##### Table of Contents



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 June 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 
  CALIFORNIA
    
    51-0308535(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 23 Pasteur, Irvine, California 92618-3816 
  (949) 727-1002 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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 July 31, 2004, the registrant had 51,859,742 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.




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WESTCORP AND SUBSIDIARIES FORM 10-Q June 30, 2004 TABLE OF CONTENTS ______________
 Page No.Forward-Looking Statements and Available Information
    
    
    1PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Consolidated Statements of Financial Condition at June 30, 2004 and December 31, 2003
    
    
    2Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003
    
    
    3Consolidated Statements of Changes in Shareholders Equity for the Periods Ended June 30, 2004 and December 31, 2003
    
    
    4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 2. Changes in Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    36Item 6. Exhibits and Reports on Form 8-K
    
    
    36SIGNATURES
    
    
    38CERTIFICATIONSEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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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.
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. 1




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements WESTCORP AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)June 30, 2004
    
    December 31, 2003(Dollars in thousands)ASSETSCash
    
    $
    76,760
    
    
    $
    50,073Interest bearing deposits with other financial institutions
    
    
    7,981
    
    
    
    41,009Other short-term investments
    
    
    143,000
    
    
    
    291,000Cash and due from banks
    
    
    227,741
    
    
    
    382,082Restricted cash
    
    
    372,587
    
    
    
    245,399Investment securities available for sale
    
    
    133,090
    
    
    
    117,749Mortgage-backed securities available for sale
    
    
    2,679,674
    
    
    
    2,701,797Loans receivable
    
    
    11,572,628
    
    
    
    11,138,483Allowance for credit losses
    
    
    (307,293
    )
    
    
    (301,602
    )Loans receivable, net
    
    
    11,265,335
    
    
    
    10,836,881Interest receivable
    
    
    76,401
    
    
    
    80,957Premises and equipment, net
    
    
    77,175
    
    
    
    81,814Other assets
    
    
    167,109
    
    
    
    169,241TOTAL ASSETS
    
    $
    14,999,112
    
    
    $
    14,615,920LIABILITIESDeposits
    
    $
    2,009,963
    
    
    $
    1,972,856Notes payable on automobile secured financing
    
    
    10,434,553
    
    
    
    10,254,641Securities sold under agreements to repurchase
    
    
    
    
    
    
    222,489Federal Home Loan Bank advances
    
    
    591,582
    
    
    
    328,644Subordinated debentures
    
    
    373,581
    
    
    
    394,854Other
    
    
    211,994
    
    
    
    188,517TOTAL LIABILITIES
    
    
    13,621,673
    
    
    
    13,362,001Minority interest
    
    
    151,802
    
    
    
    131,434SHAREHOLDERS EQUITYCommon stock (par value $1.00 per share; authorized 65,000,000
shares; issued and outstanding 51,833,196 shares at June 30, 2004
and 51,698,398 shares at December 31, 2003)
    
    
    51,833
    
    
    
    51,698Paid-in capital
    
    
    713,237
    
    
    
    710,001Retained earnings
    
    
    511,328
    
    
    
    427,527Accumulated other comprehensive loss, net of tax
    
    
    (50,761
    )
    
    
    (66,741
    )TOTAL SHAREHOLDERS EQUITY
    
    
    1,225,637
    
    
    
    1,122,485TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    14,999,112
    
    
    $
    14,615,920
 See accompanying notes to consolidated financial statements. 2




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WESTCORP AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share amounts)Interest income:Loans, including fees
    
    $
    285,893
    
    
    $
    286,862
    
    
    $
    572,193
    
    
    $
    568,150Mortgage-backed securities
    
    
    22,150
    
    
    
    21,241
    
    
    
    46,838
    
    
    
    46,015Investment securities
    
    
    1,122
    
    
    
    661
    
    
    
    2,180
    
    
    
    1,390Other
    
    
    1,818
    
    
    
    798
    
    
    
    3,431
    
    
    
    1,870TOTAL INTEREST INCOME
    
    
    310,983
    
    
    
    309,562
    
    
    
    624,642
    
    
    
    617,425Interest expense:Deposits
    
    
    13,884
    
    
    
    17,017
    
    
    
    27,191
    
    
    
    34,574Notes payable on automobile secured financing
    
    
    88,591
    
    
    
    106,174
    
    
    
    182,809
    
    
    
    217,334Other
    
    
    11,542
    
    
    
    12,446
    
    
    
    23,435
    
    
    
    25,301TOTAL INTEREST EXPENSE
    
    
    114,017
    
    
    
    135,637
    
    
    
    233,435
    
    
    
    277,209NET INTEREST INCOME
    
    
    196,966
    
    
    
    173,925
    
    
    
    391,207
    
    
    
    340,216Provision for credit losses
    
    
    51,539
    
    
    
    68,036
    
    
    
    113,834
    
    
    
    147,921NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES
    
    
    145,427
    
    
    
    105,889
    
    
    
    277,373
    
    
    
    192,295Noninterest income:Automobile lending
    
    
    25,067
    
    
    
    22,397
    
    
    
    50,815
    
    
    
    44,294Mortgage banking
    
    
    249
    
    
    
    642
    
    
    
    484
    
    
    
    853Insurance income
    
    
    1,690
    
    
    
    2,006
    
    
    
    3,514
    
    
    
    2,935Other
    
    
    548
    
    
    
    2,686
    
    
    
    1,431
    
    
    
    7,401TOTAL NONINTEREST INCOME
    
    
    27,554
    
    
    
    27,731
    
    
    
    56,244
    
    
    
    55,483Noninterest expenses:Salaries and associate benefits
    
    
    45,369
    
    
    
    41,479
    
    
    
    87,453
    
    
    
    80,934Credit and collections
    
    
    7,710
    
    
    
    8,803
    
    
    
    16,302
    
    
    
    18,349Data processing
    
    
    4,082
    
    
    
    4,864
    
    
    
    8,261
    
    
    
    9,432Occupancy
    
    
    3,851
    
    
    
    3,903
    
    
    
    7,727
    
    
    
    7,743Telephone
    
    
    1,139
    
    
    
    1,235
    
    
    
    2,300
    
    
    
    2,583Other
    
    
    11,302
    
    
    
    12,373
    
    
    
    22,627
    
    
    
    22,055TOTAL NONINTEREST EXPENSES
    
    
    73,453
    
    
    
    72,657
    
    
    
    144,670
    
    
    
    141,096INCOME BEFORE INCOME TAX
    
    
    99,528
    
    
    
    60,963
    
    
    
    188,947
    
    
    
    106,682Income tax
    
    
    39,725
    
    
    
    23,975
    
    
    
    75,039
    
    
    
    42,200INCOME BEFORE MINORITY INTEREST
    
    
    59,803
    
    
    
    36,988
    
    
    
    113,908
    
    
    
    64,482Minority interest in earnings of subsidiaries
    
    
    5,388
    
    
    
    5,385
    
    
    
    16,129
    
    
    
    9,330NET INCOME
    
    $
    54,415
    
    
    $
    31,603
    
    
    $
    97,779
    
    
    $
    55,152Earnings per common share:Basic
    
    $
    1.05
    
    
    $
    0.81
    
    
    $
    1.89
    
    
    $
    1.41Diluted
    
    $
    1.04
    
    
    $
    0.80
    
    
    $
    1.86
    
    
    $
    1.39Weighted average number of common shares outstanding:Basic
    
    
    51,823,013
    
    
    
    39,212,193
    
    
    
    51,780,338
    
    
    
    39,207,548Diluted
    
    
    52,483,220
    
    
    
    39,676,670
    
    
    
    52,531,365
    
    
    
    39,572,086Dividends declared
    
    $
    0.14
    
    
    $
    0.13
    
    
    $
    0.28
    
    
    $
    0.25
 See accompanying notes to consolidated financial statements. 3




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WESTCORP AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited) AccumulatedOtherComprehensiveCommon
    
    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
    )
    
    $
    613,197Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,605
    
    
    
    
    
    
    
    123,605Unrealized 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
    
    
    
    68,467Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158,414Issuance of common stock
    
    
    12,371,500
    
    
    
    12,372
    
    
    
    356,863
    
    
    
    
    
    
    
    
    
    
    
    369,235Issuance of subsidiary common stock
    
    
    
    
    
    
    
    
    
    
    702
    
    
    
    
    
    
    
    
    
    
    
    702Stock options expensed (5)
    
    
    
    
    
    
    
    
    
    
    669
    
    
    
    
    
    
    
    
    
    
    
    669Stock options exercised
    
    
    126,424
    
    
    
    126
    
    
    
    1,749
    
    
    
    
    
    
    
    
    
    
    
    1,875Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,607
    )
    
    
    
    
    
    
    (21,607
    )Balance at December 31, 2003
    
    
    51,698,398
    
    
    
    51,698
    
    
    
    710,001
    
    
    
    427,527
    
    
    
    (66,741
    )
    
    
    1,122,485Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,779
    
    
    
    
    
    
    
    97,779Unrealized losses on securities
available for sale, net of tax (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,267
    )
    
    
    (20,267
    )Unrealized gains on cash flow
hedges, net of tax (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,067
    
    
    
    11,067Reclassification 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)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,626
    
    
    
    26,626Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    113,759Issuance of subsidiary common stock
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    
    
    
    
    (30
    )Stock options expensed (5)
    
    
    
    
    
    
    
    
    
    
    1,176
    
    
    
    
    
    
    
    
    
    
    
    1,176Stock options exercised
    
    
    134,798
    
    
    
    135
    
    
    
    2,090
    
    
    
    
    
    
    
    
    
    
    
    2,225Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,978
    )
    
    
    
    
    
    
    (13,978
    )Balance at June 30, 2004
    
    
    51,833,196
    
    
    $
    51,833
    
    
    $
    713,237
    
    
    $
    511,328
    
    
    $
    (50,761
    )
    
    $
    1,225,637
   (1)
    
    The pre-tax amount of unrealized losses on securities available for sale
was $33.8 million for the six months ended June 30, 2004 compared with
unrealized losses of $12.2 million for the year ended December 31, 2003.(2)
    
    The pre-tax amount of unrealized gains on cash flow hedges was $18.4
million for the six months ended June 30, 2004 compared with unrealized
losses of $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 six months ended June
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 $44.4 million for the six months ended June 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. 4




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WESTCORP AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Six Months EndedJune 30,2004
    
    2003(Dollars in thousands)OPERATING ACTIVITIESNet income
    
    $
    97,779
    
    
    $
    55,152Adjustments to reconcile net income to net cash provided by
operating activities:Provision for credit losses
    
    
    113,834
    
    
    
    147,921Depreciation
    
    
    6,104
    
    
    
    7,245Amortization of losses on cash flow hedges
    
    
    22,737
    
    
    
    24,700Amortization of premium on mortgage-backed securities
    
    
    23,748
    
    
    
    33,587Amortization of participation paid to dealers
    
    
    61,388
    
    
    
    52,756Amortization, other
    
    
    766
    
    
    
    739Gain on sales, net
    
    
    (6,619
    )
    
    
    (2,257
    )Other
    
    
    556
    
    
    
    340(Increase) decrease in other assets
    
    
    (2,923
    )
    
    
    28,899Increase in other liabilities
    
    
    23,709
    
    
    
    5,082Other, net
    
    
    16,128
    
    
    
    3,594NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    357,207
    
    
    
    357,758INVESTING ACTIVITIESLoans receivable:Origination of loans
    
    
    (3,391,477
    )
    
    
    (3,157,698
    )Participation paid to dealers
    
    
    (74,972
    )
    
    
    (69,714
    )Loan payments and payoffs
    
    
    2,862,392
    
    
    
    2,433,365Investment securities available for sale:Purchases
    
    
    (63,320
    )
    
    
    (42,939
    )Proceeds from sale
    
    
    48,070
    
    
    
    515Proceeds from maturities
    
    
    330
    
    
    
    34,047Mortgage-backed securities:Purchases
    
    
    (725,877
    )
    
    
    (1,005,706
    )Proceeds from sale
    
    
    52,295Payments received
    
    
    638,705
    
    
    
    904,670Purchase of premises and equipment
    
    
    (5,226
    )
    
    
    (7,420
    )Proceeds from sales of premises and equipment
    
    
    4,499
    
    
    
    2,912NET CASH USED IN INVESTING ACTIVITIES
    
    
    (654,581
    )
    
    
    (907,968
    )FINANCING ACTIVITIESIncrease in deposits
    
    
    55,995
    
    
    
    43,164Decrease in securities sold under agreements to repurchase
    
    
    (218,741
    )
    
    
    (64,790
    )Proceeds from notes payable on automobile secured financing
    
    
    2,949,305
    
    
    
    2,832,931Payments on notes payable on automobile secured financing
    
    
    (2,743,180
    )
    
    
    (2,193,278
    )Decrease in borrowings
    
    
    (233
    )
    
    
    (300
    )Increase in FHLB advances
    
    
    262,938
    
    
    
    80,433Payments on issuance of subordinated debentures
    
    
    (22,365
    )
    
    
    (5,742
    )Increase in restricted cash
    
    
    (127,188
    )
    
    
    (127,413
    )Proceeds from issuance of common stock
    
    
    2,225
    
    
    
    579Proceeds from issuance of subsidiary common stock
    
    
    18
    
    
    
    32Cash dividends
    
    
    (13,979
    )
    
    
    (9,801
    )Payments on cash flow hedges
    
    
    (1,762
    )
    
    
    (28,299
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    143,033
    
    
    
    527,516DECREASE IN CASH AND DUE FROM BANKS
    
    
    (154,341
    )
    
    
    (22,694
    )Cash and due from banks at beginning of year
    
    
    382,082
    
    
    
    84,215CASH AND DUE FROM BANKS AT END OF PERIOD
    
    $
    227,741
    
    
    $
    61,521
 See accompanying notes to consolidated financial statements. 5




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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 six months ended June 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: June 30, 2004Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gain
    
    Loss
    
    Value(Dollars in thousands)GNMA certificates
    
    $
    2,615,634
    
    
    $
    12,601
    
    
    $
    23,512
    
    
    $
    2,604,723FNMA participation certificates
    
    
    32,594
    
    
    
    202
    
    
    
    259
    
    
    
    32,537FHLMC participation certificates
    
    
    41,080
    
    
    
    107
    
    
    
    441
    
    
    
    40,746Other
    
    
    1,668
    
    
    
    
    
    
    
    
    
    
    
    1,668$
    2,690,976
    
    
    $
    12,910
    
    
    $
    24,212
    
    
    $
    2,679,674
 6




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##### Table of Contents



December 31, 2003Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gain
    
    Loss
    
    Value(Dollars in thousands)GNMA certificates
    
    $
    2,613,962
    
    
    $
    28,607
    
    
    $
    4,484
    
    
    $
    2,638,085FNMA participation certificates
    
    
    24,967
    
    
    
    306
    
    
    
    
    
    
    
    25,273FHLMC participation certificates
    
    
    36,734
    
    
    
    9
    
    
    
    78
    
    
    
    36,665Other
    
    
    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
60% fixed rate certificates and 40% variable rate certificates at June 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: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Consumer:Automobile contracts
    
    $
    11,161,963
    
    
    $
    10,657,864Dealer participation, net of deferred contract fees
    
    
    183,679
    
    
    
    175,263Other
    
    
    6,055
    
    
    
    6,002Unearned discounts
    
    
    (48,983
    )
    
    
    (61,300
    )11,302,714
    
    
    
    10,777,829Real estate:Mortgage
    
    
    185,813
    
    
    
    237,668Construction
    
    
    33,143
    
    
    
    16,503218,956
    
    
    
    254,171Undisbursed loan proceeds
    
    
    (30,340
    )
    
    
    (17,948
    )188,616
    
    
    
    236,223Commercial
    
    
    81,298
    
    
    
    124,43111,572,628
    
    
    
    11,138,483Allowance for credit losses
    
    
    (307,293
    )
    
    
    (301,602
    )$
    11,265,335
    
    
    $
    10,836,881
 Loans managed by us, excluding dealer participation and deferred contract fees,
totaled $11.4 billion and $11.0 billion as of June 30, 2004 and December 31,
2003, respectively. We owned all of the $11.4 billion and $11.0 billion loans
managed at June 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 $51.7 million and $53.0 million at June
30, 2004 and December 31, 2003, respectively. Repossessed assets and real
estate owned were $6.7 million and $10.6 million at June 30, 2004 and December
31, 2003, respectively, and are included in other assets on our Consolidated
Statements of Financial Condition. 7




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##### Table of Contents



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 Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    303,062
    
    
    $
    281,030
    
    
    $
    301,602
    
    
    $
    269,352Chargeoffs:Consumer loans
    
    
    (70,213
    )
    
    
    (79,369
    )
    
    
    (155,714
    )
    
    
    (170,149
    )Mortgage loans
    
    
    (63
    )
    
    
    (267
    )
    
    
    (130
    )
    
    
    (338
    )(70,276
    )
    
    
    (79,636
    )
    
    
    (155,844
    )
    
    
    (170,487
    )Recoveries:Consumer loans
    
    
    22,954
    
    
    
    21,990
    
    
    
    47,679
    
    
    
    44,590Commercial loans
    
    
    14
    
    
    
    14
    
    
    
    22
    
    
    
    49Mortgage loans
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    3422,968
    
    
    
    22,029
    
    
    
    47,701
    
    
    
    44,673Net chargeoffs
    
    
    (47,308
    )
    
    
    (57,607
    )
    
    
    (108,143
    )
    
    
    (125,814
    )Provision for credit losses
    
    
    51,539
    
    
    
    68,036
    
    
    
    113,834
    
    
    
    147,921Balance at end of period
    
    $
    307,293
    
    
    $
    291,459
    
    
    $
    307,293
    
    
    $
    291,459Ratio of net chargeoffs
during the period
(annualized) to average loans
outstanding during the period
    
    
    1.7
    %
    
    
    2.3
    %
    
    
    1.9
    %
    
    
    2.5
    %Ratio of allowance for credit
losses to loans at the end of
the period
    
    
    2.7
    %
    
    
    2.8
    %
    
    
    2.7
    %
    
    
    2.8
    %
 8




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##### Table of Contents



Note 5  Deposits Deposits consisted of the following: Weighted Average
    
    
    
    
    
    Weighted AverageRate for the
    
    
    
    
    
    Rate for theWeighted
    
    Six Months Ended
    
    Effects of Hedging
    
    Six Months EndedAverage Rate
    
    June 30, 2004
    
    for the
    
    June 30, 2004At June 30,
    
    Excluding the Effects
    
    Six Months Ended
    
    Including the Effects2004 (1)
    
    of Hedging
    
    June 30, 2004
    
    of HedgingNoninterest bearing depositsDemand deposit accounts
    
    
    0.1
    %
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %Passbook accounts
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Money market deposit accounts
    
    
    1.7
    
    
    
    1.1
    
    
    
    0.1
    
    
    
    1.2Brokered certificate accounts
    
    
    1.4
    
    
    
    1.7
    
    
    
    
    
    
    
    1.7Certificate accounts
    
    
    1.9
    
    
    
    1.7
    
    
    
    4.6
    
    
    
    6.3
   (1)
    
    Contractual rate. June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Noninterest bearing deposits
    
    $
    208,649
    
    
    $
    210,405Demand deposit accounts
    
    
    492
    
    
    
    1,145Passbook accounts
    
    
    6,258
    
    
    
    7,282Money market deposit accounts
    
    
    1,147,004
    
    
    
    963,004Brokered certificate accounts
    
    
    52,500
    
    
    
    62,451Certificate accounts
    
    
    595,060
    
    
    
    728,569$
    2,009,963
    
    
    $
    1,972,856
 Note 6  Notes Payable on Automobile Secured Financing In connection with our public asset-backed securitization activities, we issued
$1.5 billion and $3.0 billion of notes secured by automobile contracts for the
three and six months ended June 30, 2004, respectively, compared with $1.5
billion and $2.8 billion for the same respective periods in 2003. There were
$10.4 billion of notes payable on automobile secured financing outstanding at
June 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 $88.6 million
and $183 million for the three and six months ended June 30, 2004,
respectively, compared with $106 million and $217 million for the same
respective periods in 2003. 9




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##### Table of Contents



Note 7  Accumulated Other Comprehensive Loss, Net of Tax The following table summarizes the components of accumulated other
comprehensive loss, net of tax: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Unrealized (loss) gain on marketable securities
    
    $
    (6,941
    )
    
    $
    14,771Unrealized loss on interest rate swaps: (1)Deposits
    
    
    (26,964
    )
    
    
    (38,297
    )Automobile secured financing
    
    
    (5,602
    )
    
    
    (19,539
    )Securities sold under agreements to repurchase
    
    
    
    
    
    
    (2,248
    )(32,566
    )
    
    
    (60,084
    )Realized loss on settled cash flow hedges: (1)Deposits
    
    
    (9,587
    )
    
    
    (9,539
    )Automobile secured financing
    
    
    (1,667
    )
    
    
    (11,889
    )(11,254
    )
    
    
    (21,428
    )Total other accumulated comprehensive loss
    
    $
    (50,761
    )
    
    $
    (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 Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Net income
    
    $
    54,414
    
    
    $
    31,603
    
    
    $
    97,779
    
    
    $
    55,152Unrealized losses
on securities
available for sale,
net of tax
    
    
    (23,380
    )
    
    
    (6,541
    )
    
    
    (20,267
    )
    
    
    (5,742
    )Unrealized gains
(losses) on cash
flow hedges, net of
tax
    
    
    32,260
    
    
    
    (25,602
    )
    
    
    11,067
    
    
    
    (37,943
    )Reclassification
adjustment for
gains on securities
available for sale
included in income,
net of tax
    
    
    (1,446
    )
    
    
    (4
    )
    
    
    (1,446
    )
    
    
    (4
    )Reclassification
adjustment for
losses on cash flow
hedges included in
income, net of tax
    
    
    12,528
    
    
    
    16,784
    
    
    
    26,626
    
    
    
    33,968Comprehensive income
    
    $
    74,376
    
    
    $
    16,240
    
    
    $
    113,759
    
    
    $
    45,431
 Note 9  Dividends On April 26, 2004, we declared a cash dividend of $0.14 per share for
shareholders of record as of August 3, 2004 with a payable date of August 17,
2004. 10




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##### Table of Contents



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 June 30, 2004 were as follows: Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageNumber
    
    Remaining
    
    Exercise
    
    Number
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$12.00  13.00
    
    
    175,066
    
    
    
    1.50
    
    
    $
    12.63
    
    
    
    175,066
    
    
    $
    12.6313.00  14.00
    
    
    165,375
    
    
    
    2.64
    
    
    
    13.25
    
    
    
    165,375
    
    
    
    13.2515.00  16.00
    
    
    1,000
    
    
    
    3.36
    
    
    
    15.25
    
    
    
    750
    
    
    
    15.2517.00  18.00
    
    
    244,838
    
    
    
    3.65
    
    
    
    17.32
    
    
    
    168,775
    
    
    
    17.3218.00  19.00
    
    
    713,833
    
    
    
    4.06
    
    
    
    18.57
    
    
    
    248,756
    
    
    
    18.5319.00  20.00
    
    
    5,000
    
    
    
    5.10
    
    
    
    19.85
    
    
    
    1,250
    
    
    
    19.8520.00  21.00
    
    
    3,000
    
    
    
    5.35
    
    
    
    20.41
    
    
    
    750
    
    
    
    20.4142.00  43.00
    
    
    535,100
    
    
    
    4.64
    
    
    
    42.19$12.00  43.00
    
    
    1,843,212
    
    
    
    3.81
    
    
    $
    24.22
    
    
    
    760,722
    
    
    $
    15.75
 Stock option activity is summarized as follows: WeightedAverageShares
    
    Exercise PriceOutstanding at January 1, 2003
    
    
    1,167,438
    
    
    $
    15.91Granted
    
    
    444,000
    
    
    
    18.78Exercised
    
    
    (126,424
    )
    
    
    14.84Forfeited
    
    
    (24,478
    )
    
    
    17.19Outstanding at December 31, 2003
    
    
    1,460,536
    
    
    
    16.86Granted
    
    
    540,900
    
    
    
    42.19Exercised
    
    
    (134,798
    )
    
    
    16.50Forfeited
    
    
    (23,426
    )
    
    
    24.01Outstanding at June 30, 2004
    
    
    1,843,212
    
    
    $
    24.22
 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 period ending June 30, 2004 was $13.26 compared to
$5.48 for the year ended December 31, 2003. 11




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##### Table of Contents



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 Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share amounts)Net income, as reported
    
    $
    54,415
    
    
    $
    31,603
    
    
    $
    97,779
    
    
    $
    55,152Add: Stock-based employee
compensation expense
included in reported net
income, net of related
tax effects
    
    
    474
    
    
    
    123
    
    
    
    709
    
    
    
    163Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    609
    
    
    
    339
    
    
    
    1,015
    
    
    
    605Pro forma net income
    
    $
    54,280
    
    
    $
    31,387
    
    
    $
    97,473
    
    
    $
    54,710Earnings per share:Basic  as reported
    
    $
    1.05
    
    
    $
    0.81
    
    
    $
    1.89
    
    
    $
    1.41Basic  pro forma
    
    $
    1.05
    
    
    $
    0.80
    
    
    $
    1.88
    
    
    $
    1.40Earnings per share:Diluted  as reported
    
    $
    1.04
    
    
    $
    0.80
    
    
    $
    1.86
    
    
    $
    1.39Diluted  pro forma
    
    $
    1.03
    
    
    $
    0.79
    
    
    $
    1.86
    
    
    $
    1.38
 Note 11  Commitments and Contingencies We or our subsidiaries are involved as parties to certain legal proceedings
incidental to our business, including Lee, et al. v. WFS Financial Inc,United
States District Court, Middle District of Tennessee at Nashville, No. 3-02-0570
filed June 17, 2002 (a putative class action raising claims under the Equal
Credit Opportunity Act) and other similar cases. 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, and gave plaintiff until July 30, 2004 to file an amended
consolidated complaint in the action. 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 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. 12




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##### Table of Contents



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. In connection with the merger, the Bank has
filed an application with the California Department of Financial Institutions
to convert its federal thrift charter to a California state bank charter. The
merger agreement is conditioned upon the conversion of the charter. The
transaction is subject to, among other closing conditions, the receipt of
regulatory approvals and the approval of a majority of WFS Financials
shareholders, other than shares controlled by Westcorp. 13




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##### Table of Contents



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
six months ended June 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 June 30,
    
    For the Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands, except per share amounts)Consolidated Statements of Income Data:Interest income
    
    $
    310,983
    
    
    $
    309,562
    
    
    $
    624,642
    
    
    $
    617,425Interest expense
    
    
    114,017
    
    
    
    135,637
    
    
    
    233,435
    
    
    
    277,209Net interest income
    
    
    196,966
    
    
    
    173,925
    
    
    
    391,207
    
    
    
    340,216Provision for credit losses
    
    
    51,539
    
    
    
    68,036
    
    
    
    113,834
    
    
    
    147,921Net interest income after provision for credit losses
    
    
    145,427
    
    
    
    105,889
    
    
    
    277,373
    
    
    
    192,295Noninterest income
    
    
    27,554
    
    
    
    27,731
    
    
    
    56,244
    
    
    
    55,483Noninterest expense
    
    
    73,453
    
    
    
    72,657
    
    
    
    144,670
    
    
    
    141,096Income before income tax
    
    
    99,528
    
    
    
    60,963
    
    
    
    188,947
    
    
    
    106,682Income tax
    
    
    39,725
    
    
    
    23,975
    
    
    
    75,039
    
    
    
    42,200Income before minority interest
    
    
    59,803
    
    
    
    36,988
    
    
    
    113,908
    
    
    
    64,482Minority interest in earnings of subsidiaries
    
    
    5,388
    
    
    
    5,385
    
    
    
    16,129
    
    
    
    9,330Net income
    
    $
    54,415
    
    
    $
    31,603
    
    
    $
    97,779
    
    
    $
    55,152Weighted average number of shares and common share
equivalents  diluted
    
    
    52,483,220
    
    
    
    39,676,670
    
    
    
    52,531,365
    
    
    
    39,572,086Earnings per common share  diluted
    
    $
    1.04
    
    
    $
    0.80
    
    
    $
    1.86
    
    
    $
    1.39Dividends per share
    
    $
    0.14
    
    
    $
    0.13
    
    
    $
    0.28
    
    
    $
    0.25Dividend payout ratio
    
    
    13.5
    %
    
    
    16.3
    %
    
    
    15.0
    %
    
    
    18.0
    %
 14




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##### Table of Contents



June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Consolidated Statements of Financial Condition Data:Assets:Cash and due from banks
    
    $
    227,741
    
    
    $
    382,082Loans:Consumer (1)
    
    
    11,302,714
    
    
    
    10,777,829Mortgage (2)
    
    
    188,616
    
    
    
    236,223Commercial
    
    
    81,298
    
    
    
    124,431Mortgage-backed securities
    
    
    2,679,674
    
    
    
    2,701,797Investments and time deposits
    
    
    505,677
    
    
    
    363,148Other assets
    
    
    320,685
    
    
    
    332,012Less: Allowance for credit losses
    
    
    307,293
    
    
    
    301,602Total assets
    
    $
    14,999,112
    
    
    $
    14,615,920Liabilities:Deposits
    
    $
    2,009,963
    
    
    $
    1,972,856Notes payable on automobile secured financing
    
    
    10,434,553
    
    
    
    10,254,641FHLB advances and other borrowings
    
    
    600,395
    
    
    
    560,179Subordinated debentures
    
    
    373,581
    
    
    
    394,854Other liabilities
    
    
    203,181
    
    
    
    179,471Total liabilities
    
    
    13,621,673
    
    
    
    13,362,001Minority interest in equity of subsidiaries
    
    
    151,802
    
    
    
    131,434Shareholders equity
    
    
    1,225,637
    
    
    
    1,122,485Total liabilities and shareholders equity
    
    $
    14,999,112
    
    
    $
    14,615,920
 At or For the
    
    At or For theThree Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Other Selected Financial Data:Average automobile contracts managed
    
    $
    10,946,273
    
    
    $
    9,839,661
    
    
    $
    10,836,160
    
    
    $
    9,686,488Average shareholders equity (3)
    
    $
    1,253,476
    
    
    $
    745,454
    
    
    $
    1,230,284
    
    
    $
    733,732Return on average shareholders equity (3)
    
    
    17.36
    %
    
    
    16.96
    %
    
    
    15.90
    %
    
    
    15.03
    %Book value per share (3)
    
    $
    24.63
    
    
    $
    19.39
    
    
    $
    24.63
    
    
    $
    19.39Total equity to assets (4)
    
    
    9.52
    %
    
    
    6.38
    %
    
    
    9.52
    %
    
    
    6.38
    %Originations:Consumer loans (1)
    
    $
    1,668,143
    
    
    $
    1,588,803
    
    
    $
    3,254,304
    
    
    $
    2,942,731Mortgage loans (2)
    
    
    8,798
    
    
    
    14,996
    
    
    
    11,455
    
    
    
    19,310Commercial loans
    
    
    58,839
    
    
    
    98,972
    
    
    
    125,718
    
    
    
    195,657Total loan originations
    
    $
    1,735,780
    
    
    $
    1,702,771
    
    
    $
    3,391,477
    
    
    $
    3,157,698Interest rate spread
    
    
    5.02
    %
    
    
    5.00
    %
    
    
    5.03
    %
    
    
    4.99
    %
   (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. 15




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##### Table of Contents



Critical Accounting Policies Management believes critical accounting policies are important to the portrayal
of our financial condition and results of operations. Critical accounting
policies require difficult and complex judgments because they rely on estimates
about the effect of matters that are inherently uncertain due to the impact of
changing market conditions. The following is a summary of accounting policies
we consider critical. Securitization Transactions Contracts sold by us to our special purpose entity subsidiaries in connection
with securitization transactions are treated as having been sold for bankruptcy
purposes. The subsequent transfer of such 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 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 send funds to a 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 scores and the effectiveness of our custom scores, and trends in the
economy generally or in specific geographic locations. Despite these analyses,
we recognize that establishing allowance for credit losses is not an exact
science and can be highly judgmental in nature. The analysis of the adequacy of the allowance for credit losses is not only
dependent upon effective quantitative and qualitative analyses, but also
effective loan review and asset classification. We classify our assets in
accordance with regulatory guidance. Our multifamily and commercial loan
portfolios are evaluated individually while our single family and consumer
portfolios are evaluated in pools. We classify our assets into five categories:
Pass, Special Mention, Substandard, Doubtful and Loss. Based upon our asset
classifications, we establish general and specific valuation allowances. General valuation allowances are determined by applying various factors to loan
balances that are classified as Pass, Special Mention, Substandard or Doubtful.
Specific valuation allowances represent loan amounts that are classified as
Loss. Some assets may be split into more than one asset classification due to
fair value or net realizable value calculations. 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. 16




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##### Table of Contents



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. 17




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##### Table of Contents



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 $197 million and $391 million for the three and six months ended June
30, 2004, respectively, compared with $174 million and $340 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. The following table presents information relative to the average balances and
interest rates for the periods indicated: For the Three Months Ended June 30,2004
    
    2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in thousands)Interest earning assets:Total investments:Mortgage-backed securities
    
    $
    2,574,744
    
    
    $
    22,150
    
    
    
    3.44
    %
    
    $
    2,541,878
    
    
    $
    21,241
    
    
    
    3.34
    %Other short-term investments
    
    
    663,896
    
    
    
    1,809
    
    
    
    1.10
    
    
    
    262,229
    
    
    
    780
    
    
    
    1.20Investment securities
    
    
    129,367
    
    
    
    1,122
    
    
    
    3.47
    
    
    
    59,601
    
    
    
    661
    
    
    
    4.43Interest earning deposits with others
    
    
    5,530
    
    
    
    9
    
    
    
    0.64
    
    
    
    8,100
    
    
    
    18
    
    
    
    0.89Total investments
    
    
    3,373,537
    
    
    
    25,090
    
    
    
    2.97
    
    
    
    2,871,808
    
    
    
    22,700
    
    
    
    3.16Total loans: (1)Consumer loans
    
    
    11,133,553
    
    
    
    281,775
    
    
    
    10.18
    
    
    
    10,009,466
    
    
    
    282,001
    
    
    
    11.30Mortgage loans
    
    
    210,156
    
    
    
    2,623
    
    
    
    4.99
    
    
    
    256,201
    
    
    
    3,519
    
    
    
    5.49Commercial loans
    
    
    103,042
    
    
    
    1,440
    
    
    
    5.53
    
    
    
    106,387
    
    
    
    1,242
    
    
    
    4.62Construction loans
    
    
    5,268
    
    
    
    55
    
    
    
    4.09
    
    
    
    8,418
    
    
    
    100
    
    
    
    4.68Total loans
    
    
    11,452,019
    
    
    
    285,893
    
    
    
    10.04
    
    
    
    10,380,472
    
    
    
    286,862
    
    
    
    11.08Total interest earning assets
    
    $
    14,825,556
    
    
    
    310,983
    
    
    
    8.43
    
    
    $
    13,252,280
    
    
    
    309,562
    
    
    
    9.37Interest bearing liabilities:Deposits
    
    $
    2,089,287
    
    
    
    13,884
    
    
    
    2.67
    
    
    $
    2,011,243
    
    
    
    17,017
    
    
    
    3.39Securities sold under agreements to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,184
    
    
    
    1,111
    
    
    
    2.15FHLB advances and other borrowings
    
    
    676,914
    
    
    
    2,053
    
    
    
    1.20
    
    
    
    391,019
    
    
    
    1,456
    
    
    
    1.47Notes payable on automobile secured financing
    
    
    10,247,231
    
    
    
    88,591
    
    
    
    3.46
    
    
    
    9,406,809
    
    
    
    106,174
    
    
    
    4.51Subordinated debentures
    
    
    381,199
    
    
    
    9,489
    
    
    
    9.96
    
    
    
    396,610
    
    
    
    9,879
    
    
    
    9.96Total interest bearing liabilities
    
    $
    13,394,631
    
    
    
    114,017
    
    
    
    3.41
    
    
    $
    12,409,865
    
    
    
    135,637
    
    
    
    4.37Net interest income and interest rate spread
    
    
    
    
    
    $
    196,966
    
    
    
    5.02
    %
    
    
    
    
    
    $
    173,925
    
    
    
    5.00
    %Net yield on average interest earning assets
    
    
    
    
    
    
    
    
    
    
    5.35
    %
    
    
    
    
    
    
    
    
    
    
    5.28
    %
   (1)
    
    For the purpose of these computations, nonaccruing loans are included in
the average loan amounts outstanding. 18




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##### Table of Contents



For the Six Months Ended June 30,2004
    
    2003Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars in thousands)Interest earning assets:Total investments:Mortgage-backed securities
    
    $
    2,584,929
    
    
    $
    46,838
    
    
    
    3.62
    %
    
    $
    2,513,539
    
    
    $
    46,015
    
    
    
    3.66
    %Other short-term investments
    
    
    627,153
    
    
    
    3,413
    
    
    
    1.09
    
    
    
    275,104
    
    
    
    1,827
    
    
    
    1.34Investment securities
    
    
    127,272
    
    
    
    2,180
    
    
    
    3.43
    
    
    
    57,230
    
    
    
    1,390
    
    
    
    4.86Interest earning deposits with others
    
    
    5,775
    
    
    
    18
    
    
    
    0.63
    
    
    
    9,173
    
    
    
    43
    
    
    
    0.94Total investments
    
    
    3,345,129
    
    
    
    52,449
    
    
    
    3.14
    
    
    
    2,855,046
    
    
    
    49,275
    
    
    
    3.45Total loans: (1)Consumer loans
    
    
    11,021,138
    
    
    
    563,816
    
    
    
    10.29
    
    
    
    9,853,159
    
    
    
    558,132
    
    
    
    11.42Mortgage loans
    
    
    219,768
    
    
    
    5,527
    
    
    
    5.03
    
    
    
    264,072
    
    
    
    7,339
    
    
    
    5.56Commercial loans
    
    
    101,165
    
    
    
    2,743
    
    
    
    5.36
    
    
    
    108,309
    
    
    
    2,529
    
    
    
    4.64Construction loans
    
    
    4,753
    
    
    
    107
    
    
    
    4.43
    
    
    
    6,862
    
    
    
    150
    
    
    
    4.36Total loans
    
    
    11,346,824
    
    
    
    572,193
    
    
    
    10.14
    
    
    
    10,232,402
    
    
    
    568,150
    
    
    
    11.20Total interest earning assets
    
    $
    14,691,953
    
    
    
    624,642
    
    
    
    8.55
    
    
    $
    13,087,448
    
    
    
    617,425
    
    
    
    9.51Interest bearing liabilities:Deposits
    
    $
    1,998,031
    
    
    
    27,191
    
    
    
    2.74
    
    
    $
    1,987,392
    
    
    
    34,574
    
    
    
    3.51Securities sold under agreements to repurchase
    
    
    16,885
    
    
    
    94
    
    
    
    1.10
    
    
    
    226,157
    
    
    
    2,400
    
    
    
    2.11FHLB advances and other borrowings
    
    
    672,198
    
    
    
    4,067
    
    
    
    1.20
    
    
    
    408,804
    
    
    
    3,085
    
    
    
    1.53Notes payable on automobile secured financing
    
    
    10,205,685
    
    
    
    182,809
    
    
    
    3.58
    
    
    
    9,254,688
    
    
    
    217,334
    
    
    
    4.70Subordinated debentures
    
    
    387,434
    
    
    
    19,274
    
    
    
    9.95
    
    
    
    397,711
    
    
    
    19,816
    
    
    
    9.96Total interest bearing liabilities
    
    $
    13,280,233
    
    
    
    233,435
    
    
    
    3.52
    
    
    $
    12,274,752
    
    
    
    277,209
    
    
    
    4.52Net interest income and interest rate spread
    
    
    
    
    
    $
    391,207
    
    
    
    5.03
    %
    
    
    
    
    
    $
    340,216
    
    
    
    4.99
    %Net yield on average interest earning assets
    
    
    
    
    
    
    
    
    
    
    5.37
    %
    
    
    
    
    
    
    
    
    
    
    5.27
    %
   (1)
    
    For the purpose of these computations, nonaccruing loans are included in
the average loan amounts outstanding. The total interest rate spread increased 2 basis points for the three months
ended June 30, 2004 compared with the three months ended June 30, 2003 due to a
decrease of 94 basis points in the yield on interest earning assets combined
with a 96 basis point decrease in the cost of funds. The total interest rate
spread increased 4 basis points for the six months ended June 30, 2004 compared
with the six months ended June 30, 2003 due to a decrease of 96 basis points in
the yield on interest earning assets combined with a 100 basis point decrease
in the cost of funds. The decrease in the yield on interest earning assets in
2004 is primarily due to our shift to originating a higher percentage of prime
credit quality contracts, higher prepayments on our mortgage-backed securities,
also known as MBS, and a lower interest rate environment. The decrease in the
cost of funds in 2004 compared with 2003 is due primarily to a lower interest
rate environment. 19




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##### Table of Contents



The following table sets forth the changes in net interest income attributable
to changes in volume (change in average portfolio volume multiplied by prior
period average rate) and changes in rates (change in weighted average interest
rate multiplied by prior period average portfolio balance): For the Six Months Ended June 30, 2004Compared to the Six Months Ended June 30, 2003 (1)Volume
    
    Rate
    
    Total(Dollars in thousands)Increase (decrease) in interest income:Mortgage-backed securities
    
    $
    2,046
    
    
    $
    (1,223
    )
    
    $
    823Other short-term investments
    
    
    2,585
    
    
    
    (999
    )
    
    
    1,586Investment securities
    
    
    1,956
    
    
    
    (1,166
    )
    
    
    790Interest earning deposits with others
    
    
    (13
    )
    
    
    (12
    )
    
    
    (25
    )Total loans:Consumer loans
    
    
    124,467
    
    
    
    (118,783
    )
    
    
    5,684Mortgage loans
    
    
    (1,155
    )
    
    
    (657
    )
    
    
    (1,812
    )Commercial loans
    
    
    (401
    )
    
    
    615
    
    
    
    214Construction loans
    
    
    (50
    )
    
    
    7
    
    
    
    (43
    )Total interest income
    
    $
    129,435
    
    
    $
    (122,218
    )
    
    $
    7,217Increase (decrease) in interest expense:Deposits
    
    $
    553
    
    
    $
    (7,936
    )
    
    $
    (7,383
    )Securities sold under agreements to repurchase
    
    
    (1,520
    )
    
    
    (786
    )
    
    
    (2,306
    )FHLB advances and other borrowings
    
    
    3,166
    
    
    
    (2,184
    )
    
    
    982Notes payable on automobile secured financing
    
    
    52,058
    
    
    
    (86,583
    )
    
    
    (34,525
    )Subordinated debentures
    
    
    (522
    )
    
    
    (20
    )
    
    
    (542
    )Total interest expense
    
    $
    53,735
    
    
    $
    (97,509
    )
    
    $
    (43,774
    )Increase in net interest income
    
    
    
    
    
    
    
    
    
    $
    50,991
   (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 $51.5 million and $114 million for the three and six months ended June
30, 2004, respectively, compared with $68.0 million and $148 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. 20




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##### Table of Contents



Contract Securitizations The following table lists each of our public securitizations. All
securitizations prior to 2000-C were paid in full on or before their
contractual maturity dates and none of the remaining securitizations have yet
reached their contractual maturity dates. Securitizations Remaining
    
    
    
    
    
    
    
    
    
    GrossRemaining
    
    Balance as a
    
    Original
    
    Original
    
    InterestIssue
    
    
    
    Original
    
    Balance at
    
    Percent of
    
    Weighted
    
    Weighted Average
    
    RateNumber
    
    Close Date
    
    Balance
    
    June 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
    
    
    
    7.571987-A
    
    March, 1987
    
    
    125,000
    
    
    Paid in full
    
    
    
    
    
    
    12.42
    
    
    
    6.75
    
    
    
    5.671987-B
    
    July, 1987
    
    
    110,000
    
    
    Paid in full
    
    
    
    
    
    
    12.68
    
    
    
    7.80
    
    
    
    4.881988-A
    
    February, 1988
    
    
    155,000
    
    
    Paid in full
    
    
    
    
    
    
    13.67
    
    
    
    7.75
    
    
    
    5.921988-B
    
    May, 1988
    
    
    100,000
    
    
    Paid in full
    
    
    
    
    
    
    14.01
    
    
    
    8.50
    
    
    
    5.511988-C
    
    July, 1988
    
    
    100,000
    
    
    Paid in full
    
    
    
    
    
    
    15.41
    
    
    
    8.50
    
    
    
    6.911988-D
    
    October, 1988
    
    
    105,000
    
    
    Paid in full
    
    
    
    
    
    
    14.95
    
    
    
    8.85
    
    
    
    6.101989-A
    
    March, 1989
    
    
    75,000
    
    
    Paid in full
    
    
    
    
    
    
    15.88
    
    
    
    10.45
    
    
    
    5.431989-B
    
    June, 1989
    
    
    100,000
    
    
    Paid in full
    
    
    
    
    
    
    15.96
    
    
    
    9.15
    
    
    
    6.811990-A
    
    August, 1990
    
    
    150,000
    
    
    Paid in full
    
    
    
    
    
    
    16.05
    
    
    
    8.35
    
    
    
    7.701990-1
    
    November, 1990
    
    
    150,000
    
    
    Paid in full
    
    
    
    
    
    
    15.56
    
    
    
    8.50
    
    
    
    7.061991-1
    
    April, 1991
    
    
    200,000
    
    
    Paid in full
    
    
    
    
    
    
    16.06
    
    
    
    7.70
    
    
    
    8.361991-2
    
    May, 1991
    
    
    200,000
    
    
    Paid in full
    
    
    
    
    
    
    15.75
    
    
    
    7.30
    
    
    
    8.451991-3
    
    August, 1991
    
    
    175,000
    
    
    Paid in full
    
    
    
    
    
    
    15.69
    
    
    
    6.75
    
    
    
    8.941991-4
    
    December, 1991
    
    
    150,000
    
    
    Paid in full
    
    
    
    
    
    
    15.53
    
    
    
    5.63
    
    
    
    9.901992-1
    
    March, 1992
    
    
    150,000
    
    
    Paid in full
    
    
    
    
    
    
    14.49
    
    
    
    5.85
    
    
    
    8.641992-2
    
    June, 1992
    
    
    165,000
    
    
    Paid in full
    
    
    
    
    
    
    14.94
    
    
    
    5.50
    
    
    
    9.441992-3
    
    September, 1992
    
    
    135,000
    
    
    Paid in full
    
    
    
    
    
    
    14.45
    
    
    
    4.70
    
    
    
    9.751993-1
    
    March, 1993
    
    
    250,000
    
    
    Paid in full
    
    
    
    
    
    
    13.90
    
    
    
    4.45
    
    
    
    9.451993-2
    
    June, 1993
    
    
    175,000
    
    
    Paid in full
    
    
    
    
    
    
    13.77
    
    
    
    4.70
    
    
    
    9.071993-3
    
    September, 1993
    
    
    187,500
    
    
    Paid in full
    
    
    
    
    
    
    13.97
    
    
    
    4.25
    
    
    
    9.721993-4
    
    December, 1993
    
    
    165,000
    
    
    Paid in full
    
    
    
    
    
    
    12.90
    
    
    
    4.60
    
    
    
    8.301994-1
    
    March, 1994
    
    
    200,000
    
    
    Paid in full
    
    
    
    
    
    
    13.67
    
    
    
    5.10
    
    
    
    8.571994-2
    
    May, 1994
    
    
    230,000
    
    
    Paid in full
    
    
    
    
    
    
    14.04
    
    
    
    6.38
    
    
    
    7.661994-3
    
    August, 1994
    
    
    200,000
    
    
    Paid in full
    
    
    
    
    
    
    14.59
    
    
    
    6.65
    
    
    
    7.941994-4
    
    October, 1994
    
    
    212,000
    
    
    Paid in full
    
    
    
    
    
    
    15.58
    
    
    
    7.10
    
    
    
    8.481995-1
    
    January, 1995
    
    
    190,000
    
    
    Paid in full
    
    
    
    
    
    
    15.71
    
    
    
    8.05
    
    
    
    7.661995-2
    
    March, 1995
    
    
    190,000
    
    
    Paid in full
    
    
    
    
    
    
    16.36
    
    
    
    7.10
    
    
    
    9.261995-3
    
    June, 1995
    
    
    300,000
    
    
    Paid in full
    
    
    
    
    
    
    15.05
    
    
    
    6.05
    
    
    
    9.001995-4
    
    September, 1995
    
    
    375,000
    
    
    Paid in full
    
    
    
    
    
    
    15.04
    
    
    
    6.20
    
    
    
    8.841995-5
    
    December, 1995
    
    
    425,000
    
    
    Paid in full
    
    
    
    
    
    
    15.35
    
    
    
    5.88
    
    
    
    9.471996-A
    
    March, 1996
    
    
    485,000
    
    
    Paid in full
    
    
    
    
    
    
    15.46
    
    
    
    6.13
    
    
    
    9.331996-B
    
    June, 1996
    
    
    525,000
    
    
    Paid in full
    
    
    
    
    
    
    15.74
    
    
    
    6.75
    
    
    
    8.991996-C
    
    September, 1996
    
    
    535,000
    
    
    Paid in full
    
    
    
    
    
    
    15.83
    
    
    
    6.60
    
    
    
    9.231996-D
    
    December, 1996
    
    
    545,000
    
    
    Paid in full
    
    
    
    
    
    
    15.43
    
    
    
    6.17
    
    
    
    9.261997-A
    
    March, 1997
    
    
    500,000
    
    
    Paid in full
    
    
    
    
    
    
    15.33
    
    
    
    6.60
    
    
    
    8.731997-B
    
    June, 1997
    
    
    590,000
    
    
    Paid in full
    
    
    
    
    
    
    15.36
    
    
    
    6.37
    
    
    
    8.991997-C
    
    September, 1997
    
    
    600,000
    
    
    Paid in full
    
    
    
    
    
    
    15.43
    
    
    
    6.17
    
    
    
    9.261997-D
    
    December, 1997
    
    
    500,000
    
    
    Paid in full
    
    
    
    
    
    
    15.19
    
    
    
    6.34
    
    
    
    8.851998-A
    
    March, 1998
    
    
    525,000
    
    
    Paid in full
    
    
    
    
    
    
    14.72
    
    
    
    6.01
    
    
    
    8.711998-B
    
    June, 1998
    
    
    660,000
    
    
    Paid in full
    
    
    
    
    
    
    14.68
    
    
    
    6.06
    
    
    
    8.621998-C
    
    November, 1998
    
    
    700,000
    
    
    Paid in full
    
    
    
    
    
    
    14.42
    
    
    
    5.81
    
    
    
    8.611999-A
    
    January, 1999
    
    
    1,000,000
    
    
    Paid in full
    
    
    
    
    
    
    14.42
    
    
    
    5.70
    
    
    
    8.721999-B
    
    July, 1999
    
    
    1,000,000
    
    
    Paid in full
    
    
    
    
    
    
    14.62
    
    
    
    6.36
    
    
    
    8.261999-C
    
    November, 1999
    
    
    500,000
    
    
    Paid in full
    
    
    
    
    
    
    14.77
    
    
    
    7.01
    
    
    
    7.762000-A
    
    March, 2000
    
    
    1,200,000
    
    
    Paid in full
    
    
    
    
    
    
    14.66
    
    
    
    7.28
    
    
    
    7.382000-B
    
    May, 2000
    
    
    1,000,000
    
    
    Paid in full
    
    
    
    
    
    
    14.84
    
    
    
    7.78
    
    
    
    7.062000-C
    
    August, 2000
    
    
    1,390,000
    
    
    $
    146,879
    
    
    10.57
    %
    
    
    15.04
    
    
    
    7.32
    
    
    
    7.722000-D
    
    November, 2000
    
    
    1,000,000
    
    
    
    147,136
    
    
    14.71
    
    
    
    15.20
    
    
    
    6.94
    
    
    
    8.262001-A
    
    January, 2001
    
    
    1,000,000
    
    
    
    169,239
    
    
    16.92
    
    
    
    14.87
    
    
    
    5.77
    
    
    
    9.102001-B
    
    May, 2001
    
    
    1,370,000
    
    
    
    247,781
    
    
    18.09
    
    
    
    14.41
    
    
    
    4.23
    
    
    
    10.182001-C
    
    August, 2001
    
    
    1,200,000
    
    
    
    285,894
    
    
    23.82
    
    
    
    13.90
    
    
    
    4.50
    
    
    
    9.402002-1
    
    March, 2002
    
    
    1,800,000
    
    
    
    601,420
    
    
    33.41
    
    
    
    13.50
    
    
    
    4.26
    
    
    
    9.242002-2
    
    May, 2002
    
    
    1,750,000
    
    
    
    696,770
    
    
    39.82
    
    
    
    12.51
    
    
    
    3.89
    
    
    
    8.622002-3
    
    August, 2002
    
    
    1,250,000
    
    
    
    563,892
    
    
    45.11
    
    
    
    12.30
    
    
    
    3.06
    
    
    
    9.242002-4
    
    November, 2002
    
    
    1,350,000
    
    
    
    724,046
    
    
    53.63
    
    
    
    12.18
    
    
    
    2.66
    
    
    
    9.522003-1
    
    February, 2003
    
    
    1,343,250
    
    
    
    752,282
    
    
    56.00
    
    
    
    11.79
    
    
    
    2.42
    
    
    
    9.372003-2
    
    May, 2003
    
    
    1,492,500
    
    
    
    940,900
    
    
    63.04
    
    
    
    11.57
    
    
    
    2.13
    
    
    
    9.442003-3
    
    August, 2003
    
    
    1,650,000
    
    
    
    1,278,490
    
    
    77.48
    
    
    
    10.59
    
    
    
    2.66
    
    
    
    7.932003-4
    
    November, 2003
    
    
    1,403,625
    
    
    
    1,119,562
    
    
    79.76
    
    
    
    10.89
    
    
    
    2.70
    
    
    
    8.192004-1
    
    February, 2004
    
    
    1,477,500
    
    
    
    1,308,805
    
    
    88.58
    
    
    
    10.89
    
    
    
    2.35
    
    
    
    8.542004-2
    
    May, 2004
    
    
    1,477,500
    
    
    
    1,477,500
    
    
    100.00
    
    
    
    10.98
    
    
    
    3.02
    
    
    
    7.96Total
    
    $
    37,565,805
    
    
    $
    10,460,596
   (1)
    
    Represents only the note payable amounts outstanding at the period
indicated. 21




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##### Table of Contents



(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. 22




---



##### Table of Contents



Noninterest Expense Noninterest expense totaled $73.5 million and $145 million for the three and
six months ended June 30, 2004, respectively, compared with $72.7 million and
$141 million for the same respective periods in 2003. Noninterest expense as a
percent of total revenues improved to 33% and 32% for the three and six months
ended June 30, 2004, respectively, compared with 36% for both 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 six months ended June 30, 2004, respectively, compared with
39% and 40% for the same respective periods in 2003. Financial Condition Overview Total assets increased $383 million or 2.6% to $15.0 billion at June 30, 2004
from $14.6 billion at December 31, 2003. The increase is due primarily to
retaining contracts originated on our balance sheet. Loan Portfolio The following table presents a summary of our automobile contracts purchased: For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)New vehicles
    
    $
    618,079
    
    
    $
    490,257
    
    
    $
    1,169,649
    
    
    $
    875,377Pre-owned vehicles
    
    
    1,048,763
    
    
    
    1,096,359
    
    
    
    2,082,367
    
    
    
    2,063,292Total volume
    
    $
    1,666,842
    
    
    $
    1,586,616
    
    
    $
    3,252,016
    
    
    $
    2,938,669Prime
    
    $
    1,358,908
    
    
    $
    1,308,867
    
    
    $
    2,662,098
    
    
    $
    2,423,151Non-prime
    
    
    307,934
    
    
    
    277,749
    
    
    
    589,918
    
    
    
    515,518Total volume
    
    $
    1,666,842
    
    
    $
    1,586,616
    
    
    $
    3,252,016
    
    
    $
    2,938,669
 Commercial Loan Portfolio We had outstanding commercial loan commitments of $285 million at June 30, 2004
compared with $225 million at December 31, 2003. We originated $58.8 million
and $126 million of commercial loans for the three and six months ended June
30, 2004, respectively, compared with $99.0 million and $196 million for the
same respective periods in 2003. Amounts outstanding at June 30, 2004 and
December 31, 2003 were $81.3 million and $124 million, respectively. 23




---



##### Table of Contents



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 us shifting to a higher concentration of
prime credit quality contracts and normal seasonal trends. The following table sets forth information with respect to the delinquency of
our portfolio of contracts: June 30, 2004
    
    December 31, 2003Amount
    
    %
    
    Amount
    
    %(Dollars in thousands)Contracts managed at end of period
    
    $
    11,113,148
    
    
    
    
    
    
    $
    10,596,665Period of delinquency30-59 days
    
    $
    178,457
    
    
    
    1.61
    %
    
    $
    219,937
    
    
    
    2.08
    %60 days or more (1)
    
    
    67,023
    
    
    
    0.60
    
    
    
    87,129
    
    
    
    0.82Total contracts delinquent and
delinquencies as a percentage of
contracts managed (1)
    
    $
    245,480
    
    
    
    2.21
    %
    
    $
    307,066
    
    
    
    2.90
    %
   (1)
    
    Excludes Chapter 13 bankruptcy accounts greater than 120 days past
due of $45.6 million at both June 30, 2004 and December 31, 2003. The following table sets forth information with respect to repossessions in
our portfolio of managed contracts: June 30, 2004
    
    December 31, 2003Number of
    
    
    
    
    
    Number ofContracts
    
    Amount
    
    Contracts
    
    Amount(Dollars in thousands)Contracts managed
    
    
    853,193
    
    
    $
    11,113,148
    
    
    
    826,122
    
    
    $
    10,596,665Repossessed vehicles
    
    
    889
    
    
    $
    6,229
    
    
    
    1,522
    
    
    $
    10,331Repossessed
vehicles as a
percentage of
number and amount
of contracts
outstanding
    
    
    0.10
    %
    
    
    0.06
    %
    
    
    0.18
    %
    
    
    0.10
    %
 24




---



##### 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 increase in the amount of prime credit contracts managed by us
and an improving economy. For the Three Months Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Average contracts managed during period
    
    $
    10,946,273
    
    
    $
    9,839,661
    
    
    $
    10,836,160
    
    
    $
    9,686,488Gross chargeoffs
    
    $
    70,213
    
    
    $
    79,369
    
    
    $
    155,707
    
    
    $
    170,148Recoveries
    
    
    22,917
    
    
    
    21,937
    
    
    
    47,617
    
    
    
    44,535Net chargeoffs
    
    $
    47,296
    
    
    $
    57,432
    
    
    $
    108,090
    
    
    $
    125,613Net chargeoffs as a percentage of
average contracts managed during
period
    
    
    1.73
    %
    
    
    2.33
    %
    
    
    1.99
    %
    
    
    2.59
    %
 25




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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 June 30, 2004 Period (1)
    
    2000-C
    
    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
    
    2004-21
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %2
    
    
    0.04
    %
    
    
    0.04
    %
    
    
    0.03
    %
    
    
    0.03
    %
    
    
    0.04
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %3
    
    
    0.13
    %
    
    
    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
    %4
    
    
    0.27
    %
    
    
    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
    %5
    
    
    0.46
    %
    
    
    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
    %6
    
    
    0.65
    %
    
    
    0.54
    %
    
    
    0.50
    %
    
    
    0.50
    %
    
    
    0.49
    %
    
    
    0.43
    %
    
    
    0.32
    %
    
    
    0.44
    %
    
    
    0.38
    %
    
    
    0.29
    %
    
    
    0.25
    %
    
    
    0.23
    %
    
    
    0.21
    %7
    
    
    0.81
    %
    
    
    0.74
    %
    
    
    0.70
    %
    
    
    0.69
    %
    
    
    0.65
    %
    
    
    0.60
    %
    
    
    0.49
    %
    
    
    0.57
    %
    
    
    0.50
    %
    
    
    0.41
    %
    
    
    0.36
    %
    
    
    0.32
    %
    
    
    0.28
    %8
    
    
    0.93
    %
    
    
    0.93
    %
    
    
    0.84
    %
    
    
    0.87
    %
    
    
    0.81
    %
    
    
    0.84
    %
    
    
    0.66
    %
    
    
    0.70
    %
    
    
    0.61
    %
    
    
    0.53
    %
    
    
    0.48
    %
    
    
    0.40
    %
    
    
    0.35
    %9
    
    
    1.07
    %
    
    
    1.13
    %
    
    
    1.04
    %
    
    
    1.05
    %
    
    
    0.95
    %
    
    
    1.06
    %
    
    
    0.82
    %
    
    
    0.82
    %
    
    
    0.78
    %
    
    
    0.66
    %
    
    
    0.59
    %
    
    
    0.47
    %10
    
    
    1.24
    %
    
    
    1.34
    %
    
    
    1.24
    %
    
    
    1.22
    %
    
    
    1.07
    %
    
    
    1.28
    %
    
    
    0.96
    %
    
    
    0.96
    %
    
    
    0.94
    %
    
    
    0.80
    %
    
    
    0.70
    %
    
    
    0.55
    %11
    
    
    1.41
    %
    
    
    1.50
    %
    
    
    1.45
    %
    
    
    1.36
    %
    
    
    1.20
    %
    
    
    1.48
    %
    
    
    1.10
    %
    
    
    1.10
    %
    
    
    1.08
    %
    
    
    0.93
    %
    
    
    0.80
    %
    
    
    0.62
    %12
    
    
    1.62
    %
    
    
    1.74
    %
    
    
    1.67
    %
    
    
    1.53
    %
    
    
    1.37
    %
    
    
    1.67
    %
    
    
    1.26
    %
    
    
    1.24
    %
    
    
    1.28
    %
    
    
    1.06
    %
    
    
    0.89
    %13
    
    
    1.86
    %
    
    
    1.95
    %
    
    
    1.90
    %
    
    
    1.67
    %
    
    
    1.55
    %
    
    
    1.82
    %
    
    
    1.39
    %
    
    
    1.38
    %
    
    
    1.43
    %
    
    
    1.21
    %
    
    
    0.98
    %14
    
    
    2.04
    %
    
    
    2.21
    %
    
    
    2.09
    %
    
    
    1.81
    %
    
    
    1.74
    %
    
    
    1.99
    %
    
    
    1.51
    %
    
    
    1.53
    %
    
    
    1.59
    %
    
    
    1.31
    %
    
    
    1.08
    %15
    
    
    2.25
    %
    
    
    2.48
    %
    
    
    2.25
    %
    
    
    2.00
    %
    
    
    1.97
    %
    
    
    2.14
    %
    
    
    1.68
    %
    
    
    1.70
    %
    
    
    1.77
    %
    
    
    1.40
    %16
    
    
    2.45
    %
    
    
    2.71
    %
    
    
    2.41
    %
    
    
    2.19
    %
    
    
    2.16
    %
    
    
    2.27
    %
    
    
    1.83
    %
    
    
    1.88
    %
    
    
    1.92
    %
    
    
    1.50
    %17
    
    
    2.68
    %
    
    
    2.89
    %
    
    
    2.54
    %
    
    
    2.37
    %
    
    
    2.36
    %
    
    
    2.45
    %
    
    
    1.99
    %
    
    
    2.03
    %
    
    
    2.05
    %
    
    
    1.60
    %18
    
    
    2.88
    %
    
    
    3.08
    %
    
    
    2.73
    %
    
    
    2.60
    %
    
    
    2.59
    %
    
    
    2.62
    %
    
    
    2.16
    %
    
    
    2.15
    %
    
    
    2.16
    %19
    
    
    3.08
    %
    
    
    3.22
    %
    
    
    2.93
    %
    
    
    2.80
    %
    
    
    2.78
    %
    
    
    2.80
    %
    
    
    2.31
    %
    
    
    2.28
    %
    
    
    2.25
    %20
    
    
    3.23
    %
    
    
    3.40
    %
    
    
    3.11
    %
    
    
    3.01
    %
    
    
    2.95
    %
    
    
    2.99
    %
    
    
    2.46
    %
    
    
    2.41
    %
    
    
    2.37
    %21
    
    
    3.38
    %
    
    
    3.59
    %
    
    
    3.34
    %
    
    
    3.19
    %
    
    
    3.14
    %
    
    
    3.15
    %
    
    
    2.60
    %
    
    
    2.52
    %22
    
    
    3.54
    %
    
    
    3.78
    %
    
    
    3.54
    %
    
    
    3.34
    %
    
    
    3.29
    %
    
    
    3.31
    %
    
    
    2.72
    %
    
    
    2.62
    %23
    
    
    3.67
    %
    
    
    3.96
    %
    
    
    3.72
    %
    
    
    3.49
    %
    
    
    3.41
    %
    
    
    3.45
    %
    
    
    2.86
    %
    
    
    2.74
    %24
    
    
    3.83
    %
    
    
    4.18
    %
    
    
    3.92
    %
    
    
    3.62
    %
    
    
    3.57
    %
    
    
    3.58
    %
    
    
    2.95
    %25
    
    
    4.00
    %
    
    
    4.41
    %
    
    
    4.10
    %
    
    
    3.75
    %
    
    
    3.73
    %
    
    
    3.69
    %
    
    
    3.03
    %26
    
    
    4.16
    %
    
    
    4.58
    %
    
    
    4.23
    %
    
    
    3.87
    %
    
    
    3.88
    %
    
    
    3.80
    %
    
    
    3.13
    %27
    
    
    4.35
    %
    
    
    4.79
    %
    
    
    4.36
    %
    
    
    4.00
    %
    
    
    4.04
    %
    
    
    3.92
    %28
    
    
    4.50
    %
    
    
    4.96
    %
    
    
    4.47
    %
    
    
    4.15
    %
    
    
    4.20
    %
    
    
    4.02
    %29
    
    
    4.64
    %
    
    
    5.08
    %
    
    
    4.56
    %
    
    
    4.28
    %
    
    
    4.35
    %30
    
    
    4.79
    %
    
    
    5.22
    %
    
    
    4.67
    %
    
    
    4.40
    %
    
    
    4.46
    %31
    
    
    4.92
    %
    
    
    5.34
    %
    
    
    4.81
    %
    
    
    4.52
    %
    
    
    4.57
    %32
    
    
    5.02
    %
    
    
    5.44
    %
    
    
    4.92
    %
    
    
    4.64
    %
    
    
    4.69
    %33
    
    
    5.12
    %
    
    
    5.54
    %
    
    
    5.04
    %
    
    
    4.73
    %
    
    
    4.77
    %34
    
    
    5.22
    %
    
    
    5.66
    %
    
    
    5.13
    %
    
    
    4.83
    %
    
    
    4.85
    %35
    
    
    5.29
    %
    
    
    5.76
    %
    
    
    5.24
    %
    
    
    4.93
    %
    
    
    4.92
    %36
    
    
    5.38
    %
    
    
    5.86
    %
    
    
    5.31
    %
    
    
    4.99
    %37
    
    
    5.47
    %
    
    
    5.97
    %
    
    
    5.39
    %
    
    
    5.05
    %38
    
    
    5.53
    %
    
    
    6.04
    %
    
    
    5.45
    %
    
    
    5.11
    %39
    
    
    5.62
    %
    
    
    6.12
    %
    
    
    5.50
    %40
    
    
    5.68
    %
    
    
    6.19
    %
    
    
    5.56
    %41
    
    
    5.75
    %
    
    
    6.25
    %
    
    
    5.61
    %42
    
    
    5.80
    %
    
    
    6.28
    %43
    
    
    5.84
    %
    
    
    6.32
    %44
    
    
    5.88
    %
    
    
    6.36
    %45
    
    
    5.90
    %46
    
    
    5.94
    %47
    
    
    5.96
    %Prime 
Mix
(2)
    
    
    68
    %
    
    
    68
    %
    
    
    71
    %
    
    
    71
    %
    
    
    76
    %
    
    
    70
    %
    
    
    87
    %
    
    
    85
    %
    
    
    80
    %
    
    
    80
    %
    
    
    82
    %
    
    
    84
    %
    
    
    82
    %
    
    
    82
    %
    
    
    82
    %
   (1)
    
    Represents the number of months since the inception of the securitization.(2)
    
    Represents the original percentage of prime automobile contracts
securitized within each pool. 26




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##### Table of Contents



Real Estate Loan Quality We had 0.79% of total mortgage loans past due over 60 days at June 30, 2004
compared with 1.25% of total mortgage loans at December 31, 2003. 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
$0.2 million and $0.7 million for the three and six months ended June 30, 2004,
respectively, compared with $0.5 million and $1.6 million for the same
respective periods in 2003. Nonperforming assets, also known as NPAs, consist of 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 June 30, 2004 compared with $63.6 million at December 31, 2003. The
decrease in the NPAs was primarily due to a $4.1 million decrease in
repossessed automobiles. NPAs represented 0.4% of total assets at both June
30, 2004 and December 31, 2003. There were no impaired loans at June 30, 2004
and December 31, 2003. Allowance for Credit Losses Our allowance for credit losses was $307 million at June 30, 2004 compared to
$302 million at December 31, 2003. Net chargeoffs totaled $47.3 million and
$108 million for the three and six months ended June 30, 2004, respectively,
compared with $57.6 million and $126 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 2.7% at both June
30, 2004 and 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 losses at the dates indicated: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Total loans (1)
    
    $
    11,572,628
    
    
    $
    11,138,483Allowance for credit losses
    
    
    307,293
    
    
    
    301,602Allowance for real estate owned losses
    
    
    100
    
    
    
    100Loans past due 60 days or more (2)
    
    
    68,548
    
    
    
    91,381Nonperforming loans (3)
    
    
    51,669
    
    
    
    53,026Nonperforming assets (4)
    
    
    58,634
    
    
    
    63,600Allowance for credit losses as a percent of:Total loans (1)
    
    
    2.7
    %
    
    
    2.7
    %Loans past due 60 days or more
    
    
    448.3
    %
    
    
    330.0
    %Nonperforming loans
    
    
    594.7
    %
    
    
    568.8
    %Total allowance for credit losses and REO losses as a percent
of nonperforming assets
    
    
    526.7
    %
    
    
    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)
    
    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: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)No minimum term:Demand deposit accounts
    
    $
    492
    
    
    $
    1,145Passbook accounts
    
    
    6,258
    
    
    
    7,282Money market accounts
    
    
    1,147,004
    
    
    
    963,004Noninterest bearing deposits
    
    
    208,649
    
    
    
    210,405Certificate accounts:Certificates (30 days to five years)
    
    
    522,363
    
    
    
    646,868Individual retirement accounts
    
    
    72,697
    
    
    
    81,701Brokered deposits
    
    
    52,500
    
    
    
    62,451$
    2,009,963
    
    
    $
    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. 28




---



##### Table of Contents



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 $1.5 billion and $3.0 billion for the three and six
months ended June 30, 2004, respectively, compared with $1.5 billion and $2.8 billion for the same respective
periods in 2003.
    
    Collections of Principal and Interest from Loans and MBS Principal and interest collections on loans and MBS
totaled $1.4 billion and $2.8 billion for the three and six months ended June 30, 2004, respectively, compared with
$1.7 billion and $3.4 billion for the same respective periods in 2003.
    
    Deposits Deposits were $2.0 billion at both June 30, 2004 and December 31, 2003.
    
    Other Borrowings Other borrowings, which include securities sold under agreements to repurchase and FHLB
advances, increased to $592 million at June 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 June 30, 2004 there was $78.8 million and
$300 million outstanding on the subordinated debentures due in 2007 and 2012, respectively, excluding discounts and
issue costs. We have provided the required notice to redeem the outstanding balance of our $150 million, 8.875%
subordinated debentures due 2007 at par, plus accrued but unpaid interest to the redemption date. The effective
date for the redemption is August 1, 2004. Principal Uses of Cash  
    
    Acquisition of Loans and Investment Securities Loan originations totaled $1.7 billion and $3.4 billion for the
three and six months ended June 30, 2004, respectively, compared with $1.7 billion and $3.2 billion for the same
respective periods in 2003. We purchased $472 million and $794 million of mortgage-backed securities and other
investment securities during the three and six months ended June 30, 2004, respectively, compared with $514 million
and $1.0 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 $1.3 billion and $2.7 billion for the three and six months ended June 30, 2004,
respectively, compared with $1.2 billion and $2.2 billion for the same respective periods in 2003.
    
    Amounts Paid to Dealers Participation paid by us to dealers was $38.9 million and $75.0 million for the three and
six months ended June 30, 2004, respectively, compared with $37.8 million and $69.7 million for the same respective
periods in 2003.
    
    Operating Our Business Operating expenses totaled $73.5 million and $145 million for the three and six months
ended June 30, 2004, respectively, compared with $72.7 million and $141 million for the same respective periods in
2003. 29




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##### Table of Contents



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 June 30, 2004 and December 31, 2003: Tier 1Tangible
    
    Core
    
    Risk-Based
    
    Risk-BasedCapital
    
    Capital
    
    Capital
    
    Capital(Dollars in thousands)June 30, 2004Actual Capital:Amount
    
    $
    992,301
    
    
    $
    992,301
    
    
    $
    989,287
    
    
    $
    1,445,645Capital ratio
    
    
    8.23
    %
    
    
    8.23
    %
    
    
    10.97
    %
    
    
    16.04
    %FIRREA minimum required capital:Amount
    
    $
    180,800
    
    
    $
    361,601
    
    
    
    N/A
    
    
    $
    721,181Capital ratio
    
    
    1.50
    %
    
    
    3.00
    %
    
    
    N/A
    
    
    
    8.00
    %Excess
    
    $
    811,501
    
    
    $
    630,700
    
    
    
    N/A
    
    
    $
    724,464FDICIA well capitalized required capital:Amount
    
    
    N/A
    
    
    $
    602,668
    
    
    $
    540,886
    
    
    $
    901,477Capital ratio
    
    
    N/A
    
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %Excess
    
    
    N/A
    
    
    $
    389,633
    
    
    $
    448,401
    
    
    $
    544,168December 31, 2003Actual Capital:Amount
    
    $
    884,536
    
    
    $
    884,536
    
    
    $
    881,517
    
    
    $
    1,357,744Capital ratio
    
    
    7.06
    %
    
    
    7.06
    %
    
    
    9.20
    %
    
    
    14.17
    %FIRREA minimum required capital:Amount
    
    $
    187,923
    
    
    $
    375,845
    
    
    
    N/A
    
    
    $
    766,665Capital ratio
    
    
    1.50
    %
    
    
    3.00
    %
    
    
    N/A
    
    
    
    8.00
    %Excess
    
    $
    696,613
    
    
    $
    508,691
    
    
    
    N/A
    
    
    $
    591,079FDICIA well capitalized required capital:Amount
    
    
    N/A
    
    
    $
    626,409
    
    
    $
    574,999
    
    
    $
    958,332Capital ratio
    
    
    N/A
    
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %Excess
    
    
    N/A
    
    
    $
    258,127
    
    
    $
    306,518
    
    
    $
    399,412
 30




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##### Table of Contents



The following table reconciles the Banks capital in accordance with GAAP to
the Banks tangible, core and risk-based capital: June 30,
    
    December 31,2004
    
    2003(Dollars in thousands)Bank shareholders equity  GAAP basis
    
    $
    790,377
    
    
    $
    685,045Plus: Net unrealized losses
    
    
    50,269
    
    
    
    68,203Plus: Minority interest in equity of subsidiaries
    
    
    151,802
    
    
    
    131,434Less: Non-permissible activities
    
    
    (147
    )
    
    
    (146
    )Total tangible and core capital
    
    
    992,301
    
    
    
    884,536Adjustments for risk-based capital:Subordinated debentures (1)
    
    
    342,653
    
    
    
    355,370General loan valuation allowance (2)
    
    
    113,705
    
    
    
    120,857Low-level recourse deduction
    
    
    (3,014
    )
    
    
    (3,019
    )Risk-based capital
    
    $
    1,445,645
    
    
    $
    1,357,744
   (1)
    
    Excludes capitalized discounts and issue costs.(2)
    
    Limited to 1.25% of risk-weighted assets.   31




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##### Table of Contents



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. 32




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##### Table of Contents



The following table summarizes our maturity GAP position: Interest Rate Sensitivity Analysis at June 30, 20043 YearsWithin
    
    3 Months
    
    1 Year to
    
    to
    
    After 53 Months
    
    to 1 Year
    
    3 Years
    
    5 Years
    
    Years
    
    Total(Dollars in thousands)Interest earning assets:Investment securities
    
    $
    83,022
    
    
    
    
    
    
    $
    50,068
    
    
    
    
    
    
    
    
    
    
    $
    133,090Other investments
    
    
    523,568
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523,568Mortgage-backed securities
    
    
    732,016
    
    
    $
    1,078,770
    
    
    
    574,227
    
    
    $
    168,524
    
    
    $
    126,137
    
    
    
    2,679,674Total investments
    
    
    1,338,606
    
    
    
    1,078,770
    
    
    
    624,295
    
    
    
    168,524
    
    
    
    126,137
    
    
    
    3,336,332Consumer loans (1)
    
    
    791,473
    
    
    
    3,110,300
    
    
    
    5,366,543
    
    
    
    1,980,324
    
    
    
    54,072
    
    
    
    11,302,712Mortgage loans:Adjustable rate (2)
    
    
    163,321
    
    
    
    5,542
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,863Fixed rate (2)
    
    
    1,116
    
    
    
    2,668
    
    
    
    3,920
    
    
    
    1,711
    
    
    
    1,268
    
    
    
    10,683Construction loans (2)
    
    
    9,070
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,070Commercial loans (2)
    
    
    81,224
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,298Total interest earning assets
    
    
    2,384,810
    
    
    
    4,197,354
    
    
    
    5,994,758
    
    
    
    2,150,559
    
    
    
    181,477
    
    
    
    14,908,958Interest bearing liabilities:Deposits:Passbook accounts
    
    
    6,258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,258Demand deposit and money market
accounts
    
    
    1,147,496
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,147,496Certificate accounts (3)
    
    
    201,812
    
    
    
    428,377
    
    
    
    15,277
    
    
    
    2,094
    
    
    
    
    
    
    
    647,560Notes payable on automobile secured
financing (3)
    
    
    2,602,883
    
    
    
    2,703,458
    
    
    
    4,238,476
    
    
    
    889,736
    
    
    
    
    
    
    
    10,434,553FHLB advances (3)
    
    
    589,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,582
    
    
    
    591,582Subordinated debentures (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,844
    
    
    
    295,737
    
    
    
    373,581Other borrowings (3)
    
    
    8,813
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,813Total interest bearing
liabilities
    
    
    4,556,262
    
    
    
    3,131,835
    
    
    
    4,253,753
    
    
    
    969,674
    
    
    
    298,319
    
    
    
    13,209,843Excess interest earning/bearing assets
(liabilities)
    
    
    (2,171,452
    )
    
    
    1,065,519
    
    
    
    1,741,005
    
    
    
    1,180,885
    
    
    
    (116,842
    )
    
    
    1,699,115Effect of hedging activities (4)
    
    
    2,560,624
    
    
    
    (807,131
    )
    
    
    (1,134,269
    )
    
    
    (419,224
    )
    
    
    (200,000
    )Hedged excess (deficit)
    
    $
    389,172
    
    
    $
    258,388
    
    
    $
    606,736
    
    
    $
    761,661
    
    
    $
    (316,842
    )
    
    $
    1,699,115Cumulative excess
    
    $
    389,172
    
    
    $
    647,560
    
    
    $
    1,254,296
    
    
    $
    2,015,957
    
    
    $
    1,699,115
    
    
    $
    1,699,115Cumulative excess as a percentage
of total interest earning assets
    
    
    2.61
    %
    
    
    4.34
    %
    
    
    8.41
    %
    
    
    13.52
    %
    
    
    11.40
    %
    
    
    11.40
    %
   (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.   33




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##### Table of Contents



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. 34




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##### Table of Contents



PART II. OTHER INFORMATION 
  Item 1.
    Legal Proceedings  We or our subsidiaries are involved as parties to certain
legal proceedings incidental to our business, including Lee,
et al. v. WFS Financial Inc,United States District Court,
Middle District of Tennessee at Nashville, No. 3-02-0570
filed June 17, 2002 (a putative class action raising claims
under the Equal Credit Opportunity Act) and other similar
cases. 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, and gave
plaintiff until July 30, 2004 to file an amended
consolidated complaint in the action. 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 these
actions and do not believe that the outcome of these
proceedings will have a material effect upon our financial
condition, results of operations and cash flows. 
  Item 2.
    Changes in Securities and Use of Proceeds  None 
  Item 3.
    Defaults Upon Senior Securities  None 
  Item 4.
    Submission of Matters to a Vote of Security Holders  On April 26, 2004, we held our annual shareholders
meeting. There were 51,782,995 shares of common stock
outstanding entitled to vote, and a total of 47,884,960, or
92.5%, were represented at the meeting in person or by
proxy. The following summarizes vote results of proposals
submitted to our shareholders:  1.
    
    Proposal to elect four Class
II Directors for term expiring 2006, provided that
if the amendment to the Articles of Incorporation
to declassify the Board of Directors, as described
in Proposal 3, is adopted by the shareholders, then
each of these directors shall serve a one-year term
ending in 2005 NAME
    
    FOR
    
    WITHHELDJudith M. Bardwick,
    
    
    34,318,738
    
    
    
    537,988James R. Dowlan
    
    
    39,033,808
    
    
    
    8,851,152Duane A. Nelles
    
    
    47,329,132
    
    
    
    555,828Ernest S. Rady
    
    
    42,815,984
    
    
    
    5,068,976
  2.
    
    Proposal to approve the
Westcorp Long Term Incentive Plan FOR
    
    AGAINST
    
    ABSTAIN47,508,169
    
    
    376,791
 35




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##### Table of Contents



3.
    
    Proposal to amend Westcorps
Articles of Incorporation and Bylaws to declassify
the Board of Directors FOR
    
    AGAINST
    
    ABSTAIN47,634,990
    
    
    249,470
    
    
    
    500
  4.
    
    Proposal to ratify the
appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31,
2004 FOR
    
    AGAINST
    
    ABSTAIN47,613,782
    
    
    271,178
 
  Item 5.
    Other Information  None 
  Item 6.
    Exhibits and Reports on Form 8-K  (a)
    Exhibits Exhibit No.
    
    Description of Exhibit2.1
    
    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 CEO31.2
    
    Section 302 Certification of CFO32.1
    
    Section 906 Certification of CEO32.2
    
    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. 36




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##### Table of Contents



(b)
    Reports on Form 8-K  Westcorp press release on April 13, 2004Westcorp press release on May 24, 2004 37




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##### Table of Contents



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   Date: August 6, 2004
    By:
    /S/ ERNEST S. RADYErnest S. RadyChairman of the Board and
Chief Executive OfficerDate: August 6, 2004
    By:
    /s/ LEE A. WHATCOTTLee A. WhatcottExecutive Vice President,
Chief Financial Officer and
Chief Operating Officer (Principal
Financial and Accounting Officer) 38




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##### Table of Contents



Exhibits Exhibit No.
    
    Description of Exhibit2.1
    
    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 CEO31.2
    
    Section 302 Certification of CFO32.1
    
    Section 906 Certification of CEO32.2
    
    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. 39