UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period ________ to _________

Commission file number 33-93068

WFS Financial Inc

23 Pasteur, Irvine, California 92618-3816

(949) 727-1002

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

Indicated 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 No o

As of April 29, 2005, the registrant had 41,057,923 shares outstanding of common stock, no par value. The shares of common stock represent the only class of common stock of the registrant.

The total number of sequentially numbered pages is 24.

WFS FINANCIAL INC AND SUBSIDIARIES

FORM 10-Q

March 31, 2005

TABLE OF CONTENTS

Forward-Looking Statements

This Form 10- Q includes and incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended or the Exchange Act. Forward-looking statements relate to analyses and other information that 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, as well as the proposed merger of the Bank and us and the conversion of the Bank to a California State Commercial Bank. These statements are subject to uncertainties and, among other things, 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 their 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. These statements are contained in sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Form 10-Q and in the documents incorporated by reference.

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 exercise of discretionary authority by regulatory agencies;
	•	a decision to change our corporate structure;
	•	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 as to these items prove incorrect, our actual results may vary materially from those expected, estimated or projected.

Additional factors that could cause actual results to differ are discussed under the heading “Business Risks” and in other sections of our Form 10-K for the fiscal year ended December 31, 2004 on file with the Securities and Exchange Commission, and in our other current and periodic reports filed from time to time with the Commission. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.

INDUSTRY DATA

In this Form 10-Q, we rely on and refer to information regarding the automobile lending industry from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we cannot guarantee the accuracy and completeness of this information, and we have not independently verified any of it.

Available Information

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

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WFS FINANCIAL INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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WFS FINANCIAL INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — Basis of Presentation

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

The unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles, also known as GAAP, 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 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 three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004 included in our Form 10-K.

Note 2 — Net Contracts Receivable

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

Net contracts receivable consisted of the following:

Contracts managed by us, excluding dealer participation and deferred contract fees, totaled $11.9 billion and $11.6 billion at March 31, 2005 and December 31, 2004, respectively. Of the $11.9 billion contracts managed at March 31, 2005, $10.0 billion were owned by us and $1.9 billion were owned by Westcorp, our ultimate parent. Of the $11.6 billion contracts managed at December 31, 2004, $9.4 billion were owned by us and $2.2 billion were owned by Westcorp. Nonperforming loans, or loans on which we have discontinued the accrual of interest income, included in net loans receivable were $40.9 million at both March 31, 2005 and December 31, 2004. Repossessed assets were $4.8 million and $6.4 million at March 31, 2005 and December 31, 2004, respectively, and are included in other assets on our Consolidated Statements of Financial Condition.

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Note 3 — Allowance for Credit Losses

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

Note 4 — Whole Loan Sale

For the three months ended March 31, 2004, we sold $1.5 billion of automobile contracts to Westcorp, our parent company, in a whole loan sale at a price of 103%. These receivables were subsequently securitized by Westcorp and continue to be managed by us under the terms of the securitization. As a result of selling contracts in a whole loan sale rather than securitizing them in a secured financing transaction, we recorded a cash gain on sale of $13.8 million. Included in this amount was $2.2 million of losses from accumulated other comprehensive loss related to hedges of future interest payments on the forecasted secured financing. The hedge loss was included in the gain on sale on the Consolidated Statements of Income. We did not execute a similar transaction for the three months ended March 31, 2005.

Note 5 — Notes Payable on Automobile Secured Financing

In connection with our asset-backed securitization activities, we issued $3.0 billion of notes secured by contracts for the three months ended March 31, 2005. We did not issue any notes secured by contracts during the three months ended March 31, 2004. The $3.0 billion issued during 2005 was through two public transactions. There were $9.9 billion of notes payable on automobile secured financing outstanding at March 31, 2005 compared with $8.1 billion at December 31, 2004.

Interest payments are due either monthly or quarterly, in arrears. Interest expense on all notes payable on automobile secured financing, including interest payments under interest rate swap agreements, totaled $72.8 million and $72.2 million for the three months ended March 31, 2005 and 2004, respectively.

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Note 6 — Notes Payable — Parent

We borrowed $450 million from the Bank under the terms of a $300 million note and a $150 million note with rates of 10.25% and 8.875% per annum, respectively. We had amounts outstanding on the notes of $300 million at both March 31, 2005 and December 31, 2004. The $150 million note was paid in the third quarter of 2004. Interest payments on the notes totaled $7.7 million and $9.9 for the three months ended March 31, 2005 and 2004, respectively.

Note 7 — Accumulated Other Comprehensive Income (Loss), Net of Tax

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

Note 8 — Comprehensive income

The following table presents the components of comprehensive income, net of related tax, for the periods indicated:

Note 9 — Commitments and Contingencies

We or our subsidiaries are involved as a party to certain legal proceedings incidental to our business. Beginning on May 24, 2004 and continuing thereafter, a total of four separate purported class action lawsuits relating to the announcement by Westcorp and us that we had entered into a merger agreement, pursuant to which Westcorp would acquire our outstanding 16% common stock interest not already owned by Westcorp’s wholly owned subsidiary, Western Financial Bank, and we would be merged with and into Western Financial Bank were filed in the Orange County, California Superior Court against Westcorp, us, our individual board members, and individual board members of Westcorp. On June 24, 2004, the actions were consolidated under the caption In re WFS Financial Shareholder Litigation, Case No. 04CC00559 (the “Action”). On July 16, 2004, the court granted a motion by plaintiff Alaska Hotel & Restaurant Employees Pension Trust Fund, in Case No.04CC00573, to amend the consolidation order to designate it the lead plaintiff in the litigation. The lead plaintiff filed a consolidated amended complaint on August 9, 2004, and then filed the present “corrected” consolidated amended complaint on September 15, 2004. All of the shareholder-related actions allege, among other things, that the defendants breached their respective fiduciary duties and seek to enjoin or rescind the transaction and obtain an unspecified sum in damages and costs, including attorneys’ fees and expenses. The parties have tentatively agreed to a full and final resolution of the Action and, on January 19, 2005, the parties entered into a Memorandum of Understanding (“MOU”) concerning the terms of the tentative settlement. Pursuant to the terms of the MOU, the parties have agreed, among other things, that additional disclosures will be made in Westcorp’s Registration Statement on Form S-4 (as filed with the SEC on July 16, 2004), the claims asserted in the Action will be fully released, and the Action will be dismissed with prejudice. Further, pursuant to the MOU, the defendants have

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agreed to pay plaintiffs’ attorneys’ fees and expenses in the amount of $675,000, or in such lesser amount as the Court may order. The effectiveness of the settlement agreement is contingent on the transaction actually occurring. The parties prepared a formal settlement agreement based on the terms of the MOU and will present it to the Court for preliminary approval on June 17, 2005. The parties have further agreed and reported to the Court that the parties will not proceed with providing notice of the proposed settlement to shareholders nor schedule a final hearing on approval of the settlement unless and until the necessary regulatory approvals for the transaction have been obtained. We are vigorously defending this action and do not believe that the outcome of this proceeding will have a material effect upon our financial condition, results of operations and cash flows.

Note 10 — Proposed Merger

On May 23, 2004, we entered into a definitive agreement pursuant to which our ultimate parent company, Westcorp, will acquire our outstanding 16% common stock minority interest. The transaction is structured as a merger of us with and into the Bank. In connection with the merger, the Bank has filed an application with the California Department of Financial Institutions to convert its federal thrift charter to a California state bank charter. The merger agreement is conditioned upon the conversion of the charter. The transaction is subject to, among other closing conditions, the receipt of regulatory approvals and the approval of a majority of our shareholders, other than shares controlled by Westcorp.

The California Department of Financial Institutions and the Office of Thrift Supervision have approved the Bank’s application to convert from a federal savings bank to a California state commercial bank subject to receipt of all other required regulatory approvals. The Federal Deposit Insurance Corporation approved the application to merge us into the Bank as part of its acquisition of our minority interest. The conversion is still contingent upon the approval of Westcorp’s application to become a bank holding company by the Board of Governors of the Federal Reserve. If the conversion is completed, the Bank will be subject to the laws, regulation and oversight of the California Department of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve. The merger is also subject to approval by the majority of our minority shareholders.

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

Overview

We are one of the nation’s largest independent automobile finance companies with 32 years of experience in the automobile finance industry. We believe that the automobile finance industry is the second largest consumer finance industry in the United States with approximately $500 billion of loan originations during 2004. We originate, service and securitize new and pre-owned automobile installment contracts, which are generated through our relationships with approximately 8,300 franchised and independent automobile dealers in 45 states. We originated $1.8 billion and $1.6 billion of automobile contracts during the three months ended March 31, 2005 and 2004, respectively. We managed a portfolio of $11.9 billion at March 31, 2005 compared with $11.6 billion at December 31, 2004.

Our primary sources of revenue are net interest income and servicing income. Net interest income is the difference between the income earned on interest earning assets and the interest paid on interest bearing liabilities. The primary components of servicing income include late charges and other collection related fee income on managed contracts and contractually specified servicing income on contracts sold in whole loan sales that we continue to service. The primary components of operating expenses are salaries, credit and collection expenses and data processing costs.

Selected Financial Data

The following table presents summary unaudited financial data for the three months ended March 31, 2005 and 2004. 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.

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Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations, also known as MD&A, is based on our consolidated financial statements and accompanying notes that have been prepared in accordance with GAAP. Our significant accounting policies are described in “Note 1 — Summary of Significant Accounting Policies” in our Consolidated Financial Statements in our 2004 Form 10-K and are essential in understanding our MD&A. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, income, and expenses in our Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates. We have identified accounting for the allowance for credit losses as the most critical accounting estimate to understanding and evaluating our reported financial results of operations. This estimate is critical because it requires us to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is possible that materially different amounts would be reported under different conditions or using different assumptions. Additionally, the accounting for derivative financial instruments and accrued taxes requires the use of assumptions and accounting estimates that are also inherently subjective.

Allowance for Credit Losses

The allowance for credit losses is our estimate of probable losses in our loan portfolio as of the balance sheet date. Our determination of the amount of the allowance for credit losses was based on a review of various quantitative and qualitative analyses. Our process for determining the allowance for credit losses is discussed in detail in “Note 1 — Summary of Significant Accounting Policies” in our Consolidated Financial Statements in our 2004 Form 10-K.

Key analyses considered in the process of establishing our allowance for credit losses include migration analysis of delinquent and current accounts by risk category, econometric forecasts, the evaluation of the size of any particular asset group, the concentration of any credit tier, the percentage of delinquency, the severity of depreciated values of repossessions, trends in the number of days repossessions are held in inventory, trends in delinquency roll rates, and trends in the economy. The process of determining the level of the allowance for credit losses based upon the foregoing analyses requires a high degree of judgment. It is possible that others, given the same information, may reach different

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conclusions and such differences could be material. To the extent that the analyses considered in determining the allowance for credit losses are not indicative of future performance or other assumptions used by us do not prove to be accurate, loss experience could differ significantly from our estimate, resulting in either higher or lower future provision for credit losses.

Derivative Financial Instruments

We use derivatives in connection with our interest rate risk management activities. We record all derivative instruments at fair value. Fair value information for our derivative financial instruments is reported using quoted market prices for which it is practicable to estimate that value. In cases where quoted market prices are not readily available, fair values are based on estimates using present value or other valuation techniques.

Some of our derivatives qualify for hedge accounting. To qualify for hedge accounting, we must demonstrate, on an ongoing basis, that our derivatives are highly effective in protecting us against interest rate risk. We employ regression analysis and discounted cash flow analysis to determine the effectiveness of our hedging activity.

The techniques used in estimating fair values and hedge effectiveness are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. It is possible that others, given the same information, may reach different conclusions and such differences could be material.

Accrued Taxes

We estimate tax expenses based on the amount we expect to owe various tax jurisdictions. We currently file tax returns in approximately 39 states. Our estimate of tax expense is reported on our Consolidated Statements of Income. Accrued taxes represent the net estimated amount due or to be received from taxing jurisdictions either currently or in the future and are reported as a component of other assets on our Consolidated Statements of Financial Condition. In estimating accrued taxes, we assess the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position.

Changes to our estimate of accrued taxes occur periodically due to changes in the tax rates, implementation of new tax planning strategies, resolution with taxing authorities of issues with previously taken tax positions, and newly enacted statutory, judicial and regulatory guidance. These changes, when they occur, affect accrued taxes and could be material.

Proposed Merger

On May 23, 2004, we entered into a definitive agreement pursuant to which Westcorp will acquire our outstanding 16% common stock minority interest not already owned by our parent, the Bank. The transaction is structured as a merger of us with and into the Bank. If the merger is consummated, the public holders of our shares would receive 1.11 shares of Westcorp’s common stock for each share of our common stock held by them in a tax-free exchange. Based on the $42.60 closing price of Westcorp’s common stock on May 21, 2004, the last business day prior to the execution of the agreement, the transaction has an indicated value of $47.29 per share of our common stock.

In connection with the merger, the Bank has filed an application with the California Department of Financial Institutions, also known as the DFI, to convert its federal thrift charter to a California state bank charter. Among other things, the merger is conditioned upon the conversion of the charter and the transaction is subject to, among other closing conditions, the receipt of regulatory approvals and the approval of a majority of our minority shareholders, other than shares controlled by Westcorp. The DFI and the Office of Thrift Supervision, also known as the OTS, have approved the Bank’s application to convert from a federal savings bank to a California state commercial bank subject to receipt of all other required regulatory approvals. The FDIC approved the application to merge us into the Bank as part of the acquisition of our minority interest.

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The conversion is still contingent upon the approval by the Board of Governors of the Federal Reserve, also known as the Federal Reserve, of Westcorp’s application to become a bank holding company, which process is taking longer than originally expected. As a result, Westcorp believes that the proposed conversion will not occur until the latter half of 2005, if at all. The Federal Reserve recently has raised some questions and potential concerns with Westcorp’s proposal and has requested additional information from Westcorp. Assembling the information and responding to the Federal Reserve’s concerns and questions will take additional time. Those concerns and questions will need to be addressed to the Federal Reserve’s satisfaction before the Federal Reserve will deem Westcorp’s application complete.

Although Westcorp intends to continue to pursue Federal Reserve approval, there can be no assurance that such approval will ultimately be granted or that any conditions to such approval imposed on the Bank will not affect the feasibility of moving forward with the proposed conversion and the related merger of us into the Bank. Westcorp is currently exploring other alternatives in the event that the proposed conversion and related merger cannot go forward as planned. In that regard, we have begun the process of filing for state licenses.

If the conversion is completed, Westcorp and its subsidiaries will be subject to the laws, regulation and oversight of the DFI, the FDIC and the Federal Reserve.

Results of Operations

Net Interest Income

Net interest income is affected by our interest rate spread, which is the difference between the rate earned on our interest earning assets and the rate paid on our interest bearing liabilities, and the relative amounts of our interest earning assets and interest bearing liabilities. Net interest income totaled $169 million and $140 million for the three months ended March 31, 2005 and 2004, respectively. The increase in net interest income was the result of us holding more contracts on the balance sheet and an increase in net interest margins for the three months ended March 31, 2005.

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

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The total interest rate spread increased 33 basis points for the three months ended March 31, 2005 compared with the three months ended March 31, 2004 due to a decrease of 11 basis points in the yield on interest earning assets combined with a 44 basis point decrease in the cost of funds. The decrease in the yield on interest earning assets in 2005 compared with 2004 was due to a low interest rate environment. The decrease in the cost of funds in 2005 compared with 2004 was primarily due to a low interest rate environment and an improvement of credit spreads on our automobile secured financings.

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):

Provision for Credit Losses

We maintain an allowance for credit losses to cover probable losses that can be reasonably estimated for contracts held on balance sheet. The level of the allowance is based principally on the outstanding balance of contracts held on balance sheet and historical loss trends. We believe that the allowance for credit losses is currently adequate to absorb probable losses in our owned portfolio that can be reasonably estimated. The provision for credit losses was $49.3 million and $20.0 million for the three months ended March 31, 2005 and 2004, respectively. The increase in the provision for credit losses was a result of reversing the allowance for credit losses in the three months ended March 31, 2004, commensurate with the $1.5 billion of automobile contracts sold to our ultimate parent.

Contract Sales and Securitizations

Contract sales and securitizations totaled $3.0 billion and $1.5 billion for the three months ended March 31, 2005 and 2004, respectively. The following table lists each of the securitizations we manage. We receive servicing fees and other ancillary income on loans sold to our ultimate parent company, Westcorp, that we continue to manage. All securitizations prior to 2001-C were paid in full on or before their contractual maturity dates and none of the remaining securitizations have yet reached their contractual maturity dates.

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Securitizations

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Noninterest Income and Noninterest Expense

     Noninterest income decreased to $22.9 million for the three months ended March 31, 2005 compared with $49.1 million for the same period a year earlier as $14.5 million of additional loan origination fees were deferred during the quarter. Noninterest expense was affected by $6.4 million in additional direct origination costs that were deferred in the quarter as well. Historically, we performed analyses on the fees and direct costs related to our origination of automobile loans and elected not to defer and amortize such amounts as the net effect was not material to our financial statements in accordance with Statement of Financial Accounting Standard No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, and SEC Staff Accounting Bulletin: No. 99 – Materiality. Due to continuing improvements in operating efficiencies and the higher amount of documentation fees earned, the difference between the amount of fees received and the direct costs incurred has gradually increased. Therefore, we have decided to defer and amortize these amounts prospectively beginning this quarter.

Income Taxes

     We file federal and certain state tax returns as part of a consolidated group that includes the Bank and Westcorp. We file other state tax returns as a separate entity. Tax liabilities from the consolidated returns are allocated in accordance with a tax sharing agreement based on the relative income or loss of each entity on a stand-alone basis. Our effective tax rate was 39% for three months ended March 31, 2005 and 40% for the three months ended March 31, 2004, respectively.

Financial Condition

Contracts Receivable

     We held a portfolio of contracts on balance sheet that totaled $10.2 billion at March 31, 2005 and $9.6 billion at December 31, 2004. The increase is due primarily to an increase in automobile contracts originated.

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

Asset 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.

     We calculate delinquency based on the contractual due date. The improvement in delinquency is primarily the result of an improving economy and our continued emphasis on risk-focused underwriting.

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     The following table sets forth information with respect to the delinquency of our portfolio of contracts managed, which includes contracts that are owned by us and contracts that have been sold to Westcorp through whole loan sales and are managed by us:

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

     The following table sets forth information with respect to actual credit loss experience on our portfolio of managed contracts. Net chargeoffs declined as a result of an improving economy.

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

Cumulative Static Pool Loss Curves
At March 31, 2005