UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2005

OR

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

For the transition period from __________________ to __________________

Westcorp

(Exact name of registrant as specified in its charter)

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

23 Pasteur, Irvine, California 92618-3816

(Address of principal executive offices)

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes þ     No o

As of July 31, 2005, the registrant had 52,189,893 outstanding shares of common stock, $1.00 par value. The shares of common stock represent the only class of common stock of the registrant.

The total number of sequentially numbered pages is 36.

 

 

WESTCORP AND SUBSIDIARIES

FORM 10-Q

June 30, 2005

TABLE OF CONTENTS

				Page No.
Forward-Looking Statements and Available Information					1
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements			2
		Consolidated Statements of Financial Condition at June 30, 2005 and December 31, 2004			2
		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2005 and 2004			3
		Consolidated Statements of Changes in Shareholders’ Equity for the Periods Ended June 30, 2005 and December 31, 2004			4
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004			5
		Notes to Consolidated Financial Statements			6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.		Quantitative and Qualitative Disclosure About Market Risk			31
Item 4.		Controls and Procedures			32
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3.		Defaults Upon Senior Securities			33
Item 4.		Submission of Matters to a Vote of Security Holders			33
Item 5.		Other Information			34
Item 6.		Exhibits			35
SIGNATURES					36
CERTIFICATIONS
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

Forward-Looking Statements

This Form 10-Q includes and incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, also known as the Exchange Act. Forward-looking statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies, as well as the proposed merger of WFS Financial Inc, also known as WFS, and Western Financial Bank, also known as the Bank, and the conversion of the Bank to a California state 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 the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Form 10-Q and in the documents incorporated by reference.

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

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

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

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

INDUSTRY DATA

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

Available Information

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

		(Unaudited)
		June 30, 2005				December 31, 2004
		(Dollars in thousands)
ASSETS
Cash		$	120,780			$	89,333
Interest bearing deposits with other financial institutions			2,629				4,177
Other short-term investments			275,000				125,000
Cash and due from banks			398,409				218,510
Restricted cash			494,374				417,833
Investment securities available for sale			180,410				119,811
Mortgage-backed securities available for sale			2,643,222				2,649,758
Loans receivable			12,819,403				12,135,748
Allowance for credit losses			(318,776	)			(315,402	)
Loans receivable, net			12,500,627				11,820,346
Interest receivable			82,925				79,825
Premises and equipment, net			74,536				76,526
Other assets			169,731				162,731
TOTAL ASSETS		$	16,544,234			$	15,545,340
LIABILITIES
Deposits		$	2,262,888			$	2,183,499
Notes payable on automobile secured financing			10,212,648				10,242,900
Federal Home Loan Bank advances			1,910,463				1,139,521
Subordinated debentures			295,856				295,321
Other liabilities			215,322				178,939
TOTAL LIABILITIES			14,897,177				14,040,180
Minority interest			185,197				165,484
SHAREHOLDERS’ EQUITY
Common stock (par value $1.00 per share; authorized 65,000,000 shares; issued and outstanding 52,154,159 shares at June 30, 2005 and 51,895,258 shares at December 31, 2004)			52,154				51,895
Paid-in capital			722,487				717,098
Retained earnings			717,910				606,987
Accumulated other comprehensive loss, net of tax			(30,691	)			(36,304	)
TOTAL SHAREHOLDERS’ EQUITY			1,461,860				1,339,676
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	16,544,234			$	15,545,340

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Dollars in thousands, except per share amounts)
Interest income:
Loans, including fees		$	307,929			$	285,893			$	609,544			$	572,193
Mortgage-backed securities			27,516				22,150				54,652				46,838
Investment securities			1,210				1,122				2,348				2,180
Other			6,063				1,818				10,210				3,431
TOTAL INTEREST INCOME			342,718				310,983				676,754				624,642
Interest expense:
Deposits			21,479				13,884				37,989				27,191
Notes payable on automobile secured financing			93,043				88,591				180,527				182,809
Other			13,946				11,360				27,061				23,071
TOTAL INTEREST EXPENSE			128,468				113,835				245,577				233,071
NET INTEREST INCOME			214,250				197,148				431,177				391,571
Provision for credit losses			37,699				51,539				86,677				113,834
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES			176,551				145,609				344,500				277,737
Noninterest income:
Automobile lending			14,709				25,067				30,040				50,815
Insurance income			2,150				1,690				4,195				3,514
Mortgage banking			60				249				177				484
Other			2,656				548				4,456				1,431
TOTAL NONINTEREST INCOME			19,575				27,554				38,868				56,244
Noninterest expenses:
Salaries and associate benefits			43,151				45,369				86,937				87,453
Credit and collections			8,021				7,710				16,588				16,302
Data processing			4,866				4,082				9,488				8,261
Occupancy			3,902				3,851				7,837				7,727
Other			14,153				12,623				25,833				25,291
TOTAL NONINTEREST EXPENSES			74,093				73,635				146,683				145,034
INCOME BEFORE INCOME TAX			122,033				99,528				236,685				188,947
Income tax			47,099				39,725				92,738				75,039
INCOME BEFORE MINORITY INTEREST			74,934				59,803				143,947				113,908
Minority interest in earnings of subsidiaries			9,616				5,388				17,947				16,129
NET INCOME		$	65,318			$	54,415			$	126,000			$	97,779
Earnings per common share:
Basic		$	1.25			$	1.05			$	2.42			$	1.89
Diluted		$	1.24			$	1.04			$	2.39			$	1.86
Weighted average number of common shares outstanding:
Basic			52,080,837				51,823,013				52,019,699				51,780,338
Diluted			52,680,870				52,483,220				52,641,796				52,531,365
Dividends declared		$	0.15			$	0.14			$	0.30			$	0.28

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

																		Accumulated
																		Other
																		Comprehensive
						Common				Paid-in				Retained				Income (Loss),
		Shares				Stock				Capital				Earnings				Net of Tax				Total
		(Dollars in thousands, except share amounts)
Balance at January 1, 2004			51,698,398			$	51,698			$	710,001			$	427,527			$	(66,741	)		$	1,122,485
Net income															207,962								207,962
Unrealized losses on securities available for sale, net of tax (1)																			(9,677	)			(9,677	)
Unrealized losses on cash flow hedges, net of tax (2)																			(1,570	)			(1,570	)
Reclassification adjustment for gains on securities available for sale included in net income, net of tax (3)																			(1,446	)			(1,446	)
Reclassification adjustment for losses on cash flow hedges included in income, net of tax (4)																			43,130				43,130
Comprehensive income																							238,399
Issuance of subsidiary common stock											(47	)											(47	)
Stock options expensed (5)											2,665												2,665
Stock options exercised			196,860				197				4,479												4,676
Cash dividends															(28,502	)							(28,502	)
Balance at December 31, 2004			51,895,258				51,895				717,098				606,987				(36,304	)			1,339,676
Net income															126,000								126,000
Unrealized losses on securities available for sale, net of tax (1)																			(6,797	)			(6,797	)
Unrealized gains on cash flow hedges, net of tax (2)																			579				579
Reclassification adjustment for losses on cash flow hedges included in income, net of tax (4)																			11,831				11,831
Comprehensive income																							131,613
Issuance of subsidiary common stock											(748	)											(748	)
Stock options expensed (5)											2,014												2,014
Stock options exercised			258,901				259				4,123												4,382
Cash dividends															(15,077	)							(15,077	)
Balance at June 30, 2005			52,154,159			$	52,154			$	722,487			$	717,910			$	(30,691	)		$	1,461,860

See accompanying notes to consolidated financial statements.

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		For the Six Months Ended
		June 30,
		2005				2004
		(Dollars in thousands)
OPERATING ACTIVITIES:
Net income		$	126,000			$	97,779
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses			86,677				113,834
Amortization of loan fees and costs			58,532				61,388
Amortization of losses on cash flow hedges			17,757				22,737
Amortization of premium on mortgage-backed securities			10,791				23,748
Depreciation			6,312				6,104
Amortization, other			597				766
Gain on sales, net			(1,875	)			(6,619	)
Other			682				556
Increase in other assets			(14,025	)			(2,923	)
Increase in other liabilities			36,624				23,709
Other, net			17,948				16,128
NET CASH PROVIDED BY OPERATING ACTIVITIES			346,020				357,207
INVESTING ACTIVITIES:
Increase in restricted cash			(76,541	)			(127,188	)
Loans receivable:
Origination of loans, net of fees and costs			(4,191,539	)			(3,466,449	)
Loan payments and payoffs			3,365,800				2,862,392
Investment and mortgage-backed securities available for sale:
Purchases			(568,221	)			(789,197	)
Proceeds from sale			46,757				100,365
Payments received			446,550				639,035
Purchase of premises and equipment			(2,506	)			(5,226	)
Proceeds from sales of premises and equipment			38				4,499
NET CASH USED IN INVESTING ACTIVITIES			(979,662	)			(781,769	)
FINANCING ACTIVITIES:
Increase in deposits			87,689				55,995
Notes payable on automobile secured financing:
Proceeds from issuance			3,005,045				2,949,305
Payments on notes			(3,032,322	)			(2,743,180	)
Decrease in securities sold under agreements to repurchase							(218,741	)
Increase in FHLB advances			770,941				262,938
Payments on subordinated debentures							(22,365	)
Decrease in borrowings			(239	)			(233	)
Proceeds from issuance of common stock			4,382				2,225
Proceeds from issuance of subsidiary common stock			340				18
Cash dividends			(15,077	)			(13,979	)
Payments on cash flow hedges			(7,218	)			(1,762	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			813,541				270,221
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS			179,899				(154,341	)
Cash and due from banks at beginning of year			218,510				382,082
CASH AND DUE FROM BANKS AT END OF PERIOD		$	398,409			$	227,741

See accompanying notes to consolidated financial statements.

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 six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2004 included in our Form 10-K.

Note 2 – Mortgage-Backed Securities Available for Sale

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

		June 30, 2005
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gain				Loss				Value
		(Dollars in thousands)
GNMA certificates		$	2,587,419			$	9,884			$	14,636			$	2,582,667
FNMA participation certificates			26,512				146				189				26,469
FHLMC participation certificates			32,859				7				250				32,616
Other			1,470												1,470
		$	2,648,260			$	10,037			$	15,075			$	2,643,222

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

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

Note 3 – Net Loans Receivable

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

Net loans receivable consisted of the following:

		June 30,				December 31,
		2005				2004
		(Dollars in thousands)
Consumer:
Automobile contracts		$	12,339,936			$	11,599,528
Other consumer			2,713				4,386
Unearned discounts			(32,754	)			(38,871	)
			12,309,895				11,565,043
Real estate:
Mortgage			160,976				202,095
Construction			56,867				48,730
			217,843				250,825
Undisbursed loan proceeds			(37,287	)			(37,061	)
			180,556				213,764
Commercial			134,706				165,806
			12,625,157				11,944,613
Dealer participation			210,181				191,336
Deferred contract fees			(15,935	)			(201	)
Loans receivable			12,819,403				12,135,748
Allowance for credit losses			(318,776	)			(315,402	)
Loans receivable, net		$	12,500,627			$	11,820,346

Loans owned and managed by us, excluding dealer participation and deferred contract fees, totaled $12.6 billion and $11.9 billion as of June 30, 2005 and December 31, 2004, respectively. Nonperforming loans, or loans on which we have

discontinued the accrual of interest income, included in net loans receivable were $49.7 million and $51.9 million at June 30, 2005 and December 31, 2004, respectively. Repossessed assets and real estate owned were $6.1 million and $8.3 million at June 30, 2005 and December 31, 2004, respectively, and are included in other assets on our Consolidated Statements of Financial Condition.

Note 4 – Allowance for Credit Losses

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Balance at beginning of period		$	315,882			$	303,062			$	315,402			$	301,602
Chargeoffs:
Consumer loans			(58,060	)			(70,213	)			(130,017	)			(155,714	)
Commercial loans			(118	)							(118	)
Mortgage loans			(92	)			(63	)			(138	)			(130	)
			(58,270	)			(70,276	)			(130,273	)			(155,844	)
Recoveries:
Consumer loans			23,368				22,954				46,865				47,679
Commercial loans			83				14				91				22
Mortgage loans			14								14
			23,465				22,968				46,970				47,701
Net chargeoffs			(34,805	)			(47,308	)			(83,303	)			(108,143	)
Provision for credit losses			37,699				51,539				86,677				113,834
Balance at end of period		$	318,776			$	307,293			$	318,776			$	307,293
Ratio of net chargeoffs during the period (annualized) to average loans outstanding during the period			1.1	%			1.7	%			1.4	%			1.9	%
Ratio of allowance for credit losses to loans at the end of the period			2.5	%			2.7	%			2.5	%			2.7	%

Note 5 – Deposits

Deposits consisted of the following:

		June 30,				December 31,
		2005				2004
		(Dollars in thousands)
Noninterest bearing deposits		$	323,746			$	268,556
Demand deposit accounts			1,717				705
Passbook accounts			4,751				5,880
Money market deposit accounts			1,209,755				1,257,074
Certificate accounts			722,919				651,284
		$	2,262,888			$	2,183,499

						Weighted Average								Weighted Average
						Rate for the								Rate for the
		Weighted Average				Six Months Ended				Effects of Hedging				Six Months Ended
		Rate at				June 30, 2005				for the				June 30, 2005
		June 30,				Excluding the Effects				Six Months Ended				Including the Effects
		2005(1)				of Hedging				June 30, 2005				of Hedging
Demand deposit accounts			0.1	%			0.1	%							0.1	%
Passbook accounts			0.4				0.3								0.3
Money market deposit accounts			2.7				2.2				1.2	%			3.4
Certificate accounts			3.0				2.7				2.6				5.3

Note 6 – Notes Payable on Automobile Secured Financing

In connection with our public asset-backed securitization activities, we issued $1.5 billion of notes secured by automobile contracts during the three months ended June 30, 2004. We did not issue notes secured by automobile contacts during the three months ended June 30, 2005. We issued $3.0 billion of notes secured by automobile contracts during both the six months ended June 30, 2005 and 2004. There were $10.2 billion of notes payable on automobile secured financing outstanding at both June 30, 2005 and 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 $93.0 million and $181 million for the three and six months ended June 30, 2005, respectively, compared with $88.6 million and $183 million for the same respective periods in 2004.

Note 7 – Accumulated Other Comprehensive Loss, Net of Tax

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

		June 30,				December 31,
		2005				2004
		(Dollars in thousands)
Unrealized (loss) gain on marketable securities		$	(3,149	)		$	3,648
Unrealized (loss) gain on interest rate swaps (1)
Deposits			(24,223	)			(29,203	)
Automobile secured financing			1,216				(353	)
			(23,007	)			(29,556	)
Realized (loss) gain on settled cash flow hedges: (1)
Deposits			(4,929	)			(8,369	)
Automobile secured financing			394				(2,027	)
			(4,535	)			(10,396	)
Total accumulated other comprehensive loss		$	(30,691	)		$	(36,304	)

Note 8 – Comprehensive income

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Net income		$	65,318			$	54,414			$	126,000			$	97,779
Unrealized gains (losses) on securities available for sale, net of tax			6,239				(23,380	)			(6,797	)			(20,267	)
Unrealized (losses) gains on cash flow hedges, net of tax			(9,836	)			32,260				579				11,067
Reclassification adjustment for gains on securities available for sale included in income, net of tax							(1,446	)							(1,446	)
Reclassification adjustment for losses on cash flow hedges included in income, net of tax			5,702				12,528				11,831				26,626
Comprehensive income		$	67,423			$	74,376			$	131,613			$	113,759

Note 9 — Dividends

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.

Note 10 – Stock Options

In May 2001, we adopted the 2001 Westcorp Stock Option Plan, also known as the 2001 Plan, a stock option plan for certain employees, to whom we refer as associates, and directors. The 2001 Plan replaced the 1991 Stock Option Plan, also known as the 1991 Plan, that expired on April 15, 2001. Those who received options prior to the approval of the 2001 Plan are still subject to the 1991 Plan and may continue to exercise the remaining 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. The 2001 Plan was amended and restated at the April 26, 2005 Annual Meeting of Shareholders. See “Part II, Item 5 – Other Information.”

Options outstanding and exercisable at June 30, 2005 were as follows:

			Options Outstanding												Options Exercisable
							Weighted				Weighted								Weighted
							Average				Average								Average
			Number				Remaining				Exercise				Number				Exercise
Exercise Prices			Outstanding				Life (Years)				Price				Exercisable				Price
$	12.00 — 13.00			78,178				0.70			$	12.66				78,178			$	12.66
	13.00 — 14.00			125,625				1.64				13.25				125,625				13.25
	15.00 — 16.00			1,000				2.36				15.25				1,000				15.25
	17.00 — 18.00			170,571				2.65				17.32				170,571				17.32
	18.00 — 19.00			573,572				3.05				18.58				372,246				18.56
	19.00 — 20.00			5,000				4.10				19.85				2,500				19.85
	20.00 — 21.00			3,000				4.35				20.41				1,500				20.41
	42.00 — 43.00			476,915				3.64				42.19				159,476				42.19
	44.00 — 45.00			20,000				4.82				44.48
	46.00 — 47.00			498,000				4.67				46.66
	49.00 — 50.00			5,000				4.94				49.97
$	12.00 — 50.00			1,956,861				3.42			$	31.14				911,096			$	21.23

Stock option activity is summarized as follows:

						Weighted Average
		Shares				Exercise Price
Outstanding at January 1, 2004			1,460,536			$	16.86
Granted			540,900				42.19
Exercised			(196,860	)			16.40
Forfeited			(57,694	)			27.10
Outstanding at December 31, 2004			1,746,882				24.41
Granted			564,000				46.61
Exercised			(258,901	)			16.93
Forfeited			(95,120	)			38.02
Outstanding at June 30, 2005			1,956,861			$	31.14

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 believe it provides a better measure of value for companies that pay dividends than other valuation models. In our opinion, no option valuation model necessarily provides a reliable single measure of the fair value of our employee stock options. The weighted average fair value of options granted during the six month period ended June 30, 2005 was $14.75 per share compared to $13.26 per share for the year ended December 31, 2004.

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

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

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Dollars in thousands, except per share amounts)
Net income, as reported		$	65,318			$	54,415			$	126,000			$	97,779
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			847				474				1,225				709
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			900				609				1,387				1,015
Pro forma net income		$	65,265			$	54,280			$	125,838			$	97,473
Basic earnings per share:
As reported		$	1.25			$	1.05			$	2.42			$	1.89
Pro forma		$	1.25			$	1.05			$	2.42			$	1.88
Diluted earnings per share:
As reported		$	1.24			$	1.04			$	2.39			$	1.86
Pro forma		$	1.24			$	1.03			$	2.39			$	1.86

Note 11 – Proposed Acquisition and Merger

On May 23, 2004, we entered into a definitive agreement pursuant to which we would 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.

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 Federal Deposit Insurance Corporation, also known as 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 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 has raised some questions and potential concerns with our proposal and has requested additional

information from us. These concerns and questions will need to be addressed to the Federal Reserve’s satisfaction before it 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. At June 30, 2005, we have capitalized $2.9 million of costs related to the merger that are included in other assets on our Consolidated Statements of Financial Condition. If the merger is completed, the capitalized costs will be included in the calculation of the purchase price allocation. If the merger is not completed, the capitalized costs will be expensed as other noninterest expense on our Consolidated Statements of Income.

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

Note 12 – Commitments and Contingencies

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

Beginning on May 24, 2004 and continuing thereafter, a total of four separate purported class action lawsuits relating to the announcement by 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 the Bank, and WFS would be merged with and into the 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, also known as the Action. On July 16, 2004, the court granted a motion by plaintiff Alaska Hotel & Restaurant Employees Pension Trust Fund, in Case No.04CC00573, to amend the consolidation order to designate it the lead plaintiff in the 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, also known as the MOU, concerning the terms of the tentative settlement. Pursuant to the terms of the MOU, the parties have agreed, among other things, that additional disclosures will be made in Westcorp’s Registration Statement on Form S-4 (as filed with the SEC on July 16, 2004), the claims asserted in the Action will be fully released, and the Action will be dismissed with prejudice. Further, pursuant to the MOU, the defendants have 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 obtained preliminary approval for the settlement from the Court on June 17, 2005. The parties have further agreed, with the Court’s consent, 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.

Note 13 – Subsequent Events

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

On July 27, 2005, we completed the issuance of $2.7 billion of notes secured by contracts with a weighted average interest rate of 4.35% through a securitization transaction accounted for as a secured financing. The senior notes issued are credit enhanced through the issuance of subordinated notes.

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

Overview

We are a financial services holding company that provides automobile lending services through our second-tier subsidiary, WFS Financial Inc, also known as WFS, and retail and commercial banking services through our wholly owned subsidiary, Western Financial Bank, also known as the Bank. The Bank currently owns 84% of the capital stock of WFS.

Our primary sources of revenue are net interest income and noninterest income. Net interest income is the difference between the income earned on interest earning assets and the interest paid on interest bearing liabilities. We generate interest income from our loan portfolio, which consists of consumer, mortgage and commercial loans, and from investments in mortgage-backed securities, also known as MBS, and other short-term investments. We fund our loan portfolio and investments with deposits, advances from the Federal Home Loan Bank, also known as the FHLB, securities sold under agreements to repurchase, securitizations, other borrowings and equity.

Noninterest income is primarily made up of revenues generated from the servicing of automobile contracts and real estate loans. The primary components of noninterest income include late charges and other miscellaneous servicing fee income. Other components of noninterest income include gains and losses from the sale of investment securities and mortgage-backed securities, insurance income, fees related to the sales of investment products such as mutual funds and annuities, and fee income from depository accounts. The primary components of noninterest expense are salaries, credit and collection expenses, and data processing costs.

Selected Financial Data

The following table presents summary unaudited financial data for the three and six months ended June 30, 2005 and 2004. Since this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read our Consolidated Financial Statements contained elsewhere herein. Certain amounts from the prior years’ Consolidated Financial Statements have been reclassified to conform to the current year presentation.

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Dollars in thousands, except per share amounts)
Consolidated Statements of Income Data:
Interest income		$	342,718			$	310,983			$	676,754			$	624,642
Interest expense			128,468				113,835				245,577				233,071
Net interest income			214,250				197,148				431,177				391,571
Provision for credit losses			37,699				51,539				86,677				113,834
Net interest income after provision for credit losses			176,551				145,609				344,500				277,737
Noninterest income			19,575				27,554				38,868				56,244
Noninterest expense			74,093				73,635				146,683				145,034
Income before income tax			122,033				99,528				236,685				188,947
Income tax			47,099				39,725				92,738				75,039
Income before minority interest			74,934				59,803				143,947				113,908
Minority interest in earnings of subsidiaries			9,616				5,388				17,947				16,129
Net income		$	65,318			$	54,415			$	126,000			$	97,779
Weighted average number of shares and common share equivalents — diluted			52,680,870				52,483,220				52,641,796				52,531,365
Earnings per common share — diluted		$	1.24			$	1.04			$	2.39			$	1.86
Dividends declared per share		$	0.15			$	0.14			$	0.30			$	0.28
Dividend payout ratio			12.1	%			13.5	%			12.5	%			15.0	%

		June 30,				December 31,
		2005				2004
		(Dollars in thousands)
Consolidated Statements of Financial Condition Data:
Assets:
Cash and due from banks		$	398,409			$	218,510
Loans:
Consumer (1)			12,504,141				11,756,178
Mortgage (2)			180,556				213,764
Commercial			134,706				165,806
Mortgage-backed securities			2,643,222				2,649,758
Investments and time deposits			674,784				537,644
Other assets			327,192				319,082
Less: Allowance for credit losses			318,776				315,402
Total assets		$	16,544,234			$	15,545,340
Liabilities and Shareholders’ Equity:
Deposits		$	2,262,888			$	2,183,499
Notes payable on automobile secured financing			10,212,648				10,242,900
FHLB advances and other borrowings			1,918,801				1,148,098
Subordinated debentures			295,856				295,321
Other liabilities			206,984				170,362
Total liabilities			14,897,177				14,040,180
Minority interest in equity of subsidiaries			185,197				165,484
Shareholders’ equity			1,461,860				1,339,676
Total liabilities and shareholders’ equity		$	16,544,234			$	15,545,340

		At or For the Three								At or For the Six
		Months Ended June 30,								Months Ended June 30,
		2005				2004				2005				2004
		(Dollars in thousands)
Other Selected Financial Data:
Average automobile contracts managed		$	12,019,325			$	10,946,273			$	11,860,935			$	10,836,160
Average shareholders’ equity (3)		$	1,461,426			$	1,253,476			$	1,431,924			$	1,230,284
Return on average shareholders’ equity (3)			17.88	%			17.36	%			17.60	%			15.90	%
Book value per share (3)		$	28.62			$	24.63			$	28.62			$	24.63
Total equity to assets (4)			10.14	%			9.52	%			10.14	%			9.52	%
Originations:
Consumer loans (1)		$	2,014,970			$	1,668,143			$	3,798,691			$	3,254,304
Mortgage loans (2)			7,336				8,798				15,345				11,455
Commercial loans			144,142				58,839				310,424				125,718
Total loan originations		$	2,166,448			$	1,735,780			$	4,124,460			$	3,391,477
Interest rate spread			4.95	%			5.02	%			5.11	%			5.03	%

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, shareholders’ equity, 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 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

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 would 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.

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 Federal Deposit Insurance Corporation, also known as 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 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 has raised some questions and potential concerns with our proposal and has requested additional information from us. These concerns and questions will need to be addressed to the Federal Reserve’s satisfaction before it 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. At June 30, 2005, we have capitalized $2.9 million of costs related to the merger that are included in other assets on our Consolidated Statements of Financial Condition. If the merger is completed, the capitalized costs will be included in the calculation of the purchase price allocation. If the merger is not completed, the capitalized costs will be expensed as other noninterest expense on our Consolidated Statements of Income.

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 $214 million and $431 million for the three and six months

ended June 30, 2005, respectively, compared with $197 million and $392 million for the same respective periods in 2004. The increase in net interest income was primarily the result of us holding more automobile contracts on balance sheet.

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

		For the Three Months Ended June 30,
		2005												2004
		Average								Yield/				Average								Yield/
		Balance				Interest				Rate				Balance				Interest				Rate
										(Dollars in thousands)
Interest earning assets:
Total investments:
Mortgage-backed securities		$	2,591,591			$	27,516				4.25	%		$	2,574,744			$	22,150				3.44	%
Other short-term investments			799,736				6,001				3.01				663,896				1,809				1.10
Investment securities			131,525				1,210				3.68				129,367				1,122				3.47
Interest earning deposits with others			44,571				62				0.55				5,530				9				0.64
Total investments			3,567,423				34,789				3.90				3,373,537				25,090				2.97
Total loans:(1)
Consumer loans			12,213,059				303,013				9.95				11,133,553				281,775				10.18
Mortgage loans			158,586				2,210				5.57				210,156				2,623				4.99
Commercial loans			141,989				2,283				6.36				103,042				1,440				5.53
Construction loans			25,512				423				6.57				5,268				55				4.09
Total loans			12,539,146				307,929				9.85				11,452,019				285,893				10.04
Total interest earning assets		$	16,106,569				342,718				8.53			$	14,825,556				310,983				8.43
Interest bearing liabilities:
Deposits		$	2,222,714				21,479				3.88			$	2,089,287				13,884				2.67
FHLB advances and other borrowings			833,261				6,459				3.07				656,979				1,871				1.13
Notes payable on automobile secured financing			11,015,549				93,043				3.38				10,247,231				88,591				3.46
Subordinated debentures			295,680				7,487				10.13				381,199				9,489				9.96
Total interest bearing liabilities		$	14,367,204				128,468				3.58			$	13,374,696				113,835				3.41
Net interest income and interest rate spread						$	214,250				4.95	%						$	197,148				5.02	%
Net yield on average interest earning assets											5.34	%											5.34	%