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, 2005
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _________ to _________

Westcorp

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

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

(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

Indicated by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

As of October 31, 2005, the registrant had 52,274,898 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 36.

 

 

WESTCORP AND SUBSIDIARIES

FORM 10-Q

September 30, 2005

TABLE OF CONTENTS

		Page No.
Forward-Looking Statements and Available Information			1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			2
Consolidated Statements of Financial Condition at September 30, 2005 and December 31, 2004			2
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2005 and 2004			3
Consolidated Statements of Changes in Shareholders’ Equity for the Periods Ended September 30, 2005 and December 31, 2004			4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosure About Market Risk			32
Item 4. Controls and Procedures			33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 3. Defaults Upon Senior Securities			35
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 5. Other Information			35
Item 6. Exhibits			35
SIGNATURES			36
CERTIFICATIONS
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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, as well as the proposed merger with Wachovia Corporation. These statements are subject to uncertainties and, among other things, factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements.

These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” and similar terms and phrases, including references to assumptions. These statements are contained in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Form 10-Q and in the documents incorporated by reference.

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

	•		changes in general economic and business conditions;
	•		interest rate fluctuations, including hedging activities;
	•		our financial condition and liquidity, as well as future cash flows and earnings;
	•		competition;
	•		our level of operating expenses;
	•		the effect, interpretation or application of new or existing laws, regulations and court decisions;
	•		the exercise of discretionary authority by regulatory agencies;
	•		a decision to change our corporate structure;
	•		the availability of sources of funding;
	•		the level of chargeoffs on the automobile contracts that we originate; and
	•		significant litigation.

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

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

INDUSTRY DATA

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

Available Information

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTCORP AND SUBSIDIARIES

		(Unaudited)
		September 30, 2005				December 31, 2004
		(Dollars in thousands)
ASSETS
Cash		$	93,222			$	89,333
Interest bearing deposits with other financial institutions			32,158				4,177
Other short-term investments			285,000				125,000
Cash and due from banks			410,380				218,510
Restricted cash			550,183				417,833
Investment securities available for sale			164,984				119,811
Mortgage-backed securities available for sale			2,635,947				2,649,758
Loans receivable			13,222,321				12,135,748
Allowance for credit losses			(320,001	)			(315,402	)
Loans receivable, net			12,902,320				11,820,346
Interest receivable			85,436				79,825
Premises and equipment, net			73,391				76,526
Other assets			176,487				162,731
TOTAL ASSETS		$	16,999,128			$	15,545,340
LIABILITIES
Deposits		$	2,317,405			$	2,183,499
Notes payable on automobile secured financing			11,327,812				10,242,900
Federal Home Loan Bank advances			1,122,434				1,139,521
Subordinated debentures			296,074				295,321
Other liabilities			207,662				178,939
TOTAL LIABILITIES			15,271,387				14,040,180
Minority interest			196,824				165,484
SHAREHOLDERS’ EQUITY
Common stock (par value $1.00 per share; authorized 65,000,000 shares; issued and outstanding 52,251,061 shares at September 30, 2005 and 51,895,258 shares at December 31, 2004)			52,251				51,895
Paid-in capital			725,590				717,098
Retained earnings			776,602				606,987
Accumulated other comprehensive loss, net of tax			(23,526	)			(36,304	)
TOTAL SHAREHOLDERS’ EQUITY			1,530,917				1,339,676
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	16,999,128			$	15,545,340

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees		$	327,638			$	291,796			$	937,182			$	863,989
Mortgage-backed securities			27,368				25,828				82,020				72,666
Investment securities			1,798				1,173				4,146				3,354
Other			8,418				2,441				18,628				5,871
TOTAL INTEREST INCOME			365,222				321,238				1,041,976				945,880
Interest expense:
Deposits			21,110				15,101				59,099				42,291
Notes payable on automobile secured financing			101,587				89,869				282,114				272,678
Other			16,262				10,030				43,323				33,102
TOTAL INTEREST EXPENSE			138,959				115,000				384,536				348,071
NET INTEREST INCOME			226,263				206,238				657,440				597,809
Provision for credit losses			40,188				60,337				126,865				174,171
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES			186,075				145,901				530,575				423,638
Noninterest income:
Automobile lending			15,498				26,830				45,538				77,646
Insurance income			3,020				2,264				7,215				548
Mortgage banking			82				64				259				5,778
Other			1,246				869				5,701				2,300
TOTAL NONINTEREST INCOME			19,846				30,027				58,713				86,272
Noninterest expenses:
Salaries and associate benefits			41,522				43,541				128,459				130,995
Credit and collections			8,773				8,056				25,361				24,359
Data processing			5,172				4,053				14,660				12,313
Occupancy			4,182				3,983				12,019				11,710
Other			18,361				15,313				44,193				40,604
TOTAL NONINTEREST EXPENSES			78,010				74,946				224,692				219,981
INCOME BEFORE INCOME TAX			127,911				100,982				364,596				289,929
Income tax			51,138				40,188				143,876				115,227
INCOME BEFORE MINORITY INTEREST			76,773				60,794				220,720				174,702
Minority interest in earnings of subsidiaries			10,252				6,122				28,199				22,251
NET INCOME		$	66,521			$	54,672			$	192,521			$	152,451
Earnings per common share:
Basic		$	1.27			$	1.05			$	3.70			$	2.94
Diluted		$	1.26			$	1.04			$	3.65			$	2.90
Weighted average number of common shares outstanding:
Basic			52,207,935				51,859,531				52,083,134				51,806,929
Diluted			52,886,618				52,510,834				52,746,532				52,528,983
Dividends declared		$	0.15			$	0.14			$	0.45			$	0.42

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES

																		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, 2004			51,698,398			$	51,698			$	710,001			$	427,527			$	(66,741	)		$	1,122,485
Net income															207,962								207,962
Unrealized losses on securities available for sale, net of tax (1)																			(9,677	)			(9,677	)
Unrealized losses on cash flow hedges, net of tax (2)																			(1,570	)			(1,570	)
Reclassification adjustment for gains on securities available for sale included in net income, net of tax (3)																			(1,446	)			(1,446	)
Reclassification adjustment for losses on cash flow hedges included in income, net of tax (4)																			43,130				43,130
Comprehensive income																							238,399
Issuance of subsidiary common stock											(47	)											(47	)
Stock options expensed (5)											2,665												2,665
Stock options exercised			196,860				197				4,479												4,676
Cash dividends															(28,502	)							(28,502	)
Balance at December 31, 2004			51,895,258				51,895				717,098				606,987				(36,304	)			1,339,676
Net income															192,521								192,521
Unrealized losses on securities available for sale, net of tax (1)																			(15,837	)			(15,837	)
Unrealized gains on cash flow hedges, net of tax (2)																			12,490				12,490
Reclassification adjustment for losses on cash flow hedges included in income, net of tax (4)																			16,125				16,125
Comprehensive income																							205,299
Issuance of subsidiary common stock											(771	)											(771	)
Stock options expensed (5)											3,340												3,340
Stock options exercised			355,803				356				5,923												6,279
Cash dividends															(22,906	)							(22,906	)
Balance at September 30, 2005			52,251,061			$	52,251			$	725,590			$	776,602			$	(23,526	)		$	1,530,917

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES

		For the Nine Months Ended
		September 30,
		2005				2004
		(Dollars in thousands)
OPERATING ACTIVITIES:
Net income		$	192,521			$	152,451
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses			126,865				174,171
Amortization of loan premiums, fees and costs			91,822				94,185
Amortization of losses on cash flow hedges			24,776				32,186
Amortization of premium on mortgage-backed securities			17,216				32,012
Depreciation			9,490				8,935
Amortization, other			848				4,586
Gain on sales, net			(1,930	)			(6,605	)
Other			1,362				502
(Increase) decrease in other assets			(28,752	)			2,332
Increase in other liabilities			29,084				31,558
Other, net			28,199				22,251
NET CASH PROVIDED BY OPERATING ACTIVITIES			491,501				548,564
INVESTING ACTIVITIES:
Increase in restricted cash			(132,350	)			(147,131	)
Loans receivable:
Origination of loans			(6,494,021	)			(5,437,458	)
Loan payments and payoffs			5,192,955				4,381,867
Investment and mortgage-backed securities available for sale:
Purchases			(864,621	)			(1,040,714	)
Proceeds from sale			76,757				133,549
Payments received			714,774				911,140
Purchase of premises and equipment			(4,539	)			(9,332	)
Proceeds from sales of premises and equipment			38				4,509
NET CASH USED IN INVESTING ACTIVITIES			(1,511,007	)			(1,203,570	)
FINANCING ACTIVITIES:
Increase in deposits			154,872				142,884
Notes payable on automobile secured financing:
Proceeds from issuance			5,722,966				4,498,305
Payments on notes			(4,631,413	)			(4,308,510	)
Decrease in securities sold under agreements to repurchase							(218,741	)
(Decrease) increase in FHLB advances			(17,087	)			542,014
Payments on subordinated debentures							(104,683	)
Decrease in borrowings			(360	)			(351	)
Proceeds from issuance of common stock			6,279				2,846
Proceeds from issuance of subsidiary common stock			350				37
Cash dividends			(22,906	)			(21,239	)
Payments on cash flow hedges, net			(1,325	)			(11,390	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,211,376				521,172
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS			191,870				(133,834	)
Cash and due from banks at beginning of year			218,510				382,082
CASH AND DUE FROM BANKS AT END OF PERIOD		$	410,380			$	248,248

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES

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, also known as GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2004 included in our Form 10-K.

Note 2 — Mortgage-Backed Securities Available for Sale

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

		September 30, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
		(Dollars in thousands)
GNMA certificates		$	2,598,797			$	5,563			$	24,904			$	2,579,456
FNMA participation certificates			25,637				65				271				25,431
FHLMC participation certificates			30,229				1				594				29,636
Other			1,424												1,424
		$	2,656,087			$	5,629			$	25,769			$	2,635,947

		December 31, 2004
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
		(Dollars in thousands)
GNMA certificates		$	2,575,081			$	15,232			$	8,753			$	2,581,560
FNMA participation certificates			30,195				123				143				30,175
FHLMC participation certificates			36,497				154				193				36,458
Other			1,565												1,565
		$	2,643,338			$	15,509			$	9,089			$	2,649,758

Our portfolio of mortgage-backed securities available for sale was comprised of 63% fixed rate certificates and 37% variable rate certificates at September 30, 2005, compared with 62% fixed rate certificates and 38% variable rate certificates at December 31, 2004.

Note 3 — Net Loans Receivable

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

Net loans receivable consisted of the following:

		September 30,				December 31,
		2005				2004
		(Dollars in thousands)
Consumer:
Automobile contracts		$	12,748,745			$	11,599,528
Other consumer			6,201				4,386
Unearned discounts			(30,292	)			(38,871	)
			12,724,654				11,565,043
Real estate:
Mortgage			154,266				202,095
Construction			60,740				48,730
			215,006				250,825
Undisbursed loan proceeds			(35,843	)			(37,061	)
			179,163				213,764
Commercial			126,758				165,806
			13,030,575				11,944,613
Dealer participation			215,713				191,336
Deferred contract fees, net of deferred costs			(23,967	)			(201	)
Loans receivable			13,222,321				12,135,748
Allowance for credit losses			(320,001	)			(315,402	)
Loans receivable, net		$	12,902,320			$	11,820,346

Loans owned and managed by us, excluding dealer participation and deferred contract fees, totaled $13.0 billion and $11.9 billion as of September 30, 2005 and December 31, 2004, respectively. Nonperforming loans, or loans on which we have discontinued the accrual of interest income, included in net loans receivable were $49.5 million and $51.9 million at September 30, 2005 and December 31, 2004, respectively. Repossessed assets and real estate owned were $7.2 million and $8.3 million at September 30, 2005 and December 31, 2004, respectively, and are included in other assets on our Consolidated Statements of Financial Condition.

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,
		2005				2004				2005				2004
		(Dollars in thousands)
Balance at beginning of period		$	318,776			$	307,293			$	315,402			$	301,602
Chargeoffs:
Consumer loans			(69,228	)			(76,689	)			(199,246	)			(232,403	)
Commercial loans							(492	)			(118	)			(492	)
Mortgage loans							(37	)			(138	)			(167	)
			(69,228	)			(77,218	)			(199,502	)			(233,062	)
Recoveries:
Consumer loans			29,874				21,792				76,740				69,471
Commercial loans			391				18				482				40
Mortgage loans											14
			30,265				21,810				77,236				69,511
Net chargeoffs			(38,963	)			(55,408	)			(122,266	)			(163,551	)
Provision for credit losses			40,188				60,337				126,865				174,171
Balance at end of period		$	320,001			$	312,222			$	320,001			$	312,222
Ratio of net chargeoffs during the period (annualized) to average loans outstanding during the period			1.2	%			1.9	%			1.3	%			1.9	%
Ratio of allowance for credit losses to loans at the end of the period			2.4	%			2.6	%			2.4	%			2.6	%

Note 5 — Deposits

Deposits consisted of the following:

		September 30,				December 31,
		2005				2004
		(Dollars in thousands)
Noninterest bearing deposits		$	294,209			$	268,556
Demand deposit accounts			301				705
Passbook accounts			4,239				5,880
Money market deposit accounts			1,268,821				1,257,074
Certificate accounts			749,835				651,284
		$	2,317,405			$	2,183,499

						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, 2005				for the				September 30, 2005
		September 30,				Excluding the Effects				Nine Months Ended				Including the Effects
		2005 (1)				of Hedging				September 30, 2005				of Hedging
Demand deposit accounts			0.1	%			0.1	%							0.1	%
Passbook accounts			0.5				0.3								0.3
Money market deposit accounts			3.0				2.4				1.3	%			3.7
Certificate accounts			3.4				2.9				2.2				5.1

Note 6 — Notes Payable on Automobile Secured Financing

In connection with our public asset-backed securitization activities, we issued $2.7 billion and $5.7 billion of notes secured by contracts for the three and nine months ended September 30, 2005, respectively, compared with $1.6 billion and $4.5 billion for the same respective periods in 2004. There were $11.3 billion of notes payable on automobile secured financing outstanding at September 30, 2005, compared with $10.2 billion at December 31, 2004.

Interest payments are due either monthly or quarterly, in arrears. Interest expense on all notes payable on automobile secured financing, including interest payments under interest rate swap agreements, totaled $102 million and $282 million for the three and nine months ended September 30, 2005, respectively, compared with $90 million and $273 million for the same respective periods in 2004.

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,
		2005				2004
		(Dollars in thousands)
Unrealized (loss) gain on marketable securities		$	(12,188	)		$	3,648
Unrealized (loss) gain on interest rate swaps: (1)
Deposits			(16,624	)			(29,203	)
Automobile secured financing			3,011				(353	)
			(13,613	)			(29,556	)
Realized (loss) gain on settled cash flow hedges:  (1)
Deposits			(2,917	)			(8,369	)
Automobile secured financing			5,192				(2,027	)
			2,275				(10,396	)
Total accumulated other comprehensive loss		$	(23,526	)		$	(36,304	)

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,
		2005				2004				2005				2004
		(Dollars in thousands)
Net income		$	66,521			$	54,672			$	192,521			$	152,451
Unrealized (losses) gains on securities available for sale, net of tax			(9,040	)			15,723				(15,837	)			(4,544	)
Unrealized gains (losses) on cash flow hedges, net of tax			11,911				(15,278	)			12,490				(4,211	)
Reclassification adjustment for gains on securities available for sale included in income, net of tax															(1,446	)
Reclassification adjustment for losses on cash flow hedges included in income, net of tax			4,294				9,832				16,125				36,458
Comprehensive income		$	73,686			$	64,949			$	205,299			$	178,708

Note 9 — Dividends

On July 29, 2005, we declared a cash dividend of $0.15 per share for shareholders of record as of November 1, 2005 with a payable date of November 15, 2005.

Note 10 — Stock Options

In May 2001, we adopted the 2001 Westcorp Stock Option Plan, also known as the 2001 Plan, a stock option plan for certain employees, to whom we refer as 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 options 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. The 2001 Plan was amended and restated at the April 26, 2005 Annual Meeting of Shareholders.

Options outstanding and exercisable at September 30, 2005 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			63,000				0.82			$	12.67				63,000			$	12.67
13.00 — 14.00			118,125				1.64				13.25				118,125				13.25
15.00 — 16.00			1,000				2.36				15.25				1,000				15.25
17.00 — 18.00			150,108				2.65				17.32				150,108				17.32
18.00 — 19.00			530,324				3.04				18.58				329,290				18.57
19.00 — 20.00			5,000				4.10				19.85				3,750				19.85
20.00 — 21.00			3,000				4.35				20.41				1,500				20.41
42.00 — 43.00			464,444				3.64				42.19				148,338				42.19
44.00 — 45.00			20,000				4.82				44.48
46.00 — 47.00			491,500				4.67				46.66
49.00 — 50.00			5,000				4.94				49.97
$12.00 — 50.00			1,851,501				3.46			$	31.68				815,111			$	21.42

Stock option activity is summarized as follows:

						Weighted Average
		Shares				Exercise Price
Outstanding at January 1, 2004			1,460,536			$	16.86
Granted			540,900				42.19
Exercised			(196,860	)			16.40
Forfeited			(57,694	)			27.10
Outstanding at December 31, 2004			1,746,882				24.41
Granted			564,000				46.61
Exercised			(355,803	)			17.65
Forfeited			(103,578	)			38.58
Outstanding at September 30, 2005			1,851,501			$	31.68

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 assumptions used in the option valuation model can materially affect the fair value estimate. We utilize the Binomial option valuation model for all stock options expensed as we believe it provides a better measure of value for companies that pay dividends than other valuation models. In our opinion, no option valuation model necessarily provides a reliable single measure of the fair value of our employee stock options. The weighted average fair value of options granted during the nine month period ended September 30, 2005 was $14.75 per share compared to $13.26 per share for the year ended December 31, 2004.

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,
		2005				2004				2005				2004
		(Dollars in thousands, except per share amounts)
Net income, as reported		$	66,521			$	54,672			$	192,521			$	152,451
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			795				458				2,022				1,167
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			845				581				2,233				1,597
Pro forma net income		$	66,471			$	54,549			$	192,310			$	152,021
Basic earnings per share:
As reported		$	1.27			$	1.05			$	3.70			$	2.94
Pro forma		$	1.27			$	1.05			$	3.69			$	2.93
Diluted earnings per share:
As reported		$	1.26			$	1.04			$	3.65			$	2.90
Pro forma		$	1.26			$	1.04			$	3.65			$	2.89

Note 11 — Proposed Acquisition and Merger

On September 12, 2005, we terminated the Agreement and Plan of Merger and Reorganization, dated as of May 23, 2004, entered into among Western Financial Bank, WFS Financial and us, in connection with our entry into the Merger Agreement with Wachovia described below.

On September 12, 2005, we entered into an Agreement and Plan of Merger, which was subsequently amended and restated on October 21, 2005, also known as the Merger Agreement, by and among Wachovia Corporation, Western Financial Bank, WFS Financial and us, that provides for, among other things (i) the merger of us with and into Wachovia, also known as the Westcorp Merger, (ii) the conversion of Western Financial Bank into a national banking association, (iii) the merger of Wachovia Bank, National Association, a national banking association and wholly owned subsidiary of Wachovia and Western Financial Bank and (iv) the acquisition of WFS Financial by Wachovia, pursuant to the merger of WFS Financial with a new wholly owned subsidiary, also known as the WFS Financial Merger.

In connection with the Westcorp Merger, each share of our common stock that is outstanding immediately prior to the effective time of the Westcorp Merger (other than shares held by our subsidiaries or Wachovia or any of its subsidiaries or those held by persons properly exercising their dissenters’ rights, if available), will be converted into the right to receive 1.2749 shares of Wachovia’s common stock. In connection with the WFS Financial Merger, each share of WFS Financial’s common stock that is outstanding immediately prior to the effective time of the WFS Financial Merger (other than those shares held by Wachovia or us, or any of our respective subsidiaries or those held by persons properly exercising their dissenters’ rights, if available), will be converted into the right to receive 1.4661 shares of Wachovia’s common stock.

The Westcorp Merger is subject to the requisite approval of our shareholders, and the WFS Financial Merger is subject to the requisite approval of WFS Financial’s shareholders (including the approval of a majority of shares of WFS Financial common stock represented and voting at the WFS shareholder meeting, excluding shares of WFS Financial common stock held by us and our affiliates). Additionally, each of the mergers are subject to receipt of requisite regulatory approvals, including the approval of applicable banking regulators, receipt of tax opinions and other closing conditions.

Note 12 — Commitments and Contingencies

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

Beginning on May 24, 2004 and continuing thereafter, a total of four separate purported class action lawsuits relating to the announcement by WFS and us that we had entered into the May 23, 2004 merger agreement, pursuant to which we would acquire the outstanding 16% common stock interest of WFS not already owned by the Bank, and WFS would be merged with and into the Bank were filed in the Orange County, California Superior Court against WFS, us, WFS’ individual board members, and our individual board members. On June 24, 2004, the actions were consolidated under the caption In re WFS Financial Shareholder Litigation, Case No. 04CC00559, also known as the Action. On July 16, 2004, the court granted a motion by plaintiff Alaska Hotel & Restaurant Employees Pension Trust Fund, in Case No. 04CC00573, to amend the consolidation order to designate it the lead plaintiff in the Action. The lead plaintiff filed a consolidated amended complaint on August 9, 2004, and then filed the present “corrected” consolidated amended complaint on September 15, 2004. All of the shareholder-related actions allege, among other things, that the defendants breached their respective fiduciary duties and seek to enjoin or rescind the transaction and obtain an unspecified sum in damages and costs, including attorneys’ fees and expenses. The parties tentatively agreed to a full and final resolution of the Action and, on January 19, 2005, the parties entered into a Memorandum of Understanding, also known as the MOU, concerning the terms of the tentative settlement. Pursuant to the terms of the MOU, the parties agreed, among other things, that additional disclosures would be made in our Registration Statement on Form S-4 related to the May 23, 2004 merger agreement (as filed with the SEC on July 16, 2004), the claims asserted in the Action would be fully released, and the Action would be dismissed with prejudice. Further, pursuant to the MOU, the defendants agreed to pay plaintiffs’ attorneys’ fees and expenses in the amount of $675,000, or in such lesser amount as the Court may order. The effectiveness of the settlement agreement was contingent on the transaction actually occurring. The parties prepared a formal settlement agreement based on the terms of the MOU and obtained preliminary approval for the settlement from the Court on June 17, 2005. The parties further agreed, with the Court’s consent, that the parties would not proceed with providing notice of the proposed settlement to shareholders nor schedule a final hearing on approval of the settlement unless and until the necessary regulatory approvals for the transaction have been obtained. Subsequently, on September 12, 2005, we entered into an Agreement and Plan of Merger by and among Wachovia Corporation, also known as Wachovia, WFS, Western Financial Bank and us, also known as the Wachovia Merger Agreement, as described above in Note 11. Accordingly, on September 12, 2005, we terminated the merger agreement dated as of May 23, 2004, which is the subject of the Action. Thereafter, counsel for plaintiffs indicated that they are evaluating the Wachovia Merger Agreement to determine whether and to what extent they might proceed with the Action. A further status conference in the Action is scheduled for January 18, 2006. 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 13 — Subsequent Events

On October 25, 2005, we entered into a conduit financing transaction with WFS’ wholly owned subsidiary, WFS Funding, Inc., WFS Financial 2005-A Owner Trust, a trust created by WFS Funding, Wachovia Capital Markets, LLC, also known as Wachovia Capital, Wachovia Bank, National Association and certain purchasers, pursuant to which WFS Funding, Inc. sold automobile contract-backed notes issued by the WFS Financial 2005-A Owner Trust to an asset-backed commercial paper conduit administered by Wachovia Capital. The initial funding under the conduit was $1.4 billion. The asset-backed commercial paper conduit is obligated to purchase up to $3.0 billion of notes. The conduit financing transaction will terminate on October 24, 2006, unless terminated sooner. The terms of the conduit financing were negotiated between the parties on an arm’s length basis. WFS and Wachovia Capital will each receive fees that are considered usual and customary for transactions of this type. This transaction will be accounted for as a secured financing.

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

Overview

We are a 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, also known as MBS, 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 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, 2005 and 2004. Since this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read our Consolidated Financial Statements contained elsewhere herein. Certain amounts from the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation.

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
		(Dollars in thousands, except per share amounts)
Consolidated Statements of Income Data:
Interest income		$	365,222			$	321,238			$	1,041,976			$	945,880
Interest expense			138,959				115,000				384,536				348,071
Net interest income			226,263				206,238				657,440				597,809
Provision for credit losses			40,188				60,337				126,865				174,171
Net interest income after provision for credit losses			186,075				145,901				530,575				423,638
Noninterest income			19,846				30,027				58,713				86,272
Noninterest expense			78,010				74,946				224,692				219,981
Income before income tax			127,911				100,982				364,596				289,929
Income tax			51,138				40,188				143,876				115,227
Income before minority interest			76,773				60,794				220,720				174,702
Minority interest in earnings of subsidiaries			10,252				6,122				28,199				22,251
Net income		$	66,521			$	54,672			$	192,521			$	152,451
Weighted average number of shares and common share equivalents — diluted			52,886,618				52,510,834				52,746,532				52,528,983
Earnings per common share — diluted		$	1.26			$	1.04			$	3.65			$	2.90
Dividends declared per share		$	0.15			$	0.14			$	0.45			$	0.42
Dividend payout ratio			11.9	%			13.5	%			12.3	%			14.5	%

		September 30,				December 31,
		2005				2004
		(Dollars in thousands)
Consolidated Statements of Financial Condition Data:
Assets:
Cash and due from banks		$	410,380			$	218,510
Loans:
Consumer (1)			12,916,400				11,756,178
Mortgage (2)			179,163				213,764
Commercial			126,758				165,806
Mortgage-backed securities			2,635,947				2,649,758
Investments and time deposits			715,167				537,644
Other assets			335,314				319,082
Less: Allowance for credit losses			320,001				315,402
Total assets		$	16,999,128			$	15,545,340
Liabilities and Shareholders’ Equity:
Deposits		$	2,317,405			$	2,183,499
Notes payable on automobile secured financing			11,327,812				10,242,900
FHLB advances and other borrowings			1,130,651				1,148,098
Subordinated debentures			296,074				295,321
Other liabilities			199,445				170,362
Total liabilities			15,271,387				14,040,180
Minority interest in equity of subsidiaries			196,824				165,484
Shareholders’ equity			1,530,917				1,339,676
Total liabilities and shareholders’ equity		$	16,999,128			$	15,545,340

		At or For the Three								At or For the Nine
		Months Ended September 30,								Months Ended September 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Other Selected Financial Data:
Average automobile contracts managed		$	12,550,228			$	11,268,695			$	12,090,699			$	10,980,339
Average shareholders’ equity (3)		$	1,522,940			$	1,300,509			$	1,462,262			$	1,253,692
Return on average shareholders’ equity (3)			17.47	%			16.82	%			17.55	%			16.21	%
Book value per share (3)		$	29.75			$	25.55			$	29.75			$	25.55
Total equity to assets (4)			10.30	%			9.66	%			10.30	%			9.66	%
Originations:
Consumer loans (1)		$	2,075,369			$	1,801,355			$	5,874,060			$	5,055,659
Mortgage loans (2)			11,979				15,548				27,324				27,003
Commercial loans			180,968				111,853				491,392				237,570
Total loan originations		$	2,268,316			$	1,928,756			$	6,392,776			$	5,320,232
Interest rate spread			4.91	%			5.02	%			5.05	%			5.02	%