WESTCORP /CA/ - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003


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

For the transition period from _________ to _________

Commission file number 33-13646

Westcorp

(Exact name of registrant as specified in its charter)


CALIFORNIA (State or other jurisdiction of incorporation or organization)		51-0308535 (I.R.S. Employer Identification No.)

23 Pasteur, Irvine, California 92618-3816

(Address of principal executive offices)

(949) 727-1002

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x Noo

As of July 31, 2003, the registrant had 45,378,802 outstanding shares of common stock, $1.00 par value. The shares of common stock represent the only class of common stock of the registrant.

The total number of sequentially numbered pages is 35.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

WESTCORP AND SUBSIDIARIES

FORM 10-Q

June 30, 2003

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition at June 30, 2003 and December 31, 2002	2
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002	3
	Consolidated Statements of Changes in Shareholders’ Equity for the Periods Ended June 30, 2003 and December 31, 2002	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	30
Item 4.	Controls and Procedures	32
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 2.	Changes in Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities 33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits and Reports on Form 8-K	34
SIGNATURES		35
CERTIFICATIONS

Forward-Looking Statements

This Form 10-Q 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, interpretation, or application of new or existing 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.

Available Information

The company provides access to all filings with the Securities and Exchange Commission on its Web site at http:\\www.westcorpinc.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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


			(Unaudited)
			June 30, 2003			December 31, 2002

			(Dollars in thousands)
ASSETS
Cash and due from banks			$	61,521		$	84,215
Restricted cash				199,176			71,763
Investment securities available for sale				6,576			10,425
Mortgage-backed securities available for sale				2,707,249			2,649,657
Loans receivable				10,583,482			9,443,901
Allowance for credit losses				(291,459	)		(269,352	)

	Loans receivable, net			10,292,023			9,174,549
Amounts due from trusts							101,473
Premises and equipment, net				78,173			78,664
Other				320,391			311,893

		TOTAL ASSETS	$	13,665,109		$	12,482,639

LIABILITIES
Deposits			$	2,033,262		$	1,974,984
Notes payable on automobile secured financing				9,729,336			8,494,678
Securities sold under agreements to repurchase				212,268			276,600
Federal Home Loan Bank advances				416,709			336,275
Amounts held on behalf of trustee							177,642
Subordinated debentures				395,628			400,561
Other				117,183			107,036

		TOTAL LIABILITIES		12,904,386			11,767,776
Minority interest				111,079			101,666
SHAREHOLDERS’ EQUITY
Common stock (par value $1.00 per share; authorized 65,000,000 shares; issued and outstanding 39,240,116 shares at June 30, 2003 and 39,200,474 shares at December 31, 2002)				39,240			39,200
Paid-in capital				350,795			350,018
Retained earnings				370,880			325,529
Accumulated other comprehensive loss, net of tax				(111,271	)		(101,550	)

		TOTAL SHAREHOLDERS’ EQUITY		649,644			613,197

		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	13,665,109		$	12,482,639

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


			For the Three Months Ended				For the Six Months Ended
			June 30,				June 30,

			2003		2002		2003		2002

			(Dollars in thousands, except per share amounts)
Interest income:
		Loans, including fees	$	286,862	$	249,863	$	568,150	$	482,776
		Mortgage-backed securities		21,241		27,680		46,015		55,662
		Investment securities		87		115		180		233
		Other		1,372		2,350		3,080		3,533

	TOTAL INTEREST INCOME			309,562		280,008		617,425		542,204
Interest expense:
		Deposits		17,017		20,186		34,574		41,196
		Notes payable on automobile secured financing		106,174		103,155		217,334		195,172
		Other		12,446		9,770		25,301		16,812

	TOTAL INTEREST EXPENSE			135,637		133,111		277,209		253,180

NET INTEREST INCOME				173,925		146,897		340,216		289,024
Provision for credit losses				68,036		62,350		147,921		128,048

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES				105,889		84,547		192,295		160,976
Noninterest income:
		Automobile lending		21,280		16,080		42,229		27,755
		Other		6,451		4,652		13,254		10,137

	TOTAL NONINTEREST INCOME			27,731		20,732		55,483		37,892
Noninterest expenses:
		Salaries and associate benefits		41,479		36,184		80,934		71,055
		Credit and collections		8,803		10,175		18,349		18,253
		Data processing		4,864		4,560		9,432		9,139
		Occupancy		3,903		3,669		7,743		7,430
		Other		13,608		10,186		24,638		19,757

	TOTAL NONINTEREST EXPENSES			72,657		64,774		141,096		125,634

INCOME BEFORE INCOME TAX				60,963		40,505		106,682		73,234
Income tax				23,975		15,185		42,200		28,149

INCOME BEFORE MINORITY INTEREST				36,988		25,320		64,482		45,085
Minority interest in earnings of subsidiaries				5,385		3,612		9,330		6,523

NET INCOME			$	31,603	$	21,708	$	55,152	$	38,562

Earnings per common share:
		Basic	$	0.81	$	0.55	$	1.41	$	1.02

		Diluted	$	0.80	$	0.55	$	1.39	$	1.00

Weighted average number of common shares outstanding:
		Basic		39,212,193		39,140,543		39,207,548		37,972,632

		Diluted		39,676,670		39,691,778		39,572,086		38,381,102

Dividends declared			$	0.13	$	0.12	$	0.25	$	0.24

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)


													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, 2002				35,802,491	$	35,802	$	301,955		$	263,853		$	(60,906	)	$	540,704
		Net income									79,718						79,718
		Unrealized gains on securities available for sale and retained interest in securitized assets, net of tax (1)												28,605			28,605
		Unrealized losses on cash flow hedges, net of tax (2)												(135,422	)		(135,422	)
		Reclassification adjustment for gains on securities available for sale included in net income, net of tax (3)												(3	)		(3	)
		Reclassification adjustment for losses on cash flow hedges included in income, net of tax (4)												66,176			66,176

		Comprehensive income															39,074
		Issuance of subsidiary common stock						(1,405	)								(1,405	)
		Stock options exercised		3,397,983		3,398		49,468									52,866
		Cash dividends									(18,042	)					(18,042	)

Balance at December 31, 2002				39,200,474		39,200		350,018			325,529			(101,550	)		613,197
	Net income										55,152						55,152
		Unrealized losses on securities available for sale, net of tax (1)												(5,742	)		(5,742	)
		Unrealized losses on cash flow hedges, net of tax (2)												(37,943	)		(37,943	)
		Reclassification adjustment for gains on securities available for sale included in net income, net of tax (3)												(4	)		(4	)
		Reclassification adjustment for losses on cash flow hedges included in income, net of tax (4)												33,968			33,968

		Comprehensive income															45,431
		Issuance of subsidiary common stock						(32	)								(32	)
		Stock options expensed (5)						270									270
		Stock options exercised		39,642		40		539									579
		Cash dividends									(9,801	)					(9,801	)

Balance at June 30, 2003				39,240,116	$	39,240	$	350,795		$	370,880		$	(111,271	)	$	649,644

(1)		The pre-tax amount of unrealized gains and losses on securities available for sale and retained interest in securitized assets was $9.6 million for the six months ended June 30, 2003 compared with $48.5 million for the year ended December 31, 2002.

(2)		The pre-tax amount of unrealized losses on cash flow hedges was $63.2 million for the six months ended June 30, 2003 compared with $230 million for the year ended December 31, 2002.

(3)		The pre-tax amount of unrealized gains on securities available for sale reclassified into earnings was $6.7 thousand for the six months ended June 30, 2003 compared with $5.0 thousand for the year ended December 31, 2002.

(4)		The pre-tax amount of unrealized losses on cash flow hedges reclassified into earnings was $56.6 million for the six months ended June 30, 2003 compared with $112 million for the year ended December 31, 2002.

(5)		Amount represents expense related to stock options granted.

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


		For the Six Months Ended
		June 30,

		2003			2002

		(Dollars in thousands)
OPERATING ACTIVITIES
Net income		$	55,152		$	38,562
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for credit losses		147,921			128,048
	Depreciation and amortization		7,983			7,837
	Amortization of losses on cash flow hedges		24,700			14,386
	Amortization of premium on mortgage-backed securities		33,587			17,338
	Amortization of participation paid to dealers		52,756			43,273
	Amortization of retained interest in securitized assets					24,912
	Gain on sales, net		(2,257	)
Loans held for sale:
	Proceeds from sale of mortgage loans					554
Decrease in other assets			14,301			38,461
Increase in other liabilities			5,082			4,659
Other, net			9,666			5,724

NET CASH PROVIDED BY OPERATING ACTIVITIES			348,891			323,754
INVESTING ACTIVITIES
Loans receivable:
	Origination of loans		(3,157,698	)		(2,913,434	)
	Participation paid to dealers		(70,781	)		(65,688	)
	Loan payments and payoffs		2,434,432			1,738,000
Investment securities available for sale:
	Purchases		(120	)		(2,404	)
	Proceeds from sale		515			485
	Proceeds from maturities		95			40
Mortgage-backed securities:
	Purchases		(1,005,706	)		(445,172	)
	Payments received		904,670			469,006
Increase in amounts due from trust						15,054
Purchase of premises and equipment			(7,420	)		(12,410	)
Proceeds from sales of premises and equipment			2,912			5,807

NET CASH USED IN INVESTING ACTIVITIES			(899,101	)		(1,210,716	)
FINANCING ACTIVITIES
Increase (decrease) in deposits			43,164			(163,346	)
Decrease in securities sold under agreements to repurchase			(64,790	)		(32,548	)
Proceeds from notes payable on automobile secured financing			2,836,280			4,317,352
Payments on notes payable on automobile secured financing			(2,196,627	)		(2,700,726	)
Decrease in borrowings			(300	)		(16,598	)
Decrease in amounts held on behalf of trustee						(48,014	)
Increase (decrease) in FHLB advances			80,433			(540,570	)
(Payments on) issuance of subordinated debentures			(5,742	)		292,843
Increase in restricted cash			(127,413	)
Proceeds from issuance of common stock			579			52,484
Proceeds from issuance of subsidiary common stock			32			10,292
Cash dividends			(9,801	)		(8,635	)
Payments on cash flow hedges			(28,299	)		(46,766	)

NET CASH PROVIDED BY FINANCING ACTIVITIES			527,516			1,115,768

(DECREASE) INCREASE IN CASH AND DUE FROM BANKS			(22,694	)		228,806
Cash and due from banks at beginning of year			84,215			104,327

CASH AND DUE FROM BANKS AT END OF PERIOD		$	61,521		$	333,133

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Western Financial Bank, also known as the Bank, and its majority owned subsidiary, WFS Financial Inc, also known as WFS. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year’s presentation.

The unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles, also known as GAAP, for complete financial statements.

In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2002 included in our Form 10-K.

During the second quarter of 2003, various amounts related to certain securitization transactions were reclassified to restricted cash on the Statement of Financial Condition. Previously, such amounts were reported as a reduction of notes payable on automobile secured financing on the Statement of Financial Condition. The 2002 amounts have been reclassified accordingly. Restricted cash represents amounts due to securitization trusts that are held by the trustee until such cash is released by the trustee.

During the first quarter of 2003, Chapter 13 bankruptcy accounts greater than 120 days were reclassified to contracts receivable and the related reserves were reclassified to the allowance for credit losses on the Statement of Financial Condition. Previously, such amounts were reported as nonperforming assets and were included in other assets on the Statement of Financial Condition. The 2002 amounts have been reclassified accordingly. These loans were considered in the overall evaluation of the adequacy of our allowance for credit losses for the periods reported. See “Asset Quality — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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. 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 paragraph 55 of 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, and 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. We will no longer recognize retained interest income or expense or contractual servicing income 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. These loans were considered in the overall evaluation of the adequacy of our allowance for credit losses. See “Asset Quality — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, also known as SFAS No. 149. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other

contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 will not have a material effect on our earnings or financial position.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, also known as SFAS No. 150. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The adoption of SFAS No. 150 will not have a material effect on our earnings or financial position.

Note 2 – Mortgage-Backed Securities Available for Sale

Mortgage-backed securities available for sale consisted of the following:


			June 30, 2003

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value

			(Dollars in thousands)
GNMA certificates	$	2,638,801	$	36,558	$	1,435	$	2,673,924
FNMA participation certificates		30,239		504				30,743
FHLMC participation certificates		680		13				693
Other		1,889						1,889

	$	2,671,609	$	37,075	$	1,435	$	2,707,249


			December 31, 2002

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value

			(Dollars in thousands)
GNMA certificates	$	2,562,459	$	46,008	$	1,010	$	2,607,457
FNMA participation certificates		38,647		477				39,124
FHLMC participation certificates		1,046		22				1,068
Other		2,008						2,008

	$	2,604,160	$	46,507	$	1,010	$	2,649,657

Note 3 – Net Loans Receivable

Net loans receivable consisted of the following:


		June 30,			December 31,
		2003			2002

		(Dollars in thousands)
Consumer:
	Automobile contracts	$	10,127,145		$	8,993,266
	Dealer participation, net of deferred contract fees		166,815			154,671
	Other		9,268			7,531
	Unearned discounts		(77,180	)		(91,713	)

			10,226,048			9,063,755
Real estate:
	Mortgage		247,702			277,233
	Construction		24,612			14,150

			272,314			291,383
Undisbursed loan proceeds			(9,232	)		(8,453	)

			263,082			282,930
Commercial			94,352			97,216

			10,583,482			9,443,901
Allowance for credit losses			(291,459	)		(269,352	)

		$	10,292,023		$	9,174,549

Note 4 – Allowance for Credit Losses

The following table sets forth the activity in the allowance for credit losses:


		For the Three						For the Six
		Months Ended						Months Ended
		June 30,						June 30,

		2003			2002			2003			2002

					(Dollars in thousands)
Balance at beginning of period		$	281,030		$	196,408		$	269,352		$	178,218
Chargeoffs:
	Consumer loans		(79,369	)		(57,494	)		(170,149	)		(122,095	)
	Mortgage loans		(267	)		(3	)		(338	)		(71	)

			(79,636	)		(57,497	)		(170,487	)		(122,166	)
Recoveries:
	Consumer loans		21,990			17,075			44,590			34,236
	Mortgage loans		39						83

			22,029			17,075			44,673			34,236

Net chargeoffs			(57,607	)		(40,422	)		(125,814	)		(87,930	)
Provision for credit losses			68,036			62,350			147,921			128,048

Balance at end of period		$	291,459		$	218,336		$	291,459		$	218,336

Ratio of allowance for credit losses to loans at the end of the period			2.8	%		2.5	%		2.8	%		2.5	%
Ratio of net chargeoffs during the period (annualized) to average loans outstanding during the period			2.3	%		2.0	%		2.5	%		2.2	%

Note 5 – Deposits

Deposits consisted of the following:


				Weighted
				Average Rate
	Weighted			For the Three
	Average Rate at			Months Ended June			June 30,
	June 30, 2003 (1)			30, 2003 (2)			2003		December 31, 2002

							(Dollars in thousands)
Noninterest bearing deposits							$	207,306	$	165,844
Demand deposit accounts		0.2	%		0.2	%		1,460		1,037
Passbook accounts		0.2			0.3			6,235		6,688
Money market deposit accounts		1.6			1.5			831,787		730,245
Brokered certificate accounts		2.1			2.3			99,100		98,992
Certificate accounts		2.8			5.8			887,374		972,178

							$	2,033,262	$	1,974,984

(1)		Contractual rate.

(2)		Includes effects of hedging activities.

The increase in deposits was due to the increase in money market deposit accounts as well as the opening of a new Southern California branch.

Note 6 – Notes Payable on Automobile Secured Financing

In connection with our asset-backed securitization activities, we issued $1.5 billion and $2.8 billion of notes secured by automobile contracts for the three and six months ended June 30, 2003, respectively, compared with $1.8 billion and $4.3 billion for the same respective periods in 2002. The $1.5 billion and $2.8 billion issued during the three and six months ended June 30, 2003 were through public transactions. The $1.8 billion issued during the three months ended June 30, 2002 was through a public transaction. Of the $4.3 billion issued during the six months ended June 30, 2002, $3.5 billion was through public transactions and $775 million was through a private placement. The private placement was through a conduit facility established in January 2002. We had no amounts outstanding on a conduit facility at June 30, 2002. There were $9.7 billion of notes payable on automobile secured financing outstanding at June 30, 2003 compared with $8.5 billion at December 31, 2002.

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 facility 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 $106 million and $217 million for the three and six months ended June 30, 2003, respectively, compared with $103 million and $195 million for the same respective periods in 2002.

Note 7 – Accumulated Other Comprehensive Loss, Net of Tax

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


		June 30,			December 31,
		2003			2002

		(Dollars in thousands)
Unrealized gain on marketable securities		$	21,399		$	27,145
Unrealized loss on interest rate swaps: (1)
	Deposits		(63,049	)		(53,081	)
	Automobile secured financing		(37,700	)		(43,624	)
	Securities sold under agreements to repurchase		(3,128	)		(3,092	)

			(103,877	)		(99,797	)
Realized loss on settled cash flow hedges: (1)
	Deposits		(9,653	)		(11,367	)
	Automobile secured financing		(19,140	)		(17,531	)

			(28,793	)		(28,898	)

Total other accumulated comprehensive loss		$	(111,271	)	$	(101,550	)

(1)

All cash flow hedges are structured to hedge future interest payments on deposits or borrowings.

Note 8 — Stock Options

In May 2001, we adopted the 2001 Westcorp Stock Option Plan, also known as the 2001 Plan, an incentive stock option plan for certain associates and directors. The 2001 Plan replaced the 1991 Stock Option Plan, also known as the 1991 Plan that expired on April 15, 2001. Those who received options prior to the approval of the 2001 Plan are still subject to the 1991 Plan and may continue to exercise the remaining shares that are outstanding and exercisable. However, any and all

shares reserved for the 1991 Plan are no longer available for future grants. As such, no further grants will be made under the expired 1991 Plan.

Options outstanding and exercisable at June 30, 2003 were as follows:


		Options Outstanding					Options Exercisable

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

$9.00 - 10.00			750	2.12	$	9.94		750	$	9.94
	12.00 - 13.00		217,046	2.52		12.62		217,046		12.63
	13.00 - 14.00		217,625	3.65		13.25		153,967		13.25
	15.00 - 16.00		1,000	4.36		15.25		500		15.25
	17.00 - 18.00		307,375	4.65		17.32		146,250		17.32
	18.00 - 19.00		808,750	2.54		18.56		87,500		18.30
	19.00 - 20.00		5,000	6.11		19.85
	20.00 - 21.00		3,000	6.36		20.41

	9.00 - 21.00		1,560,546	4.45	$	16.75		606,013	$	14.73

Stock option activity is summarized as follows:


					Weighted Average
		Shares			Exercise Price

Outstanding at January 1, 2002			1,076,814		$	14.67
	Granted		414,500			18.33
	Exercised		(143,251	)		13.29
	Canceled		(180,625	)		16.06

Outstanding at December 31, 2002			1,167,438			15.91
	Granted		444,000			18.78
	Exercised		(39,642	)		14.61
	Canceled		(11,250	)		15.49

Outstanding at June 30, 2003			1,560,546		$	16.75

Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Our stock options have characteristics significantly different from traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. In 2002, we utilized the Black-Scholes option valuation model to determine the fair value of the options granted. During 2003, we decided to utilize the Binomial option valuation model for all stock options expensed as part of our implementation of SFAS No. 148. In addition, in 2003 we utilized the Binomial option valuation model to value all outstanding options, including those granted prior to 2003, as we feel it provides a better measure of value for companies that pay dividends. In our opinion, neither of these models necessarily provides a reliable single measure of the fair value of our employee stock options. The weighted average fair value of options granted during the period ending June 30, 2003 was $5.48, compared to $6.11 for the year ended December 31, 2002.

Pro forma information regarding net income and earnings per share is required by SFAS No. 123, Accounting for Stock-Based Compensation, 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. We adopted the disclosure provisions of SFAS No. 148 on December 31, 2002 and the prospective application method of transition to the fair value based method of accounting for stock options in the first quarter of 2003.

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


		For the Three Months Ended					For the Six Months Ended

				June 30,					June 30,

		2003			2002		2003			2002

					(Dollars in thousands,
					Except per share amounts)
Net income, as reported		$	31,603		$	21,708	$	55,152		$	38,562
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			123					163
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			339			214		605			429

Pro forma net income		$	31,387		$	21,494	$	54,710		$	38,133

Earnings per share
	Basic — as reported	$	0.81		$	0.55	$	1.41		$	1.02

	Basic — pro forma	$	0.80		$	0.55	$	1.40		$	1.00

Earnings per share
	Diluted — as reported	$	0.80		$	0.55	$	1.39		$	1.00

	Diluted — pro forma	$	0.79		$	0.54	$	1.38		$	0.99

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

Note 9 — Dividends

On June 9, 2003, we declared a cash dividend of $0.13 per share for shareholders of record as of August 5, 2003 with a payable date of August 19, 2003.

Note 10 – Subsequent Events

We completed a common stock offering in July 2003 in which we raised a total of $163 million through the issuance of 6.1 million additional common shares at a price of $28.00 per share. With the completion of this offering, our total number of common shares issued and outstanding increased 15.6% to 45.4 million shares at July 31, 2003.

On August 7, 2003, we declared a cash dividend of $0.13 per share for shareholders of record as of November 4, 2003 with a payable date of November 18, 2003.

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

Overview

We are a diversified financial services holding company that provides automobile lending services through our second tier subsidiary, WFS Financial Inc, also known as WFS, and retail and commercial banking services through our wholly owned subsidiary, Western Financial Bank, also known as the Bank. The Bank currently owns 84% of the capital stock of WFS.

Our primary sources of revenue are net interest income and noninterest income. Net interest income is the difference between the income earned on interest earning assets and the interest paid on interest bearing liabilities. We generate interest income from our loan portfolio, which consists of consumer, mortgage and commercial loans, and from investments in mortgage-backed securities and other short-term investments. We fund our loan portfolio and investments with funds derived from deposits, notes payable on automobile secured financing, advances from the Federal Home Loan Bank, also known as the FHLB, securities sold under agreements to repurchase, other borrowings and equity.

Noninterest income is primarily made up of revenues generated from the servicing of automobile contracts and mortgage loans. The primary components of noninterest income include late charges and other miscellaneous servicing fee income. Other components of noninterest income include gains and losses from the sale of investment securities and mortgage-backed securities, insurance income, fees related to the sales of investment products such as mutual funds and annuities, and fee income from depository accounts. The primary components of noninterest expense are salaries, credit and collection expenses, and data processing costs.

Selected Financial Data

The following table presents summary unaudited financial data for the three and six months ended June 30, 2003 and 2002. 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.


		For the Three Months Ended June 30,						For the Six Months Ended June 30,

		2003			2002			2003			2002

		(Dollars in thousands, except per share amounts)

Consolidated Statements of Operations Data:
Interest income		$	309,278		$	280,008		$	616,781		$	542,204
Interest expense			135,353			133,111			276,565			253,180

	Net interest income		173,925			146,897			340,216			289,024
Provision for credit losses			68,036			62,350			147,921			128,048

	Net interest income after provision for credit losses		105,889			84,547			192,295			160,976
Noninterest income			27,731			20,732			55,483			37,892
Noninterest expense			72,657			64,774			141,096			125,634

Income before income tax			60,963			40,505			106,682			73,234
Income tax			23,975			15,185			42,200			28,149

Income before minority interest			36,988			25,320			64,482			45,085
Minority interest in earnings of subsidiaries			5,385			3,612			9,330			6,523

Net income		$	31,603		$	21,708		$	55,152		$	38,562

Weighted average number of shares and common share equivalents — diluted			39,676,670			39,691,778			39,572,086			38,381,102
Earnings per common share — diluted		$	0.80		$	0.55		$	1.39		$	1.00
Dividends per share		$	0.13		$	0.12		$	0.25		$	0.23
Dividend payout ratio			16.3	%		21.9	%		17.9	%		22.9	%


				June 30,		December 31,
				2003		2002

				(Dollars in thousands)
Consolidated Statements of Financial Condition Data:
Assets:
	Cash and other assets			$	280,634	$	273,310
	Loans:
		Consumer (1)			10,226,048		9,063,755
		Mortgage (2)			263,082		282,930
		Commercial			94,352		97,216
	Mortgage-backed securities				2,707,249		2,649,657
	Investments and time deposits				93,744		115,771

			Total assets	$	13,665,109	$	12,482,639

Liabilities:
	Deposits			$	2,033,262	$	1,974,984
	Notes payable on automobile secured financing				9,729,336		8,494,678
	FHLB advances and other borrowings				634,567		618,766
	Amounts held on behalf of trustee						177,642
	Subordinated debentures				395,628		400,561
	Other liabilities				111,593		101,145

			Total liabilities		12,904,386		11,767,776
	Minority interest in equity of subsidiaries				111,079		101,666
	Shareholders’ equity				649,644		613,197

			Total liabilities and shareholders’ equity	$	13,665,109	$	12,482,639


					At or For the				At or For the
		Three Months Ended							Six Months Ended
					June 30,				June 30,

			2003			2002			2003			2002

						(Dollars in thousands)
Other Selected Financial Data:
Average assets			$	13,298,600		$	11,101,704		$	13,163,920		$	10,814,898
Return on average assets				0.95	%		0.78	%		0.84	%		0.71	%
Average shareholders’ equity (3)			$	742,121		$	663,995		$	732,065		$	640,736
Return on average shareholders’ equity (3)				17.03	%		13.08	%		15.07	%		12.04	%
Equity to assets ratio (3)				5.57	%		6.03	%		5.57	%		6.03	%
Book value per share (3)			$	19.39		$	17.40		$	19.39		$	17.40
Originations:
	Consumer loans (1)		$	1,588,803		$	1,495,606		$	2,942,731		$	2,761,795
	Mortgage loans (2)			14,996			12,325			19,310			21,464
	Commercial loans			98,972			68,907			195,656			130,175

		Total loan originations	$	1,702,771		$	1,576,838		$	3,157,697		$	2,913,434

Interest rate spread				5.00	%		5.16	%		4.99	%		5.39	%

(1)		Net of unearned discounts.

(2)		Net of undisbursed loan proceeds.

(3)		Accumulated other comprehensive loss excluded from shareholders’ equity.

Critical Accounting Policies

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.

Securitization Transactions

Contracts sold by us to our special purpose entity subsidiaries in connection with securitization transactions are treated as having been sold for bankruptcy remoteness purposes, thereby isolating those assets in our special purpose entity subsidiaries, and as secured financings under Generally Accepted Accounting Principles, also known as GAAP. For GAAP purposes, 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.

Allowance for Credit Losses

Management determines the amount of the allowance for credit losses based on a review of various quantitative and qualitative analyses. Quantitative analyses include the review of chargeoff trends by loan program and loan 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 or foreclosures, trends in the number of days repossessions are held in inventory, trends in the number of loan modifications, trends in delinquency roll rates, trends in deficiency balance collections both internally and from collection agencies, trends in custom scores and the effectiveness of our custom scores, and trends in the economy generally or in specific geographic locations. Despite these analyses, we recognize that establishing allowance for credit losses is not an exact science and can be highly judgmental in nature.

The analysis of the adequacy of the allowance for credit losses is not only dependent upon effective quantitative and qualitative analyses, but also effective loan review and asset classification. We classify our assets in accordance with regulatory guidance. Our multifamily and commercial loan portfolios are evaluated individually while our single family and consumer portfolios are evaluated in pools. We classify our assets 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 loan amounts 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. Real estate loans that are manifesting a weakness in performance are classified as Special Mention. Any contract that is 90 or more days delinquent is automatically classified as Substandard. Real estate loans that are manifesting a significant weakness in performance are also classified as Substandard. Any multifamily loan that is impaired is classified as Substandard. Any contract where the borrower has filed for bankruptcy or where 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 loan balance classified as Loss. Any vehicles repossessed by us that have not been sold are recorded at fair value and classified as Substandard.

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

Derivatives and Hedging Activities

Deposits and Securities Sold Under Agreements to Repurchase

We may enter into cash flow hedges that will protect against potential changes in interest rates affecting interest payments on future deposits gathered by us and future securities sold under agreements to repurchase. The fair value of the interest rate swap agreements is included in deposits and securities sold under agreements to repurchase, respectively, 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. Related interest income or expense is settled on a quarterly basis and is recorded in accumulated other comprehensive income (loss) and reclassified into earnings in the period during which cash flows on the hedged items affect income.

Notes Payable on Automobile Secured Financing

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. If a hedge is greater than 100% effective, the effective portion of the gain or loss on such hedge is reported in other comprehensive income and the ineffective portion (the amount in excess of 100%) is immediately reported in interest expense. Upon closing of the securitization transaction, the gains or losses are amortized on a level yield basis over the duration of the notes issued.

If we issue 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. If a hedge is greater than 100% effective, the effective portion of the gain or loss on such hedge is reported in other comprehensive income and the ineffective portion (the amount in excess of 100%) is immediately reported in interest expense. 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 may 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, 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 and related income or expense is recorded to other noninterest income each month.

Results of Operations

Net Interest Income

Net interest income is affected by the difference between the rate earned on our interest earning assets and the rate paid on our interest bearing liabilities (interest rate spread) and the relative amounts of our interest earning assets and interest bearing liabilities. Net interest income totaled $174 million and $340 million for the three and six months ended June 30, 2003, respectively, compared to $147 million and $289 million for the same respective periods in 2002. The increase in net interest income was the result of us holding more automobile contracts on the balance sheet even as overall net interest margins declined.

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


								For the Three Months Ended June 30,

				2003							2002

				Average				Yield/			Average				Yield/
				Balance		Interest		Rate			Balance		Interest		Rate

								(Dollars in thousands)
Interest earning assets:
	Total investments:
		Mortgage-backed securities		$	2,541,878	$	21,241		3.34	%	$	2,039,400	$	27,680		5.43	%
		Other short-term investments			315,330		1,354		1.72			417,589		2,332		2.24
		Investment securities			6,500		87		5.35			6,553		115		6.99
		Interest earning deposits with others			8,100		18		0.89			4,911		18		1.46

			Total investments		2,871,808		22,700		3.16			2,468,453		30,145		4.88
	Total loans: (1)
	Consumer loans				10,009,466		282,001		11.30			7,735,524		243,409		12.62
		Mortgage loans			256,201		3,519		5.49			337,027		5,199		6.17
		Commercial loans			114,805		1,342		4.62			91,863		1,255		5.40

			Total loans		10,380,472		286,862		11.08			8,164,414		249,863		12.27

			Total interest earning assets	$	13,252,280		309,562		9.37		$	10,632,867		280,008		10.55

Interest bearing liabilities:
	Deposits			$	2,011,243		17,017		3.39		$	2,187,586		20,186		3.70
	Securities sold under agreements to repurchase				204,184		1,111		2.15			125,676		1,053		2.89
	FHLB advances and other borrowings				391,019		1,456		1.47			44,018		392		3.57
	Notes payable on automobile secured financing				9,406,809		106,174		4.51			7,289,064		103,155		5.66
	Subordinated debentures				396,610		9,879		9.96			337,030		8,325		9.88

			Total interest bearing liabilities	$	12,409,865		135,637		4.37		$	9,983,374		133,111		5.39

Net interest income and interest rate spread						$	173,925		5.00	%			$	146,897		5.16	%

Net yield on average interest earning assets									5.25	%						5.53	%

(1)

For the purpose of these computations, nonaccruing loans are included in the average loan amounts outstanding.


								For the Six Months Ended June 30,

						2003							2002

				Average				Yield/			Average				Yield/
				Balance		Interest		Rate			Balance		Interest		Rate

								(Dollars in thousands)
Interest earning assets:
	Total investments:
		Mortgage-backed securities		$	2,513,539	$	46,015		3.66	%	$	2,074,934	$	55,662		5.37	%
		Other short-term investments			325,566		3,037		1.88			278,984		3,491		2.52
		Investment securities			6,768		180		5.33			6,293		233		7.39
		Interest earning deposits with others			9,173		43		0.94			5,359		42		1.59

			Total investments		2,855,046		49,275		6.90			2,365,570		59,428		10.05
	Total loans: (1)
		Consumer loans			9,853,159		558,132		11.42			7,453,582		468,860		12.69
		Mortgage loans			264,072		7,339		5.56			344,494		11,002		6.39
		Commercial loans			115,171		2,679		4.65			96,290		2,914		6.05

			Total loans		10,232,402		568,150		11.20			7,894,366		482,776		12.33

			Total interest earning assets	$	13,087,448		617,425		9.51		$	10,259,936		542,204		10.64

Interest bearing liabilities:
	Deposits			$	1,987,392		34,574		3.51		$	2,265,132		41,196		3.67
	Securities sold under agreements to repurchase				226,157		2,400		2.11			145,419		2,097		2.87
	FHLB advances and other borrowings				408,804		3,085		1.53			256,181		2,894		2.27
	Notes payable on automobile secured financing				9,254,688		217,334		4.70			6,758,304		195,172		5.78
	Subordinated debentures				397,711		19,816		9.96			242,395		11,821		9.75

			Total interest bearing liabilities	$	12,274,752		277,209		4.52		$	9,667,431		253,180		5.25

Net interest income and interest rate spread						$	340,216		4.99	%			$	289,024		5.39	%

Net yield on average interest earning assets									5.20	%						5.63	%

(1)

For the purpose of these computations, nonaccruing loans are included in the average loan amounts outstanding.

The total interest rate spread decreased 16 basis points for the three months ended June 30, 2003, compared with the three months ended June 30, 2002 due to a decrease of 118 basis points in the yield on interest earning assets combined with an 102 basis point decrease in the cost of funds. The total interest rate spread decreased 40 basis points for the six months ended June 30, 2003 compared with the six months ended June 30, 2002 due to a decrease of 113 basis points in the yield on interest earning assets combined with a 73 basis point decrease in the cost of funds. The decrease in the yield on interest earning assets in 2003 is primarily due to our shift to originating a higher percentage of prime credit quality contracts, higher prepayments on our MBS portfolio, and a lower interest rate environment. The decrease in the cost of funds in 2003 compared with 2002 is due primarily to a lower interest rate environment. Net interest income increased as more automobile contracts were held on the balance sheet.

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):


			For the Six Months Ended June 30, 2003
			Compared to the Six Months Ended June 30, 2002 (1)

			Volume			Rate			Total

						(Dollars in thousands)
Interest income:
	Mortgage-backed securities		$	24,463		$	(34,110	)	$	(9,647	)
	Other short-term investments			1,236			(1,690	)		(454	)
	Investment securities			44			(97	)		(53	)
	Interest earning deposits with others			45			(44	)		1
Total loans:
	Consumer loans			212,525			(123,253	)		89,272
	Mortgage loans			4,632			(8,295	)		(3,663	)
	Commercial loans			1,129			(1,364	)		(235	)

		Total interest earning assets	$	244,074		$	(168,853	)	$	75,221

Interest expense:
	Deposits		$	(4,885	)	$	(1,737	)	$	(6,622	)
	Securities sold under agreements to repurchase			579			(276	)		303
	FHLB advances and other borrowings			420			(229	)		191
	Notes payable on automobile secured financings			44,849			(22,687	)		22,162
	Subordinated debentures			7,735			260			7,995

		Total interest bearing liabilities	$	48,698		$	(24,669	)	$	24,029

Net change in net interest income									$	51,192

(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.

Provision for Credit Losses

We maintain an allowance for credit losses to cover probable losses that can be reasonably estimated for the loans 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 the loans or reversing the allowance for credit losses through the provision for credit losses when the amount of loans held on balance sheet is reduced through loan sales. The level of allowance is based principally on the outstanding balance of loans 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 loan portfolio that can be reasonably estimated.

The provision for credit losses totaled $68.0 million and $148 million for the three and six months ended June 30, 2003, respectively, compared with $62.4 million and $128 million for the same respective periods a year earlier. Net chargeoffs totaled $57.6 million and $126 million for the three and six months ended June 30, 2003, respectively, compared with $40.4 million and $87.9 million for the same respective periods in 2002. The increase in the provision for credit losses was a result of our loans held on balance sheet increasing by approximately $1.1 billion or 12% from December 31, 2002 as well as an increase in chargeoffs due to the slowdown in the economy. The increase in our loans was due primarily to gaining control over the loans of the trusts for all of our outstanding securitization transactions previously treated as sales for accounting purposes as well as retaining loans originated during the quarter. We recorded $10.4 million and $22.1 million in provisions for credit losses in excess of chargeoffs for the three and six months ended June 30, 2003 as a result of the transitional effects related to the elimination of off balance sheet accounting for securitizations. The allowance for credit losses as a percentage of owned loans outstanding was 2.8% at June 30, 2003, compared with 2.9% at December 31, 2002.

Contract Securitizations

The following table lists each of our public securitizations. All securitizations prior to 1999-A were paid in full on or before their contractual maturity dates:

Securitizations


						Remaining				Gross
					Remaining	Balance as a	Original			Original			Interest
Issue		Original			Balance at	Percent of	Weighted			Weighted Average			Rate
Number	Close Date	Balance			June 30, 2003 (1)	Original Balance	Average APR			Securitization Rate			Spread (2)

				(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		Paid in full			14.68			6.06			8.62
1998-C	November, 1998		700,000		Paid in full			14.42			5.81			8.61
1999-A	January, 1999		1,000,000		$53,956	5.40%		14.42			5.70			8.72
1999-B	July, 1999		1,000,000		102,018	10.20		14.62			6.36			8.26
1999-C	November, 1999		500,000		73,427	14.69		14.77			7.01			7.76
2000-A	March, 2000		1,200,000		202,313	16.86		14.66			7.28			7.38
2000-B	May, 2000		1,000,000		188,130	18.81		14.84			7.78			7.06
2000-C	August, 2000		1,390,000		340,560	24.50		15.04			7.32			7.72
2000-D	November, 2000		1,000,000		307,742	30.77		15.20			6.94			8.26
2001-A	January, 2001		1,000,000		340,625	34.06		14.87			5.77			9.10
2001-B	May, 2001		1,370,000		491,016	35.84		14.41			4.23			10.18
2001-C	August, 2001		1,200,000		536,227	44.69		13.90			4.50			9.40
2002-1	March, 2002		1,800,000		1,079,389	59.97		13.50			4.26			9.24
2002-2	May, 2002		1,750,000		1,208,579	69.06		12.51			3.89			8.62
2002-3	August, 2002		1,250,000		937,871	75.03		12.30			3.06			9.24
2002-4	November, 2002		1,350,000		1,160,050	85.93		12.18			2.66			9.52
2003-1	February, 2003		1,343,250		1,209,572	90.05		11.79			2.42			9.37
2003-2	May, 2003		1,492,500		1,492,500	100.00		11.57			2.13			9.44

	Total	$	31,557,180		$9,723,975

(1)		Represents only the note payable amounts outstanding at the period indicated.

(2)		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.

Noninterest Expense

Noninterest expense totaled $72.7 million and $141 million for the three and six months ended June 30, 2003, compared with $64.8 million and $126 million for the same respective periods in 2002. Noninterest expense as a percent of total revenues improved to 36% for both the three and six months ended June 30, 2003, compared to 39% and 38% for the same respective periods a year ago as a result of fully amortizing our retained interest in securitized assets during 2002.

Income Taxes

We file federal and certain state tax returns as part of a consolidated group that includes the Bank and WFS. 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 39% and 40% for the three and six months ended June 30, 2003, respectively, compared to 38% for the same respective periods in 2002.

Financial Condition

Overview

Total assets increased $1.2 billion or 9.5% to $13.7 billion at June 30, 2003 from $12.5 billion at December 31, 2002. The increase is due to retaining contracts originated on our balance sheet and regaining control over all assets of the trusts for all our outstanding securitizations previously treated as sales for accounting purposes.

Loan Portfolio

The following table presents a summary of our automobile contracts purchased:


		For the Three Months Ended				For the Six Months Ended
		June 30,				June 30,

		2003		2002		2003		2002

				(Dollars in thousands)
New vehicles		$	490,257	$	450,205	$	875,377	$	773,472
Pre-owned vehicles			1,096,359		1,044,802		2,063,292		1,987,061

Total volume		$	1,586,616	$	1,495,007	$	2,938,669	$	2,760,533

Prime		$	1,308,867	$	1,178,654	$	2,423,151	$	2,183,941
Non-prime			277,749		316,353		515,518		576,592

	Total volume	$	1,586,616	$	1,495,007	$	2,938,669	$	2,760,533

Commercial Loan Portfolio

We had outstanding loan commitments of $194 million at June 30, 2003 compared with $199 million at December 31, 2002. We originated $99.0 million and $196 million of commercial loans for the three and six months ended June 30, 2003, respectively, compared with $68.9 million and $130 million for the same respective periods in 2002. Amounts outstanding at June 30, 2003 and December 31, 2002 were $94.4 million and $97.2 million, respectively. Though we continue to focus on expanding our commercial banking operation, it has not been a significant source of revenue.

Asset Quality

Overview

Nonperforming assets, repossessions, loan delinquency and credit losses are considered by us as key measures of asset quality. Asset quality, in turn, affects our determination of the allowance for credit losses. We also take into consideration general economic conditions in the markets we serve, individual loan reviews, and the level of assets relative to reserves in determining the adequacy of the allowance for credit losses.

Automobile Contract Quality

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.

At June 30, 2003, the percentage of accounts delinquent 30 days or greater was 2.75% compared with 3.50% at December 31, 2002. We calculate delinquency based on the contractual due date. The improvement in delinquency is primarily the result of seasonal trends. Net chargeoffs on average automobile contracts were 2.33% and 2.59% for the three and six months ended June 30, 2003, respectively, compared with 2.19% and 2.47% for the same respective periods in 2002. The increase in credit loss experience is primarily a result of continued weakness in the economy.

The following table sets forth information with respect to the delinquency of our portfolio of contracts:


		June 30, 2003					December 31, 2002

		Amount		%			Amount		%

		(Dollars in thousands)
Contracts managed at end of period		$	10,049,965				$	9,389,974

Period of delinquency 30-59 days		$	198,901		1.98	%	$	238,204		2.54	%
	60 days or more (1)		77,391		0.77			90,291		0.96

Total contracts delinquent and delinquencies as a percentage of contracts managed (1)		$	276,292		2.75	%	$	328,495		3.50	%

(1)

Excludes Chapter 13 bankruptcy accounts greater than 120 days past due of $42.6 million and $41.5 million at June 30, 2003 and December 31, 2002, respectively.

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


	June 30, 2003						December 31, 2002

	Number of						Number
	Contracts			Amount			of Contracts			Amount

		(Dollars in thousands)
Contracts managed		796,688		$	10,049,965			757,269		$	9,389,974

Repossessed vehicles		1,412		$	9,417			2,375		$	16,433

Repossessed vehicles as a percentage of number and amount of contracts outstanding		0.18	%		0.09	%		0.31	%		0.18	%

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


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,

	2003			2002			2003			2002

				(Dollars in thousands)
Average contracts managed during period	$	9,839,661		$	8,640,187		$	9,686,488		$	8,456,742

Gross chargeoffs	$	79,369		$	68,508		$	170,148		$	148,300
Recoveries		21,937			21,227			44,535			43,860

Net chargeoffs	$	57,432		$	47,281		$	125,613		$	104,440

Net chargeoffs as a percentage of average contracts managed during period		2.33	%		2.19	%		2.59	%		2.47	%

The following table sets forth the cumulative static pool losses by month for all outstanding public securitized pools:

Cumulative Static Pool Loss Curves
At June 30, 2003


Period (1)			1999-A			1999-B			1999-C			2000-A			2000-B			2000-C			2000-D			2001-A			2001-B			2001-C			2002-1			2002-2			2002-3			2002-4			2003-1			2003-2

	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			0.04	%		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	%		0.01	%		0.00	%
	3			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	%		0.07	%		0.04	%
	4			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	%		0.16	%		0.11	%
	5			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	%		0.26	%		0.18	%
	6			0.46	%		0.66	%		0.56	%		0.55	%		0.59	%		0.65	%		0.54	%		0.50	%		0.50	%		0.49	%		0.43	%		0.32	%		0.44	%		0.38	%
	7			0.62	%		0.87	%		0.71	%		0.71	%		0.78	%		0.81	%		0.74	%		0.70	%		0.69	%		0.65	%		0.60	%		0.49	%		0.57	%		0.50	%
	8			0.76	%		1.00	%		0.86	%		0.91	%		0.99	%		0.93	%		0.93	%		0.84	%		0.87	%		0.81	%		0.84	%		0.66	%		0.70	%		0.61	%
	9			0.92	%		1.13	%		1.01	%		1.10	%		1.17	%		1.07	%		1.13	%		1.04	%		1.05	%		0.95	%		1.06	%		0.82	%		0.82	%
	10			1.11	%		1.24	%		1.14	%		1.27	%		1.33	%		1.24	%		1.34	%		1.24	%		1.22	%		1.07	%		1.28	%		0.96	%		0.96	%
	11			1.30	%		1.35	%		1.34	%		1.45	%		1.44	%		1.41	%		1.50	%		1.45	%		1.36	%		1.20	%		1.48	%		1.10	%		1.10	%
	12			1.47	%		1.44	%		1.52	%		1.58	%		1.57	%		1.62	%		1.74	%		1.67	%		1.53	%		1.37	%		1.67	%		1.26	%
	13			1.61	%		1.58	%		1.74	%		1.73	%		1.72	%		1.86	%		1.95	%		1.90	%		1.67	%		1.55	%		1.82	%		1.39	%
	14			1.73	%		1.74	%		1.94	%		1.85	%		1.86	%		2.04	%		2.21	%		2.09	%		1.81	%		1.74	%		1.99	%		1.51	%
	15			1.81	%		1.85	%		2.09	%		2.00	%		2.04	%		2.25	%		2.48	%		2.25	%		2.00	%		1.97	%		2.14	%
	16			1.89	%		2.03	%		2.27	%		2.15	%		2.24	%		2.45	%		2.71	%		2.41	%		2.19	%		2.16	%		2.27	%
	17			2.00	%		2.16	%		2.39	%		2.37	%		2.39	%		2.68	%		2.89	%		2.54	%		2.37	%		2.36	%
	18			2.10	%		2.30	%		2.53	%		2.52	%		2.55	%		2.88	%		3.08	%		2.73	%		2.60	%		2.59	%
	19			2.24	%		2.42	%		2.67	%		2.67	%		2.73	%		3.08	%		3.22	%		2.93	%		2.80	%		2.78	%
	20			2.35	%		2.50	%		2.81	%		2.83	%		2.93	%		3.23	%		3.40	%		3.11	%		3.01	%		2.95	%
	21			2.46	%		2.58	%		2.92	%		2.99	%		3.12	%		3.38	%		3.59	%		3.34	%		3.19	%		3.14	%
	22			2.55	%		2.67	%		3.10	%		3.16	%		3.27	%		3.54	%		3.78	%		3.54	%		3.34	%		3.29	%
	23			2.63	%		2.77	%		3.28	%		3.34	%		3.38	%		3.67	%		3.96	%		3.72	%		3.49	%		3.41	%
	24			2.71	%		2.87	%		3.38	%		3.49	%		3.52	%		3.83	%		4.18	%		3.92	%		3.62	%
	25			2.77	%		3.01	%		3.55	%		3.63	%		3.63	%		4.00	%		4.41	%		4.10	%		3.75	%
	26			2.82	%		3.14	%		3.68	%		3.75	%		3.73	%		4.16	%		4.58	%		4.23	%		3.87	%
	27			2.89	%		3.16	%		3.84	%		3.86	%		3.84	%		4.35	%		4.79	%		4.36	%
	28			2.96	%		3.29	%		3.98	%		3.97	%		3.97	%		4.50	%		4.96	%		4.47	%
	29			3.02	%		3.40	%		4.14	%		4.09	%		4.11	%		4.64	%		5.08	%		4.56	%
	30			3.09	%		3.50	%		4.19	%		4.21	%		4.26	%		4.79	%		5.22	%
	31			3.17	%		3.61	%		4.30	%		4.33	%		4.40	%		4.92	%		5.34	%
	32			3.20	%		3.68	%		4.38	%		4.47	%		4.50	%		5.02	%		5.44	%
	33			3.27	%		3.74	%		4.46	%		4.59	%		4.61	%		5.12	%
	34			3.35	%		3.81	%		4.57	%		4.68	%		4.70	%		5.22	%
	35			3.41	%		3.87	%		4.66	%		4.79	%		4.78	%		5.29	%
	36			3.47	%		3.91	%		4.76	%		4.86	%		4.85	%
	37			3.52	%		3.97	%		4.84	%		4.93	%		4.94	%
	38			3.55	%		4.03	%		4.96	%		5.01	%		4.99	%
	39			3.58	%		4.09	%		5.03	%		5.08	%
	40			3.61	%		4.13	%		5.13	%		5.13	%
	41			3.63	%		4.18	%		5.20	%
	42			3.66	%		4.23	%		5.24	%
	43			3.68	%		4.28	%		5.28	%
	44			3.72	%		4.33	%		5.34	%
	45			3.75	%		4.35	%		5.38	%
	46			3.79	%		4.38	%
	47			3.80	%		4.39	%
	48			3.83	%		4.41	%
	49			3.85	%
	50			3.85	%
	51			3.87	%
	52			3.88	%
	53			3.88	%
Prime Mix		(2)		70	%		70	%		67	%		68	%		69	%		68	%		68	%		71	%		71	%		76	%		70	%		87	%		85	%		80	%		80	%		82	%

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

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

Real Estate Loan Quality

We had $3.5 million of single family mortgage loans, or 1.32% of total mortgage loans, past due over 60 days at June 30, 2003 compared with $3.8 million, or 1.32% of total mortgage loans, at December 31, 2002.

Nonperforming Assets

Nonperforming assets, also known as NPAs, consist of repossessed automobiles and real estate owned, also known as REO. REO is carried at lower of cost or fair value. NPAs decreased $6.3 million to $12.6 million at June 30, 2003 compared with $18.8 million at December 31, 2002. The decrease in the NPAs was primarily due to a $5.5 million decrease in repossessed automobiles. NPAs represented 0.1% of total assets at June 30, 2003 and 0.2% of total assets at December 31, 2002. There were no impaired loans at June 30, 2003 and December 31, 2002.

Nonperforming loans, also known as NPLs, are defined as all nonaccrual loans. This includes mortgage loans 90 days or more past due and impaired loans where full collection of principal and interest is not reasonably assured. For Chapter 13 bankruptcy accounts greater than 120 days delinquent, all accrued interest is reversed and income is recognized on a cash basis. When a loan is designated as nonaccrual, all previously accrued but unpaid interest is reversed. Interest on NPLs excluded from interest income was $0.3 million and $0.6 million for the six months ended June 30, 2003 and 2002, respectively.

Allowance for Credit Losses

Our allowance for credit losses was $291 million at June 30, 2003 compared to $269 million at December 31, 2002. Net chargeoffs totaled $57.6 million and $126 million for the three and six months ended June 30, 2003, respectively, compared with $40.4 million and $87.9 million for the same respective periods in 2002. The increase in the allowance for credit losses was the result of a higher level of automobile contracts held on balance sheet as well as higher chargeoffs related to a slowing economy. The allowance for credit losses as a percentage of owned loans outstanding was 2.8% at June 30, 2003 compared with 2.9% at December 31, 2002. Based on the analysis we performed related to the allowance for credit losses as described under Critical Accounting Policies, we believe that our allowance for credit losses is currently adequate to cover probable losses in our loan portfolio that can be reasonably estimated.

The following table presents summarized data relative to the allowance for credit and real estate losses at the dates indicated:


		June 30,			December 31,
		2003			2002

		(Dollars in thousands)
Total loans (1)		$	10,583,482		$	9,443,901
Allowance for credit losses			291,459			269,352
Allowance for real estate owned losses			100			250
Loans past due 60 days or more (2)			84,257			86,199
Nonperforming loans (3)			49,453			39,231
Nonperforming assets (4)			12,553			18,807
Allowance for credit losses as a percent of:
	Total loans (1)		2.8	%		2.9	%
	Loans past due 60 days or more		345.9	%		312.5	%
	Nonperforming loans		589.4	%		686.6	%
Total allowance for credit losses and REO losses as a percent of nonperforming assets			2,322.6	%		1,433.5	%
Nonperforming loans as a percent of total loans			0.5	%		0.4	%
Nonperforming assets as a percent of total assets			0.1	%		0.2	%

(1)		Loans net of unearned interest and undisbursed loan proceeds.

(2)		Excludes Chapter 13 bankruptcy accounts greater than 120 days past due.

(3)		All nonperforming loans are on nonaccrual.

(4)		Repossessed automobiles and real estate owned, net of allowance.

Deposits

We attract both short-term and long-term deposits from the general public, commercial enterprises and institutions by offering a variety of accounts and rates. We offer regular passbook accounts, demand deposit accounts, money market accounts, certificate of deposit accounts and individual retirement accounts. Our retail banking division gathers deposits from 18 retail branch locations throughout Southern California. Our commercial banking division gathers deposits by establishing commercial relationships with businesses located throughout Southern California.

The following table sets forth the amount of our deposits by type at the dates indicated:


		June 30,		December 31,
		2003		2002

		(Dollars in thousands)
No minimum term:
	Demand deposit accounts	$	1,460	$	1,037
	Passbook accounts		6,235		6,688
	Money market accounts		831,787		730,245
	Noninterest bearing deposits		207,306		165,844
Certificate accounts:
	Certificates (30 days to five years)		794,959		878,096
	IRAs		92,415		94,082
Brokered deposits			99,100		98,992

		$	2,033,262	$	1,974,984

The variety of deposits we offer has allowed us to remain competitive in obtaining funds and provided us the flexibility to respond to changes in customer demand and competitive pressures. Generally, as other financial institutions, we have become more subject to short-term fluctuations in deposit flows as customers have become more interest rate conscious. Our ability to attract and maintain deposits and control our cost of funds has been, and will continue to be, significantly affected by market conditions.

Capital Resources and Liquidity

Overview

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. During the fourth quarter of 2002, we fully amortized our retained interest in securitized assets. As a result, our net income is an effective measurement of our operating cash flows. Therefore, we will no longer report operating cash flows on a direct basis.

Principal Sources of Cash

• Collections of Principal and Interest from Loans and MBS – Principal and interest collections totaled $2.3 billion and $4.4 billion for the three and six months ended June 30, 2003, respectively, compared with $1.8 billion and $3.6 billion for the same respective periods in 2002.

• Deposits – Deposits were $2.0 billion at both June 30, 2003 and December 31, 2002, respectively.

• Automobile Contract Securitizations – Securitizations totaled $1.5 billion and $2.8 billion for the three and six months ended June 30, 2003, respectively, compared with $1.8 billion and $4.3 billion for the same respective periods in 2002.

• Subordinated Debentures – In 1997 and 2002, we issued $150 million of 8.875% and $300 million of 9.625% subordinated capital debentures due in 2007 and 2012, respectively. At June 30, 2003 there was $102 million and $300 million outstanding on the subordinated debentures due in 2007 and 2012, respectively, excluding discounts and issue costs.

• Other Borrowings – Other borrowings, which include securities sold under agreements to repurchase and FHLB advances, increased to $629 million at June 30, 2003 from $613 million at December 31, 2002.

Principal Uses of Cash

• Acquisition of Loans and Investment Securities – Loan originations totaled $1.7 billion and $3.2 billion for the three and six months ended June 30, 2003, respectively, compared with $1.6 billion and $2.9 billion for the same respective periods in 2002. We purchased $487 million and $1.0 billion of mortgage-backed securities and other investment securities during the three and six months ended June 30, 2003 compared with $90.6 million and $445 million during the same respective periods in 2002.

• Payments of Principal and Interest on Securitizations – Payments of principal and interest to noteholders and certificateholders totaled $1.3 billion and $2.4 billion for the three and six months ended June 30, 2003 respectively, compared to $1.8 billion and $3.3 billion for the same respective periods in 2002.

• Amounts Paid to Dealers – Participation paid by us to dealers was $31.7 million and $69.2 million for the three and six months ended June 30, 2003, respectively, compared to $32.6 million and $61.9 million for the same respective periods in 2002.

• Operating Our Business – Operating expenses totaled $72.7 million and $141 million for the three and six months ended June 30, 2003, respectively, compared to $64.8 million and $126 million for the same respective periods in 2002.

Capital Requirements

The Bank is a federally chartered savings bank. As such, it is subject to certain minimum capital requirements imposed by the Financial Institutions Reform, Recovery and Enforcement Act, also known as FIRREA and the Federal Deposit Insurance Corporation Improvement Act, also known as FDICIA. FDICIA separates all financial institutions into one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In order to be considered “well capitalized,” an institution must have a total risk-based capital ratio of 10.0% or greater, a tier 1 or core risk-based capital ratio of 6.0% or greater, a leverage ratio of 5.0% or greater and not be subject to any Office of Thrift Supervision, also known as OTS, order. The Bank currently meets all of the requirements of a “well capitalized” institution.

The following table summarizes the Bank’s actual capital and required capital as of June 30, 2003 and December 31, 2002:


									Tier 1
			Tangible			Core			Risk-Based			Risk-Based
			Capital			Capital			Capital			Capital

		(Dollars in thousands)
June 30, 2003
Actual Capital:
	Amount		$	776,297		$	776,297		$	773,274		$	1,275,348
	Capital ratio			6.05	%		6.05	%		7.76	%		12.80	%
FIRREA minimum required capital:
	Amount		$	192,561		$	385,122			N/A		$	797,235
	Capital ratio			1.50	%		3.00	%		N/A			8.00	%
	Excess		$	583,736		$	391,175			N/A		$	478,113
FDICIA well capitalized required capital:
	Amount			N/A		$	641,869		$	597,926		$	996,544
	Capital ratio			N/A			5.00	%		6.00	%		10.00	%
	Excess			N/A		$	134,428		$	175,348		$	278,804

December 31, 2002
Actual Capital:
	Amount		$	728,631		$	728,631		$	655,142		$	1,143,345
	Capital ratio			6.43	%		6.43	%		7.67	%		13.38	%
FIRREA minimum required capital:
	Amount		$	169,991		$	339,981			N/A		$	683,481
	Capital ratio			1.50	%		3.00	%		N/A			8.00	%
	Excess		$	558,640		$	388,650			N/A		$	459,864
FDICIA well capitalized required capital:
	Amount			N/A		$	566,635		$	512,611		$	854,351
	Capital ratio			N/A			5.00	%		6.00	%		10.00	%
	Excess			N/A		$	161,996		$	142,531		$	288,994

The following table reconciles the Bank’s capital in accordance with GAAP to the Bank’s tangible, core and risk-based capital:


		June 30,			December 31,
		2003			2002

		(Dollars in thousands)
Bank shareholder’s equity — GAAP basis		$	557,262		$	532,902
	Plus: net unrealized losses		108,113			94,220
	Plus: minority interest in equity of subsidiaries		111,079			101,666
	Less: non-permissible activities		(157	)		(157	)

Total tangible and core capital			776,297			728,631
Adjustments for risk-based capital:
	Subordinated debentures (1)		376,247			380,314
	General loan valuation allowance (2)		125,827			107,889
	Low-level recourse deduction		(3,023	)		(73,489	)

Risk-based capital		$	1,275,348		$	1,143,345

(1)		Excludes capitalized discounts and issue costs.

(2)		Limited to 1.25% of risk-weighted assets.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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 effects 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 our net portfolio value, also known as NPV. NPV is the discounted value of the future cash flows (or ‘paths’ of cash flows in the presence of options based on volatility assumptions and an arbitrage free Monte Carlo simulation method to achieve the current market price) of all assets minus all liabilities whose value is affected by interest rate changes plus the book value of non-interest rate sensitive assets minus the book value of non-interest rate sensitive 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 NPV ratio is the ratio of the NPV to the market value of our assets as calculated above. In general, an increase in interest rates would more adversely affect our NPV than would a decrease in interest rates.

Another important measurement of our interest rate risk is ‘GAP’ analysis. GAP is defined as the difference between the amount of interest sensitive assets that reprice versus the amount of interest sensitive liabilities that also reprice within a defined period of time. We have more interest sensitive liabilities rather than assets repricing in shorter term maturity buckets and more interest sensitive assets rather than liabilities repricing in longer term maturity buckets.

The Asset/Liability Committee monitors our hedging activities to ensure that the value of hedges, their correlation to the loans 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 quarter.

The following table summarizes our maturity GAP position:


				Interest Rate Sensitivity Analysis at June 30, 2003

													3 Years
				Within			3 Months			1 Year to			To			After 5
				3 Months			to 1 Year			3 Years			5 Years			Years			Total

										(Dollars in thousands)
Interest earning assets:
	Investment securities			$	6,061											$	515		$	6,576
	Other investments				225,180		$	200												225,380
	Mortgage-backed securities				494,868			789,088		$	1,002,887		$	274,920			145,486			2,707,249

			Total investments		726,109			789,288			1,002,887			274,920			146,001			2,939,205
	Consumer loans (1)				770,440			2,857,511			4,767,327			1,739,797			90,973			10,226,048
	Mortgage loans:
		Adjustable rate (2)			197,457			29,850												227,307
		Fixed rate (2)			1,627			4,009			11,696			1,561			1,502			20,395
	Construction loans (2)				15,380															15,380
	Commercial loans (2)				91,809			651			631			240			1,021			94,352

			Total interest earning assets		1,802,822			3,681,309			5,782,541			2,016,518			239,497			13,522,687
Interest bearing liabilities:
	Deposits:
		Passbook accounts (3)			661			2,382			3,192									6,235
		Demand deposit and money market accounts (3)			158,223			252,256			422,768									833,247
		Certificate accounts (4)			331,663			598,867			51,227			4,717						986,474
	FHLB advances (4)				414,000												2,709			416,709
	Securities sold under agreements to repurchase (4)				212,268															212,268
	Subordinated debentures (4)													101,913			293,715			395,628
	Notes payable on automobile secured financing (4)				2,940,442			2,172,648			3,848,064			768,182						9,729,336
	Other borrowings (4)				5,591															5,591

			Total interest bearing liabilities		4,062,848			3,026,153			4,325,251			874,812			296,424			12,585,488

Excess interest earning/bearing assets (liabilities)					(2,260,026	)		655,156			1,457,290			1,141,706			(56,927	)		937,199
Effect of hedging activities (5)					2,333,113			(709,768	)		(887,726	)		(390,619	)		(345,000	)

Hedged excess (deficit)				$	73,087		$	(54,612	)	$	569,564		$	751,087		$	(401,927	)	$	937,199

Cumulative excess				$	73,087		$	18,475		$	588,039		$	1,339,126		$	937,199		$	937,199

Cumulative excess as a percentage of total interest earning assets					0.54	%		0.14	%		4.35	%		9.90	%		6.93	%		6.93	%

(1)		Based on contractual maturities adjusted by our historical prepayment rate.

(2)		Based on interest rate repricing adjusted for projected prepayments.

(3)		Based on assumptions established by the OTS.

(4)		Based on contractual maturity.

(5)		Includes effect of interest rate swaps designated against deposits and securities sold under agreements to repurchase.

Item 4. Controls and Procedures

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 quarterly 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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We or our subsidiaries are involved as parties to certain legal proceedings incidental to our business, including 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 Thompson v. WFS Financial Inc, Superior Court of the State of California, County of Alameda, Case No. RG03088926 filed March 27, 2003 (a putative class action raising claims under California Business and Professions Code and the California Unruh Civil Rights Act). 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 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

On April 29, 2003, we held our annual shareholders’ meeting. There were 39,203,791 shares of common stock outstanding entitled to vote, and a total of 34,652,231, or 88.39%, were represented at the meeting in person or by proxy. The following summarizes vote results of proposals submitted to our shareholders:

1. Proposal to elect four Class I Directors for term expiring 2005 and one Class II Director for terms expiring in 2004


NAME	FOR		WITHHELD

Robert T. Barnum, Class I		34,318,738		333,493
Harry M. Rady, Class I		32,512,734		2,139,497
Charles E. Scribner, Class I		34,523,299		128,932
Thomas A. Wolfe, Class I		32,361,538		2,290,693
Duane A. Nelles, Class II		34,523,299		128,932

2. Proposal to ratify the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 2003


FOR	AGAINST		ABSTAIN

34,460,694		98,103		93,434

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


31.1		Section 302 Certification of CEO

31.2		Section 302 Certification of CFO

32.1		Section 906 Certification of CEO

32.2		Section 906 Certification of CFO

(b) Reports on Form 8-K

Westcorp press release on April 23, 2003

Westcorp update of earnings per share guidance on June 19, 2003

Westcorp prospective issuance of common stock on June 27, 2003

SIGNATURES

Pursuant to the requirements 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.

Westcorp

(Registrant)


Date:	August 14, 2003	By:	/S/ ERNEST S. RADY

			Ernest S. Rady Chairman of th Board and Chief Executive Officer

Date:	August 14, 2003	By:	/S/ LEE A. WHATCOTT

			Lee A. Whatcott Executive Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Description

31.1		Section 302 Certification of CEO

31.2		Section 302 Certification of CFO

32.1		Section 906 Certification of CEO

32.2		Section 906 Certification of CFO

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	•		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, interpretation, or application of new or existing 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.

•		Collections of Principal and Interest from Loans and MBS – Principal and interest collections totaled $2.3 billion and $4.4 billion for the three and six months ended June 30, 2003, respectively, compared with $1.8 billion and $3.6 billion for the same respective periods in 2002.

•		Deposits – Deposits were $2.0 billion at both June 30, 2003 and December 31, 2002, respectively.

•		Automobile Contract Securitizations – Securitizations totaled $1.5 billion and $2.8 billion for the three and six months ended June 30, 2003, respectively, compared with $1.8 billion and $4.3 billion for the same respective periods in 2002.

•		Subordinated Debentures – In 1997 and 2002, we issued $150 million of 8.875% and $300 million of 9.625% subordinated capital debentures due in 2007 and 2012, respectively. At June 30, 2003 there was $102 million and $300 million outstanding on the subordinated debentures due in 2007 and 2012, respectively, excluding discounts and issue costs.

•		Other Borrowings – Other borrowings, which include securities sold under agreements to repurchase and FHLB advances, increased to $629 million at June 30, 2003 from $613 million at December 31, 2002.

•		Acquisition of Loans and Investment Securities – Loan originations totaled $1.7 billion and $3.2 billion for the three and six months ended June 30, 2003, respectively, compared with $1.6 billion and $2.9 billion for the same respective periods in 2002. We purchased $487 million and $1.0 billion of mortgage-backed securities and other investment securities during the three and six months ended June 30, 2003 compared with $90.6 million and $445 million during the same respective periods in 2002.

•		Payments of Principal and Interest on Securitizations – Payments of principal and interest to noteholders and certificateholders totaled $1.3 billion and $2.4 billion for the three and six months ended June 30, 2003 respectively, compared to $1.8 billion and $3.3 billion for the same respective periods in 2002.

•		Amounts Paid to Dealers – Participation paid by us to dealers was $31.7 million and $69.2 million for the three and six months ended June 30, 2003, respectively, compared to $32.6 million and $61.9 million for the same respective periods in 2002.

(b)		Reports on Form 8-K

		Westcorp press release on April 23, 2003

		Westcorp update of earnings per share guidance on June 19, 2003

		Westcorp prospective issuance of common stock on June 27, 2003