business:

We service all of the contracts we purchase, both those held by us and those sold in automobile securitizations or whole loan sales. The servicing process includes collecting and processing payments, responding to borrower inquiries, maintaining the security interest in the vehicle, maintaining physical damage insurance coverage and repossessing and selling collateral when necessary. During the second quarter of 2000, we implemented a new decision support system that incorporates behavioral scoring models. Additionally, in the second quarter of 2001, we began purchasing credit bureau information on all borrowers, which is updated each quarter. These three tools allow us to continually seek the most efficient and effective collection methods.

We use monthly billing statements to serve as a reminder to borrowers as well as an early warning mechanism in the event a borrower has failed to notify us of an address change. Payments received in the mail or through our offices are processed by our centralized remittance processing center. To expedite the collection process, we accept payments from borrowers through automated payment programs including Internet banking, direct debits and third party payment processing services. Our customer service center uses interactive voice response technology to answer routine account questions and route calls to the appropriate service counselor.

Our fully integrated servicing, decision and collections system automatically forwards accounts to our automated dialer or regional collection centers based on the assessed risk of default or loss. Account assessment poses several courses of action, including delaying collection activity based on the likelihood of self curing, directing an account to the automated dialer for a predetermined number of days before forwarding it to a regional collections office, or directly forwarding to a loan service counselor in the regional office for accelerated collection efforts as early as seven days past due. This process balances the efficiency of centralized collection efforts with the effectiveness of decentralized personal collection efforts. Our systems track delinquencies and chargeoffs, monitor the performance of our collection associates and assist in delinquency forecasting. To assist in the collection process, we can access original documents through our imaging system, which stores all the documents related to each contract. We limit deferments to a maximum of three over the life of the contract and rarely rewrite contracts.

If satisfactory payment arrangements are not made, the automobile is generally repossessed within 60 to 90 days of the date of delinquency, subject to compliance with applicable law. We use independent contractors to perform repossessions. The automobile remains in our custody generally for 15 days, or longer if required by local law, to provide the obligor the opportunity to redeem the automobile. If after the redemption period the delinquency is not cured, we write down the vehicle to fair value and reclassify the contract as a repossessed asset. After the redemption period expires, we prepare the automobile for sale. We sell substantially all repossessed automobiles through wholesale automobile auctions, subject to applicable law. We do not provide the financing on repossessions sold. We use regional remarketing departments to sell our repossessed vehicles. Once the vehicles are sold, we charge off any remaining deficiency balances. At December 31, 2002, repossessed automobiles managed by us were $16.4 million or 0.18% of the total managed contract portfolio compared with $7.6 million or 0.09% of the total managed contract portfolio at December 31, 2001.

It is our policy to charge off an account when it becomes contractually delinquent by 120 days, except for accounts that are in Chapter 13 bankruptcy, even if we have not yet repossessed the vehicle. At the time that a contract is charged off, all accrued interest is reversed. After chargeoff, we collect deficiency balances through our centralized asset recovery center. These efforts include contacting the borrower directly, seeking a deficiency judgment through a small claims court or instituting other judicial action where necessary. In some cases, particularly where recovery is believed to be less likely, the account may be assigned to a collection agency for final resolution. For those accounts that are in Chapter 13 bankruptcy and contractually past due 120 days, we reverse all accrued interest and recognize income on a cash basis. Additionally, we mark down such contracts to fair value and reclassify them as nonperforming accounts.

We believe that the transactions described below have been on terms no less favorable to us than could be obtained from unaffiliated parties, notwithstanding that the transactions were not negotiated at arm’s length. However, the transactions were approved by our Board of Directors and the Boards of Directors of the Bank and Westcorp, including their respective independent directors. See “Supervision and Regulation.”

We have various borrowing arrangements with the Bank, including long-term, unsecured debt and lines of credit designed to provide financing for us and our subsidiaries. These borrowings are the only source of liquidity we utilize outside of the asset-backed securities market. These borrowing arrangements, on an unconsolidated basis, provide the Bank with what it believes to be a market rate of return. Additionally, the Bank believes that it is more profitable for it, on a consolidated basis, to lend money to us rather than for us to seek financing from an outside third party because its cost of funds is lower than the rates on these borrowing arrangements.

We borrowed $125 million from the Bank under the terms of a $125 million note executed in 1995. The $125 million note provided 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 $125 million note were due quarterly, in arrears, calculated at the rate of 7.25% per annum. We made payments on the $125 million note of $11.2 million and $32.7 million for the years ended December 31, 2001 and 2000, respectively, without prepayment penalties. The $125 million note was paid off in the third quarter of 2001 in connection with the retirement of the Bank’s 8.5% subordinated debentures. There was no outstanding balance on the $125 million note at December 31, 2002 and 2001 compared with $11.2 million outstanding at December 31, 2000. Interest expense on this note totaled $0.5 million and $1.5 million for the years ended December 31, 2001 and 2000, respectively.

We borrowed $135 million from the Bank under the terms of a $135 million note. We initially borrowed $50 million under this note in 1997. The amount was increased to $135 million in 1999. According to the terms of the amendment in 1999, the $135 million note provided for two equal principal payments of $67.5 million per year, commencing July 31, 2001. Under its original terms, interest payments on the $135 million note were due quarterly, in arrears, calculated at the rate of 9.42% per annum. On January 1, 2002, the note was amended to increase the remaining principal amount from $67.5 million to $150 million and to decrease the interest rate from 9.42% to 8.875% per annum. All principal is due and payable on August 1, 2007, although the Bank has the option to require payment in part or in full at any time prior to that date. We made principal payments on this note totaling $42.0 million during 2002 in conjunction with the Bank’s purchase of $42.0 million of its 8.875% subordinated debentures. Pursuant to the terms of this note, we may not incur any other indebtedness, which is senior to the obligations evidenced by this note except for (i) indebtedness under the $125 million note, (ii) indebtedness collateralized or secured under the $1.8 billion line of credit discussed below and (iii) indebtedness for similar types of warehouse lines of credit. There was $108 million outstanding on this note at December 31, 2002 compared with $67.5 million at December 31, 2001. Interest expense on this note totaled $12.4 million, $10.1 million and $12.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Additionally, we borrowed $300 million from the Bank under the terms of a $300 million note in May 2002. This note matures on May 15, 2012. Interest payments on the $300 million note are due semi-annually, in arrears, calculated at the rate of 10.25% per annum. Pursuant to the terms of this note, we may not incur any other indebtedness that is senior to the obligations evidenced by this note except for (i) indebtedness under the $150 million note, (ii) indebtedness collateralized or secured under the $1.8 billion line of credit and (iii) indebtedness for similar types of warehouse lines of credit. There was $300 million outstanding on this note at December 31, 2002. Interest expense on this note totaled $20.3 million for the year ended December 31, 2002.

We have a line of credit extended by the Bank permitting us to draw up to $1.8 billion as needed to be used in our operations. We do not pay a commitment fee for this line of credit. The line of credit terminates on December 31, 2004, although we may extend the term for additional periods of up to 60 months. There was no amount outstanding at December 31, 2002. There was $374 million and $236 million outstanding on this line of credit at December 31, 2001 and 2000, respectively. The $1.8 billion line of credit carries an interest rate based on the one-month London Interbank Offer Rate, also known as LIBOR, and an interest spread of 125 basis points when unsecured and 90 basis points when secured. The Bank has the right under this line of credit to refuse to permit additional amounts to be drawn if, in the Bank’s discretion, the amount sought to be drawn will not be used to finance the purchase of contracts or other working capital requirements.

On November 30, 2001 and August 8, 2002, some of our subsidiaries entered into additional lines of credit with the Bank. These lines permit our subsidiaries to draw up to a total of $255 million to fund activities related to our securitizations. Of the total $255 million, $10 million terminates on December 1, 2006 and $245 million terminates on January 1, 2010, although the terms may be extended by these subsidiaries for additional periods of up to 60 months. At December 31, 2002, the amount outstanding on these lines of credit totaled $62.0 million compared with $47.3 million outstanding at December 31, 2001. The $255 million in lines of credit held by our subsidiaries with the Bank carry an interest rate based on one-month LIBOR and an interest spread of 112.5 basis points when unsecured and 62.5 basis points when secured.

Interest on the amounts outstanding under the lines of credit is paid monthly, in arrears, and is calculated on the daily average amount outstanding that month. Interest expense for these lines of credit totaled $3.0 million, $8.9 million and $37.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest rates for the lines of credit were 2.74%, 4.43% and 7.09% for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest rates for the lines of credit were 2.55%, 3.08% and 7.44% at December 31, 2002, 2001 and 2000, respectively.

We invest our excess cash at the Bank under an investment agreement. Prior to January 1, 2002, the Bank paid us an interest rate equal to the federal composite commercial paper rate on this excess cash. On January 1, 2002, the agreement was amended to revise the interest rate to the one-month LIBOR. The weighted average interest rate was 1.77%, 3.80% and 6.58% for the years ended December 31, 2002, 2001 and 2000, respectively. At December 31, 2002, we held $688 million excess cash with the Bank under the investment agreement. Interest income earned under this agreement totaled $10.2 million, $4.9 million and $1.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest rate was 1.44% at December 31, 2002, compared with 6.53% at December 31, 2000. We had no excess cash invested at the Bank at December 31, 2001.

Pursuant to a series of agreements to which we, the Bank and our subsidiary, WFAL2, among others, are parties, we have access to the cash flows of certain outstanding securitizations, including the cash held in the spread accounts for these securitizations. We are permitted to use that cash as we determine, including to originate contracts.

In certain securitizations, the Bank and WFAL2 have entered into a reinvestment contract that is deemed to be an eligible investment under the relevant securitization agreements. The securitization agreements require that all cash flows of the relevant trust and the associated spread accounts be invested in the applicable reinvestment contract. A limited portion of the invested funds may be used by WFAL2 and the balance may be used by the Bank. The Bank makes its portion available to us pursuant to the terms of the WFS Reinvestment Contract. Under the WFS Reinvestment Contract, we receive access to all of the cash available to the Bank under each trust reinvestment contract and are obligated to repay to the Bank an amount equal to the cash so used when needed by the Bank to meet its obligations under the individual trust reinvestment contracts. With the portion of the cash available to it under the individual trust reinvestment contracts, WFAL2 purchases contracts from us pursuant to the terms of the sale and servicing agreements.

In accordance with these agreements, the Bank and WFAL2 pledge property owned by each of them for the benefit of the trustee of each trust and the surety. We pay the Bank a fee equal to 12.5 basis points of the amount of collateral pledged by the Bank as consideration for the pledge of collateral and for our access to cash under the WFS Reinvestment Contract. We paid the Bank $1.2 million, $1.1 million and $0.7 million for the years ended December 31, 2002, 2001 and 2000, respectively, for this purpose. As WFAL2 directly utilizes the cash made available to it to purchase contracts for its own account from us, no additional consideration from us is required to support WFAL2’s pledge of its property under the agreement with Financial Security Assurance, also known as FSA. While we are under no obligation to repurchase contracts from WFAL2, to the extent WFAL2 needs to sell any such contracts to fund its repayment obligations under the trust reinvestment contracts, it is anticipated that we would prefer to purchase those contracts than for WFAL2 to sell those contracts to a third party. The WFS Reinvestment Contract, by its terms, is to remain in effect so long as any of the trust reinvestment contracts is an eligible investment for its related securitization. There was $944 million, $942 million and $832 million outstanding on the trust reinvestment contracts at December 31, 2002, 2001 and 2000, respectively.

We sold $1.4 billion of contracts to Westcorp in whole loan sales for each of the years ended December 31, 2001 and 2000. In these transactions, we received cash for the amount of the principal outstanding on the contracts plus a premium of $44.3 million and $41.2 million for the years ended December 31, 2001 and 2000, respectively. These premiums were recorded as a cash gain on sale, net of the write-off of outstanding dealer participation balances and the effect of hedging activities. These contracts were subsequently securitized by Westcorp and continue to be managed by us under the terms of the transactions. We sold no contracts to Westcorp for the year ended December 31, 2002.

We and our subsidiaries are parties to an amended 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 this 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 Westcorp its estimated share of tax liability when otherwise due, but in no event may the amount paid exceed the amount of tax that 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 that permit the filing of a consolidated or combined return. Tax liabilities to states that require the filing of separate tax returns for each company are paid by each company. The term of the amended tax sharing agreement commenced on the first day of the consolidated return year beginning January 1, 2002 and continues in effect until the parties to the tax sharing agreement agree in writing to terminate it. See “Consolidated Financial Statements — Note 17 — Income Taxes.”

We have entered into certain management agreements with the Bank and Westcorp pursuant to which we pay an 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 us or our subsidiaries, including our principal office facilities, our field offices, and overhead and associate benefits pertaining to Bank and Westcorp associates who also provide services to us or our subsidiaries. Additionally, as part of these management agreements, the Bank and Westcorp have agreed to reimburse us for similar costs incurred. Net amounts paid to us by the Bank, Westcorp and their affiliates under these agreements were $6.4 million, $5.9 million and $2.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. The management agreements may be terminated by any party upon five 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 management agreement or for violation of law, ordinance, statute, rule or regulation governing either party to the applicable management agreement.

Set forth below is a general discussion of laws and regulations that have a material effect on our business. The laws and regulations discussed are intended to protect depositors, federal deposit insurance funds, and the banking system as a whole; they are not intended to protect security holders. To the extent that the following discussion describes statutory or regulatory provisions, the exact language of the statute or regulatory provision qualifies any such discussion. Furthermore, such statutes and regulations are continually under review by Congress and federal regulatory agencies. Any future changes in laws, regulations or the policies of various regulatory authorities may have a material effect on our business. Accordingly, we cannot assure you that we will not be affected by any such future changes.

We purchase contracts in 44 states and are subject to both state and federal regulations. Since we are owned by the Bank, which is a federal savings association, we are subject to regulation and examination primarily by the Office of Thrift Supervision, also known as the OTS, and secondarily by the FDIC. We must also comply with each state’s consumer finance, automobile finance, licensing and titling laws and regulations to the extent those laws and regulations are not pre-empted by OTS regulations. We believe that we are in compliance with OTS and FDIC regulations as well as state laws applicable to the purchase and securitization of contracts.

The contracts we originate and service are also subject to numerous federal and state consumer protection laws. The consumer protection laws include 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, the California Rees-Leveraging Act, other retail installment sales laws and similar state laws. Most state consumer protection laws also govern the process by which we may repossess and sell an automobile pledged as security on a defaulted contract. We must follow those laws carefully in order to maximize the amount of money we can recover on a defaulted contract.

We must also comply with OTS regulations regarding ownership and operations. The Bank is permitted by OTS regulations to have operating subsidiaries and service corporation subsidiaries. We were created as an operating subsidiary of the Bank in order to: (i) enable us to sell our equity securities to third parties rather than be limited by the restrictions placed on service corporations, whose equity securities may only be sold to other savings associations, (ii) enjoy the same pre-emption from state law that is granted to the Bank by OTS regulations and (iii) so that the Bank could invest in our activities without regard to HOLA limits on service corporations. As an operating subsidiary, we are prohibited from engaging in any business activity that the Bank may not itself engage in. All of our business activities are activities in which the Bank is permitted to engage. Furthermore, prior to engaging in any new business activity, acquiring a business from a third party or creating a new subsidiary, we must first give notice to the OTS and the FDIC. Finally, at all times, a majority of our voting stock must be held by the Bank.

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, also known as HOLA. Westcorp is registered with the OTS as a savings and loan holding company. Therefore, it is subject to the OTS’ regulations, examination and reporting requirements. The OTS may take substantive action if 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.

The OTS has oversight authority for all holding company affiliates, not just the Bank. The OTS may, as necessary, limit transactions between the Bank, Westcorp and the subsidiaries or affiliates of Westcorp or the

Provisions of HOLA limit the type of activities and investments in which the savings association subsidiaries of a savings and loan holding company may participate if the investment and/or activity involves an affiliate of that savings association subsidiary. In addition, transactions between a savings association subsidiary or its subsidiary and an affiliate must be on terms that are at least as favorable to the bank or its subsidiary as are the terms of the transactions with unaffiliated companies.

Savings association subsidiaries of holding companies must also comply with regulations regarding loans to executive officers, directors and principal shareholders. Loans secured by a first lien on an executive officer’s residence may be made without prior approval of the board of directors of the financial institution. As a matter of policy, the Bank does not make loans to executive officers, directors or principal shareholders.

As an operating subsidiary, our investments are required to be consolidated with those of the Bank for purposes of determining whether the Bank, on a consolidated basis, is in full compliance with HOLA regulations, which limit certain of its activities to a percentage of its total consolidated assets. The HOLA regulations allow the Bank 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 by the Bank or its operating subsidiaries. Thus, not more than 30% of the Bank’s consolidated assets may be invested in contracts purchased from new and pre-owned automobile dealers or from other lenders. For the year ended December 31, 2002, we purchased contracts at an average rate of approximately $450 million per month. However, the Bank was able to remain in compliance with this regulatory limitation on its consolidated activities, as we securitized contracts worth approximately $6.9 billion during 2002. Our securitization activities are structured to enable the Bank to remove securitized automobile contracts from its balance sheet for regulatory purposes. As a result, securitized automobile contracts are not included in the calculation of the percentage of the Bank’s consolidated assets subject to either the 30% or 35% limitation on consumer loans. We intend to regularly securitize contracts to insure that the Bank will remain in compliance with this regulatory limitation on its consolidated activities. If we are unable to continue to securitize the automobile contracts we purchase, this regulatory limitation may force us to limit our acquisition of new automobile contracts, thereby adversely affecting our ability to remain a preferred source of financing for the dealers from whom we purchase automobile contracts. Any such limitation may also have a material adverse effect on our financial position, liquidity and results of operations.

HOLA mandates that the OTS promulgate capital regulations that include capital standards no less stringent than the capital standards applicable to national banks. Any savings association that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. The Bank exceeded the current minimum requirements for core capital, tangible capital, tier 1 risk-based capital and total risk-based capital as of December 31, 2002 as more fully described below.

HOLA and the OTS regulations require savings associations to maintain “core capital” in an amount not less than 3% of adjusted total assets. The Bank’s core capital ratio at December 31, 2002 was 6.43%. As of December 31, 2002, the Bank’s core capital was $729 million, exceeding the Bank’s regulatory requirement by $389 million.

A savings association must maintain “tangible capital” in an amount not less than 1.5% of adjusted total assets. The Bank’s tangible capital is the same as its core capital as the Bank does not have intangible assets or other such assets that must be deducted from core capital to arrive at tangible capital. Therefore, at December 31, 2002, the Bank’s tangible capital ratio was also 6.43%. The Bank’s tangible capital at December 31, 2002 was $729 million, exceeding the applicable regulatory requirement by $559 million.

In addition, the OTS has adopted a regulation pertaining to the capital treatment of recourse, direct credit substitutes and residual interests in asset securitizations. The regulation modifies the capital rules for residual interests arising upon the transfer of assets, including limiting the amount of residual interests that are credit-enhancing interest-only strips that may be included in calculating an institution’s capital. The new regulation requires all institutions to hold “dollar-for-dollar” capital against their total contractual exposure to loss resulting from residual interest assets arising from the transfer of assets accounted for as a sale. The regulation also requires that all residual interest assets which are credit-enhancing interest-only strips in excess of 25% of an institution’s tier 1 risk-based capital be deducted from capital.

The regulation became effective on January 1, 2002 for any transaction that closed on or after that date. For transactions closed before that date, an institution can elect to have the regulation apply to those earlier transactions. The Bank elected to adopt the new regulation as of September 30, 2002. The amount of capital held against residual interests in asset securitizations and other recourse obligations at December 31, 2002 was $73.5 million.

Since March 2002, we have structured our securitization transactions so that they are required to be accounted for as secured financings rather than as sales under Generally Accepted Accounting Principles, also known as GAAP. We do not record any residual interests on these securitizations. The new regulation applies only to residual interests arising from the transfer of assets accounted for as sales. Therefore, the new regulation will not cause any adverse capital effect on the Bank related to these securitizations. In the future, we do not anticipate that we will engage in any securitizations accounted for as sales under GAAP.

The Bank’s total risk-weighted assets are determined by taking the sum of the products obtained by multiplying each of the Bank’s assets and certain off balance sheet items by a designated risk-weight. Four risk-weight categories (0%, 20%, 50% and 100%) exist for on balance sheet assets. Before a risk-weight category can be applied to a consolidated off balance sheet item, the item must be converted into a credit-equivalent amount by multiplying its face amount by one of four credit conversion factors (0%, 20%, 50% and 100%). As of December 31, 2002, the Bank’s total risk-weighted assets equaled $8.5 billion.

Total risk-based capital, as defined by OTS regulations, is core capital plus supplementary capital less direct equity investments not permissible to national banks (subject to a phase-in schedule), reciprocal holdings of depository institution capital investments. Supplementary capital is comprised of permanent capital instruments not included in core capital, maturing capital instruments such as subordinated debentures, and general valuation loan and lease loss allowance. Supplementary capital is limited to 100% of core capital.

The Bank is permitted to include subordinated debentures in its supplementary capital. At December 31, 2002, there were two issuances remaining, one with an outstanding balance excluding discounts and issuance costs of $108 million and an interest rate of 8.875% due in 2007 and a second with an outstanding balance excluding discounts and issuance costs of $300 million and an interest rate of 9.625% due in 2012. The first issuance is redeemable at our option, in whole or in part, on or after August 1, 2004, at 100% of the principal amount being redeemed plus accrued interest as of the date of redemption, and the second is redeemable on the same terms, on or after May 15, 2009. In addition, the 9.625% debentures may be redeemed in part prior to May 15, 2005, provided at least 65% of the debentures remain outstanding, the redemption is with the proceeds of and within 90 days of an equity issuance by the Bank and the redemption price is not less than 109.625%. Pursuant to the approval from the OTS to treat those debentures as supplementary capital, the total amount of debentures issued by the Bank that may be included as supplementary capital may not exceed the total amount of the Bank’s core capital. The amount of the 8.875% debentures that may be included as supplementary capital began to decrease at the rate of 20% of the amount originally outstanding per year, net of redemptions, on August 1, 2002. The 9.625% debentures will not begin to be phased out as supplementary capital until May 15, 2007. The Bank’s total risk-based capital at December 31, 2002 was $1.1 billion and its total risk-based capital ratio was 13.38%.

The Gramm-Leach-Bliley Act, or GLBA, permits insurance, banking and securities firms to be owned by a single owner. GLBA generally prohibits unitary savings and loan holding companies, like Westcorp, from being acquired by commercial companies. Westcorp is permitted under GLBA, however, to continue to engage in any business opportunities in which we had a right to engage prior to the enactment of GLBA. In short, GLBA does not have an effect on our business, and we do not expect that any of its provisions will have an adverse effect on our operations or our financial condition.

GLBA also creates additional obligations on financial institutions, such as the Bank and its subsidiaries, regarding the safeguarding of nonpublic personal information of their customers and creates affirmative duties to advise customers as to what the financial institutions do with their customers’ nonpublic personal information. The privacy requirements of GLBA do not have a significant impact on the Bank or any of its subsidiaries, because the Bank and its subsidiaries have historically safeguarded the personal confidential information of their customers as required by other federal statutes.

On July 30, 2002, President Bush signed into law corporate responsibility and accounting reform legislation known as the Sarbanes-Oxley Act of 2002, also known as the Sarbanes-Oxley Act. The Sarbanes-Oxley Act is primarily directed at public companies and companies that have a pending registration statement under the Securities Act of 1933. Under applicable OTS regulations, as the Bank has debentures outstanding registered with the OTS, the Sarbanes-Oxley Act is applicable to the Bank as well as to Westcorp and us. Parts of the Sarbanes-Oxley Act that are already effective include provisions that (i) require that periodic reports containing financial statements that are filed with the Securities and Exchange Commission, also known as the SEC, be accompanied by Chief Executive Officer and Chief Financial Officer certifications as to their accuracy and compliance with law; (ii) prohibit public companies, with certain limited exceptions, from making personal loans to their directors or executive officers; (iii) force company Chief Executive Officers and Chief Financial Officers to forfeit bonuses and profits if company financial statements are restated due to misconduct; (iv) require audit committees to pre-approve all audit and non-audit services provided by an issuer’s outside auditors, except for de minimis non-audit services; (v) protect employees of public companies who assist in investigations relating to violations of the federal securities laws from job discrimination; (vi) require companies to disclose in plain English on a “rapid and current basis” material changes to their financial condition or operations; (vii) require a public company’s Section 16 insiders to make Form 4 filings with the SEC within two business days following the day on which purchases or sales of the company’s equity securities were made; and (viii) increase penalties for existing crimes and create new criminal offenses. Compliance with other provisions will be required after implementing rules and regulations are adopted by the SEC and the newly created public company accounting oversight board authorized by the Sarbanes-Oxley Act. While we expect to incur additional expenses in complying with the requirements of the Sarbanes-Oxley Act and the regulations adopted by the SEC, we do not anticipate that those expenses will have a material effect on our results of operations or financial condition.

The OTS, in conjunction with other federal banking regulatory agencies, issued a guidance statement regarding asset securitization activities of banks and savings associations which applies to the Bank and to us as an operating subsidiary. The guidance generally provides that institutions engaged in asset securitization activities should ensure that sufficient capital is held to support the risks associated with those activities, that valuations are reasonable, conservative and supported and that appropriate management oversight and reporting is accomplished with respect to the institution’s asset securitization activities. We, as an operating subsidiary of the Bank, believe that our securitization activities are in compliance with the guidance provisions.

The OTS, along with other agencies, has adopted guidance pertaining to sub-prime lending programs. Pursuant to the guidance, lending programs that provide credit to borrowers whose credit histories reflect specified negative characteristics, such as bankruptcies or payment delinquencies, are deemed to be sub-prime lending programs. Pursuant to the guidance, examiners may require that an institution with a sub-prime lending program hold additional capital which ranges from one and one-half to three times the normal capital required for similar loans made to borrowers who are not sub-prime borrowers, although institutions whose sub-prime loans are well secured and well managed may not be required to hold additional capital.

To the extent that the guidance, as implemented, requires the Bank to raise and continue to maintain higher levels of capital, our ability to originate, service and securitize new and pre-owned contracts, especially as to which the borrower is determined to be a sub-prime borrower, may be adversely affected. Any changes to regulations that would negatively impact us may require us to curtail our contract purchasing activities or change the relative percentage of types of contracts we originate, either of which could have a material adverse effect on our financial position, liquidity and results of operations.

We file federal and certain state tax returns as part of a consolidated group that includes the Bank and Westcorp, the holding company parent of the Bank. We file other state returns as a separate entity. Tax liabilities from the consolidated returns are allocated in accordance with our tax sharing agreement based on the relative taxable income or loss of each entity on a stand-alone basis.

We, as part of Westcorp’s consolidated federal tax return, are under examination by the Internal Revenue Service for the tax years ended December 31, 1997 through 1999. We do not anticipate any significant changes based upon these examinations.

At the end of 2002, we had a tax presence in approximately 37 states. However, we expect that over 50% of the activity of the group and the resulting income will be taxed as California source income, with the remaining amounts apportioned or allocated outside California.

The California franchise tax applicable to financial corporations is higher than the rate of tax applicable to non-financial corporations because it includes an amount “in lieu” of local personal property and business license taxes paid by non-financial corporations, but not generally paid by financial institutions. For taxable years ending on or after December 31, 1995, the tax rate for a financial corporation is equal to the tax rate on a regular corporation plus 2%. For income years beginning after January 1, 1997, the California regular corporate tax rate is 8.84% and the financial corporation tax rate is 10.84%.

Prior to 2002 under California law, a financial corporation could determine its bad debt deduction using one of two methods. The first method allowed a deduction for debts that became wholly or partially worthless during the tax year, i.e., the specific chargeoff method. The second method allowed a reasonable addition to a reserve to be deducted. During 2002, California enacted legislation that eliminated the use of the reserve method for financial corporations. As of the first tax year beginning on or after January 1, 2002, only debts which become worthless during the period may be deducted. In the first year of the change in accounting method, 50% or $57 million of the ending reserve prior to the change will be included in California taxable income. The remaining 50% of the reserve is not required to be recaptured into income and represents a permanent difference between GAAP and California tax accounting. The deferred tax liability related to this permanent difference has been eliminated from the balance sheet and the current year state tax expense reduced accordingly.

We compute our taxable income for California purposes on a unitary basis, or as if we were one business unit, and file one combined California franchise tax return with Westcorp and its other subsidiaries. We, as

part of that combined return, are under examination by the California Franchise Tax Board and various other state taxing authorities for tax years 1998 through 2001. We do not anticipate any significant changes based upon these examinations.

The following subsidiaries are included in our Consolidated Financial Statements.

WFAL is our wholly owned, Nevada based, limited purpose operating subsidiary. WFAL was organized primarily for the purpose of purchasing contracts that we originate and securitizing them in the asset-backed securities market. All sales to securitization trusts directly from WFAL are treated as sales for accounting purposes. WFAL has not purchased any automobile contracts since March 2000.

WFAL2 is our wholly owned, Nevada based, limited purpose operating subsidiary. WFAL2 purchases contracts that are then used as collateral for its reinvestment contract activities. See “Transactions with Related Parties — Reinvestment Contracts.”

WFS Investments, Inc., also known as WFSII, is our wholly owned, California based, limited purpose operating subsidiary. WFSII was incorporated for the purpose of purchasing limited ownership interests 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.

WFS Funding, Inc., also known as WFSFI, is our wholly owned, Nevada based, limited purpose service corporation subsidiary. WFSFI was incorporated for the purpose of providing conduit financings. WFSFI completed a $775 million and a $650 million conduit financing transaction during January 2002 and December 2001, respectively. Both of these conduit financing transactions were paid off as of December 31, 2002.

WFS Receivables Corporation, also known as WFSRC, is our wholly owned, Nevada based, limited purpose service corporation subsidiary. WFSRC was incorporated for the purpose of purchasing contracts that we originate and securitizing them in the asset-backed securities market. Securitizations originated by WFSRC are guaranteed under a financial guaranty insurance policy issued by an unaffiliated third-party company. Securitization transactions in which contracts are sold through WFSRC are treated as secured financings for accounting purpose. At December 31, 2002, WFSRC had $6.3 billion in notes payable on automobile secured financing outstanding.

WFS Receivables Corporation 3, also known as WFSRC3, is our wholly owned, Nevada based, limited purpose service corporation subsidiary. WFSRC3 was organized for the purpose of purchasing contracts that we originate and securitizing them in the asset-backed securities market. Securitizations originated by WFSRC3 include senior notes which are credit enhanced through the issuance of subordinated notes. Securitization transactions in which contracts are sold through WFSRC3 are treated as secured financings for accounting purposes. At December 31, 2002, WFSRC3 had $1.1 billion in notes payable on automobile secured financing outstanding.

WFS Web Investments, also known as WFSWEB, is our wholly owned, California based, limited purpose service corporation subsidiary. WFSWEB was incorporated for the purpose of investing in an Internet service company called DealerTrack. Our investment in DealerTrack provides us with the unique opportunity of being involved with a company that provides a business-to-business Internet portal, specifically designed for the indirect automobile lending market. Currently, over half of our applications are received through DealerTrack.

At December 31, 2002, we had 2,100 full-time and 67 part-time associates. None of our associates are represented by a collective bargaining unit or union. We believe that we have good relations with our associates.

At December 31, 2002, we owned one property in Texas. Additionally, we leased 40 properties at various locations in various states.

Our executive offices are located at 23 Pasteur, Irvine, California and are leased from the Bank. The remaining leased properties are used as automobile lending regional business centers and other operating centers. At December 31, 2002, the net book value of property and leasehold improvements was approximately $16.7 million. We leased space at one location during 2002 from a company controlled by the Chairman of the Board of our company and majority shareholder of Westcorp.

We or our subsidiaries are involved as parties to certain legal proceedings incidental to our businesses, including Chiquita Lee, et al. v. WFS Financial Inc, United States District Court, Middle District of Tennessee at Nashville, No. 3-02-0570 filed June 17, 2002 (a putative class action raising claims under the Equal Credit Opportunity Act) and other consumer class action lawsuits. We are vigorously defending these actions and do not believe that the outcome of these proceedings will have a material effect upon our financial condition, results of operations and cash flows.

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock has been publicly traded since August 8, 1995 on the Nasdaq National Market® under the symbol WFSI. The following table illustrates the high and low sale prices by quarter in 2002 and 2001 as reported by Nasdaq, which prices are believed to represent actual transactions:

We had 1,016 shareholders of our common stock at March 11, 2003. The number of shareholders was determined by the number of record holders, including the number of individual participants, in security position listings.

We have not declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. We are not currently under any regulatory or contractual limitations on our ability to declare or pay dividends.

The following table presents summary audited financial data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. Since this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read our Consolidated Financial Statements contained elsewhere herein. Certain amounts from the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation.


(1)	Information for 1998 includes a one-time restructuring charge of $15.0 million, including $1.8 million for employee severance and $13.2 million for lease termination fees and the write-off of disposed assets.

(2)	Information for 2002, 2001 and 1999 includes $775 million, $650 million and $500 million, respectively, of contracts securitized in a privately placed conduit facility.

(3)	Operating cash flows are defined as cash flows from securitizations, net interest margin on owned contracts and other fee income less dealer participation and operating costs.

(4)	Includes delinquency and loss information relating to contracts that were sold, but which were originated and are managed by us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Asset Quality.”

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes thereto and other information included or incorporated by reference herein.

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 late charges and other collection related fee income on managed contracts, retained interest income or expense, and contractual specified servicing income on contracts in securitization transactions treated as sales for accounting purposes and whole loan sales. The primary components of operating expenses are salaries, credit and collection expenses and data processing costs.

Management believes critical accounting policies are 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.

Automobile contract asset-backed securitization transactions are treated as either sales or secured financings for accounting purposes depending upon the securitization structure. In September 2000, the Financial Accounting Standards Board, also known as the FASB, issued Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, also known as SFAS No. 140, to replace Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, also known as SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it generally carries over most of SFAS No. 125’s provisions without reconsideration. SFAS No. 140 defines the criteria used to evaluate securitization structures in determining the proper accounting treatment. These criteria pertain to whether or not the transferor has surrendered control over the transferred assets. If a securitization transaction meets all the criteria defined in SFAS No. 140, the transaction is required to be treated as a sale. If any one of the criteria is not met, the transaction is required to be treated as a secured financing. Since March 31, 2000, our securitization transactions included certain provisions which allow us to effectively maintain control over the transferred assets. As a result, these securitization transactions are required to be treated as secured financings. Our securitization transactions prior to March 31, 2000 did not give us this right and, therefore, we were required to treat such transactions as sales.

For securitization transactions treated as sales, we recorded a non-cash gain equal to the present value of the estimated future cash flows on a cash out basis, net of the write-off of dealer participation and gains or losses on hedges. We determined whether or not we must record a servicing asset or liability by estimating future servicing revenues, including servicing fees, late charges, other ancillary income and float benefit, less the actual cost to service the loans.

In determining the fair value of our retained interest in securitized assets, also known as RISA, we evaluated the cost basis of contracts relative to the fair value of such contracts and the fair value of the RISA recorded. The RISA was capitalized and amortized over the expected life of the underlying contracts. Net interest income and servicing fees earned on these contracts are recognized over the life of the securitization transactions as contractual servicing income, retained interest income and fee income. The amortization of the RISA is calculated so as to recognize retained interest income on an effective yield basis. These amounts are reported as servicing income on our Consolidated Statements of Income.

RISA is classified in a manner similar to available for sale securities and as such was marked to market each quarter. Market value changes were calculated by discounting estimated future cash flows using the current market discount rate. Any changes in the market value of the RISA were reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. On a quarterly basis, we evaluated the carrying value of the RISA in light of the actual performance of the underlying contracts and made adjustments to reduce the carrying value, if appropriate.

For securitization transactions treated as secured financings, the contracts are retained on the balance sheet with the securities issued to finance the contracts recorded as notes payable on automobile secured financing. We record interest income on the securitized contracts and interest expense on the notes issued through the securitization transactions.

The excess cash flows generated by securitized contracts are deposited into spread accounts in the name of the trustee under the terms of the securitization transactions. In addition, we advance additional monies to initially fund these spread accounts. For securitization transactions treated as sales, amounts due to us held in the spread accounts and servicing income earned by us for which we have not yet received repayment from the trust are reported as amounts due from trust on our Consolidated Statements of Financial Condition.

As servicer of these contracts, we hold and remit funds collected from the borrowers on behalf of the trustee pursuant to reinvestment contracts that we have entered into. For securitization transactions treated as sales, these amounts are reported as amounts held on behalf of trustee on our Consolidated Statements of Financial Condition.

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, analysis of cumulative losses 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 nonperformance and the percentage of delinquency.

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 contract 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 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.

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 prior to closing the transaction. 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.

If we issue certain variable rate notes payable in connection with our securitization activities, 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.

We also enter into interest rate swap agreements or other derivatives that do not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, also known as SFAS No. 133, or that we choose not to designate as hedges. These derivatives pertain to variable rate notes issued in conjunction with the securitization of our contracts. Any change in the market value of such derivatives is recorded to noninterest income each month. Any income or expense recognized on such derivatives is recognized as miscellaneous noninterest income or expense.

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 (interest rate spread) and the relative amounts of our interest earning assets and interest bearing liabilities. Net interest income totaled $471 million, $313 million and $184 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in net interest income in 2002 is primarily the result of us holding a greater percentage of contracts on balance sheet as we utilized the liquidity sources provided by our parent and completed public securitizations totaling approximately $6.2 billion and a conduit financing totaling $775 million that were accounted for as secured financings.

Our decision to account for our securitizations as secured financings by changing the structure of our securitizations was based upon a business philosophy that focuses on presenting high quality, cash-based earnings and maintaining a conservative, well-capitalized balance sheet. In order to defeat sale treatment, some of our securitization transactions include a provision that provides us with the right to repurchase contracts at our option. The percentage of contracts that we could repurchase was increased from 10% to 20% as of March 2000. Other securitization transactions allow the trust to invest in other financial assets. We

believe that a presentation in which assets and liabilities remain on the balance sheet for securitization transactions treated as secured financings provides a better understanding of our business and the inherent risks associated with our securitizations. In addition, by accounting for our securitizations as secured financings we no longer record a retained interest asset upon completion of each securitization, the valuation of which is based upon subjective assumptions.

The following table presents information relative to the average balances and interest rates on an owned basis for the periods indicated:

The total interest spread decreased 66 basis points for 2002 compared with 2001 due to a decrease of 192 basis points in the yield on interest earning assets and a decrease in the cost of funds of 126 basis points. The total interest rate spread decreased 7 basis points in 2001 compared with 2000 due to a decrease in the yield on interest earning assets of 67 basis points and a decrease in the cost of funds of 60 basis points. The decrease in the yield on interest earning assets is primarily due to our shift to originating a higher percentage of prime credit quality contracts originated and a lower interest rate environment. The decrease in the cost of funds in 2002 and 2001 is primarily due to a lower interest rate environment.

The following table sets forth the changes in net interest income attributable to changes in volume (change in average portfolio volume multiplied by prior period average rate) and changes in rates (change in weighted average interest rate multiplied by prior period average portfolio balance):


(1)	In the analysis of interest changes due to volume and rate, the changes due to the volume/rate variance (the combined effect of change in weighted average interest rate and change in average portfolio balance) have been allocated proportionately based on the absolute value of the volume and rate variances. If there is no balance in the previous year, the total change is allocated to volume.

Since the first quarter of 2000, we have not completed a securitization that has been accounted for as a sale. For transactions treated as sales prior to April 2000, 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 are recognized over the life of the transactions as contractual servicing income and retained interest income or expense.

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.

Servicing income decreased primarily as a result of decreases in contractual servicing income and higher retained interest expense, offset by increases in other fee income.

Fee income consists primarily of documentation fees, late charges and 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 fee income is due to the growth in our average managed portfolio to $8.8 billion in 2002 from $7.6 billion in 2001 and $6.1 billion in 2000.

Contractual servicing income earned by us from Westcorp relating to the whole loan sales totaled approximately $51.1 million, $62.8 million and $16.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. According to the terms of each securitization, contractual servicing income is generally earned at rates ranging from 1.0% to 1.25% per annum on the outstanding balance of contracts securitized. For accounting purposes, this income is only recognized on contracts sold through securitizations treated as sales. Contractual servicing income earned by us relating to sales to securitization trusts totaled approximately $10.7 million, $23.0 million and $41.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease from 2001 to 2002 was a result of the decrease in the average balance of the sold portfolio.

Retained interest expense totaled $29.8 million for the year ended December 31, 2002, compared with retained interest expense of $27.8 million and retained interest income $51.4 million for each of the years ended December 31, 2001 and 2000, respectively. For accounting purposes, this income or expense is only recognized on contracts sold through securitizations treated as sales. Retained interest income or expense is dependent upon the average excess spread on the contracts sold, credit losses and the size of the sold portfolio. The retained interest expense recognized in 2002 is the result of higher chargeoff experience on our sold portfolio as well as revised estimates of future chargeoffs due to continued slowing in the economy. Net chargeoffs on the sold portfolio decreased to $30.4 million in 2002 from $50.4 million in 2001 and $75.5 million in 2000. The outstanding sold portfolio had a weighted average gross interest rate spread of 6.71% in 2002 compared with 6.97% and 7.38% in 2001 and 2000, respectively. The average balance of the sold portfolio, excluding the loans sold in the whole loan sale on which we do not recognize retained interest income, was $840 million in 2002 compared with $1.8 billion in 2001 and $3.4 billion in 2000.

The following table sets forth our contract sales and securitizations and related gains on sales:


(1)	Amounts represent whole loan sales to Westcorp. Westcorp then securitized such contracts.

(2)	Information for 2002, 2001 and 1999 includes $775 million, $650 million, and $500 million, respectively, of contracts securitized in a privately placed conduit facility.

(3)	Net of the write-off of outstanding dealer participation balances and the effect of hedging activities.

The following table lists each of our public securitizations. All securitizations prior to 1998-B were paid in full on or before their contractual maturity dates.


(1)	Represents the difference between the original weighted average annual percentage rate, also known as APR, and the estimated weighted average securitization rate on the closing date of the securitization.

(2)	The 2003-1 securitization closed on February 27, 2003.

We maintain an allowance for credit losses to cover probable losses that can be reasonably estimated for contracts held on the 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 and from 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 currently adequate to absorb probable losses in our owned portfolio that can be reasonably estimated.

The provision for credit losses was $249 million, $144 million and $69.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net chargeoffs were $158 million, $79.0 million and $34.3 million for the same respective periods. The increase in the provision for credit losses is the result of a greater amount of contracts held on balance sheet as well as higher credit losses due to slowing in the economy.

Operating expenses totaled $213 million, $205 million and $189 million for the years ended December 31, 2002, 2001 and 2000, respectively. Operating expenses as a percentage of total revenues were 36% in 2002 compared with 46% in 2001 and 51% in 2000. Operating expenses as a percentage of average managed contracts declined to 2.4% in 2002 compared with 2.7% in 2001 and 3.1% in 2000 as the result of operating efficiencies achieved through the centralization and automation of certain processes as well as the deployment of new technologies.

The efficiencies realized include increasing the conversion ratios on contracts purchased through dealer education, automating the loan application and underwriting system, increasing the percentage of applications received via the Internet, outsourcing the data entry process, centralizing the verification process, and implementing proprietary credit scorecards and electronic funds transfers for our dealers. Operating efficiencies also include implementing automated dialers, centralizing and upgrading payment processing and asset recovery processes, upgrading toll free lines for customer service and interactive voice response technology, implementing direct debit for our borrowers, imaging for record retention and retrieval, and implementing a new behavioral scoring collection system.

Currently, we pay a monthly management fee to the Bank and Westcorp, which covers various administrative expenses. Additionally, the Bank and Westcorp pay fees to us for information technology and other services. The management fee is based on the actual costs incurred and estimates of actual usage. We believe that the management fee approximates the cost to perform these services on our own behalf or to acquire them from third parties. We have the option, under the management agreements, to procure these services on our own should it be more economically beneficial for us to do so. See “Business — Transactions with Related Parties — Management Agreements.”

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 was approximately 36% in 2002 compared with 39% in 2001 and 40% in 2000, respectively. The decrease in the effective tax rate is a result of a one-time benefit of new legislation enacted by the State of California which eliminated the use of the reserve method of accounting for bad debts for large banks and financial corporations for taxable income purposes. In the first year of this change, 50% of the ending reserve amount deducted from taxable income in prior periods will be included in the current year California taxable income. The remaining 50% of the reserve is not required to be recaptured into income but rather represents a permanent difference between GAAP and California tax accounting. The deferred tax liability related to this permanent difference has been eliminated from our balance sheet and the current year

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 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 or expense is recognized. Instead, the earnings of the contracts in the trust, including servicing fees, 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.

Since 2000, our securitizations that were recorded as sales have matured and an increasing percentage of securitized contracts are represented by securitizations that are accounted for as secured financings. During the transitory period, we have presented pro forma 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. These statements provided a method by which to gauge our year to year performance while we made this transition. Effective the first quarter of 2003, we will discontinue presenting portfolio basis earnings since we have completed our transition to treating securitization transactions as secured financings rather than sales for accounting purposes and have fully amortized our residual interest assets.

The growth in our portfolio basis earnings reflects the growth in our managed contract portfolio to $9.4 billion at December 31, 2002, compared with $8.2 billion and $6.8 billion at December 31, 2001 and 2000, respectively. We monitor the periodic portfolio basis earnings of our managed contract portfolio and believe these portfolio basis statements assist in better understanding our business.

The following tables present the portfolio basis statements of income, portfolio yields and reconciliation to net income as reflected in our Consolidated Statements of Income:


(1)	Represents actual chargeoffs incurred during the period, net of recoveries.

(2)	Represents additional allowance for credit losses that would be set aside due to an increase in the managed contract portfolio.

(3)	Such tax effect is based upon our tax rate for the respective period.


(1)	Rates are calculated by dividing amounts by average managed contracts for the respective periods.

We originated $5.4 billion and $4.9 billion of contracts for the years ended December 31, 2002 and 2001, respectively. As a result of higher contract originations, our portfolio of managed contracts reached $9.4 billion at December 31, 2002, up from $8.2 billion at December 31, 2001.

The excess cash flows generated by contracts sold to each of the securitization trusts are deposited into spread accounts in the name of the trustee under the terms of the securitizations. In addition, at the time a securitization closes, the Bank advances additional monies to our subsidiary that originated the securitization trust to initially fund these spread accounts. As these spread accounts reach the balances required by the trust, excess amounts are released to us and are used to pay down these amounts. The amounts due from trusts represent initial advances made to spread accounts and excess cash flows that are still under obligation to be held in the spread accounts for transactions treated as sales. The amounts due from trusts at December 31, 2002 was $101 million compared with $185 million at December 31, 2001. The decrease is the result of a reduction in the outstanding amount of securitizations treated as sales for accounting purposes. Amounts due from trusts is expected to continue to decline in 2003.

None of our securitization transactions in 2002 or 2001 were treated as sales. Therefore, we did not record any retained interest in securitized assets.


(1)	The change in unrealized gain/loss on RISA represents temporary changes in valuation including changes in the discount rate based on the current interest rate environment. Such amounts will not be realized unless the RISA is sold. Changes in prepayment and credit loss assumptions for the RISA are other than temporary in nature and impact the value of the RISA. Such other than temporary differences are immediately recognized in income as a component of retained interest income or expense.

(2)	There were no restrictions on the RISA.

The following table summarizes certain cash flows received from and paid to securitization trusts on securitizations treated as sales and on whole loan sales:

The balance of contracts 30 days or more delinquent included in such securitization trusts totaled $93.7 million and $144 million at December 31, 2002 and 2001, respectively. Net chargeoffs for these securitization trusts totaled $87.0 million, $93.2 million and $81.9 million for the years ended December 31, 2002, 2001 and 2000, respectively.

We provide financing in a market where there is a risk of default by borrowers. Chargeoffs directly impact our earnings and cash flows. To minimize the amount of credit losses we incur, we monitor delinquent accounts, promptly repossess and remarket vehicles, and seek to collect on deficiency balances. See “Business — Operations.”

At December 31, 2002, the percentage of managed accounts delinquent 30 days or greater was 3.50% compared with 3.72% at December 31, 2001 and 3.18% at December 31, 2000. We calculate delinquency based on the contractual due date. Net chargeoffs on average contracts outstanding for the year ended December 31, 2002 were 2.77% compared with 2.27% and 1.91% for the years ended December 31, 2001 and 2000, respectively. The increase in delinquency and credit loss experience is a result of a slowing economy.

The following table sets forth information with respect to the delinquency of our portfolio of contracts managed, which includes contracts that are owned by us and contracts that have been sold and/or securitized but are managed by us:

The following table sets forth information with respect to repossessions in our portfolio of contracts managed:

The following table sets forth information with respect to actual credit loss experience on our portfolio of contracts managed:

Cumulative static pool losses are another means of analyzing contract quality. The cumulative static pool loss ratio of a securitization is the cumulative amount of losses actually recognized, net of recoveries, as to the contracts securitized, up to and including a given month, divided by the original principal balance of the contracts in that securitization. The following table sets forth the cumulative static pool loss ratios by month for all outstanding securitized pools:


(1)	Represents the number of months since the inception of the securitization.

(2)	Represents the original percentage of prime contracts securitized within each pool.

(3)	Represents loans sold to Westcorp in whole loan sales and subsequently securitized by Westcorp. We manage these contracts pursuant to an agreement with Westcorp and the securitization trust.

Our allowance for credit losses was $220 million at December 31, 2002 compared with $132 million at December 31, 2001. We have increased our percentage of allowance for credit losses from 2.5% at December 31, 2001 to 2.8% at December 31, 2002 as we have experienced higher losses in our owned portfolio due to a slowing economy. Based on the analyses we performed related to the allowance for credit losses as described under Critical Accounting Polices, we believe that our allowance for credit losses is currently adequate to cover probable losses in our contract portfolio that can be reasonably estimated.

We require substantial capital resources and cash to support our business. Our ability to maintain positive cash flows from operations is the result of our consistent managed growth, our ability to manage risk-adjusted returns and our efficient operations.

In addition to our indirect statement of cash flows as presented under GAAP, we also analyze the key cash flows from our operations on a direct basis excluding certain items such as the purchase or securitization of contracts. The following table shows our operating cash flows:

Operating cash flows improved 36% for 2002 compared with 2001 and 18% for 2001 compared with 2000 as a result of the growth in our managed portfolio as well as improved operating efficiencies.

Our primary source of funds is the collection of principal and interest from contracts originated and securitized, to the extent that the transaction is an on balance sheet transaction. These monies are deposited into collection accounts established in connection with each securitization, or into our accounts for non-securitized contracts. Pursuant to reinvestment contracts entered into in connection with most securitizations, we receive access to the amounts deposited into collection accounts and amounts held in the spread accounts. We use those amounts so received in our daily operations to fund the purchase of contracts or to cover the day to day costs of our operations. If delinquency or chargeoff rates in a securitization exceed established triggers, amounts required to be held in spread accounts will increase, requiring additional pledged collateral. We may bear additional expense due to an increase in required collateral. If the reinvestment contracts were no longer deemed an eligible investment, which determination would be made by the rating agencies or FSA, we would no longer have the ability to use this cash in the ordinary course of business and would need to obtain alternative financing, which may only be available on less attractive terms. See “Business — Transactions with Related Parties — Reinvestment Contracts.” If we were unable to obtain additional financing, we may have to curtail our contract purchasing activities, which would also have a material adverse effect on our financial position, liquidity and results of operations. Also, a significant increase in credit losses could have a material adverse impact on our collections of principal and interest from contracts.

Principal and interest collections totaled $5.9 billion, $4.9 billion and $3.8 billion for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in principal and interest collections is primarily due to an increase in the amount of contracts managed.

Our business depends on our ability to aggregate and sell contracts in the form of asset-backed securities. These sales generate cash proceeds that allow us to repay amounts borrowed and to purchase additional contracts. Since 1985, we have sold or securitized over $30 billion of automobile receivables in 58 public offerings, making us the fourth largest issuer by dollar amount of such securities in the nation. Changes in our asset-backed securities program could materially adversely affect our earnings or ability to purchase and resell contracts on a timely basis. Such changes could include a:


	•	delay in the completion of a planned securitization;

	•	negative market perception of us; or

	•	failure of the contracts we intend to sell to conform to insurance company and rating agency requirements.

If we are unable to effectively securitize our contracts, we may have to reduce or even curtail our contract purchasing activities, which would have a material adverse effect on our financial position, liquidity and results of operations.

Our parent company is a federally insured savings institution. It has the ability to raise significant amounts of liquidity by attracting both short-term and long-term deposits from the general public, commercial enterprises and institutions by offering a variety of accounts and rates. The Bank may also raise funds by issuing commercial paper, obtaining advances from the Federal Home Loan Bank, also known as the FHLB, and selling securities under agreements to repurchase and utilizing other borrowings. We are able to utilize these liquidity sources through agreements we have entered into with our parent. These include notes, lines of credit and the WFS Reinvestment Contract. The notes are long-term, unsecured debt, while the lines of credit are designed to provide financing to us and our subsidiaries.

These financing arrangements provide us with another source of liquidity beyond the secondary markets, thereby providing a source of short-term funding and affording us a greater ability to choose the timing of our

securitizations. The availability of these financing sources depends upon factors outside of our control, including regulatory issues such as the capital requirements of the Bank and availability of funds at the Bank. If the Bank were unable to extend this financing to us, we would need to replace it with outside sources or curtail contract purchasing activities, which would have a material adverse effect on our financial position, liquidity and results of operations, by increasing our interest expense, reducing our interest income and negatively impacting our ability to remain a preferred source of financing for the dealers from whom we purchase contracts.

We enter into secured conduit financing transactions using an automobile receivable securitization structure for short-term financing needs. For the years ended December 31, 2002 and 2001, we issued $775 million and $650 million of notes secured by contracts through conduit facilities established in January 2002 and December 2001, respectively. We terminated the December 2001 facility in March 2002 in conjunction with a $1.8 billion public automobile contract asset-backed securitization. The January 2002 facility was terminated in May 2002 in conjunction with a $1.8 billion public automobile contract asset-backed securitization.

We completed rights offerings in March 2002 and May 2001 which raised $110 million and $116 million of equity through the issuance of 6.1 million and 6.4 million additional common shares at a price of $18.00 and $18.25 per share, respectively. With the completion of the March 2002 offering, the number of our common shares issued and outstanding increased by 18% to 41.1 million shares, compared with an increase of 22% to 35.0 million shares in May 2001.

Of the 6.1 million and 6.4 million additional common shares issued in 2002 and 2001, the Bank purchased 5.2 million and 5.3 million shares in the amount of $94.4 million and $96.5 million, respectively. At December 31, 2002, the Bank owned 84% of our common stock.

Cash flows from owned contracts, trusts, servicing income, cash gain on sale and fee income less cash paid for dealer participation and operating expenses represents our operating cash flows. We are able to use our operating cash flow as an additional source of cash. Operating cash flows were $234 million, $172 million and $146 million for the years ended December 31, 2002, 2001 and 2000, respectively. Operating cash flows for 2002 have increased 60% since 2000 as a result of growth in our managed portfolio as well as improved operating efficiencies.

Our most significant use of cash is for the purchase of contracts. We acquire these contracts through our nationwide relationship with franchised and select independent automobile dealers. Payments for such contracts are sent to our dealers either via an electronic funds transfer or check. We purchased $5.4 billion of contracts in 2002 compared with $4.9 billion in 2001 and $4.2 billion in 2000.

Under the terms of our reinvestment contract, we fund quarterly payments of interest and principal to security holders derived from the cash flows on the securitized contracts that we service. Payments of principal and interest to security holders totaled $5.6 billion in 2002 compared with $3.7 billion and $2.7 billion in 2001 and 2000, respectively. Payments of principal and interest have increased as a result of an increase in the amount of automobile asset-backed securities outstanding.

Consistent with industry practice, we generally pay participation to the originating dealer for each contract purchased. Participation paid to dealers during 2002 totaled $129 million compared with $121 million and $100 million in 2001 and 2000, respectively. Typically, the acquisition of prime quality contracts higher up the prime credit quality spectrum requires a higher amount of participation paid to the dealer due to increased level of competition for such contracts. The amount of participation paid to dealers increased primarily as a result of an increase in the amount of contracts purchased.

As the servicer of contracts sold in securitizations, we periodically make advances to the securitization trusts to provide for temporary delays in the receipt of required payments from borrowers in accordance with servicing agreements. We receive reimbursement of these advances without interest through payments from the obligors on the contracts or from the trustee at the time a contract liquidates.

Our largest operating expenditure is salaries and benefits paid to our associates. Other amounts include occupancy costs, costs associated with collection and repossession, telephone and data processing costs. We also use substantial amounts of cash in capital expenditures for automation and new technologies to remain competitive and to become more efficient. See “Business — Our Business Strategy — Create Operating Efficiencies Through Technology and Best Practices.”

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Accounting for Business Combinations, also known as SFAS No. 141, and Statement of Financial Accounting Standards No. 142, Accounting for Goodwill and Intangible Assets, also known as SFAS No. 142. Under SFAS No. 141 and SFAS No. 142, companies may no longer use the pooling-of-interest accounting method for business combinations or account for mergers on their financial statements under the traditional purchase method, which required companies to amortize goodwill assets over a specific time period. Instead purchased goodwill will remain on the balance sheet as an asset subject to impairment reviews. We adopted SFAS No. 141 and SFAS No. 142 on January 1, 2002, and they did not have a material effect on our earnings or financial position.

In July 2001, the FASB 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 2003 fiscal year. The adoption of SFAS No. 143 will not have a material effect on our earnings or financial position.

commits to a plan to sell the assets meeting several strict criteria. The three-step approach for recognizing and measuring impairment of assets to be held and used under SFAS No. 121 remains applicable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and for interim periods within those fiscal years. We adopted SFAS No. 144 on January 1, 2002, and it did not have a material effect on our earnings or financial position.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, also known as SFAS No. 145. SFAS No. 145 rescinds Statements of Financial Accounting Standards No. 4 and 64 that required gains and losses from extinguishment of debt to be classified as extraordinary items. SFAS No. 145 also rescinds Statement of Financial Accounting Standards No. 44 that provided transition provisions related to the Motor Carrier Act of 1980. SFAS No. 145 amended Statement of Financial Accounting Standards No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued on or after May 15, 2002. We adopted SFAS No. 145 and it did not have a material effect on our earnings or financial position.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, also known as SFAS No. 146, in which liabilities for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liabilities are incurred. SFAS No. 146 eliminated the recognition of certain costs associated with exit or disposal activities that were previously recognized as liabilities at a plan (commitment) date under Emerging Issues Task Force Issue No. 94-3 that did not meet the definition of a liability in FASB Concepts Statement No. 6, Elements of Financial Statements. SFAS No. 146 is effective for disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 will not have a material effect on our earnings or financial position.

In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions — an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9, also known as SFAS No. 147, to remove acquisitions of financial institutions from the scope of both FASB Statement No. 72 and FASB Interpretation No. 9. SFAS No. 147 now requires that acquisitions of financial institutions be accounted for in accordance with SFAS No. 141 and 142. SFAS No. 147 also amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions. Consequently, customer-relationship intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. SFAS No. 147 is effective for acquisitions made on or after October 1, 2002 and is effective for measurement of impairment of long-lived assets on October 1, 2002. We adopted SFAS No. 147 on October 1, 2002 and it did not have a material effect on our earnings or financial position.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123, also known as SFAS No. 148. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the method used on reported results. SFAS No. 148 provides two additional transition methods for entities that adopt Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, also known as SFAS No. 123. Both of these methods avoid the ramp-up effects arising from prospective application of the fair value based method. SFAS No. 148 does not permit the use of the original SFAS No. 123 method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. This statement also requires disclosure of comparable information for all companies regardless of which method of accounting for stock-based employee compensation. SFAS No. 148 improves the timeliness of disclosures by requiring their inclusion in financial

reports for interim periods. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 on December 31, 2002, and expect to adopt the prospective application method of transition to the fair value based method of accounting for stock options in the first quarter of 2003. Neither the adoption of the disclosure provisions nor the adoption of the fair value based method will have a material effect on our earnings or financial position.

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, also known as FIN No. 45. FIN No. 45 will require that guarantees meeting the characteristics described in FIN No. 45 be recognized and initially measured at fair value. In addition, FIN No. 45 will require new disclosures by guarantors, even if the likelihood of the guarantor making payments under the guarantee is remote. The disclosure provisions of FIN No. 45 are effective for fiscal years ending after December 15, 2002. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We adopted FIN No. 45 on December 15, 2002 and it did not have a material effect on our earnings or financial position.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, also known as FIN No. 46. FIN No. 46 changes the consolidation requirements by requiring a variable interest entity to be consolidated by a company if that company is subject to the majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. In addition, FIN No. 46 requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN No. 46 apply to variable interest entities created after January 31, 2003 and apply to existing variable interest entities in the first fiscal year or interim period beginning after June 15, 2003. The adoption of FIN No. 46 will not have a material effect on our earnings or financial position.

Fluctuations in interest rates and early prepayment of contracts are the primary market risks facing us. The Credit and Pricing Committee is responsible for setting credit and pricing policies and for monitoring credit quality. Our Asset/ Liability Committee is responsible for the management of interest rate and prepayment risks. Asset/ liability management is the process of measuring and controlling interest rate risk through matching the maturity and repricing characteristics of interest earning assets with those of interest bearing liabilities.

The Asset/ Liability Committee closely monitors interest rate and prepayment risks and recommends policies for managing such risks. The primary measurement tool for evaluating this risk is the use of interest rate shock analysis. This analysis simulates the effect of an instantaneous and sustained change in interest rates (in increments of 100 basis points) on our assets and liabilities and measures the resulting increase or decrease to the net present value, also known as NPV, of our assets and liabilities. It should be noted that shock analysis is objective but not entirely realistic in that it assumes an instantaneous and isolated set of events.

The contracts originated and held by us are 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 enter into various hedge agreements. We enter into Euro-dollar future contracts and forward agreements in order to hedge our future interest payments on our notes payable on automobile secured financing. The market value of these hedge agreements responds 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). Any ineffective portion is recognized in interest expense during that period if the hedge is greater than 100% effective. Upon completion of the securitization, 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 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. These hedge instruments are settled daily, and therefore, there are no related financial instruments recorded on the Consolidated Statements of Financial Condition. Credit risk related to these hedge instruments is minimal.

As we issued certain variable rate notes payable in 2002 and 2001, we also entered 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.

We also enter into interest rate swap agreements or other derivatives that do not qualify for hedge accounting under SFAS No. 133 or that we choose not to designate as hedges. These derivatives pertain to variable rate notes issued in conjunction with the securitization of our contracts. Any change in the market value of such derivatives is recorded to income each month. Any income or expense recognized on such derivatives is recognized as miscellaneous income or expense.

The Asset/ Liability Committee monitors our hedging activities to ensure that the value of hedges, their correlation to the contracts being hedged and the amounts being hedged continue to provide effective protection against interest rate risk. The amount and timing of hedging transactions are determined by our senior management based upon the monitoring activities of the Asset/ Liability Committee. As a result of our approach to interest rate risk management and our hedging strategies, we do not anticipate that changes in interest rates will materially affect our results of operations or liquidity, although we can provide no assurance in this regard. There were no material changes in market risks in the current year compared with the prior year.

The following table provides information about our derivative financial instruments and other financial instruments used that are sensitive to changes in interest rates. For contracts and liabilities with contractual maturities, the table presents principal cash flows and related weighted average interest rates by contractual maturities as well as our historical experience of the impact of interest rate fluctuations on the prepayment of contracts. For interest rate swap agreements, the table presents notional amounts and, as applicable, weighted average interest rates by contractual maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts.

ALLOWANCE FOR CREDIT LOSSES: Funds in an account established to cover probable credit losses. If we believe an automobile contract is uncollectible, we set aside in the allowance account a portion of earnings equal to the difference between unpaid principal and the market value of the contract. If the contract is charged off, we reduce the principal balance and the allowance by equal amounts.

ASSET-BACKED SECURITIES: Securities that are backed by financial assets such as automobile contracts.

BOOK VALUE PER COMMON SHARE: The value of a share of common stock based on the values at which the assets are recorded on the balance sheet determined by dividing shareholders’ equity by the total number of common shares outstanding.

CHARGEOFF RATE: Net annualized chargeoffs divided by average contracts outstanding for the period.

CONDUIT FINANCING: A transaction involving the transfer of a pool of assets to a trust, wherein securities representing undivided interests in, or obligations of, the trust are purchased by an investor that issues short-term notes. The transaction is treated as a secured financing.

CORE CAPITAL: A capital measure applicable to savings institutions. The Bank’s core capital is comprised of common shareholders’ equity (excluding certain components of accumulated other comprehensive income or loss), minority interest in includable consolidated subsidiaries, less investments in and advances to nonincludable subsidiaries.

CORE CAPITAL RATIO: A regulatory measure of capital adequacy. The Bank’s core capital ratio is core capital to total assets adjusted for assets in certain subsidiaries that cannot be included and certain unrealized gains or losses on certain securities and cash flow hedges.

DEALER PARTICIPATION: The amount paid to a dealer for the purchase of an automobile contract in excess of the principal amount financed.

DELINQUENCY: A method of determining aging of past due accounts based on the status of payments under the loan.

DERIVATIVES: Interest rate swaps, futures, forwards, option contracts or other off-balance sheet financial instruments used for asset and liability management purposes. These instruments derive their values or contractually determined cash flows from the price of an underlying asset or liability, reference rate, index or other security.

DEFERRED TAX ASSET: An asset attributable to deductible temporary differences and carryforwards. A deferred tax asset is measured using the applicable enacted tax rate and provisions of the enacted tax law.

DEFERRED TAX LIABILITY: A liability attributable to taxable temporary differences. A deferred tax liability is measured using the applicable enacted tax rate and provisions of the enacted law.

EARNING PER SHARE (EPS): The most common method of expressing a company’s profitability. Its purpose is to indicate how effective an enterprise has been in using the resources provided by common shareholders. EPS is usually presented in two ways: basic EPS and diluted EPS. The computation of basic EPS includes other instruments that are equivalent to common stock. Diluted EPS includes all instruments that have the potential of causing additional shares of common stock to be issued, such as unexercised stock options.

EURO-DOLLAR FUTURES CONTRACTS: Futures contracts used as a hedge to lock in a gross spread on a future securitization transaction prior to closing the transaction.

FEE INCOME: Income from documentation fees, late charges, deferment fees, transaction processing fees, and other fees.

FHLB: The Federal Home Loan Bank, a network of twelve regional Federal Home Loan Banks chartered by Congress in 1932 to ensure financial institutions have access to money to lend to consumers for home mortgages.

FORWARD AGREEMENTS: Contracts to exchange payments on a specified future date, based on a market change in interest rates from trade date to contract settlement date.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP): Accounting rules and conventions defining acceptable practices in preparing financial statements in the United States of America. The Financial Accounting Standards Board (FASB), an independent self-regulatory organization, is the primary source of accounting rules.

HEDGE: A derivative instrument designed to reduce or eliminate risk, such as interest rate risk. To be treated as a hedge under GAAP, the instrument must meet certain requirements as defined under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.

HOLDING COMPANY: A corporation or other entity that owns a majority of stock or securities of one or more other corporations, thus obtaining control of the other corporations.

INTEREST BEARING LIABILITIES: The sum of deposits, notes, subordinated debt and other borrowings on which interest expense is incurred.

INTEREST EARNING ASSETS: The sum of loans and investments on which interest income is earned.

INTEREST RATE SPREAD: The difference between the yield on our interest earning assets and the rate paid on our interest bearing liabilities.

INTEREST RATE SWAP: A contract between two parties to exchange interest payments on a notional amount for a specified period. Typically, one party makes fixed rate payments, while the other party makes payments using a variable rate. Such a transaction is commonly used to manage the asset or liability sensitivity of a balance sheet by converting fixed rate assets or liabilities to floating rates, or vice versa.

LIBOR: London Interbank Offered Rate, which is a widely quoted market rate that is frequently the index used to determine the rate at which our subsidiaries or we borrow funds.

LIQUIDITY: A measure of how quickly we can convert assets to cash or raise additional cash by issuing debt.

MANAGED CONTRACTS or MANAGED PORTFOLIO: Automobile contracts on the balance sheet plus contracts securitized in transactions treated as sales under GAAP, which we continue to service.

NET CHARGEOFFS or NET CREDIT LOSSES: The amount of automobile contracts written off as uncollectible, net of the recovery of contracts previously written off as uncollectible.

NET INTEREST INCOME: Interest income and loan fees on interest earning assets less the interest expense incurred on all interest bearing liabilities.

NET INTEREST MARGIN: Interest income from automobile contracts and other interest earning assets reduced by interest expense as a percentage of the average balance of such interest earning assets.

NET YIELD ON AVERAGE INTEREST EARNING ASSETS: The average interest rate earned on interest earning assets less the average interest rate paid on interest bearing liabilities.

NONACCRUAL CONTRACTS: Automobile contracts on which we no longer accrue interest because ultimate collection is unlikely.

NONPERFORMING ASSETS (NPAs): Chapter 13 bankruptcy accounts greater than 120 days delinquent.

NOTIONAL AMOUNT: The principal amount of a financial instrument on which a derivative transaction is based. In an interest rate swap, for example, the notional amount is used to calculate the interest rate cash flows to be exchanged. No exchange of principal occurs.

PORTFOLIO BASIS: Method of reporting whereby net interest margin, other revenues and credit losses on securitized contracts and contracts sold in whole loan sales, which we continue to service, are reported as if those receivables were still held on our balance sheet.

PROVISION FOR CREDIT LOSSES: A charge to earnings to recognize that all contracts will not be fully paid. The amount is determined based on such factors as our actual loss experience, management’s expectations of probable credit losses, as well as current economic trends.

REINVESTMENT CONTRACTS: A series of agreements between WFS, the Bank and WFAL2 through which WFS has access to the cash flows of certain securitizations. Under such agreements, collections of principal and interest on the contracts in the securitization trust and funds in the spread account are invested at either the Bank or WFAL2. Funds invested at the Bank are collateralized by mortgage-backed securities and made available to WFS through the WFS Reinvestment Contract. Funds invested at WFAL2 are collateralized by automobile contracts, which WFAL2 purchases from WFS.

RETAINED INTEREST IN SECURITIZED ASSETS (RISA): An asset that represents our contractual right to receive interest and other cash flows from our securitization trusts after the investors receive their contractual return.

RETAINED INTEREST INCOME OR EXPENSE: The excess cash flows on the contracts sold through securitizations treated as sales less the amortization of the retained interest in securitized assets. The excess cash flows represent all cash received on the contracts securitized less payments to investors for principal and interest.

RETURN ON AVERAGE ASSETS: A financial measurement of the efficiency with which a business uses its assets. Return on average assets is the ratio of net income divided by average total assets.

RETURN ON AVERAGE SHAREHOLDERS’ EQUITY: A measure of how effective a business has been in investing its net worth. Return on equity is expressed as a ratio, calculated by dividing net income by average equity excluding accumulated other comprehensive income or loss.

RISK-WEIGHTED ASSETS: An amount used in determining risk-based capital ratios applicable to savings institutions. The amount of risk-weighted assets is calculated by taking the face amount of assets on and off the balance sheet and applying a factor based on the inherent risk of such assets as defined by regulation.

SECURED FINANCING: A transaction where interests in a pool of financial assets, such as automobile contracts, are sold to investors. Typically, the assets are transferred to a trust that issues interests that are sold to investors. The contracts and related debt remain on our balance sheet.

SECURITIZATION: A transaction involving the transfer of a pool of assets to a trust, wherein securities representing undivided interests in, or obligations of, the trust are purchased by investors. The securities are repaid by the cash flows from the assets transferred to the trust. The transaction is treated as either a secured financing or a sale, depending on the terms of the transaction.

SHAREHOLDERS’ EQUITY: A balance sheet amount that represents the total investment in the corporation by holders of common stock.

SPREAD ACCOUNT: An account of a securitization trust into which excess cash flows generated by the contracts securitized are deposited. The terms of the account, which vary with each securitization, typically

state a maximum balance, generally expressed as a percentage of the current principal balance of the notes and certificates. The initial deposit is generally funded by the company securitizing the assets and is expressed as a percentage of the original balance of the notes and certificates. Once the required or maximum spread account balance is reached, the excess is typically released to the certificate holder.

SUBORDINATED DEBENTURES: Borrowing in the form of an unsecured note, debenture, or other debt instrument, which in the event of the debtor’s bankruptcy, has a claim to the assets of the debtor with a lower priority than other classes of debt.

SUPPLEMENTARY CAPITAL: Instruments that qualify as additional regulatory capital for total risk-based capital measurement. The Bank’s supplementary capital includes subordinated debentures and general valuation loan and lease loss allowance limited to 1.25% of risk-weighted assets. Supplementary capital is limited to 100% of core capital.

TANGIBLE CAPITAL: A capital measure applicable to savings institutions. The Bank’s tangible capital is the same as its core capital because the Bank does not have any intangible assets that would be deducted from core capital to derive tangible capital.

TIER 1 RISK-BASED CAPITAL: A capital measure applicable to savings institutions. The Bank’s tier 1 risk-based capital equals core capital less a dollar-for-dollar reduction for its residual interests in securitized assets and other recourse obligations. Prior to its adoption of new capital regulations in September 2002 regarding the regulatory treatment of these credit-enhancing assets, its tier 1 risk-based capital equaled its core capital.

TIER 1 RISK-BASED CAPITAL RATIO: A regulatory measurement of capital adequacy. The ratio of the Bank’s tier 1 risk-based capital to risk-weighted assets.

TOTAL RISK-BASED CAPITAL: A capital measure applicable to savings institutions. The Bank’s total risk-based capital equals its tier 1 risk-based capital plus supplementary capital.

TOTAL RISK-BASED CAPITAL RATIO: A regulatory measurement of capital adequacy. The ratio of total risk-based capital to risk-weighted assets.

WFS REINVESTMENT CONTRACT: An agreement between the Bank and us whereby the Bank allows us to utilize the funds invested in the reinvestment contract at the Bank. In return for the use of such funds, we pay the Bank a fee as consideration for its pledge of collateral.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Certain information required by Part III is omitted from this report, as we will file a definitive proxy statement, also known as the Proxy Statement, within 120 days after the end of our fiscal year pursuant to Regulation 14A of the Securities Exchange Act of 1934 for our Annual Meeting of Shareholders to be held April 29, 2003, and the information included therein is incorporated herein by reference.

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.

Information regarding executive compensation appears under the caption “Compensation of Executive Officers” in the Proxy Statement and is incorporated herein by reference.

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.

Disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operations of our disclosure controls and procedures within 90 days of the filing date of this annual report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. There has been no significant change in our internal controls or in other factors that could significantly affect the controls and procedures subsequent to the date of their evaluation.


	The following consolidated financial statements and report of independent auditors for us and our subsidiaries are included in this report commencing on page F-2:

	Report of Independent Auditors

	Consolidated Statements of Financial Condition at December 31, 2002 and 2001

	Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000

	Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2002, 2001 and 2000

	Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000

	Notes to Consolidated Financial Statements


	Schedules to the consolidated financial statements are omitted because the required information is inapplicable or the information is presented in our consolidated financial statements or related notes.


(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 as Exhibit 4.1 to the WFS Registration Statement on Form S-8 (File No. 333-40121), filed November 13, 1997, and incorporated herein by reference.

(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.

(8)	Employment Agreement dated February 27, 1998 between WFS Financial Inc, Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).

(9)	Employment Agreement, dated November 15, 1998 between WFS Financial Inc, Westcorp and Mark Olson (will be provided to the SEC upon request).


(10)	Exhibits previously filed with Annual Report on Form 10-K of WFS Financial Inc for the year ended December 31, 1998 (File No. 33-93068) as filed on or about March 31, 1999.

(11)	Exhibits previously filed with WFS Financial Inc Registration Statements on Form S-2 (File No. 333-91277) filed November 19, 1999 and subsequently amended on January 20, 2000 incorporated by reference under Exhibit Number indicated.

(12)	Exhibits previously filed with Annual Report on Form 10-K of WFS Financial Inc for the year ended December 31, 2001 as filed on or about March 29, 2002.

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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following on behalf of the registrant in the capacities and on the dates indicated.


1.	I have reviewed this annual report on Form 10-K of WFS Financial Inc;

2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a)	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c)	Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


6.	The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


1.	I have reviewed this annual report on Form 10-K of WFS Financial Inc;

2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a)	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c)	Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


6.	The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

We have audited the accompanying consolidated statements of financial condition of WFS Financial Inc and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States. 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States.


(1)	The pre-tax amount of unrealized gains and losses on retained interest in securitized assets was $0.9 million for the year ended December 31, 2002 compared with $1.4 million for the year ended December 31, 2001 and $1.0 million for the year ended December 31, 2000, respectively.

(2)	The pre-tax amount of unrealized losses on cash flow hedges was $100 million for the year ended December 31, 2002 compared with $71.6 million for the year ended December 31, 2001.

(3)	The pre-tax amount of unrealized losses on cash flow hedges reclassified into earnings was $59.8 million for the year ended December 31, 2002 compared with $21.0 million for the year ended December 31, 2001. The amount reclassified into earnings in 2001 includes $1.8 million of the $4.8 million cumulative effect adjustment related to the adoption of SFAS No. 133.

The accompanying 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 with 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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

We are a consumer finance company that specializes in the purchase, securitization and servicing of fixed rate consumer automobile contracts. We purchase contracts from automobile dealers on a nonrecourse basis and originate loans directly with consumers. We only have one reportable segment.

Cash and due from banks include cash and short-term investments, which have no material restrictions as to withdrawal or usage.

For securitization transactions treated as sales, we recorded a non-cash gain equal to the present value of the estimated future cash flows on a cash out basis, net of the write-off of dealer participation and gains or losses on hedges. We determined whether or not we must record a servicing asset or liability by estimating future servicing revenues, including servicing fees, late charges, other ancillary income, and float benefit, less the actual cost to service the loans.

The allowance for credit losses is maintained at a level that we believe is adequate to absorb probable losses in the on balance sheet contract portfolio that can be reasonably estimated. Our determination of the adequacy of the allowance is based on an evaluation of the portfolio, past credit 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.

We continue to accrue interest income on contracts until the contracts are charged off, which occurs automatically after the contracts are past due 120 days except for accounts that are in Chapter 13 bankruptcy. At the time that a contract is charged off, all accrued interest is reversed. For those accounts that are in Chapter 13 bankruptcy and contractually past due greater than 120 days, all accrued interest is reversed and income is recognized on a cash basis. For the years ended December 31, 2002 and 2001, the amount of accrued interest reversed was not material.

Premises 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. Useful lives for premises and equipment are 5 to 39 years for buildings and improvements, 5 to 7 years for furniture and equipment, 3 to 5 years for computers and software, and 5 to 15 years for all other premises and equipment.

All accounts for which collateral has been repossessed and the redemption period has expired are reclassified from contracts receivable to repossessed assets at fair value with any adjustment recorded against the allowance for credit losses. Repossessed assets were included in other assets on the Consolidated Statements of Financial Condition and are not material.

Accounts that are in Chapter 13 bankruptcy and are contractually past due greater than 120 days are reclassified from contracts receivable to nonperforming assets at fair value with any adjustment recorded against the allowance for credit losses. Nonperforming assets were included in other assets on the Consolidated Statements of Financial Condition and are not material.

Interest income is earned in accordance with the terms of the contracts. For pre-computed 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 as interest receivable to the extent not collected and reported in accrued interest receivable on the Consolidated Statements of Financial Condition. Other contracts use the sum of the month’s digits method, which approximates the effective yield method.

We defer premiums paid to dealers. The net amount is amortized as an adjustment to the related contract’s yield over their contractual life. Fees for other services are recorded as income when earned.

Interest expense is recognized when incurred. Our level yield calculation for notes payable on automobile secured financings includes the interest on the notes, underwriting discounts, hedge gains or losses and swap payments.

We file consolidated federal and state tax returns as part of a consolidated group that includes the Bank and Westcorp. Our 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 information about financial instruments is reported using quoted market prices for which it is practicable to estimate that value. 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 rates 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 instruments. Fair values for certain financial instruments and all non-financial instruments are not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent our underlying value.

We use the following methods and assumptions in estimating our fair value disclosures for financial instruments:


	Cash and due from banks: The carrying amounts reported in the Consolidated Statements of Financial Condition for cash and short-term instruments approximate those assets’ fair values.

	Investment securities available for sale: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.


	Contracts receivable: The fair values for contracts are estimated using discounted cash flow analysis, using interest rates currently being offered for contracts with similar terms to borrowers of similar credit quality.

	Retained interest in securitized assets: RISA is carried at fair value. The fair value is determined by discounting estimated cash flows using a current market discount rate.

	Interest rate swaps, forward agreements and Euro-dollar futures contracts: The fair value is estimated by obtaining market quotes from brokers or internally valuing when market quotes are not readily available.

	Lines of credit – parent, notes payable on automobile secured financing and notes payable – parent: The fair value is estimated by using discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.

	Amounts held on behalf of trustee: The carrying amounts reported in the Consolidated Statements of Financial Condition approximate their fair value.

Effective January 1, 2001, we adopted SFAS No. 133, which requires all derivatives to be recorded on the balance sheet at fair value. Changes in the fair value of derivatives designated as hedges are either offset against the change in fair value of the hedged assets, liabilities or firm commitments directly through income or recognized through accumulated other comprehensive income (loss) on the balance sheet until the hedged items are recognized in earnings, depending on the nature of the hedges. The ineffective portion of a derivative’s change in fair value for a cash flow hedge will be recognized in accumulated other comprehensive income (loss) on the balance sheet if the hedge is less than 100% effective or in earnings if the hedge is greater than 100% effective. We employ regression analysis and discounted cash flow analysis to test the effectiveness of our hedges on a quarterly basis. All of our derivative instruments that are designated as hedges are treated as cash flow hedges under SFAS No. 133.

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 enter into various hedge agreements. We enter into Euro-dollar futures contracts and forward agreements in order to hedge our future interest payments on our notes payable on automobile secured financing. The market value of these hedges responds 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. 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. These hedge instruments are settled daily, and therefore, there are no related financial instruments recorded on the Consolidated Statements of Financial Condition. Credit risk related to these hedge instruments is minimal.

variable rate notes issued in conjunction with the securitization of our contracts. Any change in the market value of such derivatives is recorded to income each month. Any income or expense recognized on such derivatives is recognized as miscellaneous income or expense.

As part of the adoption of SFAS No. 133 in 2001, we recorded a cumulative effect adjustment to accumulated other comprehensive income (loss) of $4.8 million, net of tax, which represents the deferred loss on hedge agreements outstanding at January 1, 2001. Of the $4.8 million, $1.8 million was reclassified into earnings during 2001.

As discussed below, Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123, also known as SFAS No. 148 requires expanded disclosure of the effects of a company’s accounting policy for stock-based employee compensation. We use the intrinsic value method to account for stock-based employee compensation. See Note 15 — Stock Options for further disclosure.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, also known as SFAS No. 144, to supersede Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, also known as SFAS No. 121. The basic recognition and measurement model for assets held for use and held for sale under SFAS No. 121 has been retained, however SFAS No. 144 removes goodwill from the scope as goodwill is now subject to the provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal other than by sale. Assets held for sale or disposal must be stated at the lower of the assets’ carrying amounts or fair values and depreciation would no longer be recognized. Assets to be disposed of by sale would be classified as held for sale when management, having the authority to approve the action, commits to a plan to sell the assets meeting several strict criteria. The three-step approach for recognizing and measuring impairment of assets to be held and used under SFAS No. 121 remains applicable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and for interim periods within those fiscal years. We adopted SFAS No. 144 on January 1, 2002, and it did not have a material effect on our earnings or financial position.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, also known as SFAS No. 145. SFAS No. 145 rescinds Statements of Financial Accounting Standards No. 4 and 64 that required gains and losses from extinguishment of debt be classified as extraordinary items. SFAS No. 145 also rescinds Statement of Financial Accounting Standards No. 44 that provided transition provisions related to the Motor Carrier Act of 1980. SFAS No. 145 amended Statement of Financial Accounting Standards No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for financial statements issued on or after May 15, 2002. We adopted SFAS No. 145 and it did not have a material effect on our earnings or financial position.

In December 2002, the FASB issued SFAS No. 148. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the method used on reported results. SFAS No. 148 provides two additional transition methods for entities that adopt Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, also know as SFAS No. 123. Both of these methods avoid the ramp-up effects arising from prospective application of the fair value based method. SFAS No. 148 does not permit the use of the original SFAS No. 123 method of transition for changes to the fair value based method made in fiscal years beginning after December 15, 2003. This statement also requires disclosure of comparable information for all companies regardless of which method of accounting for stock-based employee compensation. SFAS No. 148 improves the timeliness of disclosures by requiring their inclusion in financial reports for interim periods. SFAS No. 148 is effective for fiscal years ending after December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 on December 31, 2002, and expect to adopt the prospective application method of transition to the fair value based method of accounting for stock options in the first quarter of 2003. Neither the disclosure adoption nor the accounting adoption will have a material effect on our earnings or financial position.

No. 45. FIN No. 45 will require that guarantees meeting the characteristics described in FIN No. 45 be recognized and initially measured at fair value. In addition, FIN No. 45 will require new disclosures by guarantors, even if the likelihood of the guarantor making payments under the guarantee is remote. The disclosure provisions of FIN No. 45 are effective for fiscal years ending after December 15, 2002. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We adopted FIN No. 45 on December 15, 2002 and it did not have a material effect on our earnings or financial position.

Investment securities available for sale is comprised of owner trust certificates retained on securitization transactions treated as sales. The balances of these investment securities were $3.3 million and $4.7 million at December 31, 2002 and 2001, respectively. The book value of these investment securities approximates fair value. As of December 31, 2002, $3.3 million had stated maturity dates of one to five years.

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.

Contracts managed by us totaled $9.4 billion and $8.2 billion at December 31, 2002 and 2001, respectively. Of the $9.4 billion contracts managed at December 31, 2002, $7.8 billion were owned by us, $1.1 billion were owned by Westcorp, our ultimate parent, and $525 million 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.


(1)	The write-down of nonperforming assets represents specific reserves established on accounts that file for Chapter 13 Bankruptcy and are greater than 120 days delinquent. To the extent that these accounts do not perform under the court ordered plan, these specific reserves are reversed and the account is charged off.

None of our securitization transactions in 2002 or 2001 were treated as sales. Therefore, we did not record any retained interest in securitized assets.


(1)	The change in unrealized gain/loss on RISA represents temporary changes in valuation including changes in the discount rate based on the current interest rate environment. Such amounts will not be realized unless the RISA is sold. Changes in prepayment and credit loss assumptions for the RISA are other than temporary in nature and impact the value of the RISA. Such other than temporary differences are immediately recognized in income as a component of retained interest income.

(2)	There were no restrictions on the RISA.

The following table summarizes certain cash flows received from and paid to securitization trusts on securitization transactions treated as sales and on whole loan sales:

We borrowed $150 million from the Bank under the terms of a $150 million note at a rate of 8.875% per annum with a maturity date in August 2007. We had amounts outstanding on this note of $108 million and $67.5 million as of December 31, 2002 and 2001, respectively. Interest payments on this note are due quarterly, in arrears. Interest expense on the note totaled $12.4 million, $10.1 million, and $12.7 million for the years ended December 31, 2002, 2001 and 2000, respectively.

During 2001, we made a final paydown of $11.2 million on a note payable to the Bank with a maturity date in April 2003. Under the original terms of the note, interest payments on the note were due quarterly, in arrears, at a rate of 7.25% per annum. Interest expense on the note was $0.5 million and $1.5 million for the years ended December 31, 2001 and 2000, respectively.

We borrowed $300 million under the terms of a $300 million note in May 2002. This note matures on May 15, 2012. Interest payments on the $300 million note are due semi-annually, in arrears, calculated at the rate of 10.25% per annum. Pursuant to the terms of this note, WFS may not incur any other indebtedness which is senior to the obligations evidenced by this note except for (i) indebtedness under the $150 million note (ii) indebtedness collateralized or secured under the $1.8 billion line of credit and (iii) indebtedness for similar types of warehouse lines of credit. There was $300 million outstanding on this note at December 31, 2002. Interest expense on this note totaled $20.3 million for the year ended December 31, 2002.

We have a secured line of credit from the Bank permitting us to draw up to $1.8 billion as needed to be used in our operations. The secured line of credit terminates on December 31, 2004, although the term may be extended by us for additional periods of up to 60 months. There was no amount outstanding on this line of credit at December 31, 2002 compared to amounts outstanding of $374 million and $236 million at December 31, 2001 and 2000, respectively. On November 30, 2001 and August 8, 2002, our subsidiaries entered into lines of credit with the Bank. These lines permit us to draw up to a total of $255 million to fund our initial deposits to spread accounts on securitization transactions. Of the total $255 million, $10 million terminates on December 1, 2006 and $245 million terminates on January 1, 2010, although the terms may be extended by us for additional periods of up to 60 months. At December 31, 2002, the amount outstanding on these lines of credit totaled $62.0 million compared with $47.3 million outstanding at December 31 2001.

The $1.8 billion line of credit carries an interest rate based on the one-month LIBOR and an interest spread of 125 basis points when unsecured and 90 basis points when secured. The Bank has the right under this line of credit to refuse to permit additional amounts to be drawn if, in the Bank’s discretion, the amount sought to be drawn will not be used to finance the purchase of contracts or other working capital requirements. The $255 million in lines of credit held by our subsidiaries with the Bank carry an interest rate based on one-month LIBOR and an interest spread of 112.5 basis points when unsecured and 62.5 basis points when secured. Interest on the amounts outstanding under the lines of credit is paid monthly, in arrears, and is calculated on the daily average amount outstanding that month. Interest expense totaled $3.0 million, $8.9 million and $37.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest rates for the lines of credit were 2.74%, 4.43% and 7.09% for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest rates for the lines of credit were 2.55%, 3.08% and 7.44% at December 31, 2002, 2001 and 2000, respectively.

We also invest our excess cash at the Bank at an interest rate based on the federal composite commercial paper rate. The weighted average interest rates were 1.77%, 3.8% and 6.58% for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average interest rates were 1.44% at December 31, 2002, compared to 6.53% at December 31, 2000. We held no excess cash at the Bank at December 31, 2001. Interest income earned under this agreement totaled $10.2 million, $4.9 million and $1.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.

We have entered into certain management agreements with the Bank and Westcorp pursuant to which we pay a 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 us or our subsidiaries, including our principal office facilities, our field offices, and overhead and associate benefits pertaining to Bank and Westcorp associates who also provide services to us or our subsidiaries. Additionally, as part of these management agreements, the Bank and Westcorp have agreed to reimburse us for similar costs incurred. Net amounts paid to us by the Bank, Westcorp and their affiliates under these agreements were $6.4 million, $5.9 million and $2.4 million for the years ended December 31, 2002, 2001 and 2000, respectively.

In connection with our securitization transactions, we entered into a reinvestment contract with the Bank which allows us access to the cash flows of each of the outstanding securitization transactions and the cash held in each spread account for each of those transactions. We are permitted to use that cash as we determine, including in our ordinary business activities. We paid the Bank $1.2 million, $1.1 million, and $0.7 million for the years ended December 31, 2002, 2001 and 2000, respectively, pursuant to these agreements.

For the years ended December 31, 2002 and 2001, we issued $6.9 billion and $4.2 billion of notes secured by contracts, of which $6.2 billion and $3.6 billion was through public transactions and $775 million and $650 million, respectively, was through a conduit facility. We had no amount outstanding on the conduit facility at December 31, 2002 compared with $650 million at December 31, 2001. We terminated our $650 million and $775 million conduit facilities in March 2002 and May 2002, respectively.

Interest payments on the public transactions based on the respective note’s interest rate are due either monthly or quarterly, in arrears. Interest payments on the conduit facilities were due monthly, in arrears, based on the respective note’s interest rate. Interest expense on all notes payable on automobile secured financing, including interest payments under interest rate swap agreements, totaled $313 million for the year ended December 31, 2002, compared with $216 million and $87.0 million for the years ended December 31, 2001 and 2000, respectively.

At December 31, 2002, the stated maturities of our notes payable on automobile secured financing and their weighted average interest rates, including the effect of interest rate swap agreements on variable rate notes payable, were as follows:

We sold $1.4 billion of contracts to Westcorp in whole loan sales for the years ended December 31, 2001 and 2000. We continue to service the contracts pursuant to servicing agreements. We recorded cash gain on sale, net of the write-off of outstanding dealer participation balances and the effect of hedging activities, of $6.7 million and $6.0 million related to the contracts sold in 2001 and 2000, respectively.

Future minimum payments under noncancelable operating leases on premises and equipment with terms of one year or more were as follows:

In certain cases, these agreements include various renewal options and contingent rental agreements. Rental expense for premises and equipment totaled $5.6 million, $5.4 million and $4.8 million for the years ended December 31, 2002, 2001 and 2000, respectively.

We have pledged certain contracts in amounts totaling $474 million and $441 million as of December 31, 2002 and 2001, respectively, relative to amounts held on behalf of trustee including amounts related to securitization transactions treated as secured financings.

We or our subsidiaries are involved as a party in certain legal proceedings incidental to our business. We do not believe that the outcome of these proceedings will have a material effect upon our financial condition, results of operations and cash flows.

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


(1)	All cash flow hedges are structured to hedge future interest payments on borrowings.

Fee income consists primarily of documentation fees, late charges, deferment fees and other servicing fees. Additional servicing fees received by us from Westcorp relating to the whole loan sales totaled approximately $51.1 million and $62.8 million for the years ended December 31, 2002 and 2001, respectively, and are included in contractual servicing income. Contractual servicing income received by us relating to sales to securitization trusts totaled approximately $10.7 million and $23.0 million for the years ended December 31, 2002 and 2001, respectively. According to the terms of each securitization transaction, contractual servicing income is earned at rates ranging from 1.0% to 1.25% per annum on the outstanding balance of contracts securitized.

We participate in Westcorp’s three employee benefit plans, which vary on the types of associates covered and the benefits received. These plans include the Westcorp Employee Stock Ownership and Salary Savings Plan, the Executive Deferral Plan, and the Long Term Incentive Plan.

The Westcorp Employee Stock Ownership Plan, also known as the ESOP, covers essentially all associates who have completed six months of service, excluding contract or temporary employees.

Contributions to the ESOP are discretionary and determined by the Board of Directors of Westcorp within limits set forth under the Employee Retirement Income Security Act of 1974. These contributions are allocated to the associate’s account based upon years of service and annual compensation. All shares purchased by the ESOP are allocated to associates who participate in the ESOP. The Salary Savings Plan, also known as the 401(k) Plan, covers essentially all associates who have completed three months of service, excluding contract or temporary employees. Contributions to the 401(k) Plan are guaranteed and based on a fixed percent of the associate’s payroll deferral for the calendar year. Contributions to the ESOP and 401(k) Plan totaled $2.8 million, $8.4 million and $8.0 million in 2002, 2001 and 2000, respectively. Compensation expense related to the ESOP and 401(k) Plan totaled $1.4 million, $4.8 million and $7.3 million in 2002, 2001 and 2000, respectively. As of December 31, 2002, the ESOP and 401(k) plan held a total of 1,927,643 shares of Westcorp’s common stock.

The Executive Deferral Plan, also known as the EDP, covers a select group of our management or highly compensated associates as determined by Westcorp’s Board of Directors. The EDP is designed to allow participants to defer a portion of their compensation on a pre-tax basis and earn tax-deferred interest on these deferrals. The EDP also provides for us to match portions of the amounts contributed by our associates at the discretion of Westcorp’s Board of Directors. For the year ended December 31, 2002, expense related to the EDP for Westcorp and its subsidiaries totaled $0.7 million compared with $0.3 million and $0.5 million for the years ended December 31, 2001 and 2000, respectively.

The Long Term Incentive Plan, also known as the LTIP, covers certain key executive officers in which such officers will be entitled to receive a fixed incentive amount provided that Westcorp’s tangible net book value per common share as of December 31, 2004 equals or exceeds $28.08, as adjusted at Westcorp’s sole discretion, and the executive officer remains continuously employed by Westcorp or its subsidiaries through April 30, 2005. Westcorp expensed $0.8 million and $0.9 million in 2002 and 2001, respectively, related to the LTIP.

In 1996, we reserved 550,000 shares of common stock for future issuance to certain associates under an incentive stock option plan, also known as the Stock Options Plan. In 1997, we reserved an additional 550,000 shares of common stock for future issuance under the Stock Options Plan. The options may be exercised within seven years after the date of grant. There were 807,212 shares available for future grants at December 31, 2002. The weighted average life of the options outstanding at December 31, 2002 was 2.7 years and the exercise prices were either $6.94 or $13.00 per share. No options have been issued under this plan since 1998.

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 our 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 our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options. Nonetheless, the fair value of options outstanding was estimated at the date of grant using the Black-Scholes option pricing model.

We elected to follow Accounting Principles Board Opinion No. 25, also known as APB No. 25, and related Interpretations in accounting for our employee stock options. Under APB No. 25, the exercise price of our employee stock options equals the market price of the underlying stock on the date of grant and, therefore, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123 as amended by SFAS No. 148, and has been determined as if we had accounted for our employee stock options under the fair value method of that statement.

Pro forma net income and diluted earnings per share for the respective periods were as follows:

The difference between our pro forma net income and diluted earnings per share and our reported net income and earnings per share is immaterial.

We have not declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. We are not currently under any regulatory or contractual limitations on our ability to declare or pay dividends.

A reconciliation of total tax provisions and the amounts computed by applying the statutory federal income tax rate of 35% to income before taxes is as follows:

Deferred taxes reflect the net tax effect 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 reclassified. Such changes to the components of the expense occur because all tax alternatives available to us are not known for a number of months subsequent to year end.

Significant components of our deferred tax assets and liabilities were as follows:

Our interest rate swap agreements are with counterparties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional amount and a specified index. We pay a fixed interest rate and receive a floating interest rate on all of our interest rate swap agreements. At December 31, 2002 the terms of our interest rate swap agreements were to pay a weighted average fixed rate of 3.6%, and to receive a weighted average variable rate of 1.6%, with

expiration dates ranging from 2005 to 2010 and collateral requirements generally ranging from 3% to 4%. At December 31, 2001, the terms of our interest rate swap agreements were to pay a weighted average fixed rate of 5.2%, and to receive a weighted average variable rate of 2.4%, with expiration dates ranging from 2004 to 2006 and collateral requirements generally ranging from 3% to 4%. Variable interest rates may change in the future.

Notional amounts do not represent amounts exchanged with counterparties and, thus are not a measure of our exposure to loss through our use of these agreements. The amounts exchanged are determined by reference to the notional amounts and the other terms of the agreements.

The current credit exposure under these agreements is limited to the fair value of the agreements with a positive fair value at the reporting date. Master netting agreements are arranged or collateral is obtained through physical delivery of, or rights to, securities to minimize our exposure to credit losses in the event of nonperformance by counterparties to financial instruments. We use only highly rated counterparties and further reduce our risk by avoiding any material concentration with a single counterparty.

For the year ended December 31, 2002, the unrealized loss on cash flow hedges was $59.2 million, net of taxes of $41.2 million, compared to $42.2 million, net of taxes of $29.4 million, for the year ended December 31, 2001. We reclassified $35.3 million and $8.4 million, net of tax, into earnings which is included in interest expense on the Consolidated Statements of Income for the years ended December 31, 2002 and 2001, respectively. The amount recognized in earnings due to ineffectiveness was immaterial. In 2001, as a result of selling contracts in a whole loan sale rather than securitizing them in a secured financing transaction, we reclassified into earnings approximately $4.0 million, net of tax, of deferred losses from accumulated other comprehensive income (loss) related to hedges of future interest payments on the forecasted secured financing. The hedge loss was netted against the gain on sale on the Consolidated Statements of Income. We estimate that we will reclassify into earnings during the next twelve months approximately $7 million to $10 million of the unrealized loss on these instruments that was recorded in accumulated other comprehensive loss as of December 31, 2002.

The following table sets forth the computation of basic and diluted earnings per share:

On February 27, 2003, we completed the issuance of $1.3 billion of notes secured by contracts through a securitization transaction accounted for as a secured financing. The senior notes issued are credit enhanced through the issuance of subordinated notes.

Effective January 1, 2003, we regained control over assets of the trusts for all of our outstanding securitization transactions treated as sales for accounting purposes, excluding loans sold in whole loan sales.

We regained control of these assets when each trust was given the ability to invest in financial assets not related to the securitization of contracts. In accordance with Emerging Issues Task Force 02-9, Accounting for Changes that Result in a Transferor Regaining Control of Financial Assets Sold, we recorded $525 million of automobile contracts and the related notes payable on automobile secured financings on our Consolidated Statements of Financial Condition and have eliminated all remaining amounts due from trusts and amounts held on behalf of trustee for these transactions. We will no longer recognize retained interest income or expense or contractual servicing income for these securitization transactions on our Consolidated Statements of Income. Rather, we will recognize interest income on automobile contracts held in these trusts and record interest expense on notes payable on automobile secured financings.

The following is a summary of unaudited quarterly results of operations for the periods ended December 31, 2002 and 2001. Certain quarterly amounts have been adjusted to conform with the year-end presentation.


(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 as Exhibit 4.1 to the WFS Registration Statement on Form S-8 (File No. 333-40121), filed November 13, 1997, and incorporated herein by reference.

(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.

(8)	Employment Agreement dated February 27, 1998 between WFS Financial Inc, Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).

(9)	Employment Agreement, dated November 15, 1998 between WFS Financial Inc, Westcorp and Mark Olson (will be provided to the SEC upon request).


(10)	Exhibits previously filed with Annual Report on Form 10-K of WFS Financial Inc for the year ended December 31, 1998 (File No. 33-93068) as filed on or about March 31, 1999.

(11)	Exhibits previously filed with WFS Financial Inc Registration Statements on Form S-2 (File No. 333-91277) filed November 19, 1999 and subsequently amended on January 20, 2000 incorporated by reference under Exhibit Number indicated.


(12)	Exhibits previously filed with Annual Report on Form 10-K of WFS Financial Inc for the year ended December 31, 2001 as filed on or about March 29, 2002.


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .


California		33-0291646
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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


TABLE OF CONTENTS
	Forward-Looking Statements
PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosure About Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
	Item 14. Controls and Procedures
PART IV
	Item 15. Financial Statement Schedules, Exhibits and Reports on Form 8-K
EXHIBIT INDEX
EXHIBIT 10.6.1
EXHIBIT 10.6.2
EXHIBIT 10.9.3
EXHIBIT 10.9.4
EXHIBIT 10.10.1
EXHIBIT 10.18.3
EXHIBIT 10.19.1
EXHIBIT 10.20
EXHIBIT 10.20.1
EXHIBIT 10.22.1
ESHIBIT 10.22.2
EXHIBIT 10.23.1
EXHIBIT 10.23.2
EXHIBIT 10.24
EXHINIT 10.24.1
EXHIBIT 10.25
EXHIBIT 10.26
EXHIBIT 10.26.1
EXHIBIT 10.27
EXHIBIT 10.28
EXHIBIT 10.29
EXHIBIT 10.30
EXHIBIT 10.31
EXHIBIT 10.32
EXHIBIT 10.33
EXHIBIT 10.34
EXHIBIT 10.35
EXHIBIT 10.35.1
EXHIBIT 10.36
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 99.1


		Page

Forward-Looking Statements and Available Information			1
PART I
Item 1.	Business		2
Item 2.	Properties		20
Item 3.	Legal Proceedings		20
Item 4.	Submission of Matters to a Vote of Security Holders		20
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		21
Item 6.	Selected Financial Data		22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		46
Item 8.	Financial Statements and Supplementary Data		51
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		51
PART III
Item 10.	Directors and Executive Officers of the Registrant		52
Item 11.	Executive Compensation		52
Item 12.	Security Ownership of Certain Beneficial Owners and Management		52
Item 13.	Certain Relationships and Related Transactions		52
Item 14.	Controls and Procedures		52
PART IV
Item 15.	Financial Statement Schedules, Exhibits and Reports on Form 8-K		53



		For the Year Ended December 31,

		2002		2001		2000


		(Dollars in thousands)
New vehicles		$	1,548,372	$	1,208,753	$	1,028,394
Pre-owned vehicles			3,867,362		3,654,526		3,190,833

	Total volume	$	5,415,734	$	4,863,279	$	4,219,227

Prime contracts		$	4,346,212	$	3,675,351	$	2,900,960
Non-prime contracts			1,069,522		1,187,928		1,318,267

	Total volume	$	5,415,734	$	4,863,279	$	4,219,227


	*Create Operating Efficiencies Through Technology and Best Practices*



		Contract Purchases
		For the Year Ended December 31,						At December 31, 2002

State		2002		2001		2000		Managed Portfolio		Number of Dealers


		(Dollars in thousands)
California		$	2,091,347	$	1,928,371	$	1,680,814	$	3,676,606		2,082
Washington			310,189		216,003		186,078		449,715		336
Arizona			283,528		324,299		277,217		541,202		284
Oregon			214,683		196,292		158,944		334,899		326
Colorado			200,153		123,788		130,247		286,962		200
Texas			171,761		181,651		158,138		334,328		312
Ohio			171,109		174,040		165,860		336,866		381
Florida			147,931		184,289		175,341		320,007		345
South Carolina			145,892		129,963		91,246		250,624		192
North Carolina			144,859		138,956		106,664		265,334		309
Nevada			131,094		105,747		101,311		223,270		111
Virginia			123,403		99,056		97,997		218,004		236
Illinois			104,576		93,709		76,020		178,787		196
Idaho			102,475		77,184		48,639		152,719		114
Tennessee			86,228		83,892		68,955		160,873		174
Utah			84,897		77,321		63,531		133,939		156
Michigan			82,542		67,905		52,489		133,648		163
Georgia			77,294		82,352		71,341		156,433		219
Missouri			70,070		57,883		64,372		123,493		145
New York			63,519		29,801		5,097		77,488		184
Maryland			62,145		41,286		36,431		102,513		127
Pennsylvania			50,699		46,122		39,317		90,671		124
Wisconsin			44,318		40,826		37,439		73,719		112
New Jersey			42,210		28,280		26,552		69,975		99
Kentucky			41,754		41,526		34,658		75,691		92
Massachusetts			39,086		27,778		22,126		61,660		74
Indiana			37,904		36,739		26,759		69,756		101
Alabama			36,570		31,967		49,053		76,724		73
Minnesota			29,708		18,240		11,156		38,537		60
Oklahoma			27,390		25,065		16,318		44,192		35
Delaware			26,697		26,173		23,709		52,401		43
New Hampshire			24,275		10,563		7,157		30,275		54
New Mexico			23,930		24,146		9,469		39,195		38
Connecticut			22,928		11,508		13,638		35,872		52
Iowa			20,552		9,228		13,027		28,532		38
Kansas			19,448		21,533		22,683		39,398		67
Mississippi			18,051		19,691		17,434		38,996		55
Wyoming			12,507		6,918		5,114		16,228		15
Nebraska			9,824		5,248		5,427		13,498		27
West Virginia			9,447		11,930		16,763		22,868		26
Rhode Island			4,385		2,947		2,642		7,213		15
South Dakota			3,843		2,078				3,971		11
Maine			492		985		2,054		1,859		3
Vermont			21						10		1
Hawaii									1,023

	Total	$	5,415,734	$	4,863,279	$	4,219,227	$	9,389,974		7,807



	2002				2001

	High		Low		High		Low

First Quarter	$	25.62	$	18.36	$	21.29	$	17.06
Second Quarter		31.77		23.95		30.14		15.55
Third Quarter		26.32		16.90		31.76		14.89
Fourth Quarter		21.25		16.26		26.83		15.63



		At or For the Year Ended December 31,

		2002			2001			2000			1999			1998


		(Dollars in thousands, except per share amounts)
Consolidated Statements of Operations Data:
Net interest income		$	470,937		$	313,006		$	183,542		$	99,229		$	64,978
Servicing income			119,302			130,826			170,919			140,780			76,110
Gain on sale of contracts						6,741			13,723			54,977			25,438

	Total revenues		590,239			450,573			368,184			294,986			166,526
Provision for credit losses			249,093			144,130			68,962			36,578			15,146
Operating expenses			212,904			205,292			188,634			173,453			165,042
Restructuring charge(1)															15,000

	Total expenses		461,997			349,422			257,596			210,031			195,188

Income (loss) before income tax (benefit)			128,242			101,151			110,588			84,955			(28,662	)
Income tax (benefit)			46,152			39,503			44,216			35,580			(12,095	)

Net income (loss)		$	82,090		$	61,648		$	66,372		$	49,375		$	(16,567	)

Net income (loss) per common share — diluted		$	2.05		$	1.90		$	2.35		$	1.91		$	(0.64	)

Consolidated Statements of Financial Condition Data:
Contracts receivable, net		$	7,729,913		$	5,083,891		$	2,978,167		$	1,459,035		$	884,825
Retained interest in securitized assets						37,392			111,558			167,277			171,230
Total assets			8,789,703			5,490,757			3,575,137			2,130,927			1,444,340
Lines of credit — parent			62,048			421,175			235,984			551,189			554,836
Notes payable — parent			408,010			67,500			146,219			178,908			160,000
Notes payable on automobile secured financing			7,323,180			4,005,925			2,249,363			461,104
Total shareholders’ equity			634,532			465,293			317,205			212,188			164,341
Other Selected Financial Data:
Prime contract purchases		$	4,346,212		$	3,675,351		$	2,900,960		$	2,313,573		$	1,808,013
Non-prime contract purchases			1,069,522			1,187,928			1,318,267			1,026,573			862,683

	Total contract purchases	$	5,415,734		$	4,863,279		$	4,219,227		$	3,340,146		$	2,670,696

Contracts sold or securitized(2)		$	6,925,000		$	4,220,000		$	4,590,000		$	3,000,000		$	1,885,000
Operating cash flows(3)		$	233,635		$	171,825		$	145,913		$	101,702		$	16,521
Operating expenses as a percentage of average managed contracts			2.4	%		2.7	%		3.1	%		3.6	%		4.1	%
Number of states in which contracts were purchased			44			43			43			43			42
Number of dealers from which contracts were purchased			7,807			7,598			8,545			8,722			11,323


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*



			2002 Compared to 2001(1)									2001 Compared to 2000(1)

			Volume			Rate			Total			Volume			Rate			Total


			(Dollars in thousands)
Interest income:
	Contracts receivable		$	331,031		$	(60,486	)	$	270,545		$	244,990		$	(14,594	)	$	230,396
	Investment securities			9,621			(5,499	)		4,122			3,135			(1,869	)		1,266

		Total interest earning assets	$	340,652		$	(65,985	)	$	274,667		$	248,125		$	(16,463	)	$	231,662

Interest expense:
	Lines of credit — parent		$	(3,176	)	$	(2,705	)	$	(5,881	)	$	(18,224	)	$	(10,557	)	$	(28,781	)
	Notes payable — parent			21,727			495			22,222			(4,014	)		305			(3,709	)
	Notes payable on automobile secured financing			156,225			(55,830	)		100,395			140,088			(5,400	)		134,688

		Total interest bearing liabilities	$	174,776		$	(58,040	)	$	116,736		$	117,850		$	(15,652	)	$	102,198

Net change in net interest income									$	157,931								$	129,464


								Remaining									Gross
						Remaining		Balance as a			Original			Original			Interest
Issue				Original		Balance at		Percent of			Weighted			Weighted Average			Rate
Number		Close Date		Balance		December 31, 2002		Original Balance			Average APR			Securitization Rate			Spread(1)


(Dollars in thousands)
	1985-A		December, 1985	$	110,000		Paid in full					18.50	%		8.38	%		10.12	%
	1986-A		November, 1986		191,930		Paid in full					14.20			6.63			7.57
	1987-A		March, 1987		125,000		Paid in full					12.42			6.75			5.67
	1987-B		July, 1987		110,000		Paid in full					12.68			7.80			4.88
	1988-A		February, 1988		155,000		Paid in full					13.67			7.75			5.92
	1988-B		May, 1988		100,000		Paid in full					14.01			8.50			5.51
	1988-C		July, 1988		100,000		Paid in full					15.41			8.50			6.91
	1988-D		October, 1988		105,000		Paid in full					14.95			8.85			6.10
	1989-A		March, 1989		75,000		Paid in full					15.88			10.45			5.43
	1989-B		June, 1989		100,000		Paid in full					15.96			9.15			6.81
	1990-A		August, 1990		150,000		Paid in full					16.05			8.35			7.70
	1990-1		November, 1990		150,000		Paid in full					15.56			8.50			7.06
	1991-1		April, 1991		200,000		Paid in full					16.06			7.70			8.36
	1991-2		May, 1991		200,000		Paid in full					15.75			7.30			8.45
	1991-3		August, 1991		175,000		Paid in full					15.69			6.75			8.94
	1991-4		December, 1991		150,000		Paid in full					15.53			5.63			9.90
	1992-1		March, 1992		150,000		Paid in full					14.49			5.85			8.64
	1992-2		June, 1992		165,000		Paid in full					14.94			5.50			9.44
	1992-3		September, 1992		135,000		Paid in full					14.45			4.70			9.75
	1993-1		March, 1993		250,000		Paid in full					13.90			4.45			9.45
	1993-2		June, 1993		175,000		Paid in full					13.77			4.70			9.07
	1993-3		September, 1993		187,500		Paid in full					13.97			4.25			9.72
	1993-4		December, 1993		165,000		Paid in full					12.90			4.60			8.30
	1994-1		March, 1994		200,000		Paid in full					13.67			5.10			8.57
	1994-2		May, 1994		230,000		Paid in full					14.04			6.38			7.66
	1994-3		August, 1994		200,000		Paid in full					14.59			6.65			7.94
	1994-4		October, 1994		212,000		Paid in full					15.58			7.10			8.48
	1995-1		January, 1995		190,000		Paid in full					15.71			8.05			7.66
	1995-2		March, 1995		190,000		Paid in full					16.36			7.10			9.26
	1995-3		June, 1995		300,000		Paid in full					15.05			6.05			9.00
	1995-4		September, 1995		375,000		Paid in full					15.04			6.20			8.84
	1995-5		December, 1995		425,000		Paid in full					15.35			5.88			9.47
	1996-A		March, 1996		485,000		Paid in full					15.46			6.13			9.33
	1996-B		June, 1996		525,000		Paid in full					15.74			6.75			8.99
	1996-C		September, 1996		535,000		Paid in full					15.83			6.60			9.23
	1996-D		December, 1996		545,000		Paid in full					15.43			6.17			9.26
	1997-A		March, 1997		500,000		Paid in full					15.33			6.60			8.73
	1997-B		June, 1997		590,000		Paid in full					15.36			6.37			8.99
	1997-C		September, 1997		600,000		Paid in full					15.43			6.17			9.26
	1997-D		December, 1997		500,000		Paid in full					15.19			6.34			8.85
	1998-A		March, 1998		525,000		Paid in full					14.72			6.01			8.71
	1998-B		June, 1998		660,000	$	30,398		4.61	%		14.68			6.06			8.62
	1998-C		November, 1998		700,000		50,381		7.20			14.42			5.81			8.61
	1999-A		January, 1999		1,000,000		96,552		9.66			14.42			5.70			8.72
	1999-B		July, 1999		1,000,000		162,087		16.21			14.62			6.36			8.26
	1999-C		November, 1999		500,000		108,805		21.76			14.77			7.01			7.76
	2000-A		March, 2000		1,200,000		294,664		24.56			14.66			7.28			7.38
	2000-B		May, 2000		1,000,000		274,923		27.49			14.84			7.78			7.06
	2000-C		August, 2000		1,390,000		473,976		34.10			15.04			7.32			7.72
	2000-D		November, 2000		1,000,000		416,366		41.64			15.20			6.94			8.26
	2001-A		January, 2001		1,000,000		458,549		45.85			14.87			5.77			9.10
	2001-B		May, 2001		1,370,000		651,944		47.59			14.41			4.23			10.18
	2001-C		August, 2001		1,200,000		697,633		58.14			13.90			4.50			9.40
	2002-1		March, 2002		1,800,000		1,370,605		76.14			13.50			4.26			9.24
	2002-2		May, 2002		1,750,000		1,506,738		86.10			12.51			3.89			8.62
	2002-3		August, 2002		1,250,000		1,139,684		91.17			12.30			3.06			9.24
	2002-4		November, 2002		1,350,000		1,350,000		100.00			12.18			2.66			9.52
	2003-1(2)		February, 2003		1,343,250							11.79			2.42			9.37

			Total	$	30,064,680	$	9,083,305



		For the Year Ended December 31,

		2002(1)			2001(1)			2000(1)


		(Dollars in thousands)
Interest income			12.5	%		13.3	%		13.5	%
Interest expense			5.8			6.5			6.7

	Net interest income		6.7			6.8			6.8
Net chargeoffs			2.8			2.3			1.9
Provision for growth			0.2			0.2			0.4

	Provision for credit losses		3.0			2.5			2.3

	Net interest income after provision for credit losses		3.7			4.3			4.5
Other income			1.0			1.0			1.0
Operating expenses			2.4			2.8			3.2

Income before income tax			2.3			2.5			2.3
Income tax			0.9			1.0			0.9

Portfolio basis net income			1.4	%		1.5	%		1.4	%

Average managed contracts		$	8,845,635		$	7,576,681		$	6,076,814


(1)	Such tax is based on our tax rate for the respective period.



		December 31,


		2002					2001					2000

		Amount		Percentage			Amount		Percentage			Amount		Percentage


							(Dollars in thousands)
Contracts managed		$	9,389,974				$	8,152,882				$	6,818,182

Period of delinquency:
	30 — 59 days	$	238,204		2.54	%	$	217,873		2.67	%	$	157,843		2.32	%
	60 days or more		90,291		0.96			85,290		1.05			59,166		0.86

Total contracts delinquent and delinquencies as a percentage of contracts managed		$	328,495		3.50	%	$	303,163		3.72	%	$	217,009		3.18	%



	For the Year Ended December 31,

	2002			2001			2000			1999			1998

Weighted average coupon(1)		11.35	%		12.74	%		13.95	%		13.57	%		13.44	%
Interest on borrowings(1)		3.74			5.37			6.74			6.08			5.89

Net interest margins		7.61			7.37			7.21			7.49			7.55
Credit losses(2)		2.77			2.27			1.91			2.13			3.42

Risk-adjusted margins		4.84	%		5.10	%		5.30	%		5.36	%		4.13	%


	*Underwriting and Purchasing of Contracts*


	*Servicing of Contracts*


	Regulatory Capital Requirements




Period(1)		1998-B			1998-C			1999-A			1999-B			1999-C			2000-A			2000-B			2000-C(3)			2000-D			2001-A			2001-B(3)			2001-C			2002-1			2002-2			2002-3			2002-4


	1		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
	2		0.02			0.04			0.04			0.04			0.02			0.03			0.02			0.04			0.04			0.03			0.03			0.04			0.01			0.00			0.02			0.02
	3		0.08			0.11			0.11			0.11			0.10			0.10			0.09			0.13			0.11			0.09			0.10			0.09			0.06			0.03			0.06
	4		0.18			0.23			0.20			0.26			0.25			0.20			0.24			0.27			0.24			0.20			0.21			0.20			0.15			0.10			0.14
	5		0.38			0.39			0.33			0.47			0.40			0.36			0.39			0.46			0.39			0.33			0.33			0.35			0.29			0.18			0.27
	6		0.59			0.50			0.46			0.66			0.56			0.55			0.59			0.65			0.54			0.50			0.50			0.49			0.43			0.32
	7		0.83			0.61			0.62			0.87			0.71			0.71			0.78			0.81			0.74			0.70			0.69			0.65			0.60			0.49
	8		1.03			0.75			0.76			1.00			0.86			0.91			0.99			0.93			0.93			0.84			0.87			0.81			0.84			0.66
	9		1.21			0.86			0.92			1.13			1.01			1.10			1.17			1.07			1.13			1.04			1.05			0.95			1.06
	10		1.40			1.00			1.11			1.24			1.14			1.27			1.33			1.24			1.34			1.24			1.22			1.07			1.28
	11		1.53			1.17			1.30			1.35			1.34			1.45			1.44			1.41			1.50			1.45			1.36			1.20
	12		1.62			1.32			1.47			1.44			1.52			1.58			1.57			1.62			1.74			1.67			1.53			1.37
	13		1.74			1.48			1.61			1.58			1.74			1.73			1.72			1.86			1.95			1.90			1.67			1.55
	14		1.84			1.66			1.73			1.74			1.94			1.85			1.86			2.04			2.21			2.09			1.81			1.74
	15		1.96			1.79			1.81			1.85			2.09			2.00			2.04			2.25			2.48			2.25			2.00			1.97
	16		2.10			1.91			1.89			2.03			2.27			2.15			2.24			2.45			2.71			2.41			2.19			2.16
	17		2.22			2.01			2.00			2.16			2.39			2.37			2.39			2.68			2.89			2.54			2.37			2.36
	18		2.40			2.07			2.10			2.30			2.53			2.52			2.55			2.88			3.08			2.73			2.60
	19		2.55			2.11			2.24			2.42			2.67			2.67			2.73			3.08			3.22			2.93			2.80
	20		2.69			2.17			2.35			2.50			2.81			2.83			2.93			3.23			3.40			3.11			3.01
	21		2.79			2.24			2.46			2.58			2.92			2.99			3.12			3.38			3.59			3.34
	22		2.85			2.34			2.55			2.67			3.10			3.16			3.27			3.54			3.78			3.54
	23		2.89			2.43			2.63			2.77			3.28			3.34			3.38			3.67			3.96			3.72
	24		2.92			2.52			2.71			2.87			3.38			3.49			3.52			3.83			4.18
	25		2.97			2.62			2.77			3.01			3.55			3.63			3.63			4.00			4.41
	26		3.04			2.71			2.82			3.14			3.68			3.75			3.73			4.16			4.58
	27		3.13			2.80			2.89			3.16			3.84			3.86			3.84			4.35
	28		3.18			2.87			2.96			3.29			3.98			3.97			3.97			4.50
	29		3.24			2.90			3.02			3.40			4.14			4.09			4.11			4.64
	30		3.32			2.95			3.09			3.50			4.19			4.21			4.26
	31		3.38			3.00			3.17			3.61			4.30			4.33			4.40
	32		3.43			3.02			3.20			3.68			4.38			4.47			4.50
	33		3.47			3.08			3.27			3.74			4.46			4.59
	34		3.48			3.14			3.35			3.81			4.57			4.68
	35		3.52			3.15			3.41			3.87			4.66
	36		3.54			3.21			3.47			3.91			4.76
	37		3.58			3.25			3.52			3.97			4.84
	38		3.63			3.30			3.55			4.03			4.96
	39		3.66			3.35			3.58			4.09			5.03
	40		3.65			3.39			3.61			4.13
	41		3.69			3.39			3.63			4.18
	42		3.73			3.42			3.66			4.23
	43		3.75			3.45			3.68
	44		3.79			3.47			3.72
	45		3.81			3.48			3.75
	46		3.81			3.50			3.79
	47		3.83			3.52			3.80
	48		3.84			3.56
	49		3.85			3.58
	50		3.86			3.60
	51		3.87
	52		3.88
	53		3.89
	54		3.89
	55		3.89
	Prime Mix(2)		67	%		70	%		70	%		70	%		67	%		68	%		69	%		68	%		68	%		71	%		71	%		76	%		70	%		87	%		85	%		80	%


Item 7A.	*Quantitative and Qualitative Disclosure About Market Risk*


		2003			2004			2005			2006			2007			Thereafter			Total			Fair Value


											(Dollars in thousands)
Rate sensitive assets:
Fixed interest rate contracts		$	2,596,168		$	2,183,846		$	1,607,004		$	1,042,946		$	470,663		$	49,496		$	7,950,123		$	8,850,736
	Average interest rate		12.26	%		12.32	%		12.29	%		12.04	%		11.37	%		10.11	%		12.19	%
Fixed interest rate securities		$	3,348																	$	3,348		$	3,348
	Average interest rate		5.50	%																	5.50	%
Rate sensitive liabilities:
Automobile secured financing — Fixed		$	2,213,970		$	1,766,085		$	774,225		$	618,815								$	5,373,095		$	5,617,527
	Average interest rate		3.58	%		4.43	%		3.68	%		4.03	%								3.92	%
Automobile secured financing — Variable		$	1,950,085																	$	1,950,085		$	1,950,085
	Average interest rate		1.85	%																	1.85	%
Notes payable — parent														$	180,010		$	300,000		$	408,010		$	426,738
	Average interest rate														8.88	%		10.25	%		9.89	%
Lines of credit		$	62,048																	$	62,048		$	62,111
	Average interest rate		2.54	%																	2.54	%
Interest rate swap agreements		$	2,928,084		$	(973,257	)	$	(1,527,475	)	$	(427,352	)										$	(59,244	)
	Average pay rate		2.91	%		3.44	%		2.70	%		2.49	%								2.91	%
	Average receive rate		1.43	%		1.48	%		1.40	%		1.39	%								1.43	%


Item 15.	*Financial Statement Schedules, Exhibits and Reports on Form 8-K*


Exhibit
No.		Description of Exhibit

	4	Specimen WFS Financial Inc Common Stock Certificate(5)
	10.1	Westcorp Incentive Stock Option Plan(2)
	10.2	Westcorp Employee Stock Ownership and Salary Savings Plan(3)
	10.3	Westcorp 1991 Stock Option Plan(4)
	10.3.1	Westcorp 2001 Stock Option Plan
	10.4	1985 Executive Deferral Plan(1)
	10.5	2000 Executive Deferral Plan V(12)
	10.6	Revolving Line of Credit Agreement between WFS Funding, Inc. and Western Financial Bank, dated November 30, 2001(12)
	10.6.1	Amended Revolving Line of Credit Agreement between WFS Funding, Inc. and Western Financial Bank, dated June 1, 2002
	10.6.2	First Amendment dated October 15, 2002, to the Revolving Line of Credit Agreement between WFS Funding, Inc. and Western Financial Bank
	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	Revolving Line of Credit Agreement between WFS Financial Inc and Western Financial Bank, dated June 15, 1999(11)
	10.9.1	Amendment No. 1, dated as of August 1, 1999, to the Revolving Line of Credit Agreement between WFS Financial Inc and Western Financial Bank(11)
	10.9.2	Amendment No. 2, dated May 23, 2000, to the Revolving Line of Credit Agreement between WFS Financial Inc and Western Financial Bank
	10.9.3	Amendment No. 3, dated January 1, 2002, to the Revolving Line of Credit Agreement between WFS Financial Inc and Western Financial Bank



Signature	Title	Date


/s/ ERNEST S. RADY Ernest S. Rady	Chairman of the Board and Director	March 18, 2003

/s/ THOMAS A. WOLFE Thomas A. Wolfe	President, Chief Executive Officer and Director	March 18, 2003

/s/ JUDITH M. BARDWICK Judith M. Bardwick	Director	March 18, 2003

/s/ JAMES R. DOWLAN James R. Dowlan	Director	March 18, 2003

/s/ DUANE A. NELLES Duane A. Nelles	Director	March 18, 2003

/s/ RONALD I. SIMON Ronald I. Simon	Director	March 18, 2003

/s/ FREDRICKA TAUBITZ Fredricka Taubitz	Director	March 18, 2003

/s/ LEE A. WHATCOTT Lee A. Whatcott	Senior Executive Vice President, Chief Financial Officer, and Chief Operating Officer (Principal Financial and Accounting Officer)	March 18, 2003


	Page

Report of Independent Auditors		F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at December 31, 2002 and 2001		F-3
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000		F-4
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2002, 2001 and 2000		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000		F-6
Notes to Consolidated Financial Statements		F-7


										Accumulated
										Other
										Comprehensive
				Common		Paid-in		Retained		Income (Loss),
		Shares		Stock		Capital		Earnings		Net of Tax			Total


				(Dollars in thousands, except share amounts)
Balance at January 1, 2000			25,771,956	$	74,010	$	4,327	$	134,690	$	(839	)	$	212,188
	Net income								66,372					66,372
	Unrealized gains on retained interest in securitized assets, net of tax(1)										575			575

	Comprehensive income													66,947
	Issuance of common stock		2,674,881		38,060		10							38,070

Balance at December 31, 2000			28,446,837		112,070		4,337		201,062		(264	)		317,205
	Net income								61,648					61,648
	Unrealized gains on retained interest in securitized assets, net of tax(1)										814			814
	Unrealized losses on cash flow hedges, net of tax(2)										(42,237	)		(42,237	)
	Reclassification adjustment for losses on cash flow hedges included in net income, net of tax(3)										12,365			12,365

	Comprehensive income													32,590
	Issuance of common stock		6,373,341		115,498									115,498

Balance at December 31, 2001			34,820,178		227,568		4,337		262,710		(29,322	)		465,293
	Net income								82,090					82,090
	Unrealized losses on retained interest in securitized assets, net of tax(1)										(550	)		(550	)
	Unrealized losses on cash flow hedges, net of tax(2)										(59,248	)		(59,248	)
	Reclassification adjustment for losses on cash flow hedges included in net income, net of tax(3)										35,294			35,294

	Comprehensive income													57,586
	Issuance of common stock		6,199,855		110,618		1,035							111,653

Balance at December 31, 2002			41,020,033	$	338,186	$	5,372	$	344,800	$	(53,826	)	$	634,532


			Weighted
	(Dollars in		Average
	thousands)		Interest Rate

2003	$	440,595		1.74	%
2004		67,719		7.69
2005		1,761,946		3.24
2006		1,183,716		4.86
2007		1,518,269		3.40
Thereafter		2,350,935		4.91

	$	7,323,180		3.98	%



		Options Outstanding						Options Exercisable

				Weighted		Weighted				Weighted
				Average		Average				Average
		Number		Remaining		Exercise		Number		Exercise
Exercise Prices		Outstanding		Life		Price		Exercisable		Price

$	6.94		67,812		2.71	$	6.94		67,812	$	6.94
	13.00		2,875		1.83		13.00		2,875		13.00

	6.94 — 13.00		70,687		2.68	$	7.18		70,687	$	7.18


					Weighted Average
		Shares			Exercise Price

Outstanding at January 1, 2000.			218,968		$	7.47
	Granted
	Exercised		(24,881	)		6.94
	Canceled		(10,739	)		13.74

Outstanding at December 31, 2000			183,348			7.18
	Granted
	Exercised		(47,503	)		7.37
	Canceled		(2,805	)		6.94

Outstanding at December 31, 2001			133,040			7.11
	Granted
	Exercised		(61,929	)		7.04
	Canceled		(424	)		6.94

Outstanding at December 31, 2002			70,687		$	7.18



	For the Three Months Ended

	March 31		June 30		September 30		December 31


	(Dollars in thousands, except per share amounts)
2002
Interest income	$	171,432	$	197,867	$	220,285	$	230,865
Interest expense		68,554		86,980		95,849		98,129
Net interest income		102,878		110,887		124,436		132,736
Provision for credit losses		49,708		50,680		63,098		85,607
Income before income tax		30,211		35,965		38,846		23,220
Income tax		11,997		13,461		15,505		5,189
Net income		18,214		22,504		23,341		18,031
Earnings per common share — basic		0.50		0.55		0.57		0.44
Earnings per common share — diluted		0.50		0.55		0.57		0.44
2001
Interest income	$	122,329	$	124,586	$	139,731	$	159,136
Interest expense		56,952		55,642		58,445		61,737
Net interest income		65,377		68,944		81,286		97,399
Provision for credit losses		20,068		32,026		41,179		50,857
Income before income tax		31,374		32,451		15,365		21,961
Income tax		12,606		12,908		6,024		7,965
Net income		18,768		19,543		9,341		13,996
Earnings per common share — basic		0.66		0.63		0.27		0.40
Earnings per common share — diluted		0.66		0.63		0.27		0.40