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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2004

OR

     
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   51-0308535

 
 
 
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   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 þ No o

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 þ No o

As of October 29, 2004, the registrant had 51,873,467 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 37.



 


WESTCORP AND SUBSIDIARIES

FORM 10-Q

September 30, 2004

TABLE OF CONTENTS


         
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 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

 


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, also known as 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. 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. These statements are contained in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Form 10-Q.

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

We provide access to all our filings with the Securities and Exchange Commission on our 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.

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                 
    (Unaudited)    
    September 30, 2004
  December 31, 2003
    (Dollars in thousands)
ASSETS
               
Cash
  $ 95,150     $ 50,073  
Interest bearing deposits with other financial institutions
    3,098       41,009  
Other short-term investments
    150,000       291,000  
 
   
 
     
 
 
Cash and due from banks
    248,248       382,082  
Restricted cash
    392,531       245,399  
Investment securities available for sale
    107,374       117,749  
Mortgage-backed securities available for sale
    2,670,344       2,701,797  
Loans receivable
    11,935,998       11,138,483  
Allowance for credit losses
    (312,222 )     (301,602 )
 
   
 
     
 
 
Loans receivable, net
    11,623,776       10,836,881  
Interest receivable
    76,428       80,957  
Premises and equipment, net
    78,424       81,814  
Other assets
    154,874       169,241  
 
   
 
     
 
 
TOTAL ASSETS
  $ 15,351,999     $ 14,615,920  
 
   
 
     
 
 
LIABILITIES
               
Deposits
  $ 2,108,668     $ 1,972,856  
Notes payable on automobile secured financing
    10,415,151       10,254,641  
Securities sold under agreements to repurchase
            222,489  
Federal Home Loan Bank advances
    870,658       328,644  
Subordinated debentures
    295,053       394,854  
Other
    219,726       188,517  
 
   
 
     
 
 
TOTAL LIABILITIES
    13,909,256       13,362,001  
Minority interest
    158,045       131,434  
SHAREHOLDERS’ EQUITY
               
Common stock (par value $1.00 per share; authorized 65,000,000 shares; issued and outstanding 51,873,467 shares at September 30, 2004 and 51,698,398 shares at December 31, 2003)
    51,873       51,698  
Paid-in capital
    714,569       710,001  
Retained earnings
    558,740       427,527  
Accumulated other comprehensive loss, net of tax
    (40,484 )     (66,741 )
 
   
 
     
 
 
TOTAL SHAREHOLDERS’ EQUITY
    1,284,698       1,122,485  
 
   
 
     
 
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 15,351,999     $ 14,615,920  
 
   
 
     
 
 

See accompanying notes to consolidated financial statements.

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Table of Contents

WESTCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands, except per share amounts)
Interest income:
                               
Loans, including fees
  $ 291,796     $ 293,019     $ 863,989     $ 861,169  
Mortgage-backed securities
    25,828       15,936       72,666       61,950  
Investment securities
    1,173       823       3,354       2,213  
Other
    2,441       1,133       5,871       3,004  
 
   
 
     
 
     
 
     
 
 
TOTAL INTEREST INCOME
    321,238       310,911       945,880       928,336  
Interest expense:
                               
Deposits
    15,101       15,695       42,291       50,269  
Notes payable on automobile secured financing
    89,869       101,803       272,678       319,136  
Other
    10,040       12,550       33,477       37,852  
 
   
 
     
 
     
 
     
 
 
TOTAL INTEREST EXPENSE
    115,010       130,048       348,446       407,257  
 
   
 
     
 
     
 
     
 
 
NET INTEREST INCOME
    206,228       180,863       597,434       521,079  
Provision for credit losses
    60,337       73,150       174,171       221,071  
 
   
 
     
 
     
 
     
 
 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
                               
LOSSES
    145,891       107,713       423,263       300,008  
Noninterest income:
                               
Automobile lending
    26,830       23,516       77,646       67,810  
Mortgage banking
    97       279       581       1,132  
Insurance income
    2,264       3,252       5,778       6,187  
Other
    836       786       2,267       8,187  
 
   
 
     
 
     
 
     
 
 
TOTAL NONINTEREST INCOME
    30,027       27,833       86,272       83,316  
Noninterest expenses:
                               
Salaries and associate benefits
    43,541       40,016       130,995       120,950  
Credit and collections
    8,056       8,655       24,359       27,004  
Data processing
    4,053       4,258       12,313       13,690  
Occupancy
    3,983       4,041       11,710       11,784  
Telephone
    1,219       1,296       3,519       3,880  
Other
    14,084       8,479       36,710       30,532  
 
   
 
     
 
     
 
     
 
 
TOTAL NONINTEREST EXPENSES
    74,936       66,745       219,606       207,840  
 
   
 
     
 
     
 
     
 
 
INCOME BEFORE INCOME TAX
    100,982       68,801       289,929       175,484  
Income tax
    40,188       27,343       115,227       69,544  
 
   
 
     
 
     
 
     
 
 
INCOME BEFORE MINORITY INTEREST
    60,794       41,458       174,702       105,940  
Minority interest in earnings of subsidiaries
    6,122       12,123       22,251       21,453  
 
   
 
     
 
     
 
     
 
 
NET INCOME
  $ 54,672     $ 29,335     $ 152,451     $ 84,487  
 
   
 
     
 
     
 
     
 
 
Earnings per common share:
                               
Basic
  $ 1.05     $ 0.65     $ 2.94     $ 2.05  
 
   
 
     
 
     
 
     
 
 
Diluted
  $ 1.04     $ 0.64     $ 2.90     $ 2.03  
 
   
 
     
 
     
 
     
 
 
Weighted average number of common shares outstanding:
                               
Basic
    51,859,531       45,033,836       51,806,929       41,154,810  
 
   
 
     
 
     
 
     
 
 
Diluted
    52,510,834       45,786,913       52,528,983       41,680,576  
 
   
 
     
 
     
 
     
 
 
Dividends declared
  $ 0.14     $ 0.13     $ 0.42     $ 0.39  
 
   
 
     
 
     
 
     
 
 

See accompanying notes to consolidated financial statements.

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Table of Contents

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, 2003
    39,200,474     $ 39,200     $ 350,018     $ 325,529     $ (101,550 )   $ 613,197  
Net income
                            123,605               123,605  
Unrealized losses on securities available for sale,
net of tax (1)
                                    (7,315 )     (7,315 )
Unrealized losses on cash flow hedges, net of tax
(2)
                                    (21,285 )     (21,285 )
Reclassification adjustment for gains on securities available for sale included in net income, net of
tax (3)
                                    (5,058 )     (5,058 )
Reclassification adjustment for losses on cash
flow hedges included in income, net of tax (4)
                                    68,467       68,467  
 
                                           
 
 
Comprehensive income
                                            158,414  
Issuance of common stock
    12,371,500       12,372       356,863                       369,235  
Issuance of subsidiary common stock
                    702                       702  
Stock options expensed (5)
                    669                       669  
Stock options exercised
    126,424       126       1,749                       1,875  
Cash dividends
                            (21,607 )             (21,607 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at December 31, 2003
    51,698,398       51,698       710,001       427,527       (66,741 )     1,122,485  
Net income
                            152,451               152,451  
Unrealized losses on securities available for sale, net of tax (1)
                                    (4,544 )     (4,544 )
Unrealized losses on cash flow hedges, net of tax
(2)
                                    (4,211 )     (4,211 )
Reclassification adjustment for gains on securities
available for sale included in income, net of tax
(3)
                                    (1,446 )     (1,446 )
Reclassification adjustment for losses on cash
flow hedges included in income, net of tax (4)
                                    36,458       36,458  
 
                                           
 
 
Comprehensive income
                                            178,708  
Issuance of subsidiary common stock
                    (40 )                     (40 )
Stock options expensed (5)
                    1,937                       1,937  
Stock options exercised
    175,069       175       2,671                       2,846  
Cash dividends
                            (21,238 )             (21,238 )
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at September 30, 2004
    51,873,467     $ 51,873     $ 714,569     $ 558,740     $ (40,484 )   $ 1,284,698  
 
   
 
     
 
     
 
     
 
     
 
     
 
 


(1)   The pre-tax amount of unrealized losses on securities available for sale was $7.6 million for the nine months ended September 30, 2004 compared with $12.2 million for the year ended December 31, 2003.
 
(2)   The pre-tax amount of unrealized losses on cash flow hedges was $7.0 million for the nine months ended September 30, 2004 compared with $35.5 million for the year ended December 31, 2003.
 
(3)   The pre-tax amount of unrealized gains on securities available for sale reclassified into earnings was $2.4 million for the nine months ended September 30, 3004 compared with $8.4 million for the year ended December 31, 2003.
 
(4)   The pre-tax amount of unrealized losses on cash flow hedges reclassified into earnings was $60.8 million for the nine months ended September 30, 2004 compared with $114 million for the year ended December 31, 2003.
 
(5)   Amount represents expense related to stock options granted.

See accompanying notes to consolidated financial statements.

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Table of Contents

WESTCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
                 
    For the Nine Months Ended
    September 30,
    2004
  2003
    (Dollars in thousands)
OPERATING ACTIVITIES
               
Net income
  $ 152,451     $ 84,487  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    174,171       221,071  
Depreciation
    8,935       10,620  
Amortization of losses on cash flow hedges
    32,186       43,665  
Amortization of premium on mortgage-backed securities
    32,012       55,134  
Amortization of participation paid to dealers
    94,185       81,384  
Amortization, other
    4,586       1,100  
Gain on sales, net
    (6,605 )     (10,060 )
Other
    502       (5,688 )
Decrease in other assets
    2,332       4,570  
Increase in other liabilities
    31,558       22,301  
Other, net
    22,251       21,454  
 
   
 
     
 
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
    548,564       530,038  
INVESTING ACTIVITIES
               
Loans receivable:
               
Origination of loans
    (5,320,232 )     (4,952,333 )
Participation paid to dealers
    (117,226 )     (109,325 )
Loan payments and payoffs
    4,381,867       3,745,284  
Investment securities available for sale:
               
Purchases
    (69,908 )     (119,152 )
Proceeds from sale
    81,254       1,030  
Proceeds from maturities
    398       54,475  
Mortgage-backed securities available for sale:
               
Purchases
    (970,806 )     (1,672,500 )
Proceeds from sale
    52,295       105,066  
Payments received
    910,742       1,476,522  
Purchase of premises and equipment
    (9,332 )     (13,911 )
Proceeds from sales of premises and equipment
    4,509       2,938  
 
   
 
     
 
 
NET CASH USED IN INVESTING ACTIVITIES
    (1,056,439 )     (1,481,906 )
FINANCING ACTIVITIES
               
Increase in deposits
    142,884       5,486  
Decrease in securities sold under agreements to repurchase
    (218,741 )     (30,437 )
Proceeds from notes payable on automobile secured financing
    4,498,305       4,476,713  
Payments on notes payable on automobile secured financing
    (4,308,510 )     (3,444,685 )
(Decrease) increase in borrowings
    (351 )     3,271  
Increase in FHLB advances
    542,014       47,401  
Payments on issuance of subordinated debentures
    (104,683 )     (7,315 )
Increase in restricted cash
    (147,131 )     (114,556 )
Cash dividends
    (21,239 )     (15,701 )
Payments on cash flow hedges
    (11,390 )     (34,180 )
Proceeds from issuance of common stock
    2,846       164,551  
Proceeds from issuance of subsidiary common stock
    37       68  
 
   
 
     
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    374,041       1,050,616  
 
   
 
     
 
 
(DECREASE) INCREASE IN CASH AND DUE FROM BANKS
    (133,834 )     98,748  
Cash and due from banks at beginning of year
    382,082       84,215  
 
   
 
     
 
 
CASH AND DUE FROM BANKS AT END OF PERIOD
  $ 248,248     $ 182,963  
 
   
 
     
 
 

See accompanying notes to consolidated financial statements.

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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 nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003 included in our Form 10-K.

Note 2 – Mortgage-Backed Securities Available for Sale

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

                                 
    September 30, 2004
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
    Cost
  Gain
  Loss
  Value
    (Dollars in thousands)
GNMA certificates
  $ 2,584,091     $ 20,385     $ 5,740     $ 2,598,736  
FNMA participation certificates
    31,148       191       151       31,188  
FHLMC participation certificates
    38,748       184       128       38,804  
Other
    1,616                       1,616  
 
   
 
     
 
     
 
     
 
 
 
  $ 2,655,603     $ 20,760     $ 6,019     $ 2,670,344  
 
   
 
     
 
     
 
     
 
 

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    December 31, 2003
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
    Cost
  Gain
  Loss
  Value
    (Dollars in thousands)
GNMA certificates
  $ 2,613,962     $ 28,607     $ 4,484     $ 2,638,085  
FNMA participation certificates
    24,967       306               25,273  
FHLMC participation certificates
    36,734       9       78       36,665  
Other
    1,774                       1,774  
 
   
 
     
 
     
 
     
 
 
 
  $ 2,677,437     $ 28,922     $ 4,562     $ 2,701,797  
 
   
 
     
 
     
 
     
 
 

Our mortgage-backed securities available for sale portfolio was comprised of 61% fixed rate certificates and 39% variable rate certificates at September 30, 2004 compared with 79% fixed rate certificates and 21% variable rate certificates at December 31, 2003.

Note 3 – Net Loans Receivable

Net loans receivable consisted of the following:

                 
    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
Consumer:
               
Automobile contracts
  $ 11,483,904     $ 10,657,864  
Dealer participation, net of deferred contract fees
    190,143       175,263  
Other
    6,782       6,002  
Unearned discounts
    (43,742 )     (61,300 )
 
   
 
     
 
 
 
    11,637,087       10,777,829  
Real estate:
               
Mortgage
    183,648       237,668  
Construction
    39,845       16,503  
 
   
 
     
 
 
 
    223,493       254,171  
Undisbursed loan proceeds
    (31,405 )     (17,948 )
 
   
 
     
 
 
 
    192,088       236,223  
Commercial
    106,823       124,431  
 
   
 
     
 
 
 
    11,935,998       11,138,483  
Allowance for credit losses
    (312,222 )     (301,602 )
 
   
 
     
 
 
 
  $ 11,623,776     $ 10,836,881  
 
   
 
     
 
 

Loans managed by us, excluding dealer participation and deferred contract fees, totaled $11.7 billion and $11.0 billion as of September 30, 2004 and December 31, 2003, respectively. We owned all of the $11.7 billion and $11.0 billion loans managed at September 30, 2004 and December 31, 2003, respectively. Nonperforming loans, or loans on which we have discontinued the accrual of interest income, included in net loans receivable were $51.4 million and $53.0 million at September 30, 2004 and December 31, 2003, respectively. Repossessed assets and real estate owned were $7.0 million and $10.6 million at September 30, 2004 and December 31, 2003, respectively, and are included in other assets on our Consolidated Statements of Financial Condition.

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Note 4 – Allowance for Credit Losses

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

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands)
Balance at beginning of period
  $ 307,293     $ 291,459     $ 301,602     $ 269,352  
Chargeoffs:
                               
Consumer loans
    (76,689 )     (88,345 )     (232,403 )     (258,495 )
Commercial loans
    (492 )             (492 )        
Mortgage loans
    (37 )     (7 )     (167 )     (344 )
 
   
 
     
 
     
 
     
 
 
 
    (77,218 )     (88,352 )     (233,062 )     (258,839 )
Recoveries:
                               
Consumer loans
    21,792       22,003       69,471       66,593  
Commercial loans
    18       12       40       61  
Mortgage loans
            6               40  
 
   
 
     
 
     
 
     
 
 
 
    21,810       22,021       69,511       66,694  
 
   
 
     
 
     
 
     
 
 
Net chargeoffs
    (55,408 )     (66,331 )     (163,551 )     (192,145 )
Provision for credit losses
    60,337       73,150       174,171       221,071  
 
   
 
     
 
     
 
     
 
 
Balance at end of period
  $ 312,222     $ 298,278     $ 312,222     $ 298,278  
 
   
 
     
 
     
 
     
 
 
Ratio of net chargeoffs during the period (annualized) to average loans outstanding during the period
    1.9 %     2.5 %     1.9 %     2.5 %
Ratio of allowance for credit losses to loans at the end of the period
    2.6 %     2.7 %     2.6 %     2.7 %

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Note 5 – Deposits

Deposits consisted of the following:

                                 
            Weighted Average           Weighted Average
            Rate for the           Rate for the
    Weighted Average   Nine Months Ended   Effects of Hedging   Nine Months Ended
    Rate at   September 30, 2004   for the   September 30, 2004
    September 30,   Excluding the Effects   Nine Months Ended   Including the Effects
    2004 (1)
  of Hedging
  September 30, 2004
  of Hedging
Demand deposit accounts
    0.1 %     0.1 %             0.1 %
Passbook accounts
    0.1       0.2               0.2  
Money market deposit accounts
    1.8       1.3       0.1 %     1.4  
Brokered certificate accounts
    1.4       1.7               1.7  
Certificate accounts
    2.1       1.7       4.6       6.3  


(1)   Contractual rate.
                 
    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
Noninterest bearing deposits
  $ 238,505     $ 210,405  
Demand deposit accounts
    862       1,145  
Passbook accounts
    6,102       7,282  
Money market deposit accounts
    1,219,918       963,004  
Brokered certificate accounts
    52,533       62,451  
Certificate accounts
    590,748       728,569  
 
   
 
     
 
 
 
  $ 2,108,668     $ 1,972,856  
 
   
 
     
 
 

Note 6 – Notes Payable on Automobile Secured Financing

In connection with our public asset-backed securitization activities, we issued $1.6 billion and $4.5 billion of notes secured by automobile contracts for the three and nine months ended September 30, 2004, respectively, compared with $1.7 billion and $4.5 billion for the same respective periods in 2003. There were $10.4 billion of notes payable on automobile secured financing outstanding at September 30, 2004 compared with $10.3 billion at December 31, 2003.

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 $89.9 million and $273 million for the three and nine months ended September 30, 2004, respectively, compared with $102 million and $319 million for the same respective periods in 2003.

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Note 7 – Accumulated Other Comprehensive Loss, Net of Tax

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

                 
    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
Unrealized gain on marketable securities
  $ 8,782     $ 14,771  
Unrealized loss on interest rate swaps: (1)
               
Deposits
    (34,054 )     (38,297 )
Automobile secured financing
    (3,947 )     (19,539 )
Securities sold under agreements to repurchase
            (2,248 )
 
   
 
     
 
 
 
    (38,001 )     (60,084 )
Realized loss on settled cash flow hedges: (1)
               
Deposits
    (9,123 )     (9,539 )
Automobile secured financing
    (2,142 )     (11,889 )
 
   
 
     
 
 
 
    (11,265 )     (21,428 )
 
   
 
     
 
 
Total other accumulated comprehensive loss
  $ (40,484 )   $ (66,741 )
 
   
 
     
 
 


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

Note 8 – Comprehensive income

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

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands)
Net income
  $ 54,672     $ 29,335     $ 152,451     $ 84,487  
Unrealized gains (losses) on securities available for sale,
net of tax
    15,723       (2,184 )     (4,544 )     (7,926 )
Unrealized (losses) gains on cash flow hedges,
net of tax
    (15,278 )     7,276       (4,211 )     (30,667 )
Reclassification adjustment for gains on
securities available for sale included in income,
net of tax
            (2,983 )     (1,446 )     (2,987 )
Reclassification adjustment for losses on cash
flow hedges included in income, net of tax
    9,832       20,022       36,458       53,990  
 
   
 
     
 
     
 
     
 
 
Comprehensive income
  $ 64,949     $ 51,466     $ 178,708     $ 96,897  
 
   
 
     
 
     
 
     
 
 

Note 9 – Dividends

On August 16, 2004, we declared a cash dividend of $0.14 per share for shareholders of record as of November 9, 2004 with a payable date of November 23, 2004.

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Note 10 – 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 September 30, 2004 were as follows:

                                         
    Options Outstanding
  Options Exercisable
            Weighted   Weighted           Weighted
            Average   Average           Average
    Number   Remaining   Exercise   Number   Exercise
Exercise Prices
  Outstanding
  Life (Years)
  Price
  Exercisable
  Price
$12.00 — 13.00
    168,103       1.25     $ 12.63       168,103     $ 12.63  
13.00 — 14.00
    153,250       2.39       13.25       153,250       13.25  
15.00 — 16.00
    1,000       3.11       15.25       750       15.25  
17.00 — 18.00
    227,071       3.39       17.32       152,508       17.32  
18.00 — 19.00
    701,666       3.81       18.57       243,840       18.53  
19.00 — 20.00
    5,000       4.85       19.85       2,500       19.85  
20.00 — 21.00
    3,000       5.10       20.41       750       20.41  
42.00 — 43.00
    528,500       4.38       42.19                  
 
   
 
     
 
     
 
     
 
     
 
 
$12.00 — 43.00
    1,787,590       3.57     $ 24.39       721,701     $ 15.78  
 
   
 
     
 
     
 
     
 
     
 
 

Stock option activity is summarized as follows:

                 
            Weighted
            Average
    Shares
  Exercise Price
Outstanding at January 1, 2003
    1,167,438     $ 15.91  
Granted
    444,000       18.78  
Exercised
    (126,424 )     14.84  
Forfeited
    (24,478 )     17.19  
 
   
 
     
 
 
Outstanding at December 31, 2003
    1,460,536       16.86  
Granted
    540,900       42.19  
Exercised
    (175,069 )     16.26  
Forfeited
    (38,777 )     25.83  
 
   
 
     
 
 
Outstanding at September 30, 2004
    1,787,590     $ 24.39  
 
   
 
     
 
 

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. Although we do not believe that there is a reliable single measure of the fair value of our employee stock options, we use the Binomial option valuation model to determine such value. We believe that this model provides a more reliable measure than the Black-Scholes model. The weighted average fair value of options granted during the nine month period ending September 30, 2004 was $13.26 compared to $5.48 for the year ended December 31, 2003.

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Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123, and has been determined as if we had accounted for our employee stock options under the fair value method of that statement.

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

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands, except per share amounts)
Net income, as reported
  $ 54,672     $ 29,335     $ 152,451     $ 84,487  
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
    458       122       1,167       285  
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    581       315       1,597       919  
 
   
 
     
 
     
 
     
 
 
Pro forma net income
  $ 54,549     $ 29,142     $ 152,021     $ 83,853  
 
   
 
     
 
     
 
     
 
 
Earnings per share:
                               
Basic — as reported
  $ 1.05     $ 0.65     $ 2.94     $ 2.05  
 
   
 
     
 
     
 
     
 
 
Basic — pro forma
  $ 1.05     $ 0.65     $ 2.93     $ 2.04  
 
   
 
     
 
     
 
     
 
 
Earnings per share:
                               
Diluted — as reported
  $ 1.04     $ 0.64     $ 2.90     $ 2.03  
 
   
 
     
 
     
 
     
 
 
Diluted — pro forma
  $ 1.04     $ 0.64     $ 2.89     $ 2.01  
 
   
 
     
 
     
 
     
 
 

Note 11 – Commitments and Contingencies

We or our subsidiaries are involved as a party 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, et al. v. WFS Financial Inc, California Superior Court, County of Alameda Civil Action No, RG03088926, appeal pending in the Court of Appeal of the State of California, First Appellate District, Division One, No. A104967 (a putative class action raising claims under California’s Unfair Competition Law and related claims). WFS has reached a settlement in Lee, et al. v. WFS Financial Inc and Thompson, et al. v. WFS Financial Inc cases. The settlements will be final after court approval of the settlement in Lee, et al. v. WFS Financial Inc. We do not believe that the outcome of these proceedings will have a material effect upon our financial condition, results of operations and cash flows.

Beginning on May 24, 2004 and continuing thereafter, a total of four separate purported class action lawsuits relating to the announcement by Westcorp and WFS that Westcorp was commencing an exchange offer for the outstanding public shares of WFS were filed in the Orange County, California Superior Court against Westcorp, WFS, and individual board members of Westcorp and WFS. On June 24, 2004, the actions were consolidated under the caption In re WFS Financial Shareholder Litigation, Case No. 04CC00559. 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. 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 defendants have filed demurrers challenging the legal sufficiency of the pending complaint, which are scheduled for hearing. All of the shareholder-related

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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. 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 12 – Proposed Acquisition and Merger

On May 23, 2004, we entered into a definitive agreement pursuant to which we will acquire the outstanding 16% common stock minority interest of WFS not already owned by our wholly owned subsidiary, the Bank. The acquisition is structured as a merger of WFS with and into the Bank. The public holders of WFS shares will receive 1.11 shares of our common stock for each share of WFS common stock held by them in a tax-free exchange. Based on the $42.60 closing price of our 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 WFS common stock. The transaction is subject to, among other closing conditions, the receipt of regulatory approvals and the approval of a majority of WFS Financial’s 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 WFS into the Bank as part of the acquisition of the minority interest in WFS. The conversion is still contingent upon the approval of our application to become a bank holding company by the Board of Governors of the Federal Reserve. After the conversion, we 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 WFS’ minority shareholders.

We anticipate the merger of WFS with and into the Bank and the conversion of the Bank to a California state commercial bank will be completed sometime in the first quarter of 2005. We believe the combined company will provide greater flexibility in responding to market factors and will enable us to utilize, to a greater extent, the Bank’s low cost customer deposits to finance our activities.

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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 deposits, advances from the Federal Home Loan Bank, also known as the FHLB, securities sold under agreements to repurchase, securitizations, other borrowings and equity.

Noninterest income is primarily made up of revenues generated from the servicing of automobile contracts and real estate 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 nine months ended September 30, 2004 and 2003. 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
September 30,

  For the Nine Months Ended
September 30,

    2004
  2003
  2004
  2003
    (Dollars in thousands, except per share amounts)
Consolidated Statements of Income Data:
                               
Interest income
  $ 321,238     $ 310,911     $ 945,880     $ 928,336  
Interest expense
    115,010       130,048       348,446       407,257  
 
   
 
     
 
     
 
     
 
 
Net interest income
    206,228       180,863       597,434       521,079  
Provision for credit losses
    60,337       73,150       174,171       221,071  
 
   
 
     
 
     
 
     
 
 
Net interest income after provision for credit losses
    145,891       107,713       423,263       300,008  
Noninterest income
    30,027       27,833       86,272       83,316  
Noninterest expense
    74,936       66,745       219,606       207,840  
 
   
 
     
 
     
 
     
 
 
Income before income tax
    100,982       68,801       289,929       175,484  
Income tax
    40,188       27,343       115,227       69,544  
 
   
 
     
 
     
 
     
 
 
Income before minority interest
    60,794       41,458       174,702       105,940  
Minority interest in earnings of subsidiaries
    6,122       12,123       22,251       21,453  
 
   
 
     
 
     
 
     
 
 
Net income
  $ 54,672     $ 29,335     $ 152,451     $ 84,487  
 
   
 
     
 
     
 
     
 
 
Weighted average number of shares and common share equivalents — diluted
    52,510,834       45,786,913       52,528,983       41,680,576  
Earnings per common share — diluted
  $ 1.04     $ 0.64     $ 2.90     $ 2.03  
Dividends per share
  $ 0.14     $ 0.13     $ 0.42     $ 0.39  
Dividend payout ratio
    13.4 %     20.3 %     14.5 %     19.2 %

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    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
Consolidated Statements of Financial Condition Data:
               
Assets:
               
Cash and due from banks
  $ 248,248     $ 382,082  
Loans:
               
Consumer (1)
    11,637,087       10,777,829  
Mortgage (2)
    192,088       236,223  
Commercial
    106,823       124,431  
Mortgage-backed securities
    2,670,344       2,701,797  
Investments and time deposits
    499,905       363,148  
Other assets
    309,726       332,012  
Less: Allowance for credit losses
    312,222       301,602  
 
   
 
     
 
 
Total assets
  $ 15,351,999     $ 14,615,920  
 
   
 
     
 
 
Liabilities:
               
Deposits
  $ 2,108,668     $ 1,972,856  
Notes payable on automobile secured financing
    10,415,151       10,254,641  
FHLB advances and other borrowings
    879,354       560,179  
Subordinated debentures
    295,053       394,854  
Other liabilities
    211,030       179,471  
 
   
 
     
 
 
Total liabilities
    13,909,256       13,362,001  
Minority interest in equity of subsidiaries
    158,045       131,434  
Shareholders’ equity
    1,284,698       1,122,485  
 
   
 
     
 
 
Total liabilities and shareholders’ equity
  $ 15,351,999     $ 14,615,920  
 
   
 
     
 
 
                                 
    At or For the   At or For the
    Three Months Ended   Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands)
Other Selected Financial Data:
                               
Average automobile contracts managed
  $ 11,268,695     $ 10,284,067     $ 10,980,339     $ 9,885,681  
Average shareholders’ equity (3)
  $ 1,300,509     $ 908,530     $ 1,253,692     $ 791,998  
Return on average shareholders’ equity (3)
    16.82 %     12.92 %     16.21 %     14.22 %
Book value per share (3)
  $ 25.55     $ 20.89     $ 25.55     $ 20.89  
Total equity to assets (4)
    9.66 %     7.54 %     9.66 %     7.54 %
Originations:
                               
Consumer loans (1)
  $ 1,801,355     $ 1,684,198     $ 5,055,659     $ 4,626,928  
Mortgage loans (2)
    15,548       2,016       27,003       21,326  
Commercial loans
    111,853       108,422       237,570       304,078  
 
   
 
     
 
     
 
     
 
 
Total loan originations
  $ 1,928,756     $ 1,794,636     $ 5,320,232     $ 4,952,332  
 
   
 
     
 
     
 
     
 
 
Interest rate spread
    5.06 %     4.86 %     5.04 %     4.94 %


(1)   Net of unearned discounts.
 
(2)   Net of undisbursed loan proceeds.
 
(3)   Excludes other comprehensive loss.
 
(4)   Excludes other comprehensive loss and includes minority interest.

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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

Automobile contracts sold by us to our special purpose entity subsidiaries in connection with securitization transactions are treated as having been sold for bankruptcy purposes. The subsequent transfer of such automobile contracts to the securitization trust is treated as secured financing 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 automobile 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.

As servicer of these contracts, we may hold and remit funds collected from the borrowers on behalf of the trustee pursuant to reinvestment contracts that we have entered into or we may deliver funds to the relevant trustee to be held until the distribution dates, depending on the terms of our securitizations.

Allowance for Credit Losses

Management determines the amount of the allowance for credit losses based on a review of various analyses. These analyses include trends in chargeoffs by credit tier over various time periods and at various statistical midpoints and high points, the severity of depreciated values of repossessions, trends in the number of days repossessions are held in inventory, trends in the number of contract modifications, trends in delinquency roll rates, trends in deficiency balance collections both internally and from collection agencies, trends in custom credit scores and the effectiveness of our custom credit 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.

All contracts that are 60 to 89 days delinquent are automatically classified as Special Mention. Real estate loans that are manifesting a weakness in performance are also 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.

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The allowance for credit losses is increased by charging the provision for credit losses and decreased by actual losses on the loans or by reversing the allowance for credit losses through the provision for credit losses based on credit trends or economic conditions.

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. Any ineffective portion is recognized in interest expense during that period if the hedge is greater than 100% effective. Following the closing date 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. See “Quantitative and Qualitative Disclosure About Market Risk.” The fair value of the interest rate swap agreements is included in notes payable on automobile secured financing, and any change in the fair value is reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. Any ineffective portion is recorded in interest expense during that period if the hedge is greater than 100% effective. Related interest income or expense is settled on a monthly or 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 we choose not to designate as hedges or that do not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, also known as SFAS No. 133. 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 income or expense recognized on such derivatives is recorded to noninterest income.

Proposed Acquisition and Merger

On May 23, 2004, we entered into a definitive agreement pursuant to which we will acquire the outstanding 16% common stock minority interest of WFS not already owned by our wholly owned subsidiary, the Bank. The acquisition is structured as a merger of WFS with and into the Bank. The public holders of WFS shares will receive 1.11 shares of our common stock for each share of WFS common stock held by them in a tax-free exchange. Based on the $42.60 closing price of our 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 WFS common stock. In connection with the merger, the Bank has filed an

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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 WFS Financial’s 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 WFS into the Bank as part of the acquisition of the minority interest in WFS. The conversion is still contingent upon the approval of our application to become a bank holding company by the Board of Governors of the Federal Reserve. After the conversion, we 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 WFS’ minority shareholders.

We anticipate the merger of WFS with and into the Bank and the conversion of the Bank to a California state commercial bank will be completed sometime in the first quarter of 2005. We believe the combined company will provide greater flexibility in responding to market factors and will enable us to utilize, to a greater extent, the Bank’s low cost customer deposits to finance our activities.

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 $206 million and $597 million for the three and nine months ended September 30, 2004, respectively, compared with $181 million and $521 million for the same respective periods in 2003. The increase in net interest income was the result of us holding more contracts on balance sheet as well as wider net interest margins.

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

                                                 
    For the Three Months Ended September 30,
    2004
  2003
    Average           Yield/   Average           Yield/
    Balance
  Interest
  Rate
  Balance
  Interest
  Rate
    (Dollars in thousands)
Interest earning assets:
                                               
Total investments:
                                               
Mortgage-backed securities
  $ 2,610,918     $ 25,828       3.96 %   $ 2,516,193     $ 15,936       2.53 %
Other short-term investments
    660,922       2,427       1.46       414,078       1,122       1.08  
Investment securities
    115,445       1,173       4.07       92,888       823       3.54  
Interest earning deposits with
others
    5,668       14       0.98       6,803       11       0.70  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total investments
    3,392,953       29,442       3.47       3,029,962       17,892       2.36  
Total loans: (1)
                                               
Consumer loans
    11,461,360       287,806       9.99       10,463,303       288,138       10.93  
Mortgage loans
    174,927       2,181       4.99       239,544       3,204       5.35  
Commercial loans
    116,178       1,628       5.48       116,514       1,491       5.01  
Construction loans
    13,944       181       5.08       15,061       186       4.84  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total loans
    11,766,409       291,796       9.87       10,834,422       293,019       10.73  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total interest earning assets
  $ 15,159,362       321,238       8.43     $ 13,864,384       310,911       8.90  
 
   
 
                     
 
                 
Interest bearing liabilities:
                                               
Deposits
  $ 2,083,963       15,101       2.88     $ 1,968,859       15,695       3.16  
Securities sold under agreements to
repurchase
                            203,641       1,032       1.98  
FHLB advances and other
borrowings
    509,385       1,947       1.50       515,980       1,689       1.29  
Notes payable on automobile
secured financing
    10,722,274       89,869       3.35       9,763,149       101,803       4.17  
Subordinated debentures
    321,990       8,093       10.05       394,804       9,829       9.96  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total interest bearing liabilities
  $ 13,637,612       115,010       3.37     $ 12,846,433       130,048       4.04  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net interest income and interest rate
spread
          $ 206,228       5.06 %           $ 180,863       4.86 %
 
           
 
     
 
             
 
     
 
 
Net yield on average interest earning
assets
                    5.40 %                     5.18 %
 
                   
 
                     
 
 


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

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    For the Nine Months Ended September 30,
    2004
  2003
    Average           Yield/   Average           Yield/
    Balance
  Interest
  Rate
  Balance
  Interest
  Rate
    (Dollars in thousands)
Interest earning assets:
                                               
Total investments:
                                               
Mortgage-backed securities
  $ 2,593,595     $ 72,666       3.74 %   $ 2,514,424     $ 61,950       3.29 %
Other short-term investments
    638,409       5,840       1.22       321,429       2,949       1.23  
Investment securities
    123,329       3,354       3.63       69,116       2,213       4.27  
Interest earning deposits with
others
    5,740       31       0.74       8,383       55       0.87  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total investments
    3,361,073       81,891       3.25       2,913,352       67,167       3.07  
Total loans: (1)
                                               
Consumer loans
    11,167,879       851,622       10.19       10,056,540       846,270       11.25  
Mortgage loans
    204,821       7,708       5.02       255,896       10,543       5.49  
Commercial loans
    106,169       4,371       5.41       111,044       4,020       4.77  
Construction loans
    7,817       288       4.83       9,595       336       4.63  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total loans
    11,486,686       863,989       10.05       10,433,075       861,169       11.03  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total interest earning assets
  $ 14,847,759       945,880       8.51     $ 13,346,427       928,336       9.30  
 
   
 
                     
 
                 
Interest bearing liabilities:
                                               
Deposits
  $ 2,026,245       42,291       2.79     $ 1,981,146       50,269       3.39  
Securities sold under agreements to
repurchase
    10,894       94       1.13       218,569       3,433       2.07  
FHLB advances and other
borrowings
    614,882       6,015       1.29       444,529       4,775       1.45  
Notes payable on automobile
secured financing
    10,377,881       272,678       3.50       9,426,038       319,136       4.51  
Subordinated debentures
    365,619       27,368       9.98       396,742       29,644       9.96  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total interest bearing liabilities
  $ 13,395,521       348,446       3.47     $ 12,467,024       407,257       4.36  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Net interest income and interest rate
spread
          $ 597,434       5.04 %           $ 521,079       4.94 %
 
           
 
     
 
             
 
     
 
 
Net yield on average interest earning
assets
                    5.37 %                     5.25 %
 
                   
 
                     
 
 


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

The total interest rate spread increased 20 basis points for the three months ended September 30, 2004 compared with the three months ended September 30, 2003 due to a decrease of 47 basis points in the yield on interest earning assets combined with a 67 basis point decrease in the cost of funds. The total interest rate spread increased 10 basis points for the nine months ended September 30, 2004 compared with the nine months ended September 30, 2003 due to a decrease of 79 basis points in the yield on interest earning assets combined with an 89 basis point decrease in the cost of funds. The decrease in the yield on interest earning assets and cost of funds in 2004 is primarily due to a lower interest rate environment.

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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 Nine Months Ended September 30, 2004
    Compared to the Nine Months Ended September 30, 2003 (1)
    Volume
  Rate
  Total
    (Dollars in thousands)
Increase (decrease) in interest income:
                       
Mortgage-backed securities
  $ 3,563     $ 7,153     $ 10,716  
Other short-term investments
    2,931       (40 )     2,891  
Investment securities
    1,700       (559 )     1,141  
Interest earning deposits with others
    (16 )     (8 )     (24 )
Total loans:
                       
Consumer loans
    117,968       (112,616 )     5,352  
Mortgage loans
    (1,984 )     (851 )     (2,835 )
Commercial loans
    (264 )     615       351  
Construction loans
    (70 )     22       (48 )
 
   
 
     
 
     
 
 
Total interest income
  $ 123,828     $ (106,284 )   $ 17,544  
 
   
 
     
 
     
 
 
Increase (decrease) in interest expense:
                       
Deposits
  $ 1,800     $ (9,778 )   $ (7,978 )
Securities sold under agreements to repurchase
    (2,259 )     (1,080 )     (3,339 )
FHLB advances and other borrowings
    2,067       (827 )     1,240  
Notes payable on automobile secured financing
    44,736       (91,194 )     (46,458 )
Subordinated debentures
    (2,336 )     60       (2,276 )
 
   
 
     
 
     
 
 
Total interest expense
  $ 44,008     $ (102,819 )   $ (58,811 )
 
   
 
     
 
     
 
 
Increase in net interest income
                  $ 76,355  
 
                   
 
 


(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 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 loan portfolio that can be reasonably estimated. The provision for credit losses totaled $60.3 million and $174 million for the three and nine months ended September 30, 2004, respectively, compared with $73.2 million and $221 million for the same respective periods in 2003. The provision for credit losses declined as a result of improvement in chargeoffs due to an increase in the amount of prime credit contracts held by us and an improving economy.

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Contract Securitizations

The following table lists each of our public securitizations. All securitizations prior to 2000-D were paid in full on or before their contractual maturity dates and none of the remaining securitizations have yet reached 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
  September 30, 2004 (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     Paid in full               14.42       5.70       8.72  
1999-B
  July, 1999     1,000,000     Paid in full               14.62       6.36       8.26  
1999-C
  November, 1999     500,000     Paid in full               14.77       7.01       7.76  
2000-A
  March, 2000     1,200,000     Paid in full               14.66       7.28       7.38  
2000-B
  May, 2000     1,000,000     Paid in full               14.84       7.78       7.06  
2000-C
  August, 2000     1,390,000     Paid in full               15.04       7.32       7.72  
2000-D
  November, 2000     1,000,000     $ 117,922       11.79 %     15.20       6.94       8.26  
2001-A
  January, 2001     1,000,000       137,593       13.76       14.87       5.77       9.10  
2001-B
  May, 2001     1,370,000       200,716       14.65       14.41       4.23       10.18  
2001-C
  August, 2001     1,200,000       235,507       19.63       13.90       4.50       9.40  
2002-1
  March, 2002     1,800,000       505,316       28.07       13.50       4.26       9.24  
2002-2
  May, 2002     1,750,000       591,484       33.80       12.51       3.89       8.62  
2002-3
  August, 2002     1,250,000       481,961       38.56       12.30       3.06       9.24  
2002-4
  November, 2002     1,350,000       627,358       46.47       12.18       2.66       9.52  
2003-1
  February, 2003     1,343,250       651,202       48.48       11.79       2.42       9.37  
2003-2
  May, 2003     1,492,500       820,627       54.98       11.57       2.13       9.44  
2003-3
  August, 2003     1,650,000       1,131,789       68.59       10.59       2.66       7.93  
2003-4
  November, 2003     1,403,625       973,640       69.37       10.89       2.70       8.19  
2004-1
  February, 2004     1,477,500       1,136,091       76.89       10.89       2.35       8.54  
2004-2
  May, 2004     1,477,500       1,303,972       88.26       10.98       3.02       7.96  
2004-3
  August, 2004     1,552,000       1,509,888       97.29       10.64       3.49       7.15  
2004-4
  October, 2004     1,358,000                       11.19       3.10       8.09  
 
       
 
     
 
                                 
 
  Total   $ 40,475,805     $ 10,425,066                                  
 
       
 
     
 
                                 


(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 the APR, and the estimated weighted average securitization rate on the closing date of the securitization.

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Table of Contents

Noninterest Expense

Noninterest expense totaled $74.9 million and $220 million for the three and nine months ended September 30, 2004, respectively, compared with $66.7 million and $208 million for the same respective periods in 2003. Noninterest expense as a percent of total revenues improved to 32% for both the three and nine months ended September 30, 2004, respectively, compared with 32% and 34% for the same respective periods in 2003 as a result of lower collection costs and operating efficiencies.

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 40% for both the three and nine months ended September 30, 2004 and for the same respective periods in 2003.

Financial Condition

Overview

Total assets increased $736 million or 5.0% to $15.4 billion at September 30, 2004 from $14.6 billion at December 31, 2003. The increase is due primarily to an increase in automobile contracts originated.

Loan Portfolio

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

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands)
New vehicles
  $ 626,272     $ 586,648     $ 1,795,921     $ 1,462,024  
Pre-owned vehicles
    1,172,834       1,096,754       3,255,200       3,160,047  
 
   
 
     
 
     
 
     
 
 
Total volume
  $ 1,799,106     $ 1,683,402     $ 5,051,121     $ 4,622,071  
 
   
 
     
 
     
 
     
 
 
Prime
  $ 1,434,280     $ 1,406,674     $ 4,096,399     $ 3,829,825  
Non-prime
    364,826       276,728       954,722       792,246  
 
   
 
     
 
     
 
     
 
 
Total volume
  $ 1,799,106     $ 1,683,402     $ 5,051,121     $ 4,622,071  
 
   
 
     
 
     
 
     
 
 

Commercial Loan Portfolio

We had outstanding commercial loan commitments of $283 million at September 30, 2004 compared with $225 million at December 31, 2003. We originated $112 million and $238 million of commercial loans for the three and nine months ended September 30, 2004, respectively, compared with $108 million and $304 million for the same respective periods in 2003. Amounts outstanding at September 30, 2004 and December 31, 2003 were $107 million and $124 million, respectively.

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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.

We calculate delinquency based on the contractual due date. The improvement in delinquency is primarily the result of improvements in the economy and normal seasonal trends.

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

                                 
    September 30, 2004
  December 31, 2003
    Amount
  %
  Amount
  %
    (Dollars in thousands)
Contracts managed at end of period
  $ 11,440,352             $ 10,596,665          
 
   
 
             
 
         
Period of delinquency
                               
30-59 days
  $ 183,463       1.60 %   $ 219,937       2.08 %
60 days or more (1)
    73,126       0.64       87,129       0.82  
 
   
 
     
 
     
 
     
 
 
Total contracts delinquent and delinquencies as a percentage of contracts managed (1)
  $ 256,589       2.24 %   $ 307,066       2.90 %
 
   
 
     
 
     
 
     
 
 


(1)   Excludes Chapter 13 bankruptcy accounts greater than 120 days past due of $45.4 million at September 30, 2004 and $45.6 million at December 31, 2003.

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

                                 
    September 30, 2004
  December 31, 2003
    Number of           Number of    
    Contracts
  Amount
  Contracts
  Amount
    (Dollars in thousands)
Contracts managed
    869,036     $ 11,440,352       826,122     $ 10,596,665  
 
   
 
     
 
     
 
     
 
 
Repossessed vehicles
    885     $ 6,601       1,522     $ 10,331  
 
   
 
     
 
     
 
     
 
 
Repossessed vehicles as a percentage of number and amount of contracts outstanding
    0.10 %     0.06 %     0.18 %     0.10 %
 
   
 
     
 
     
 
     
 
 

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Table of Contents

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.

                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,
  September 30,
    2004
  2003
  2004
  2003
    (Dollars in thousands)
Average contracts managed during period
  $ 11,268,696     $ 10,284,067     $ 10,980,339     $ 9,885,681  
 
   
 
     
 
     
 
     
 
 
Gross chargeoffs
  $ 76,688     $ 88,343     $ 232,395     $ 258,491  
Recoveries
    21,791       21,916       69,408       66,451  
 
   
 
     
 
     
 
     
 
 
Net chargeoffs
  $ 54,897     $ 66,427     $ 162,987     $ 192,040  
 
   
 
     
 
     
 
     
 
 
Net chargeoffs as a percentage of average contracts managed during period
    1.95 %     2.58 %     1.98 %     2.59 %
 
   
 
     
 
     
 
     
 
 

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Table of Contents

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

Cumulative Static Pool Loss Curves
At September 30, 2004

                                                                                                                         
Period (1)
  2000-D
  2001-A
  2001-B
  2001-C
  2002-1
  2002-2
  2002-3
  2002-4
  2003-1
  2003-2
  2003-3
  2003-4
  2004-1
  2004-2
  2004-3
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 %
2
    0.04 %     0.03 %     0.03 %     0.04 %     0.01 %     0.00 %     0.02 %     0.02 %     0.01 %     0.00 %     0.00 %     0.01 %     0.00 %     0.00 %     0.02 %
3
    0.11 %     0.09 %     0.10 %     0.09 %     0.06 %     0.03 %     0.06 %     0.07 %     0.04 %     0.02 %     0.02 %     0.03 %     0.02 %     0.03 %        
4
    0.24 %     0.20 %     0.21 %     0.20 %     0.15 %     0.10 %     0.14 %     0.16 %     0.11 %     0.06 %     0.06 %     0.08 %     0.06 %     0.07 %        
5
    0.39 %     0.33 %     0.33 %     0.35 %     0.29 %     0.18 %     0.27 %     0.26 %     0.18 %     0.14 %     0.13 %     0.14 %     0.11 %     0.15 %        
6
    0.54 %     0.50 %     0.50 %     0.49 %     0.43 %     0.32 %     0.44 %     0.38 %     0.29 %     0.25 %     0.23 %     0.21 %     0.19 %                
7
    0.74 %     0.70 %     0.69 %     0.65 %     0.60 %     0.49 %     0.57 %     0.50 %     0.41 %     0.36 %     0.32 %     0.28 %     0.27 %                
8
    0.93 %     0.84 %     0.87 %     0.81 %     0.84 %     0.66 %     0.70 %     0.61 %     0.53 %     0.48 %     0.40 %     0.35 %     0.34 %                
9
    1.13 %     1.04 %     1.05 %     0.95 %     1.06 %     0.82 %     0.82 %     0.78 %     0.66 %     0.59 %     0.47 %     0.44 %                        
10
    1.34 %     1.24 %     1.22 %     1.07 %     1.28 %     0.96 %     0.96 %     0.94 %     0.80 %     0.70 %     0.55 %     0.54 %                        
11
    1.50 %     1.45 %     1.36 %     1.20 %     1.48 %     1.10 %     1.10 %     1.08 %     0.93 %     0.80 %     0.62 %     0.61 %                        
12
    1.74 %     1.67 %     1.53 %     1.37 %     1.67 %     1.26 %     1.24 %     1.28 %     1.06 %     0.89 %     0.71 %                                
13
    1.95 %     1.90 %     1.67 %     1.55 %     1.82 %     1.39 %     1.38 %     1.43 %     1.21 %     0.98 %     0.80 %                                
14
    2.21 %     2.09 %     1.81 %     1.74 %     1.99 %     1.51 %     1.53 %     1.59 %     1.31 %     1.08 %     0.88 %                                
15
    2.48 %     2.25 %     2.00 %     1.97 %     2.14 %     1.68 %     1.70 %     1.77 %     1.40 %     1.20 %                                        
16
    2.71 %     2.41 %     2.19 %     2.16 %     2.27 %     1.83 %     1.88 %     1.92 %     1.50 %     1.31 %                                        
17
    2.89 %     2.54 %     2.37 %     2.36 %     2.45 %     1.99 %     2.03 %     2.05 %     1.60 %     1.41 %                                        
18
    3.08 %     2.73 %     2.60 %     2.59 %     2.62 %     2.16 %     2.15 %     2.16 %     1.70 %                                                
19
    3.22 %     2.93 %     2.80 %     2.78 %     2.80 %     2.31 %     2.28 %     2.25 %     1.85 %                                                
20
    3.40 %     3.11 %     3.01 %     2.95 %     2.99 %     2.46 %     2.41 %     2.37 %     1.99 %                                                
21
    3.59 %     3.34 %     3.19 %     3.14 %     3.15 %     2.60 %     2.52 %     2.49 %                                                        
22
    3.78 %     3.54 %     3.34 %     3.29 %     3.31 %     2.72 %     2.62 %     2.62 %                                                        
23
    3.96 %     3.72 %     3.49 %     3.41 %     3.45 %     2.86 %     2.74 %     2.73 %                                                        
24
    4.18 %     3.92 %     3.62 %     3.57 %     3.58 %     2.95 %     2.83 %                                                                
25
    4.41 %     4.10 %     3.75 %     3.73 %     3.69 %     3.03 %     2.96 %                                                                
26
    4.58 %     4.23 %     3.87 %     3.88 %     3.80 %     3.13 %     3.08 %                                                                
27
    4.79 %     4.36 %     4.00 %     4.04 %     3.92 %     3.22 %                                                                        
28
    4.96 %     4.47 %     4.15 %     4.20 %     4.02 %     3.33 %                                                                        
29
    5.08 %     4.56 %     4.28 %     4.35 %     4.12 %     3.41 %                                                                        
30
    5.22 %     4.67 %     4.40 %     4.46 %     4.22 %                                                                                
31
    5.34 %     4.81 %     4.52 %     4.57 %     4.30 %                                                                                
32
    5.44 %     4.92 %     4.64 %     4.69 %                                                                                        
33
    5.54 %     5.04 %     4.73 %     4.77 %                                                                                        
34
    5.66 %     5.13 %     4.83 %     4.85 %                                                                                        
35
    5.76 %     5.24 %     4.93 %     4.92 %                                                                                        
36
    5.86 %     5.31 %     4.99 %     5.01 %                                                                                        
37
    5.97 %     5.39 %     5.05 %     5.09 %                                                                                        
38
    6.04 %     5.45 %     5.11 %     5.16 %                                                                                        
39
    6.12 %     5.50 %     5.17 %                                                                                                
40
    6.19 %     5.56 %     5.24 %                                                                                                
41
    6.25 %     5.61 %     5.29 %                                                                                                
42
    6.28 %     5.66 %                                                                                                        
43
    6.32 %     5.70 %                                                                                                        
44
    6.36 %     5.75 %                                                                                                        
45
    6.40 %                                                                                                                
46
    6.43 %                                                                                                                
47
    6.46 %                                                                                                                
Prime
Mix (2)
    68 %     71 %     71 %     76 %     70 %     87 %     85 %     80 %     80 %     82 %     84 %     82 %     82 %     82 %     81 %


(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.

26


Table of Contents

Real Estate Loan Quality

We had 0.72% of total mortgage loans past due over 60 days at September 30, 2004 compared with 1.25% of total mortgage loans at December 31, 2003. The decrease in total mortgage loans past due over 60 days at September 30, 2004 is due to an improving economy.

Nonperforming Assets

Nonperforming loans, also known as NPLs, are defined as all nonaccrual loans. This includes mortgage loans 90 days or more past due, impaired loans where full collection of principal and interest is not reasonably assured and Chapter 13 bankruptcy accounts that are contractually past due over 120 days. For those accounts that are in Chapter 13 bankruptcy and are contractually past due over 120 days, 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 $1.0 million for the three and nine months ended September 30, 2004, respectively, compared with $0.9 million and $2.5 million for the same respective periods in 2003.

Nonperforming assets, also known as NPAs, consist of NPLs, repossessed automobiles and real estate owned, also known as REO. Repossessed automobiles and REO are carried at lower of cost or fair value. NPAs decreased $5.2 million to $58.4 million at September 30, 2004 compared with $63.6 million at December 31, 2003. The decrease in the NPAs was primarily due to a $3.7 million decrease in repossessed automobiles. NPAs represented 0.4% of total assets at both September 30, 2004 and December 31, 2003. There were no impaired loans at September 30, 2004 and December 31, 2003.

Allowance for Credit Losses

Our allowance for credit losses was $312 million at September 30, 2004 compared to $302 million at December 31, 2003. Net chargeoffs totaled $55.4 million and $164 million for the three and nine months ended September 30, 2004, respectively, compared with $66.3 million and $192 million for the same respective periods in 2003. The increase in the allowance for credit losses was the result of a higher level of automobile contracts held on balance sheet. The allowance for credit losses as a percentage of owned loans outstanding was 2.6% at September 30, 2004 compared with 2.7% at December 31, 2003. 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.

27


Table of Contents

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

                 
    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
Total loans (1)
  $ 11,935,998     $ 11,138,483  
Allowance for credit losses
    312,222       301,602  
Allowance for real estate owned losses
    100       100  
Loans past due 60 days or more (2)
    74,678       91,381  
Nonperforming loans (3)
    51,355       53,026  
Nonperforming assets (4)
    58,363       63,600  
Allowance for credit losses as a percent of:
               
Total loans (1)
    2.6 %     2.7 %
Loans past due 60 days or more
    418.1 %     330.0 %
Nonperforming loans
    608.0 %     568.8 %
Total allowance for credit losses and REO losses as a percent of nonperforming assets
    535.1 %     474.4 %
Nonperforming loans as a percent of total loans
    0.4 %     0.5 %
Nonperforming assets as a percent of total assets
    0.4 %     0.4 %


(1)   Loans net of unearned interest and undisbursed loan proceeds.
 
(2)   Excludes nonaccrual Chapter 13 bankruptcy accounts.
 
(3)   All nonperforming loans are on nonaccrual.
 
(4)   Nonperforming loans, 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 20 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:

                 
    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
No minimum term:
               
Demand deposit accounts
  $ 862     $ 1,145  
Passbook accounts
    6,102       7,282  
Money market accounts
    1,219,918       963,004  
Noninterest bearing deposits
    238,505       210,405  
 
   
 
     
 
 
Core deposits
    1,465,387       1,181,836  
Certificate accounts:
               
Certificates (30 days to five years)
    523,905       646,868  
Individual retirement accounts
    66,843       81,701  
Brokered deposits
    52,533       62,451  
 
   
 
     
 
 
 
  $ 2,108,668     $ 1,972,856  
 
   
 
     
 
 

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.

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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, favorable loss experience and our efficient operations.

Principal Sources of Cash

  Automobile Contract Securitizations – Securitizations totaled $1.6 billion and $4.5 billion for the three and nine months ended September 30, 2004, respectively, compared with $1.7 billion and $4.5 billion for the same respective periods in 2003.
 
  Collections of Principal and Interest from Loans and MBS and Release of Cash from Spread Accounts – The collection of principal and interest from contracts originated and securitized and the release of cash from spread accounts is another significant source of funds for us. Principal and interest collections on loans and MBS totaled $1.2 billion and $4.0 billion for the three and nine months ended September 30, 2004, respectively, compared with $1.8 billion and $5.2 billion for the same respective periods in 2003. The decrease in the principal and interest collections is due to principal and interest on our senior/subordinated securitizations being held at the trustee in collection and spread accounts until certain predetermined levels are reached.
 
  Deposits – Deposits were $2.1 billion at September 30, 2004 and $2.0 billion at December 31, 2003.
 
  Other Borrowings – Other borrowings, which include securities sold under agreements to repurchase and FHLB advances, increased to $871 million at September 30, 2004 from $551 million at December 31, 2003.
 
  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 September 30, 2004 there was $300 million outstanding on the subordinated debenture due in 2012, excluding discounts and issue costs. On August 1, 2004, we redeemed the outstanding balance of our $150 million, 8.875% subordinated debentures due 2007 at par plus accrued but unpaid interest to the redemption date.

Principal Uses of Cash

  Acquisition of Loans and Investment Securities – Loan originations totaled $1.9 billion and $5.3 billion for the three and nine months ended September 30, 2004, respectively, compared with $1.8 billion and $5.0 billion for the same respective periods in 2003. We purchased $252 million and $1.0 billion of mortgage-backed securities and other investment securities during the three and nine months ended September 30, 2004, respectively, compared with $743 million and $1.8 billion for the same respective periods in 2003.
 
  Payments of Principal and Interest on Securitizations – Payments of principal and interest to noteholders and certificateholders totaled $1.7 billion and $4.6 billion for the three and nine months ended September 30, 2004, respectively, compared with $1.3 billion and $3.7 billion for the same respective periods in 2003.
 
  Amounts Paid to Dealers – Participation paid by us to dealers was $42.3 million and $117 million for the three and nine months ended September 30, 2004, respectively, compared with $39.6 million and $109 million for the same respective periods in 2003.
 
  Operating Our Business – Noninterest expenses totaled $74.9 million and $220 million for the three and nine months ended September 30, 2004, respectively, compared with $66.7 million and $208 million for the same respective periods in 2003.

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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 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 September 30, 2004 and December 31, 2003:

                                 
                    Tier 1    
    Tangible   Core   Risk-Based   Risk-Based
    Capital
  Capital
  Capital
  Capital
    (Dollars in thousands)
September 30, 2004
                               
Actual Capital:
                               
Amount
  $ 1,033,691     $ 1,033,691     $ 1,030,680     $ 1,449,391  
Capital ratio
    8.10 %     8.10 %     10.56 %     14.85 %
FIRREA minimum required capital:
                               
Amount
  $ 191,365     $ 382,729       N/A     $ 780,695  
Capital ratio
    1.50 %     3.00 %     N/A       8.00 %
Excess
  $ 842,326     $ 650,962       N/A     $ 668,696  
FDICIA well capitalized required capital:
                               
Amount
    N/A     $ 637,882     $ 585,521     $ 975,869  
Capital ratio
    N/A       5.00 %     6.00 %     10.00 %
Excess
    N/A     $ 395,809     $ 445,159     $ 473,523  
December 31, 2003
                               
Actual Capital:
                               
Amount
  $ 884,536     $ 884,536     $ 881,517     $ 1,357,744  
Capital ratio
    7.06 %     7.06 %     9.20 %     14.17 %
FIRREA minimum required capital:
                               
Amount
  $ 187,923     $ 375,845       N/A     $ 766,665  
Capital ratio
    1.50 %     3.00 %     N/A       8.00 %
Excess
  $ 696,613     $ 508,691       N/A     $ 591,079  
FDICIA well capitalized required capital:
                               
Amount
    N/A     $ 626,409     $ 574,999     $ 958,332  
Capital ratio
    N/A       5.00 %     6.00 %     10.00 %
Excess
    N/A     $ 258,127     $ 306,518     $ 399,412  

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

                 
    September 30,   December 31,
    2004
  2003
    (Dollars in thousands)
Bank shareholder’s equity — GAAP basis
  $ 835,191     $ 685,045  
Plus: Net unrealized losses
    40,602       68,203  
Plus: Minority interest in equity of subsidiaries
    158,045       131,434  
Less: Non-permissible activities
    (147 )     (146 )
 
   
 
     
 
 
Total tangible and core capital
    1,033,691       884,536  
Adjustments for risk-based capital:
               
Subordinated debentures (1)
    295,599       355,370  
General loan valuation allowance (2)
    123,112       120,857  
Low-level recourse deduction
    (3,011 )     (3,019 )
 
   
 
     
 
 
Risk-based capital
  $ 1,449,391     $ 1,357,744  
 
   
 
     
 
 


(1)   Excludes capitalized discounts and issue costs.
 
(2)   Limited to 1.25% of risk-weighted assets.

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

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The following table summarizes our maturity GAP position:

                                                 
    Interest Rate Sensitivity Analysis at September 30, 2004
                            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
  $ 57,305             $ 50,069                     $ 107,374  
Other investments
    545,629                                       545,629  
Mortgage-backed securities
    683,153     $ 1,145,691       554,724     $ 166,526     $ 120,250       2,670,344  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total investments
    1,286,087       1,145,691       604,793       166,526       120,250       3,323,347  
Consumer loans (1)
    817,615       3,208,741       5,487,367       2,043,162       80,202       11,637,087  
Mortgage loans:
                                               
Adjustable rate (2)
    162,382       4,798                               167,180  
Fixed rate (2)
    1,068       2,559       3,811       1,684       1,246       10,368  
Construction loans (2)
    14,540                                       14,540  
Commercial loans (2)
    106,781       42                               106,823  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total interest earning assets
    2,388,473       4,361,831       6,095,971       2,211,372       201,698       15,259,345  
Interest bearing liabilities:
                                               
Deposits:
                                               
Passbook accounts
    6,102                                       6,102  
Demand deposit and money market
accounts
    1,220,780                                       1,220,780  
Certificate accounts (3)
    237,286       391,014       14,320       661               643,281  
Notes payable on automobile secured
financing (3)
    2,508,615       2,854,311       4,258,083       794,142               10,415,151  
FHLB advances (3)
    868,107                               2,551       870,658  
Subordinated debentures (3)
                                    295,053       295,053  
Other borrowings (3)
    8,695                                       8,695  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Total interest bearing liabilities
    4,849,585       3,245,325       4,272,403       794,803       297,604       13,459,720  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Excess interest earning/bearing assets
(liabilities)
    (2,461,112 )     1,116,506       1,823,568       1,416,569       (95,906 )     1,799,625  
Effect of hedging activities (4)
    1,431,520       (157,587 )     (640,208 )     (433,725 )     (200,000 )        
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Hedged (deficit) excess
  $ (1,029,592 )   $ 958,919     $ 1,183,360     $ 982,844     $ (295,906 )   $ 1,799,625  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cumulative (deficit) excess
  $ (1,029,592 )   $ (70,673 )   $ 1,112,687     $ 2,095,531     $ 1,799,625     $ 1,799,625  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Cumulative (deficit) excess as a percentage
of total interest earning assets
    (6.75 )%     (0.46 )%     7.29 %     13.73 %     11.79 %     11.79 %


(1)   Based on contractual maturities adjusted by our historical prepayment rate.
 
(2)   Based on interest rate repricing adjusted for projected prepayments.
 
(3)   Based on contractual maturity.
 
(4)   Includes effect of interest rate swaps designated against deposits.

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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.

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Table of Contents

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings
 
 
We or our subsidiaries are involved as a party 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, et al. v. WFS Financial Inc, California Superior Court, County of Alameda Civil Action No, RG03088926, appeal pending in the Court of Appeal of the State of California, First Appellate District, Division One, No. A104967 (a putative class action raising claims under California’s Unfair Competition Law and related claims). WFS has reached a settlement in Lee, et al. v. WFS Financial Inc and Thompson, et al. v. WFS Financial Inc cases. The settlements will be final after court approval of the settlement in Lee, et al. v. WFS Financial Inc. We do not believe that the outcome of these proceedings will have a material effect upon our financial condition, results of operations and cash flows.
 
 
Beginning on May 24, 2004 and continuing thereafter, a total of four separate purported class action lawsuits relating to the announcement by Westcorp and WFS that Westcorp was commencing an exchange offer for the outstanding public shares of WFS were filed in the Orange County, California Superior Court against Westcorp, WFS, and individual board members of Westcorp and WFS. On June 24, 2004, the actions were consolidated under the caption In re WFS Financial Shareholder Litigation, Case No. 04CC00559. 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. 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 defendants have filed demurrers challenging the legal sufficiency of the pending complaint, which are scheduled for hearing. 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. 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.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
None

Item 3.
Defaults Upon Senior Securities
 
 
None

Item 4.
Submission of Matters to a Vote of Security Holders
 
 
None

Item 5.
Other Information
 
 
None

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Table of Contents

Item 6.
Exhibits and Reports on Form 8-K
 
 
(a)
Exhibits

     
Exhibit No.
  Description of Exhibit
2.1
  Agreement and Plan of Merger and Reorganization, dated as of May 23, 2004, among Westcorp, Western Financial Bank and WFS Financial Inc (1)
3.1
  Articles of Incorporation (2)
3.1.1
  Certificate of Amendment of the Articles of Incorporation of Westcorp as filed May 14, 2001 (3)
3.1.2
  Certificate of Amendment of the Articles of Incorporation of Westcorp as filed May 19, 2004 (1)
3.2
  Bylaws (2)
4.1
  Indenture dated as of July 1, 1997 issued by Western Financial Bank, formerly Western Financial Savings Bank, F.S.B., with respect to $150,000,000 in aggregate principal amount of 8.875% Subordinated Capital Debentures due 2007 (4)
4.2
  Indenture dated as of May 1, 2002 issued by Western Financial Bank, formerly Western Financial Savings Bank, F.S.B., with respect to $300,000,000 in aggregate principal amount of 9.625% Subordinated Capital Debentures due 2012 (5)
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


(1)   Exhibit previously filed with Westcorp Registration Statement on Form S-4 (File No. 333-117424), filed July 16, 2004, incorporated herein by reference under Exhibit Number indicated.
 
(2)   Exhibits previously filed with Westcorp Registration Statement on Form S-4 (File No. 33-34286), filed April 11, 1990 incorporated herein by reference under the Exhibit Number indicated.
 
(3)   Exhibit previously filed with Annual Report on Form 10-K of Westcorp for the year ended December 31, 2003 as filed on or about March 12, 2004 incorporated herein by reference.
 
(4)   Exhibit previously filed with Annual Report on Form 10-K of Westcorp for the year ended December 31, 1997 as filed on or about March 29, 1998 incorporated herein by reference.
 
(5)   Exhibit previously filed with Annual Report on Form 10-K of Westcorp for the year ended December 31, 2002 as filed on or about March 29, 2003 incorporated herein by reference.
 
(b)   Reports on Form 8-K
 
   
Westcorp press release on July 21, 2004

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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:
  November 8, 2004   By:   /s/ ERNEST S. RADY    
         
 
   
          Ernest S. Rady    
          Chairman of the Board and Chief Executive    
          Officer    
 
               
Date:
  November 8, 2004   By:   /s/ LEE A. WHATCOTT    
         
 
   
          Lee A. Whatcott    
          Executive Vice President, Chief Financial Officer    
          and Chief Operating Officer (Principal Financial    
          and Accounting Officer)    

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Exhibit Index

     
Exhibit No.
  Description of Exhibit
2.1
  Agreement and Plan of Merger and Reorganization, dated as of May 23, 2004, among Westcorp, Western Financial Bank and WFS Financial Inc (1)
3.1
  Articles of Incorporation (2)
3.1.1
  Certificate of Amendment of the Articles of Incorporation of Westcorp as filed May 14, 2001 (3)
3.1.2
  Certificate of Amendment of the Articles of Incorporation of Westcorp as filed May 19, 2004 (1)
3.2
  Bylaws (2)
4.1
  Indenture dated as of July 1, 1997 issued by Western Financial Bank, formerly Western Financial Savings Bank, F.S.B., with respect to $150,000,000 in aggregate principal amount of 8.875% Subordinated Capital Debentures due 2007 (4)
4.2
  Indenture dated as of May 1, 2002 issued by Western Financial Bank, formerly Western Financial Savings Bank, F.S.B., with respect to $300,000,000 in aggregate principal amount of 9.625% Subordinated Capital Debentures due 2012 (5)
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


(1)   Exhibit previously filed with Westcorp Registration Statement on Form S-4 (File No. 333-117424), filed July 16, 2004, incorporated herein by reference under Exhibit Number indicated.
 
(2)   Exhibits previously filed with Westcorp Registration Statement on Form S-4 (File No. 33-34286), filed April 11, 1990 incorporated herein by reference under the Exhibit Number indicated. (3) Exhibit previously filed with Annual Report on Form 10-K of Westcorp for the year ended December 31, 2003 as filed on or about March 12, 2004 incorporated herein by reference.
 
(4)   Exhibit previously filed with Annual Report on Form 10-K of Westcorp for the year ended December 31, 1997 as filed on or about March 29, 1998 incorporated herein by reference.
 
(5)   Exhibit previously filed with Annual Report on Form 10-K of Westcorp for the year ended December 31, 2002 as filed on or about March 29, 2003 incorporated herein by reference.