##### 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 March 31, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from __________________ to __________________ Commission file number 33-13646 
 Westcorp 
  CALIFORNIA
    
    51-0308535(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
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 April 29, 2005, the registrant had 52,053,777 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 34.




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WESTCORP AND SUBSIDIARIES FORM 10-Q March 31, 2005 TABLE OF CONTENTS   Page No.Forward-Looking Statements and Available Information
    
    
    1PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    2Consolidated Statements of Financial Condition at March 31, 2005 and December 31, 2004
    
    
    2Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004
    
    
    3Consolidated Statements of Changes in Shareholders Equity for the Periods Ended March 31, 2005 and December 31, 2004
    
    
    4Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    
    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
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    31PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.
    
    Other Information
    
    
    32Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    33SIGNATURES
    
    
    34CERTIFICATIONSEXHIBIT 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 or the Exchange Act. Forward-looking statements relate to analyses and
other information that are based on forecasts of future results and estimates of amounts not yet
determinable. These statements also relate to our future prospects, developments and business
strategies, as well as the proposed merger of WFS and the Bank and the conversion of the Bank to a
California State Commercial Bank. These statements are subject to uncertainties and, among other
things, factors relating to our operations and business environment, all of which are difficult to
predict and many of which are beyond our control, that could cause actual results to differ
materially from those expressed in or implied by these forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as
anticipate, believe, could, estimate, expect, intend, may, plan, predict,
project, will, and similar terms and phrases, including references to assumptions. These
statements are contained in sections entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this Form 10-Q and in the documents
incorporated by reference. The following factors are among those that may cause actual results to differ materially from the
forward-looking statements:  
    changes in general economic and business conditions;
    interest rate fluctuations, including hedging activities;
    our financial condition and liquidity, as well as future cash flows and earnings;
    competition;
    our level of operating expenses;
    the effect, interpretation or application of new or existing laws, regulations and court decisions;
    the exercise of discretionary authority by regulatory agencies;
    a decision to change our corporate structure;
    the availability of sources of funding;
    the level of chargeoffs on the automobile contracts that we originate; and
    significant litigation. If one or more of these risks or uncertainties materialize, or if underlying assumptions as to
these items prove incorrect, our actual results may vary materially from those expected, estimated
or projected. Additional factors that could cause actual results to differ are discussed under the heading
Business Risks and in other sections of our Form 10-K for the fiscal year ended December 31, 2004
on file with the Securities and Exchange Commission, and in our other current and periodic reports
filed from time to time with the Commission. All forward-looking statements in this document are
made as of the date hereof, based on information available to us as of the date hereof, and we
assume no obligation to update any forward-looking statement. INDUSTRY DATA In this Form 10-Q, we rely on and refer to information regarding the automobile lending industry
from market research reports, analyst reports and other publicly available information. Although we
believe that this information is reliable, we cannot guarantee the accuracy and completeness of
this information, and we have not independently verified any of it. Available Information We provide access to all of our filings with the Securities and Exchange Commission on our Web site
at http://www.westcorpinc.com free of charge on the same day that these reports are electronically
filed with the Commission. The information contained in our Web site does not constitute part of
this filing. 1




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements WESTCORP AND
SUBSIDIARIES 
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
 (Unaudited)March 31, 2005
    
    
    December 31, 2004(Dollars in thousands)ASSETSCash
    
    $
    87,481
    
    
    $
    89,333Interest bearing deposits with other financial institutions
    
    
    12,443
    
    
    
    4,177Other short-term investments
    
    
    195,000
    
    
    
    125,000Cash and due from banks
    
    
    294,924
    
    
    
    218,510Restricted cash
    
    
    742,652
    
    
    
    417,833Investment securities available for sale
    
    
    134,955
    
    
    
    119,811Mortgage-backed securities available for sale
    
    
    2,663,878
    
    
    
    2,649,758Loans receivable
    
    
    12,360,961
    
    
    
    12,135,748Allowance for credit losses
    
    
    (315,882
    )
    
    
    (315,402
    )Loans receivable, net
    
    
    12,045,079
    
    
    
    11,820,346Interest receivable
    
    
    79,664
    
    
    
    79,825Premises and equipment, net
    
    
    75,782
    
    
    
    76,526Other assets
    
    
    119,354
    
    
    
    162,731TOTAL ASSETS
    
    $
    16,156,288
    
    
    $
    15,545,340LIABILITIESDeposits
    
    $
    2,248,702
    
    
    $
    2,183,499Notes payable on automobile secured financing
    
    
    11,657,786
    
    
    
    10,242,900Federal Home Loan Bank advances
    
    
    152,492
    
    
    
    1,139,521Subordinated debentures
    
    
    295,588
    
    
    
    295,321Other liabilities
    
    
    226,867
    
    
    
    178,939TOTAL LIABILITIES
    
    
    14,581,435
    
    
    
    14,040,180Minority interest
    
    
    175,197
    
    
    
    165,484SHAREHOLDERS EQUITYCommon stock (par value $1.00 per share; authorized 65,000,000
shares; issued and outstanding 52,047,110 shares at March 31, 2005
and 51,895,258 shares at December 31, 2004)
    
    
    52,047
    
    
    
    51,895Paid-in capital
    
    
    720,005
    
    
    
    717,098Retained earnings
    
    
    660,400
    
    
    
    606,987Accumulated other comprehensive loss, net of tax
    
    
    (32,796
    )
    
    
    (36,304
    )TOTAL SHAREHOLDERS EQUITY
    
    
    1,399,656
    
    
    
    1,339,676TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    16,156,288
    
    
    $
    15,545,340
 See accompanying notes to consolidated financial statements. 2




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WESTCORP AND
SUBSIDIARIES 
 CONSOLIDATED STATEMENTS
OF INCOME
 (Unaudited)
 For the Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands, exceptper share amounts)Interest income:Loans, including fees
    
    $
    301,615
    
    
    $
    286,300Mortgage-backed securities
    
    
    27,136
    
    
    
    24,688Investment securities
    
    
    1,138
    
    
    
    1,058Other
    
    
    4,148
    
    
    
    1,613TOTAL INTEREST INCOME
    
    
    334,037
    
    
    
    313,659Interest expense:Deposits
    
    
    16,510
    
    
    
    13,307Notes payable on automobile secured financing
    
    
    87,484
    
    
    
    94,218Other
    
    
    13,116
    
    
    
    11,711TOTAL INTEREST EXPENSE
    
    
    117,110
    
    
    
    119,236NET INTEREST INCOME
    
    
    216,927
    
    
    
    194,423Provision for credit losses
    
    
    48,978
    
    
    
    62,294NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES
    
    
    167,949
    
    
    
    132,129Noninterest income:Automobile lending
    
    
    15,331
    
    
    
    25,748Insurance income
    
    
    2,045
    
    
    
    1,824Mortgage banking
    
    
    117
    
    
    
    235Other
    
    
    1,800
    
    
    
    883TOTAL NONINTEREST INCOME
    
    
    19,293
    
    
    
    28,690Noninterest expenses:Salaries and associate benefits
    
    
    43,786
    
    
    
    42,084Credit and collections
    
    
    8,567
    
    
    
    8,592Data processing
    
    
    4,622
    
    
    
    4,179Occupancy
    
    
    3,935
    
    
    
    3,877Other
    
    
    11,680
    
    
    
    12,668TOTAL NONINTEREST EXPENSES
    
    
    72,590
    
    
    
    71,400INCOME BEFORE INCOME TAX
    
    
    114,652
    
    
    
    89,419Income tax
    
    
    45,639
    
    
    
    35,313INCOME BEFORE MINORITY INTEREST
    
    
    69,013
    
    
    
    54,106Minority interest in earnings of subsidiaries
    
    
    8,331
    
    
    
    10,741NET INCOME
    
    $
    60,682
    
    
    $
    43,365Earnings per common share:Basic
    
    $
    1.17
    
    
    $
    0.84Diluted
    
    $
    1.15
    
    
    $
    0.83Weighted average number of common shares outstanding:Basic
    
    
    51,957,883
    
    
    
    51,737,663Diluted
    
    
    52,597,731
    
    
    
    52,493,432Dividends declared
    
    $
    0.15
    
    
    $
    0.14
 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, 2004
    
    
    51,698,398
    
    
    $
    51,698
    
    
    $
    710,001
    
    
    $
    427,527
    
    
    $
    (66,741
    )
    
    $
    1,122,485Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,962
    
    
    
    
    
    
    
    207,962Unrealized losses on securities
available for sale, net of tax (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,677
    )
    
    
    (9,677
    )Unrealized losses on cash flow
hedges, net of tax (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,570
    )
    
    
    (1,570
    )Reclassification adjustment for
gains on securities available for
sale included in net income, net
of tax (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,446
    )
    
    
    (1,446
    )Reclassification adjustment for
losses on cash flow hedges
included in income, net of tax (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,130
    
    
    
    43,130Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238,399Issuance of subsidiary common stock
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    (47
    )Stock options expensed (5)
    
    
    
    
    
    
    
    
    
    
    2,665
    
    
    
    
    
    
    
    
    
    
    
    2,665Stock options exercised
    
    
    196,860
    
    
    
    197
    
    
    
    4,479
    
    
    
    
    
    
    
    
    
    
    
    4,676Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,502
    )
    
    
    
    
    
    
    (28,502
    )Balance at December 31, 2004
    
    
    51,895,258
    
    
    
    51,895
    
    
    
    717,098
    
    
    
    606,987
    
    
    
    (36,304
    )
    
    
    1,339,676Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,682
    
    
    
    
    
    
    
    60,682Unrealized losses on securities
available for sale, net of tax (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,036
    )
    
    
    (13,036
    )Unrealized gains on cash flow
hedges, net of tax (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,415
    
    
    
    10,415Reclassification adjustment for
losses on cash flow hedges
included in income, net of tax (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,129
    
    
    
    6,129Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,190Issuance of subsidiary common stock
    
    
    
    
    
    
    
    
    
    
    (303
    )
    
    
    
    
    
    
    
    
    
    
    (303
    )Stock options expensed (5)
    
    
    
    
    
    
    
    
    
    
    635
    
    
    
    
    
    
    
    
    
    
    
    635Stock options exercised
    
    
    151,852
    
    
    
    152
    
    
    
    2,575
    
    
    
    
    
    
    
    
    
    
    
    2,727Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,269
    )
    
    
    
    
    
    
    (7,269
    )Balance at March 31, 2005
    
    
    52,047,110
    
    
    $
    52,047
    
    
    $
    720,005
    
    
    $
    660,400
    
    
    $
    (32,796
    )
    
    $
    1,399,656
   (1)
    
    The pre-tax amount of unrealized losses on securities available for sale was $21.7 million
for the three months ended March 31, 2005 compared with $16.1 million for the year ended
December 31, 2004.(2)
    
    The pre-tax amount of unrealized gains on cash flow hedges was $17.4 million for the three
months ended March 31, 2005 compared with unrealized losses of $2.6 million for the year ended
December 31, 2004.(3)
    
    There was no pre-tax amount of unrealized gains on securities available for sale reclassified
into earnings for the three months ended March 31, 2005 compared with $2.4 million for the
year ended December 31, 2004.(4)
    
    The pre-tax amount of unrealized losses on cash flow hedges reclassified into earnings was
$10.2 million for the three months ended March 31, 2005 compared with $71.9 million for the
year ended December 31, 2004.(5)
    
    Amount represents pre-tax 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 Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)OPERATING ACTIVITIES:Net income
    
    $
    60,682
    
    
    $
    43,365Adjustments to reconcile net income to net cash provided by
operating activities:Provision for credit losses
    
    
    48,978
    
    
    
    62,294Amortization of loan fees and costs
    
    
    25,563
    
    
    
    29,754Amortization of losses on cash flow hedges
    
    
    8,233
    
    
    
    11,769Amortization of premium on mortgage-backed securities
    
    
    5,467
    
    
    
    11,722Depreciation
    
    
    3,117
    
    
    
    3,159Amortization, other
    
    
    299
    
    
    
    390Gain on sales, net
    
    
    (23
    )
    
    
    (95
    )Other
    
    
    635
    
    
    
    (103
    )Decrease in other assets
    
    
    40,848
    
    
    
    31,205Increase in other liabilities
    
    
    18,744
    
    
    
    17,074Other, net
    
    
    8,331
    
    
    
    10,741NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    220,874
    
    
    
    221,275INVESTING ACTIVITIES:Increase in restricted cash
    
    
    (324,818
    )
    
    
    (94,482
    )Loans receivable:Origination of loans, net of fees and costs
    
    
    (1,989,141
    )
    
    
    (1,691,807
    )Loan payments and payoffs
    
    
    1,689,615
    
    
    
    1,370,075Investment and mortgage-backed securities available for sale:Purchases
    
    
    (244,688
    )
    
    
    (321,910
    )Proceeds from sale
    
    
    
    
    
    
    10,172Payments received
    
    
    217,503
    
    
    
    297,130Purchase of premises and equipment
    
    
    (2,375
    )
    
    
    (2,923
    )Proceeds from sales of premises and equipment
    
    
    
    
    
    
    528NET CASH USED IN INVESTING ACTIVITIES
    
    
    (653,904
    )
    
    
    (433,217
    )FINANCING ACTIVITIES:Increase in deposits
    
    
    81,833
    
    
    
    35,579Notes payable on automobile secured financing:Proceeds from issuance
    
    
    3,005,045
    
    
    
    1,474,639Payments on notes
    
    
    (1,586,382
    )
    
    
    (1,479,271
    )Decrease in securities sold under agreements to repurchase
    
    
    
    
    
    
    (218,741
    )(Decrease) increase in FHLB advances
    
    
    (987,030
    )
    
    
    243,969Payments on issuance of subordinated debentures
    
    
    
    
    
    
    (2,060
    )Decrease in borrowings
    
    
    (119
    )
    
    
    (116
    )Proceeds from issuance of common stock
    
    
    2,727
    
    
    
    1,657Proceeds from issuance of subsidiary common stock
    
    
    138
    
    
    
    7Cash dividends
    
    
    (7,269
    )
    
    
    (6,723
    )Proceeds from (payments on) cash flow hedges
    
    
    501
    
    
    
    (10,628
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    509,444
    
    
    
    38,312INCREASE (DECREASE) IN CASH AND DUE FROM BANKS
    
    
    76,414
    
    
    
    (173,630
    )Cash and due from banks at beginning of year
    
    
    218,510
    
    
    
    382,082CASH AND DUE FROM BANKS AT END OF PERIOD
    
    $
    294,924
    
    
    $
    208,452
 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, also known as GAAP, for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the three months
ended March 31, 2005 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2005. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes thereto for the year
ended December 31, 2004 included in our Form 10-K. Note 2  Mortgage-Backed Securities Available for Sale Mortgage-backed securities available for sale consisted of the following: March 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    Value(Dollars in thousands)GNMA certificates
    
    $
    2,586,186
    
    
    $
    7,551
    
    
    $
    22,273
    
    
    $
    2,571,464FNMA participation certificates
    
    
    28,034
    
    
    
    52
    
    
    
    271
    
    
    
    27,815FHLMC participation certificates
    
    
    34,071
    
    
    
    110
    
    
    
    402
    
    
    
    33,779Other
    
    
    30,820
    
    
    
    
    
    
    
    
    
    
    
    30,820$
    2,679,111
    
    
    $
    7,713
    
    
    $
    22,946
    
    
    $
    2,663,878
 6




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December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gain
    
    
    Loss
    
    
    Value(Dollars in thousands)GNMA certificates
    
    $
    2,575,081
    
    
    $
    15,232
    
    
    $
    8,753
    
    
    $
    2,581,560FNMA participation certificates
    
    
    30,195
    
    
    
    123
    
    
    
    143
    
    
    
    30,175FHLMC participation certificates
    
    
    36,497
    
    
    
    154
    
    
    
    193
    
    
    
    36,458Other
    
    
    1,565
    
    
    
    
    
    
    
    
    
    
    
    1,565$
    2,643,338
    
    
    $
    15,509
    
    
    $
    9,089
    
    
    $
    2,649,758
 Our mortgage-backed securities available for sale portfolio was comprised of 60% fixed rate
certificates and 40% variable rate certificates at March 31, 2005 compared with 62% fixed rate
certificates and 38% variable rate certificates at December 31, 2004. Note 3  Net Loans Receivable Net loans receivable consisted of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Consumer:Automobile contracts
    
    $
    11,887,675
    
    
    $
    11,599,528Other
    
    
    1,402
    
    
    
    4,386Unearned discounts
    
    
    (35,720
    )
    
    
    (38,871
    )11,853,357
    
    
    
    11,565,043Real estate:Mortgage
    
    
    169,594
    
    
    
    202,095Construction
    
    
    53,134
    
    
    
    48,730222,728
    
    
    
    250,825Undisbursed loan proceeds
    
    
    (36,308
    )
    
    
    (37,061
    )186,420
    
    
    
    213,764Commercial
    
    
    127,004
    
    
    
    165,80612,166,781
    
    
    
    11,944,613Dealer participation, net of deferred contract fees
    
    
    194,180
    
    
    
    191,135Loans receivable
    
    
    12,360,961
    
    
    
    12,135,748Allowance for credit losses
    
    
    (315,882
    )
    
    
    (315,402
    )Loans receivable, net
    
    $
    12,045,079
    
    
    $
    11,820,346
 Loans owned and managed by us, excluding dealer participation and deferred contract fees,
totaled $12.2 billion and $11.9 billion as of March 31, 2005 and December 31, 2004, respectively.
Nonperforming loans, or loans on which we have discontinued the accrual of interest income,
included in net loans receivable were $51.2 million and $51.9 million at March 31, 2005 and
December 31, 2004, respectively. Repossessed assets and real estate owned were $6.3 million and
$8.3 million at March 31, 2005 and December 31, 2004, 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 EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    315,402
    
    
    $
    301,602Chargeoffs:Consumer loans
    
    
    (71,957
    )
    
    
    (85,500
    )Mortgage loans
    
    
    (46
    )
    
    
    (67
    )(72,003
    )
    
    
    (85,567
    )Recoveries:Consumer loans
    
    
    23,497
    
    
    
    24,726Commercial loans
    
    
    8
    
    
    
    723,505
    
    
    
    24,733Net chargeoffs
    
    
    (48,498
    )
    
    
    (60,834
    )Provision for credit losses
    
    
    48,978
    
    
    
    62,294Balance at end of period
    
    $
    315,882
    
    
    $
    303,062Ratio of net chargeoffs during the
period (annualized) to average
loans outstanding during the period
    
    
    1.6
    %
    
    
    2.2
    %Ratio of allowance for credit
losses to loans at the end of the
period
    
    
    2.6
    %
    
    
    2.7
    %
 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 Average
    
    
    Three Months Ended
    
    
    Effects of Hedging
    
    
    Three Months EndedRate at
    
    
    March 31, 2005
    
    
    for the
    
    
    March 31, 2005March 31,
    
    
    Excluding the Effects
    
    
    Three Months Ended
    
    
    Including the Effects2005 (1)
    
    
    of Hedging
    
    
    March 31, 2005
    
    
    of HedgingDemand deposit accounts
    
    
    0.1
    %
    
    
    0.2
    %
    
    
    
    
    
    
    0.2
    %Passbook accounts
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1Money market deposit
accounts
    
    
    2.5
    
    
    
    2.0
    
    
    
    0.5
    %
    
    
    2.5Certificate accounts
    
    
    2.8
    
    
    
    2.5
    
    
    
    3.1
    
    
    
    5.6
   (1)
    Contractual rate. March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Noninterest bearing deposits
    
    $
    291,765
    
    
    $
    268,556Demand deposit accounts
    
    
    300
    
    
    
    705Passbook accounts
    
    
    5,654
    
    
    
    5,880Money market deposit accounts
    
    
    1,259,670
    
    
    
    1,257,074Certificate accounts
    
    
    691,313
    
    
    
    651,284$
    2,248,702
    
    
    $
    2,183,499
 Note 6  Notes Payable on Automobile Secured Financing In connection with our public asset-backed securitization activities, we issued $3.0 billion and
$1.5 billion of notes secured by automobile contracts for the three months ended March 31, 2005 and
2004, respectively. There were $11.7 billion of notes payable on automobile secured
financing outstanding at March 31, 2005 compared with $10.2 billion at December 31, 2004. Interest payments are due either monthly or quarterly, in arrears. Interest expense on all notes
payable on automobile secured financing, including interest payments under interest rate swap
agreements, totaled $87.5 million and $94.2 million for the three months ended March 31, 2005 and
2004, respectively. 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: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Unrealized (loss) gain on marketable securities
    
    $
    (9,387
    )
    
    $
    3,648Unrealized
(loss) gain on interest rate swaps: (1)Deposits
    
    
    (19,226
    )
    
    
    (29,203
    )Automobile secured financing
    
    
    1,685
    
    
    
    (353
    )(17,541
    )
    
    
    (29,556
    )Realized
(loss) gain on settled cash flow hedges: (1)Deposits
    
    
    (7,630
    )
    
    
    (8,369
    )Automobile secured financing
    
    
    1,762
    
    
    
    (2,027
    )(5,868
    )
    
    
    (10,396
    )Total other accumulated comprehensive loss
    
    $
    (32,796
    )
    
    $
    (36,304
    )
   (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 EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Net income
    
    $
    60,682
    
    
    $
    43,365Unrealized (losses) gains on securities
available for sale, net of tax
    
    
    (13,036
    )
    
    
    3,113Unrealized gains (losses) on cash flow
hedges, net of tax
    
    
    10,415
    
    
    
    (21,193
    )Reclassification adjustment for losses on
cash flow hedges included in income, net of
tax
    
    
    6,129
    
    
    
    14,098Comprehensive income
    
    $
    64,190
    
    
    $
    39,383
 Note 9 - Dividends On March 3, 2005, we declared a cash dividend of $0.15 per share for shareholders of record as of
May 3, 2005 with a payable date of May 17, 2005. 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 March 31, 2005 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
    
    
    135,331
    
    
    
    0.74
    
    
    $
    12.63
    
    
    
    135,331
    
    
    $
    12.6313.00  14.00
    
    
    129,625
    
    
    
    1.89
    
    
    
    13.25
    
    
    
    129,625
    
    
    
    13.2515.00  16.00
    
    
    1,000
    
    
    
    2.61
    
    
    
    15.25
    
    
    
    1,000
    
    
    
    15.2517.00  18.00
    
    
    182,946
    
    
    
    2.90
    
    
    
    17.32
    
    
    
    182,946
    
    
    
    17.3218.00  19.00
    
    
    613,048
    
    
    
    3.31
    
    
    
    18.57
    
    
    
    403,765
    
    
    
    18.5619.00  20.00
    
    
    5,000
    
    
    
    4.35
    
    
    
    19.85
    
    
    
    2,500
    
    
    
    19.8520.00  21.00
    
    
    3,000
    
    
    
    4.60
    
    
    
    20.41
    
    
    
    1,500
    
    
    
    20.4142.00  43.00
    
    
    488,582
    
    
    
    3.88
    
    
    
    42.19
    
    
    
    161,478
    
    
    
    42.1946.00  47.00
    
    
    513,500
    
    
    
    4.92
    
    
    
    46.66$12.00  47.00
    
    
    2,072,032
    
    
    
    3.56
    
    
    $
    30.28
    
    
    
    1,018,145
    
    
    $
    20.62
 Stock option activity is summarized as follows: WeightedAverageShares
    
    
    Exercise PriceOutstanding at January 1, 2004
    
    
    1,460,536
    
    
    $
    16.86Granted
    
    
    540,900
    
    
    
    42.19Exercised
    
    
    (196,860
    )
    
    
    16.40Forfeited
    
    
    (57,694
    )
    
    
    27.10Outstanding at December 31, 2004
    
    
    1,746,882
    
    
    
    24.41Granted
    
    
    539,000
    
    
    
    46.66Exercised
    
    
    (151,852
    )
    
    
    17.96Forfeited
    
    
    (61,998
    )
    
    
    37.71Outstanding at March 31, 2005
    
    
    2,072,032
    
    
    $
    30.28
 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. We utilize the Binomial option valuation model for all stock options expensed as we
feel it provides a better measure of value for companies that pay dividends than other valuation
models. In our opinion, no option valuation model necessarily provides a reliable single measure of
the fair value of our employee stock options. The weighted average fair value of options granted
during the three month period ending March 31, 2005 was $14.77 compared to $13.26 for the year
ended December 31, 2004. 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 EndedMarch 31,2005
    
    
    2004(Dollars in thousands,except per share amounts)Net income, as reported
    
    $
    60,682
    
    
    $
    43,365Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects
    
    
    382
    
    
    
    234Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    490
    
    
    
    406Pro forma net income
    
    $
    60,574
    
    
    $
    43,193Earnings per share:Basic  as reported
    
    $
    1.17
    
    
    $
    0.84Basic  pro forma
    
    $
    1.17
    
    
    $
    0.83Earnings per share:Diluted  as reported
    
    $
    1.15
    
    
    $
    0.83Diluted  pro forma
    
    $
    1.15
    
    
    $
    0.82
 Note 11  Commitments and Contingencies We or our subsidiaries are involved as a party to certain legal proceedings incidental to our
business. Beginning on May 24, 2004 and continuing thereafter, a total of four separate purported
class action lawsuits relating to the announcement by us and WFS that we had entered into a merger
agreement, pursuant to which we would acquire the outstanding 16% common stock interest of WFS not
already owned by our wholly owned subsidiary, Western Financial Bank, and WFS would be merged with
and into Western Financial Bank were filed in the Orange County, California Superior Court against
us, WFS, and our individual board members and individual board members of WFS. On June 24, 2004,
the actions were consolidated under the caption In re WFS Financial Shareholder Litigation, Case
No. 04CC00559 (the Action). On July 16, 2004, the court granted a motion by plaintiff Alaska
Hotel & Restaurant Employees Pension Trust Fund, in Case No.04CC00573, to amend the consolidation
order to designate it the lead plaintiff in the litigation. The lead plaintiff filed a consolidated
amended complaint on August 9, 2004, and then filed the present corrected consolidated amended
complaint on September 15, 2004. All of the shareholder-related actions allege, among other
things, that the defendants breached their respective fiduciary duties and seek to enjoin or
rescind the transaction and obtain an unspecified sum in damages and costs, including attorneys
fees and expenses. The parties have tentatively agreed to a full and final resolution of the
Action and, on January 19, 2005, the parties entered into a Memorandum of Understanding (MOU)
concerning the terms of the tentative settlement. Pursuant to the terms of the MOU, the parties
have agreed, among other things, that additional disclosures will be made in our Registration
Statement on Form S-4 (as filed with the SEC on July 16, 2004), the claims asserted in the Action
will be fully released, and the Action will be dismissed with prejudice. Further, pursuant to the
MOU, the defendants have agreed to pay plaintiffs attorneys fees and 12




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##### Table of Contents



expenses in the amount of $675,000, or in such lesser amount as the Court may order. The
effectiveness of the settlement agreement is contingent on the transaction actually occurring. The
parties prepared a formal settlement agreement based on the terms of the MOU and will present it to
the Court for preliminary approval on June 17, 2005. The parties have further agreed and reported
to the Court that the parties will not proceed with providing notice of the proposed settlement to
shareholders nor schedule a final hearing on approval of the settlement unless and until the
necessary regulatory approvals for the transaction have been obtained. We are vigorously defending
this action and do not believe that the outcome of this proceeding will have a material effect upon
our financial condition, results of operations and cash flows. Note 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 transaction is structured as a merger of WFS with and into the Bank. In
connection with the merger, the Bank has filed an application with the California Department of
Financial Institutions to convert its federal thrift charter to a California state bank charter.
The merger agreement is conditioned upon the conversion of the charter. The transaction is subject
to, among other closing conditions, the receipt of regulatory approvals and the approval of a
majority of WFS Financials shareholders, other than shares controlled by Westcorp. The California Department of Financial Institutions and the Office of Thrift Supervision have
approved the Banks application to convert from a federal savings bank to a California state
commercial bank subject to receipt of all other required regulatory approvals. The Federal Deposit
Insurance Corporation approved the application to merge WFS into the Bank as part of the
acquisition of the minority interest in WFS. The conversion is still contingent upon the approval
of our application to become a bank holding company by the Board of Governors of the Federal
Reserve. If the conversion is completed, we will be subject to the laws, regulation and oversight
of the California Department of Financial Institutions, the Federal Deposit Insurance Corporation
and the Federal Reserve. The merger is also subject to approval by the majority of WFS minority
shareholders. Note 13  Subsequent Event On April 26, 2005, we declared a cash dividend of $0.15 per share for shareholders of record as of
August 2, 2005 with a payable date of August 16, 2005. 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 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 months ended March 31,
2005 and 2004. Since this table is only a summary and does not provide all of the information
contained in our financial statements, including the related notes, you should read our
Consolidated Financial Statements contained elsewhere herein. Certain amounts from the prior years
Consolidated Financial Statements have been reclassified to conform to the current year
presentation. For the Three MonthsEnded March 31,2005
    
    
    2004(Dollars in thousands,except per share amounts)Consolidated Statements of Income Data:Interest income
    
    $
    334,037
    
    
    $
    313,659Interest expense
    
    
    117,110
    
    
    
    119,236Net interest income
    
    
    216,927
    
    
    
    194,423Provision for credit losses
    
    
    48,978
    
    
    
    62,294Net interest income after provision for credit losses
    
    
    167,949
    
    
    
    132,129Noninterest income
    
    
    19,293
    
    
    
    28,690Noninterest expense
    
    
    72,590
    
    
    
    71,400Income before income tax
    
    
    114,652
    
    
    
    89,419Income tax
    
    
    45,639
    
    
    
    35,313Income before minority interest
    
    
    69,013
    
    
    
    54,106Minority interest in earnings of subsidiaries
    
    
    8,331
    
    
    
    10,741Net income
    
    $
    60,682
    
    
    $
    43,365Weighted average number of shares and common share
equivalents  diluted
    
    
    52,597,731
    
    
    
    52,493,432Earnings per common share  diluted
    
    $
    1.15
    
    
    $
    0.83Dividends per share
    
    $
    0.15
    
    
    $
    0.14Dividend payout ratio
    
    
    13.0
    %
    
    
    16.9
    %
 14




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##### Table of Contents



March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Consolidated Statements of Financial Condition Data:Assets:Cash and due from banks
    
    $
    294,924
    
    
    $
    218,510Loans:Consumer (1)
    
    
    12,047,537
    
    
    
    11,756,178Mortgage (2)
    
    
    186,420
    
    
    
    213,764Commercial
    
    
    127,004
    
    
    
    165,806Mortgage-backed securities
    
    
    2,663,878
    
    
    
    2,649,758Investments and time deposits
    
    
    877,607
    
    
    
    537,644Other assets
    
    
    274,800
    
    
    
    319,082Less: Allowance for credit losses
    
    
    315,882
    
    
    
    315,402Total assets
    
    $
    16,156,288
    
    
    $
    15,545,340Liabilities:Deposits
    
    $
    2,248,702
    
    
    $
    2,183,499Notes payable on automobile secured financing
    
    
    11,657,786
    
    
    
    10,242,900FHLB advances and other borrowings
    
    
    160,950
    
    
    
    1,148,098Subordinated debentures
    
    
    295,588
    
    
    
    295,321Other liabilities
    
    
    218,409
    
    
    
    170,362Total liabilities
    
    
    14,581,435
    
    
    
    14,040,180Minority interest in equity of subsidiaries
    
    
    175,197
    
    
    
    165,484Shareholders equity
    
    
    1,399,656
    
    
    
    1,339,676Total liabilities and shareholders equity
    
    $
    16,156,288
    
    
    $
    15,545,340
 At or For theThree Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Other Selected Financial Data:Average automobile contracts managed
    
    $
    11,702,544
    
    
    $
    10,726,048Average shareholders equity (3)
    
    $
    1,402,423
    
    
    $
    1,207,092Return on average shareholders equity (3)
    
    
    17.31
    %
    
    
    14.37
    %Book value per share (3)
    
    $
    27.52
    
    
    $
    23.71Total equity to assets (4)
    
    
    9.95
    %
    
    
    9.30
    %Originations:Consumer loans (1)
    
    $
    1,783,721
    
    
    $
    1,586,161Mortgage loans (2)
    
    
    8,010
    
    
    
    2,658Commercial loans
    
    
    166,283
    
    
    
    66,879Total loan originations
    
    $
    1,958,014
    
    
    $
    1,655,698Interest rate spread
    
    
    5.28
    %
    
    
    5.03
    %
   (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 Estimates Managements Discussion and Analysis of Financial Condition and Results of Operations, also known
as MD&A, is based on our consolidated financial statements and accompanying notes that have been
prepared in accordance with GAAP. Our significant accounting policies are described in Note 1 
Summary of Significant Accounting Policies in our Consolidated Financial Statements in our 2004
Form 10-K and are essential in understanding our MD&A. The preparation of financial statements in
accordance with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, income, and expenses in our Consolidated Financial Statements and
accompanying notes. Actual results could differ from those estimates. We have identified
accounting for the allowance for credit losses as the most critical accounting estimate to
understanding and evaluating our reported financial results of operations. This estimate is
critical because it requires us to make difficult, subjective and complex judgments about matters
that are inherently uncertain and because it is possible that materially different amounts would
be reported under different conditions or using different assumptions. Additionally, the
accounting for derivative financial instruments and accrued taxes requires the use of assumptions
and accounting estimates that are also inherently subjective. Allowance for Credit Losses The allowance for credit losses is our estimate of probable losses in our loan portfolio as of the
balance sheet date. Our determination of the amount of the allowance for credit losses was based
on a review of various quantitative and qualitative analyses. Our process for determining the
allowance for credit losses is discussed in detail in Note 1  Summary of Significant Accounting
Policies in our Consolidated Financial Statements in our 2004 Form 10-K. Key analyses considered in the process of establishing our allowance for credit losses include
migration analysis of delinquent and current accounts by risk category, econometric forecasts, the
evaluation of the size of any particular asset group, the concentration of any credit tier, the
percentage of delinquency, the severity of depreciated values of repossessions, trends in the
number of days repossessions are held in inventory, trends in delinquency roll rates, and trends
in the economy. The process of determining the level of the allowance for credit losses based upon
the foregoing analyses requires a high degree of judgment. It is possible that others, given the
same information, may reach different conclusions and such differences could be material. To the
extent that the analyses considered in determining the allowance for credit losses are not
indicative of future performance or other assumptions used by us do not prove to be accurate, loss
experience could differ significantly from our estimate, resulting in either higher or lower
future provision for credit losses. Derivative Financial Instruments We use derivatives in connection with our interest rate risk management activities. We record all
derivative instruments at fair value. Fair value information for our derivative financial
instruments is reported using quoted market prices for which it is practicable to estimate that
value. In cases where quoted market prices are not readily available, fair values are based on
estimates using present value or other valuation techniques. Some of our derivatives qualify for hedge accounting. To qualify for hedge accounting, we must
demonstrate, on an ongoing basis, that our derivatives are highly effective in protecting us
against interest rate risk. We employ regression analysis and discounted cash flow analysis to
determine the effectiveness of our hedging activity. The techniques used in estimating fair values and hedge effectiveness are significantly affected
by the assumptions used, including the discount rates and estimates of future cash flows. It is
possible that others, given the same information, may reach different conclusions and such
differences could be material. Accrued Taxes We estimate tax expenses based on the amount we expect to owe various tax jurisdictions. We
currently file tax returns in approximately 39 states. Our estimate of tax expense is reported on
our Consolidated Statements of Income. Accrued 16




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##### Table of Contents



taxes represent the net estimated amount due or to be received from taxing jurisdictions either
currently or in the future and are reported as a component of other assets on our Consolidated
Statements of Financial Condition. In estimating accrued taxes, we assess the relative merits and
risks of the appropriate tax treatment of transactions taking into account statutory, judicial and
regulatory guidance in the context of our tax position. Changes to our estimate of accrued taxes occur periodically due to changes in the tax rates,
implementation of new tax planning strategies, resolution with taxing authorities of issues with
previously taken tax positions, and newly enacted statutory, judicial and regulatory guidance.
These changes, when they occur, affect accrued taxes and could be material. Proposed 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 transaction is structured as a merger of WFS with and into the Bank. If
the merger is consummated, the public holders of WFS shares would 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, also known as the DFI, to convert its federal thrift charter to a
California state bank charter. Among other things, the merger is conditioned upon the conversion
of the charter and the transaction is subject to, among other closing conditions, the receipt of
regulatory approvals and the approval of a majority of WFSs minority shareholders, other than
shares controlled by us. The DFI and the Office of Thrift Supervision, also known as the OTS, have
approved the Banks application to convert from a federal savings bank to a California state
commercial bank subject to receipt of all other required regulatory approvals. The FDIC approved
the application to merge WFS into the Bank as part of the acquisition of the minority interest in
WFS. The conversion is still contingent upon the approval by the Board of Governors of the Federal
Reserve, also known as the Federal Reserve, of our application to become a bank holding company,
which process is taking longer than originally expected. As a result, we believe that the proposed
conversion will not occur until the latter half of 2005, if at all. The Federal Reserve recently
has raised some questions and potential concerns with our proposal and has requested additional
information from us. Assembling the information and responding to the Federal Reserves concerns
and questions will take additional time. Those concerns and questions will need to be addressed to
the Federal Reserves satisfaction before the Federal Reserve will deem our application complete. Although we intend to continue to pursue Federal Reserve approval, there can be no assurance that
such approval will ultimately be granted or that any conditions to such approval imposed on the
Bank will not affect the feasibility of moving forward with the proposed conversion and the
related merger of WFS into the Bank. We are currently exploring other alternatives in the event
that the proposed conversion and related merger cannot go forward as planned. In that regard, WFS
has begun the process of filing for state licenses. If the conversion is completed, we will be subject to the laws, regulation and oversight of the
DFI, the FDIC and the Federal Reserve. Results of Operations Net Interest Income Net interest income is affected by our interest rate spread, which is the difference between the
rate earned on our interest earning assets and the rate paid on our interest bearing liabilities,
and the relative amounts of our interest earning assets and interest bearing liabilities. Net
interest income totaled $217 million and $194 million for the three months ended 17




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##### Table of Contents



March 31, 2005 and 2004, respectively. 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 March 31,2005
    
    
    2004Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest earning assets:Total investments:Mortgage-backed securities
    
    $
    2,596,484
    
    
    $
    27,136
    
    
    
    4.18
    %
    
    $
    2,595,115
    
    
    $
    24,688
    
    
    
    3.81
    %Other short-term investments
    
    
    650,308
    
    
    
    4,120
    
    
    
    2.57
    
    
    
    590,409
    
    
    
    1,604
    
    
    
    1.09Investment securities
    
    
    131,915
    
    
    
    1,138
    
    
    
    3.45
    
    
    
    125,177
    
    
    
    1,058
    
    
    
    3.38Interest earning deposits with others
    
    
    36,141
    
    
    
    28
    
    
    
    0.30
    
    
    
    6,020
    
    
    
    9
    
    
    
    0.62Total investments
    
    
    3,414,848
    
    
    
    32,422
    
    
    
    3.80
    
    
    
    3,316,721
    
    
    
    27,359
    
    
    
    3.30Total loans: (1)Consumer loans
    
    
    11,898,032
    
    
    
    296,490
    
    
    
    10.11
    
    
    
    10,908,723
    
    
    
    282,041
    
    
    
    10.40Mortgage loans
    
    
    173,315
    
    
    
    2,269
    
    
    
    5.24
    
    
    
    229,379
    
    
    
    2,904
    
    
    
    5.06Commercial loans
    
    
    169,318
    
    
    
    2,528
    
    
    
    5.97
    
    
    
    99,288
    
    
    
    1,303
    
    
    
    5.19Construction loans
    
    
    21,474
    
    
    
    328
    
    
    
    6.11
    
    
    
    4,239
    
    
    
    52
    
    
    
    4.85Total loans
    
    
    12,262,139
    
    
    
    301,615
    
    
    
    9.97
    
    
    
    11,241,629
    
    
    
    286,300
    
    
    
    10.24Total interest earning assets
    
    $
    15,676,987
    
    
    
    334,037
    
    
    
    8.63
    
    
    $
    14,558,350
    
    
    
    313,659
    
    
    
    8.66Interest bearing liabilities:Deposits
    
    $
    2,132,054
    
    
    
    16,510
    
    
    
    3.14
    
    
    $
    1,906,775
    
    
    
    13,307
    
    
    
    2.81Securities sold under agreements to repurchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,400
    
    
    
    94
    
    
    
    1.11FHLB advances and other borrowings
    
    
    877,315
    
    
    
    5,629
    
    
    
    2.57
    
    
    
    658,775
    
    
    
    1,831
    
    
    
    1.10Notes payable on automobile secured financing
    
    
    10,692,932
    
    
    
    87,484
    
    
    
    3.27
    
    
    
    10,170,858
    
    
    
    94,218
    
    
    
    3.71Subordinated debentures
    
    
    295,413
    
    
    
    7,487
    
    
    
    10.14
    
    
    
    393,670
    
    
    
    9,786
    
    
    
    9.94Total interest bearing liabilities
    
    $
    13,997,714
    
    
    
    117,110
    
    
    
    3.35
    
    
    $
    13,163,478
    
    
    
    119,236
    
    
    
    3.63Net interest income and interest rate spread
    
    
    
    
    
    $
    216,927
    
    
    
    5.28
    %
    
    
    
    
    
    $
    194,423
    
    
    
    5.03
    %Net yield on average interest earning assets
    
    
    
    
    
    
    
    
    
    
    5.64
    %
    
    
    
    
    
    
    
    
    
    
    5.34
    %
   (1)

    For the purpose of these computations, nonaccruing loans are included in the average
loan amounts outstanding. The total interest rate spread increased 25 basis points for the three months ended March 31, 2005
compared with the three months ended March 31, 2004 due to a decrease of 3 basis points in the
yield on interest earning assets combined with a 28 basis point decrease in the cost of funds. The
decrease in the yield on interest earning assets in 2005 compared with 2004 is primarily due to a
low interest rate environment. The decrease in the cost of funds in 2005 compared with 2004 was
primarily due to a low interest rate environment and an improvement of credit spreads on our
automobile secured financings. 18




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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 Three Months Ended March 31, 2005Compared to the Three Months Ended March 31, 2004 (1)Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Increase (decrease) in interest income:Mortgage-backed securities
    
    $
    13
    
    
    $
    2,435
    
    
    $
    2,448Other short-term investments
    
    
    175
    
    
    
    2,341
    
    
    
    2,516Investment securities
    
    
    58
    
    
    
    22
    
    
    
    80Interest earning deposits with others
    
    
    52
    
    
    
    (33
    )
    
    
    19Total loans:Consumer loans
    
    
    59,442
    
    
    
    (44,993
    )
    
    
    14,449Mortgage loans
    
    
    (1,275
    )
    
    
    640
    
    
    
    (635
    )Commercial loans
    
    
    1,010
    
    
    
    215
    
    
    
    1,225Construction loans
    
    
    260
    
    
    
    16
    
    
    
    276Total interest income
    
    $
    59,735
    
    
    $
    (39,357
    )
    
    $
    20,378Increase (decrease) in interest expense:Deposits
    
    $
    1,606
    
    
    $
    1,597
    
    
    $
    3,203Securities sold under agreements to repurchase
    
    
    (47
    )
    
    
    (47
    )
    
    
    (94
    )FHLB advances and other borrowings
    
    
    755
    
    
    
    3,043
    
    
    
    3,798Notes payable on automobile secured financing
    
    
    25,002
    
    
    
    (31,736
    )
    
    
    (6,734
    )Subordinated debentures
    
    
    (3,584
    )
    
    
    1,285
    
    
    
    (2,299
    )Total interest expense
    
    $
    23,732
    
    
    $
    (25,858
    )
    
    $
    (2,126
    )Increase in net interest income
    
    
    
    
    
    
    
    
    
    $
    22,504
   (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 $49.0 million
and $62.3 million for the three months ended March 31, 2005 and 2004, respectively. The provision
for credit losses declined as a result of an improving economy as well as our continued emphasis on
risk-focused underwriting. 19




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##### Table of Contents



Contract Securitizations The following table lists each of our public securitizations. All securitizations prior to 2001-C
were paid in full on or before their contractual maturity dates and none of the remaining
securitizations have yet reached their contractual maturity dates. Securitizations Remaining
    
    
    
    
    
    
    
    
    
    
    GrossRemaining
    
    
    Balance as a
    
    
    Original
    
    
    Original
    
    
    InterestIssue
    
    
    
    Original
    
    
    Balance at
    
    
    Percent of
    
    
    Weighted
    
    
    Weighted Average
    
    
    RateNumber
    
    Close Date
    
    Balance
    
    
    March 31, 2005 (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
    
    
    Paid in full
    
    
    
    
    
    
    15.04
    
    
    
    7.32
    
    
    
    7.722000-D
    
    November, 2000
    
    
    1,000,000
    
    
    Paid in full
    
    
    
    
    
    
    15.20
    
    
    
    6.94
    
    
    
    8.262001-A
    
    January, 2001
    
    
    1,000,000
    
    
    Paid in full
    
    
    
    
    
    
    14.87
    
    
    
    5.77
    
    
    
    9.102001-B
    
    May, 2001
    
    
    1,370,000
    
    
    Paid in full
    
    
    
    
    
    
    14.41
    
    
    
    4.23
    
    
    
    10.182001-C
    
    August, 2001
    
    
    1,200,000
    
    
    $
    157,904
    
    
    
    13.16
    %
    
    
    13.90
    
    
    
    4.50
    
    
    
    9.402002-1
    
    March, 2002
    
    
    1,800,000
    
    
    
    350,270
    
    
    
    19.46
    
    
    
    13.50
    
    
    
    4.26
    
    
    
    9.242002-2
    
    May, 2002
    
    
    1,750,000
    
    
    
    417,237
    
    
    
    23.84
    
    
    
    12.51
    
    
    
    3.89
    
    
    
    8.622002-3
    
    August, 2002
    
    
    1,250,000
    
    
    
    349,016
    
    
    
    27.92
    
    
    
    12.30
    
    
    
    3.06
    
    
    
    9.242002-4
    
    November, 2002
    
    
    1,350,000
    
    
    
    460,723
    
    
    
    34.13
    
    
    
    12.18
    
    
    
    2.66
    
    
    
    9.522003-1
    
    February, 2003
    
    
    1,343,250
    
    
    
    484,915
    
    
    
    36.10
    
    
    
    11.79
    
    
    
    2.42
    
    
    
    9.372003-2
    
    May, 2003
    
    
    1,492,500
    
    
    
    623,906
    
    
    
    41.80
    
    
    
    11.57
    
    
    
    2.13
    
    
    
    9.442003-3
    
    August, 2003
    
    
    1,650,000
    
    
    
    875,115
    
    
    
    53.04
    
    
    
    10.59
    
    
    
    2.66
    
    
    
    7.932003-4
    
    November, 2003
    
    
    1,403,625
    
    
    
    758,143
    
    
    
    54.01
    
    
    
    10.89
    
    
    
    2.70
    
    
    
    8.192004-1
    
    February, 2004
    
    
    1,477,500
    
    
    
    869,953
    
    
    
    58.88
    
    
    
    10.89
    
    
    
    2.35
    
    
    
    8.542004-2
    
    May, 2004
    
    
    1,477,500
    
    
    
    1,003,518
    
    
    
    67.92
    
    
    
    10.98
    
    
    
    3.02
    
    
    
    7.962004-3
    
    August, 2004
    
    
    1,552,000
    
    
    
    1,208,942
    
    
    
    77.90
    
    
    
    10.64
    
    
    
    3.49
    
    
    
    7.152004-4
    
    October, 2004
    
    
    1,358,000
    
    
    
    1,166,839
    
    
    
    85.92
    
    
    
    11.19
    
    
    
    3.10
    
    
    
    8.092005-1
    
    January, 2005
    
    
    1,552,000
    
    
    
    1,495,241
    
    
    
    96.34
    
    
    
    11.25
    
    
    
    3.66
    
    
    
    7.592005-2
    
    March, 2005
    
    
    1,458,750
    
    
    
    1,458,750
    
    
    
    100.00
    
    
    
    11.51
    
    
    
    3.66
    
    
    
    7.85Total
    
    $
    43,486,555
    
    
    $
    11,680,472
   (1)
    
    Represents only the note payable amounts outstanding at the period indicated.(2)
    
    Represents the difference between the original weighted average annual percentage rate, also
known as the APR, and the estimated weighted average securitization rate on the closing date
of the securitization. 20




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##### Table of Contents



Noninterest Income and Noninterest Expense Noninterest income decreased to $19.3 million for the three months ended March 31, 2005 compared
with $28.7 million for the same period a year earlier as $14.5 million of additional loan
origination fees were deferred during the quarter. Noninterest expense was affected by $6.4
million in additional direct origination costs that were deferred in the quarter as well.
Historically, we performed analyses on the fees and direct costs related to our origination of
automobile loans and elected not to defer and amortize such amounts as the net effect was not
material to our financial statements in accordance with Statement of Financial Accounting Standard
No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases, and SEC Staff Accounting Bulletin: No. 99  Materiality. Due
to continuing improvements in operating efficiencies and the higher amount of documentation fees
earned, the difference between the amount of fees received and the direct costs incurred has
gradually increased. Therefore, we have decided to defer and amortize these amounts prospectively
beginning this quarter. Income Taxes We file federal and certain state tax returns as part of a consolidated group that includes the
Bank and 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 months ended March 31, 2005 and 2004. Financial Condition Overview Total assets increased $611 million or 3.9% to $16.2 billion at March 31, 2005 from $15.5 billion
at December 31, 2004. The increase is due primarily to an increase in automobile contracts
originated. Loan Portfolio The following table presents a summary of our automobile contracts purchased: For the Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)New vehicles
    
    $
    506,190
    
    
    $
    551,570Pre-owned vehicles
    
    
    1,276,224
    
    
    
    1,033,603Total volume
    
    $
    1,782,414
    
    
    $
    1,585,173Prime
    
    $
    1,363,083
    
    
    $
    1,303,189Non-prime
    
    
    419,331
    
    
    
    281,984Total volume
    
    $
    1,782,414
    
    
    $
    1,585,173
 Commercial Loan Portfolio We had outstanding commercial loan commitments of $381 million at March 31, 2005 compared with $327
million at December 31, 2004. We originated $166 million and $66.9 million of commercial loans for
the three months ended March 31, 2005 and 2004, respectively. Amounts outstanding at March 31, 2005
and December 31, 2004 were $127 million and $166 million, respectively. 21




---



##### 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 an improving economy and our continued emphasis on risk-focused
underwriting. The following table sets forth information with respect to the delinquency of our portfolio of
contracts: March 31, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %(Dollars in thousands)Contracts managed at end of period
    
    $
    11,852,222
    
    
    
    
    
    
    $
    11,560,890Period of delinquency30-59 days
    
    $
    130,521
    
    
    
    1.10
    %
    
    $
    191,001
    
    
    
    1.65
    %60 days or more (1)
    
    
    50,998
    
    
    
    0.43
    
    
    
    67,660
    
    
    
    0.59Total contracts delinquent and
delinquencies as a percentage of
contracts managed (1)
    
    $
    181,519
    
    
    
    1.53
    %
    
    $
    258,661
    
    
    
    2.24
    %
   (1)
    
    Excludes Chapter 13 bankruptcy accounts greater than 120 days past due of $46.1 million
at both March 31, 2005 and December 31, 2004. The following table sets forth information with respect to repossessions in our portfolio of
managed contracts: March 31, 2005
    
    
    December 31, 2004Number of

    
    
    
    
    
    Number ofContracts

    
    Amount
    
    
    Contracts
    

    Amount(Dollars in thousands)Contracts managed
    
    
    895,377
    
    
    $
    11,852,222
    
    
    
    876,695
    
    
    $
    11,560,890Repossessed vehicles
    
    
    785
    
    
    $
    5,852
    
    
    
    1,049
    
    
    $
    7,982Repossessed
vehicles as a
percentage of
number and amount
of contracts
outstanding
    
    
    0.09
    %
    
    
    0.05
    %
    
    
    0.12
    %
    
    
    0.07
    %
 22




---



##### Table of Contents



The following table sets forth information with respect to actual credit loss experience on
our portfolio of managed contracts. Net chargeoffs declined as a result of an improving economy. For the Three Months EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Average contracts managed during period
    
    $
    11,702,544
    
    
    $
    10,726,048Gross chargeoffs
    
    $
    71,953
    
    
    $
    85,494Recoveries
    
    
    23,474
    
    
    
    24,701Net chargeoffs
    
    $
    48,479
    
    
    $
    60,793Net chargeoffs as a percentage of
average contracts managed during
period
    
    
    1.66
    %
    
    
    2.27
    %
 23




---



##### 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 March 31, 2005 Period (1)
    
    2001-C
    
    
    2002-1
    
    
    2002-2
    
    
    2002-3
    
    
    2002-4
    
    
    2003-1
    
    
    2003-2
    
    
    2003-3
    
    
    2003-4
    
    
    2004-1
    
    
    2004-2
    
    
    2004-3
    
    
    2004-4
    
    
    2005-1
    
    
    2005-21
    
    
    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
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.02
    %
    
    
    0.00
    %
    
    
    0.00
    %3
    
    
    0.09
    %
    
    
    0.06
    %
    
    
    0.03
    %
    
    
    0.06
    %
    
    
    0.07
    %
    
    
    0.04
    %
    
    
    0.02
    %
    
    
    0.02
    %
    
    
    0.03
    %
    
    
    0.02
    %
    
    
    0.03
    %
    
    
    0.06
    %
    
    
    0.04
    %
    
    
    0.02
    %4
    
    
    0.20
    %
    
    
    0.15
    %
    
    
    0.10
    %
    
    
    0.14
    %
    
    
    0.16
    %
    
    
    0.11
    %
    
    
    0.06
    %
    
    
    0.06
    %
    
    
    0.08
    %
    
    
    0.06
    %
    
    
    0.07
    %
    
    
    0.13
    %
    
    
    0.09
    %5
    
    
    0.35
    %
    
    
    0.29
    %
    
    
    0.18
    %
    
    
    0.27
    %
    
    
    0.26
    %
    
    
    0.18
    %
    
    
    0.14
    %
    
    
    0.13
    %
    
    
    0.14
    %
    
    
    0.11
    %
    
    
    0.15
    %
    
    
    0.21
    %
    
    
    0.15
    %6
    
    
    0.49
    %
    
    
    0.43
    %
    
    
    0.32
    %
    
    
    0.44
    %
    
    
    0.38
    %
    
    
    0.29
    %
    
    
    0.25
    %
    
    
    0.23
    %
    
    
    0.21
    %
    
    
    0.19
    %
    
    
    0.24
    %
    
    
    0.30
    %
    
    
    0.23
    %7
    
    
    0.65
    %
    
    
    0.60
    %
    
    
    0.49
    %
    
    
    0.57
    %
    
    
    0.50
    %
    
    
    0.41
    %
    
    
    0.36
    %
    
    
    0.32
    %
    
    
    0.28
    %
    
    
    0.27
    %
    
    
    0.33
    %
    
    
    0.40
    %8
    
    
    0.81
    %
    
    
    0.84
    %
    
    
    0.66
    %
    
    
    0.70
    %
    
    
    0.61
    %
    
    
    0.53
    %
    
    
    0.48
    %
    
    
    0.40
    %
    
    
    0.35
    %
    
    
    0.34
    %
    
    
    0.41
    %
    
    
    0.50
    %9
    
    
    0.95
    %
    
    
    1.06
    %
    
    
    0.82
    %
    
    
    0.82
    %
    
    
    0.78
    %
    
    
    0.66
    %
    
    
    0.59
    %
    
    
    0.47
    %
    
    
    0.44
    %
    
    
    0.42
    %
    
    
    0.51
    %10
    
    
    1.07
    %
    
    
    1.28
    %
    
    
    0.96
    %
    
    
    0.96
    %
    
    
    0.94
    %
    
    
    0.80
    %
    
    
    0.70
    %
    
    
    0.55
    %
    
    
    0.54
    %
    
    
    0.52
    %
    
    
    0.59
    %11
    
    
    1.20
    %
    
    
    1.48
    %
    
    
    1.10
    %
    
    
    1.10
    %
    
    
    1.08
    %
    
    
    0.93
    %
    
    
    0.80
    %
    
    
    0.62
    %
    
    
    0.61
    %
    
    
    0.59
    %
    
    
    0.65
    %12
    
    
    1.37
    %
    
    
    1.67
    %
    
    
    1.26
    %
    
    
    1.24
    %
    
    
    1.28
    %
    
    
    1.06
    %
    
    
    0.89
    %
    
    
    0.71
    %
    
    
    0.73
    %
    
    
    0.67
    %13
    
    
    1.55
    %
    
    
    1.82
    %
    
    
    1.39
    %
    
    
    1.38
    %
    
    
    1.43
    %
    
    
    1.21
    %
    
    
    0.98
    %
    
    
    0.80
    %
    
    
    0.83
    %
    
    
    0.75
    %14
    
    
    1.74
    %
    
    
    1.99
    %
    
    
    1.51
    %
    
    
    1.53
    %
    
    
    1.59
    %
    
    
    1.31
    %
    
    
    1.08
    %
    
    
    0.88
    %
    
    
    0.93
    %
    
    
    0.81
    %15
    
    
    1.97
    %
    
    
    2.14
    %
    
    
    1.68
    %
    
    
    1.70
    %
    
    
    1.77
    %
    
    
    1.40
    %
    
    
    1.20
    %
    
    
    0.97
    %
    
    
    1.03
    %16
    
    
    2.16
    %
    
    
    2.27
    %
    
    
    1.83
    %
    
    
    1.88
    %
    
    
    1.92
    %
    
    
    1.50
    %
    
    
    1.31
    %
    
    
    1.07
    %
    
    
    1.09
    %17
    
    
    2.36
    %
    
    
    2.45
    %
    
    
    1.99
    %
    
    
    2.03
    %
    
    
    2.05
    %
    
    
    1.60
    %
    
    
    1.41
    %
    
    
    1.16
    %
    
    
    1.19
    %18
    
    
    2.59
    %
    
    
    2.62
    %
    
    
    2.16
    %
    
    
    2.15
    %
    
    
    2.16
    %
    
    
    1.70
    %
    
    
    1.53
    %
    
    
    1.25
    %19
    
    
    2.78
    %
    
    
    2.80
    %
    
    
    2.31
    %
    
    
    2.28
    %
    
    
    2.25
    %
    
    
    1.85
    %
    
    
    1.66
    %
    
    
    1.33
    %20
    
    
    2.95
    %
    
    
    2.99
    %
    
    
    2.46
    %
    
    
    2.41
    %
    
    
    2.37
    %
    
    
    1.99
    %
    
    
    1.76
    %
    
    
    1.40
    %21
    
    
    3.14
    %
    
    
    3.15
    %
    
    
    2.60
    %
    
    
    2.52
    %
    
    
    2.49
    %
    
    
    2.14
    %
    
    
    1.87
    %22
    
    
    3.29
    %
    
    
    3.31
    %
    
    
    2.72
    %
    
    
    2.62
    %
    
    
    2.62
    %
    
    
    2.27
    %
    
    
    1.95
    %23
    
    
    3.41
    %
    
    
    3.45
    %
    
    
    2.86
    %
    
    
    2.74
    %
    
    
    2.73
    %
    
    
    2.37
    %
    
    
    2.02
    %24
    
    
    3.57
    %
    
    
    3.58
    %
    
    
    2.95
    %
    
    
    2.83
    %
    
    
    2.84
    %
    
    
    2.47
    %25
    
    
    3.73
    %
    
    
    3.69
    %
    
    
    3.03
    %
    
    
    2.96
    %
    
    
    2.95
    %
    
    
    2.57
    %26
    
    
    3.88
    %
    
    
    3.80
    %
    
    
    3.13
    %
    
    
    3.08
    %
    
    
    3.06
    %
    
    
    2.63
    %27
    
    
    4.04
    %
    
    
    3.92
    %
    
    
    3.22
    %
    
    
    3.21
    %
    
    
    3.17
    %28
    
    
    4.20
    %
    
    
    4.02
    %
    
    
    3.33
    %
    
    
    3.31
    %
    
    
    3.25
    %29
    
    
    4.35
    %
    
    
    4.12
    %
    
    
    3.41
    %
    
    
    3.41
    %
    
    
    3.32
    %30
    
    
    4.46
    %
    
    
    4.22
    %
    
    
    3.50
    %
    
    
    3.42
    %31
    
    
    4.57
    %
    
    
    4.30
    %
    
    
    3.58
    %
    
    
    3.56
    %32
    
    
    4.69
    %
    
    
    4.39
    %
    
    
    3.66
    %
    
    
    3.62
    %33
    
    
    4.77
    %
    
    
    4.49
    %
    
    
    3.73
    %34
    
    
    4.85
    %
    
    
    4.56
    %
    
    
    3.78
    %35
    
    
    4.92
    %
    
    
    4.63
    %
    
    
    3.84
    %36
    
    
    5.01
    %
    
    
    4.69
    %37
    
    
    5.09
    %
    
    
    4.74
    %38
    
    
    5.16
    %39
    
    
    5.22
    %40
    
    
    5.27
    %41
    
    
    5.32
    %42
    
    
    5.38
    %43
    
    
    5.42
    %44
    
    
    5.46
    %Prime Mix (2)
    
    
    76
    %
    
    
    70
    %
    
    
    87
    %
    
    
    85
    %
    
    
    80
    %
    
    
    80
    %
    
    
    82
    %
    
    
    84
    %
    
    
    82
    %
    
    
    82
    %
    
    
    82
    %
    
    
    81
    %
    
    
    78
    %
    
    
    78
    %
    
    
    77
    %
   (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. 24




---



##### Table of Contents



Real Estate Loan Quality We had 0.47% of total mortgage loans past due over 60 days at March 31, 2005 compared with 0.85%
of total mortgage loans at December 31, 2004. The decrease in total mortgage loans past due over
60 days at March 31, 2005 is due to an improving economy. Nonperforming Assets Nonperforming loans, also known as NPLs, are defined as all nonaccrual loans. This includes
mortgage loans 90 days or more past due, impaired loans where full collection of principal and
interest is not reasonably assured and Chapter 13 bankruptcy accounts that are contractually past
due over 120 days. For those accounts that are in Chapter 13 bankruptcy and are contractually past
due over 120 days, all accrued interest is reversed and income is recognized on a cash basis. When
a loan is designated as nonaccrual, all previously accrued but unpaid interest is reversed.
Interest on NPLs excluded from interest income was $0.4 million and $0.6 million for the three
months ended March 31, 2005 and 2004, respectively. Nonperforming assets, also known as NPAs, consist of NPLs, repossessed automobiles and real estate
owned, also known as REO. Repossessed automobiles and REO are carried at
lower of cost or fair value. NPAs decreased $2.8 million to $57.4 million at March 31, 2005
compared with $60.2 million at December 31, 2004. The decrease in the NPAs was primarily due to a
$2.1 million decrease in repossessed automobiles. NPAs represented 0.4% of total assets at both
March 31, 2005 and December 31, 2004. There were no impaired loans at March 31, 2005 and December
31, 2004. Allowance for Credit Losses Our allowance for credit losses was $316 million at March 31, 2005 compared to $315 million at
December 31, 2004. Net chargeoffs totaled $48.5 million and $60.8 million for the three months
ended March 31, 2005 and 2004, respectively. The increase in the allowance for credit losses was
the result of a higher level of automobile contracts held on balance sheet. The allowance for
credit losses as a percentage of owned loans outstanding was 2.6% at both March 31, 2005 and
December 31, 2004. Based on the analyses we performed related to the allowance for credit losses as
described under Note 1  Summary of Significant Accounting Policies in our Consolidated Financial
Statements in our 2004 Form 10-K, we believe that our allowance for credit losses is currently
adequate to cover probable losses in our loan portfolio that can be reasonably estimated. 25




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##### Table of Contents



The following table presents summarized data relative to the allowance for credit and real estate
owned losses at the dates indicated: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Total loans (1)
    
    $
    12,360,961
    
    
    $
    12,135,748Allowance for credit losses
    
    
    315,882
    
    
    
    315,402Allowance for real estate owned losses
    
    
    100
    
    
    
    100Loans past due 60 days or more (2)
    
    
    52,911
    
    
    
    69,645Nonperforming loans (3)
    
    
    51,182
    
    
    
    51,883Nonperforming assets (4)
    
    
    57,447
    
    
    
    60,229Allowance for credit losses as a percent of:Total loans (1)
    
    
    2.6
    %
    
    
    2.6
    %Loans past due 60 days or more
    
    
    597.0
    %
    
    
    452.9
    %Nonperforming loans
    
    
    617.2
    %
    
    
    607.9
    %Total allowance for credit losses and REO losses as a percent
of nonperforming assets
    
    
    550.0
    %
    
    
    523.8
    %Nonperforming loans as a percent of total loans
    
    
    0.4
    %
    
    
    0.4
    %Nonperforming assets as a percent of total assets
    
    
    0.4
    %
    
    
    0.4
    %
   (1)

    Loans net of unearned interest and undisbursed loan proceeds.(2)

    Excludes nonaccrual Chapter 13 bankruptcy accounts.(3)

    All nonperforming loans are on nonaccrual.(4)

    Nonperforming loans, repossessed automobiles and real estate owned, net of allowance. Deposits We attract both short-term and long-term deposits from the general public, commercial enterprises
and institutions by offering a variety of accounts and rates. We offer regular passbook accounts,
demand deposit accounts, money market accounts, certificate of deposit accounts and individual
retirement accounts. Our retail banking division gathers deposits from 20 retail branch locations
throughout Southern California. Our commercial banking division gathers deposits by establishing
commercial relationships with businesses located throughout Southern California. The following table sets forth the amount of our deposits by type at the dates indicated: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)No minimum term:Demand deposit accounts
    
    $
    300
    
    
    $
    705Passbook accounts
    
    
    5,654
    
    
    
    5,880Money market accounts
    
    
    1,259,670
    
    
    
    1,257,074Noninterest bearing deposits
    
    
    291,765
    
    
    
    268,556Core deposits
    
    
    1,557,389
    
    
    
    1,532,215Certificate accounts:Certificates (30 days to five years)
    
    
    628,580
    
    
    
    586,678Individual retirement accounts
    
    
    62,733
    
    
    
    64,606$
    2,248,702
    
    
    $
    2,183,499
 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. 26




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##### 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 $3.0 billion and $1.5 billion for the three months
ended March 31, 2005 and 2004, respectively.
    Collections of Principal and Interest from Loans and MBS and Release of Cash from Spread Accounts The collection
of principal and interest from contracts originated and securitized and the release of cash from spread accounts
is another significant source of funds for us. Principal and interest collections on loans and MBS totaled $1.1
billion and $1.4 billion for the three months ended March 31, 2005 and 2004, respectively. The decrease in the
principal and interest collections is due to principal and interest on our senior/subordinated securitizations
being held at the trustee in collection and spread accounts until certain predetermined levels are reached.
    Deposits Deposits were $2.2 billion at both March 31, 2005 and December 31, 2004.
    Other Borrowings Other borrowings, which include securities sold under agreements to repurchase and FHLB
advances, decreased to $152 million at March 31, 2005 from $1.1 billion at December 31, 2004.
    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 March 31, 2005 there was $300 million
outstanding on the subordinated debentures due in 2012, excluding discounts and issue costs. On August 1, 2004, we
redeemed the outstanding balance of our $150 million, 8.875%
subordinated debentures due in 2007 at par plus accrued
but unpaid interest to the redemption date. Principal Uses of Cash  
    Acquisition of Loans and Investment Securities Loan originations totaled $2.0 billion and $1.7 billion for the
three months ended March 31, 2005 and 2004, respectively. We purchased $245 million and $322 million of
mortgage-backed securities and other investment securities during the three months ended March 31, 2005 and 2004,
respectively.
    Payments of Principal and Interest on Securitizations Payments of principal and interest to noteholders and
certificateholders totaled $1.6 billion and $1.5 billion for the three months ended March 31, 2005 and 2004,
respectively.
    Amounts Paid to Dealers Participation paid by us to dealers was $39.4 million and $36.1 million for the three
months ended March 31, 2005 and 2004, respectively.
    Operating Our Business Noninterest expenses totaled $72.6 million and $71.4 million for the three months ended
March 31, 2005 and 2004, respectively. 27




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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 March 31, 2005
and December 31, 2004: Tier 1Tangible
    
    
    Core
    
    
    Risk-Based
    
    
    Risk-BasedCapital
    
    
    Capital
    
    
    Capital
    
    
    Capital(Dollars in thousands)March 31, 2005Actual Capital:Amount
    
    $
    1,251,037
    
    
    $
    1,251,037
    
    
    $
    1,247,965
    
    
    $
    1,682,543Capital ratio
    
    
    8.75
    %
    
    
    8.75
    %
    
    
    11.37
    %
    
    
    15.32
    %FIRREA minimum required capital:Amount
    
    $
    214,371
    
    
    $
    428,741
    
    
    
    N/A
    
    
    $
    878,381Capital ratio
    
    
    1.50
    %
    
    
    3.00
    %
    
    
    N/A
    
    
    
    8.00
    %Excess
    
    $
    1,036,666
    
    
    $
    822,296
    
    
    
    N/A
    
    
    $
    804,162FDICIA well capitalized required capital:Amount
    
    
    N/A
    
    
    $
    714,569
    
    
    $
    658,786
    
    
    $
    1,097,976Capital ratio
    
    
    N/A
    
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %Excess
    
    
    N/A
    
    
    $
    536,468
    
    
    $
    589,179
    
    
    $
    584.567December 31, 2004Actual Capital:Amount
    
    $
    1,196,579
    
    
    $
    1,196,579
    
    
    $
    1,193,529
    
    
    $
    1,619,317Capital ratio
    
    
    8.99
    %
    
    
    8.99
    %
    
    
    11.59
    %
    
    
    15.72
    %FIRREA minimum required capital:Amount
    
    $
    199,654
    
    
    $
    399,308
    
    
    
    N/A
    
    
    $
    824,105Capital ratio
    
    
    1.50
    %
    
    
    3.00
    %
    
    
    N/A
    
    
    
    8.00
    %Excess
    
    $
    996,925
    
    
    $
    797,271
    
    
    
    N/A
    
    
    $
    795,212FDICIA well capitalized required capital:Amount
    
    
    N/A
    
    
    $
    665,513
    
    
    $
    618,079
    
    
    $
    1,030,131Capital ratio
    
    
    N/A
    
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    10.00
    %Excess
    
    
    N/A
    
    
    $
    531,066
    
    
    $
    575,450
    
    
    $
    589,186
 28




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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: March 31,
    
    
    December 31,2005
    
    
    2004(Dollars in thousands)Bank shareholders equity  GAAP basis
    
    $
    1,042,240
    
    
    $
    993,959Plus: Net unrealized losses
    
    
    33,992
    
    
    
    37,529Plus: Minority interest in equity of subsidiaries
    
    
    175,197
    
    
    
    165,484Less: Non-permissible activities
    
    
    (392
    )
    
    
    (393
    )Total tangible and core capital
    
    
    1,251,037
    
    
    
    1,196,579Adjustments for risk-based capital:Subordinated debentures (1)
    
    
    296,075
    
    
    
    295,838General loan valuation allowance (2)
    
    
    138,503
    
    
    
    129,950Low-level recourse deduction
    
    
    (3,072
    )
    
    
    (3,050
    )Risk-based capital
    
    $
    1,682,543
    
    
    $
    1,619,317
   (1)

    Excludes capitalized discounts and issue costs.(2)

    Limited to 1.25% of risk-weighted assets. 29




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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 NPV as a percentage of the discounted value of the future cash flows
of all assets. At March 31, 2005, we maintained minimal interest rate risk exposure within a change
in interest rates of plus or minus 100 basis points. The following table summarizes our NPV sensitivity analysis at March 31, 2005 based on guidance
from the OTS: Changes in Interest Rates
    
    NPV Ratio+100 basis points
    
    
    11.41
    %Base case
    
    
    11.58
    % 100 basis points
    
    
    11.57
    %
 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 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. We enter into Euro-dollar future contracts and forward agreements
in order to hedge our future interest payments on our notes payable on automobile secured
financing. 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
noninterest income during that period if the hedge is greater than 100% effective. Upon completion
of the securitization transaction, the gains or losses are amortized on a level yield basis over
the duration of the notes issued. These hedge instruments are settled daily, and therefore, there
are no related financial instruments recorded on the Consolidated Statements of Financial
Condition. Credit risk related to these hedge instruments is minimal. 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. As we issued certain variable rate notes payable in connection with our securitization activities,
we also entered into interest rate swap agreements in order to hedge our variable interest rate
exposure on future interest payments. The fair value of the interest rate swap agreements is
included in notes payable on automobile secured financing, and any change in the fair value is
reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated
Statements of Financial Condition. Any ineffective portion is recorded in noninterest income during
that period if the hedge is greater than 100% effective. Related interest income or expense is
settled on a quarterly basis and recognized as an adjustment to interest expense in our
Consolidated Statements of Income. 30




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##### Table of Contents



We have entered into interest rate swap agreements or other derivatives that we choose not to
designate as hedges or that do not qualify for hedge accounting. 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 any income or expense recognized on such derivatives is
recorded to noninterest income. We have entered into or committed to interest rate swaps as hedges against deposits to manage
interest rate risk exposure. The fair value of the interest rate swap agreements is included in
deposits 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. 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. 
 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 is 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. Our prior Chief Financial Officer resigned on March 11, 2005 to assume a position at another
company. Our current Chief Financial Officer was hired on May 8, 2005. From March 11, 2005 to
May 8, 2005, our interim Chief Financial Officer performed the function of our Chief Financial
Officer. Under the supervision and with the participation of our management, including our Chief
Executive Officer and our interim 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 interim
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. 31




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1.   Legal Proceedings We or our subsidiaries are involved as a party to certain legal proceedings
incidental to our business. Beginning on May 24, 2004 and continuing
thereafter, a total of four separate purported class action lawsuits
relating to the announcement by us and WFS that we had entered into a merger
agreement, pursuant to which we would acquire the outstanding 16% common
stock interest of WFS not already owned by our wholly owned subsidiary,
Western Financial Bank, and WFS would be merged with and into Western
Financial Bank were filed in the Orange County, California Superior Court
against us, WFS, and our individual board members and individual board
members of WFS. On June 24, 2004, the actions were consolidated under the
caption In re WFS Financial Shareholder Litigation, Case No. 04CC00559 (the
Action). On July 16, 2004, the court granted a motion by plaintiff Alaska
Hotel & Restaurant Employees Pension Trust Fund, in Case No.04CC00573, to
amend the consolidation order to designate it the lead plaintiff in the
litigation. The lead plaintiff filed a consolidated amended complaint on
August 9, 2004, and then filed the present corrected consolidated amended
complaint on September 15, 2004. All of the shareholder-related actions
allege, among other things, that the defendants breached their respective
fiduciary duties and seek to enjoin or rescind the transaction and obtain an
unspecified sum in damages and costs, including attorneys fees and
expenses. The parties have tentatively agreed to a full and final
resolution of the Action and, on January 19, 2005, the parties entered into
a Memorandum of Understanding (MOU) concerning the terms of the tentative
settlement. Pursuant to the terms of the MOU, the parties have agreed, among
other things, that additional disclosures will be made in our Registration
Statement on Form S-4 (as filed with the SEC on July 16, 2004), the claims
asserted in the Action will be fully released, and the Action will be
dismissed with prejudice. Further, pursuant to the MOU, the defendants have
agreed to pay plaintiffs attorneys fees and expenses in the amount of
$675,000, or in such lesser amount as the Court may order. The
effectiveness of the settlement agreement is contingent on the transaction
actually occurring. The parties prepared a formal settlement agreement
based on the terms of the MOU and will present it to the Court for
preliminary approval on June 17, 2005. The parties have further agreed and
reported to the Court that the parties will not proceed with providing
notice of the proposed settlement to shareholders nor schedule a final
hearing on approval of the settlement unless and until the necessary
regulatory approvals for the transaction have been obtained. We are
vigorously defending this action and do not believe that the outcome of this
proceeding will have a material effect upon our financial condition, results
of operations and cash flows. 
 Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3.   Defaults Upon Senior Securities None 
 Item 4.   Submission of Matters to a Vote of Security Holders None 
 Item 5.   Other Information None 32




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##### Table of Contents



Item 6.   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)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. 33




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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: May 6, 2005
    
    By:
    
    /s/ Ernest S. RadyErnest S. RadyChairman of the Board andChief Executive OfficerDate: May 6, 2005
    
    By:
    
    /s/ Mark K. OlsonMark K. OlsonVice President, Controller andInterim Chief Financial Officer
 34




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##### Table of Contents



INDEX TO 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)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.