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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2005


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

For the transition period to

Commission file number 33-93068

WFS Financial Inc

(Exact name of registrant as specified in its charter)


CALIFORNIA		33-0291646

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

23 Pasteur, Irvine, California 92618-3816

(Address of principal executive offices)

(949) 727-1002

(Registrant’s telephone number, including area code)

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

Indicated 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 41,086,912 shares outstanding of common stock, no 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 26.

WFS FINANCIAL INC 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		10

Item 3. Quantitative and Qualitative Disclosures About Market Risk		22

Item 4. Controls and Procedures		23

PART II.OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		24

Item 3. Defaults Upon Senior Securities		24

Item 4. Submission of Matters to a Vote of Security Holders		25

Item 5. Other Information		25

Item 6. Exhibits		25

SIGNATURES		26

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 Western Financial Bank, also known as the Bank, and us 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 our filings with the Securities and Exchange Commission on our web site at http:\\www.wfsfinancial.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

WFS FINANCIAL INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


	(Unaudited)
	June 30, 2005			December 31, 2004
	(Dollars in thousands)
ASSETS
Cash	$	73,198		$	87,963
Restricted cash		448,504			363,783
Contracts receivable		10,883,522			9,563,057
Allowance for credit losses		(273,172	)		(252,465	)

Contracts receivable, net		10,610,350			9,310,592
Interest receivable		60,936			55,126
Premises and equipment, net		30,079			30,820
Other assets		119,251			100,934

TOTAL ASSETS	$	11,342,318		$	9,949,218


LIABILITIES
Lines of credit –– parent	$	916,890		$	213,741
Notes payable on automobile secured financing		8,698,221			8,105,275
Notes payable –– parent		300,000			300,000
Amounts held on behalf of trustee		139,745			194,913
Other liabilities		141,364			104,812

TOTAL LIABILITIES		10,196,220			8,918,741

SHAREHOLDERS’ EQUITY
Common stock (no par value; authorized 50,000,000 shares; issued and outstanding 41,086,912 shares at June 30, 2005 and 41,038,003 shares at December 31, 2004)		338,668			338,328
Paid-in capital		6,324			6,324
Retained earnings		800,492			689,429
Accumulated other comprehensive income (loss), net of tax		614			(3,604	)

TOTAL SHAREHOLDERS’ EQUITY		1,146,098			1,030,477

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	11,342,318		$	9,949,218

See accompanying notes to consolidated financial statements.

WFS FINANCIAL INC 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	$	262,866	$	208,034		$	511,162	$	429,611
Other		6,180		2,232			10,492		4,664

TOTAL INTEREST INCOME		269,046		210,266			521,654		434,275
Interest expense:
Notes payable on automobile secured financing		82,017		62,966			154,825		135,169
Other		10,887		11,300			21,354		22,664

TOTAL INTEREST EXPENSE		92,904		74,266			176,179		157,833

NET INTEREST INCOME		176,142		136,000			345,475		276,442
Provision for credit losses		40,224		53,421			89,486		73,397

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES		135,918		82,579			255,989		203,045
Noninterest income:
Automobile servicing		19,419		34,927			40,702		69,263
Gain on sale of contracts									13,792
Other		1,205		(195	)		2,844		822

TOTAL NONINTEREST INCOME		20,624		34,732			43,546		83,877
Noninterest expense:
Salaries and associate benefits		36,596		41,458			74,228		79,749
Credit and collections		7,881		7,659			16,360		16,064
Data processing		4,558		3,826			8,906		7,716
Occupancy		2,902		2,776			5,787		5,628
Other		6,760		5,911			11,780		11,390

TOTAL NONINTEREST EXPENSE		58,697		61,630			117,061		120,547

INCOME BEFORE INCOME TAX		97,845		55,681			182,474		166,375
Income tax		38,528		22,135			71,411		65,921

NET INCOME	$	59,317	$	33,546		$	111,063	$	100,454


Earnings per common share:
Basic	$	1.44	$	0.82		$	2.71	$	2.45

Diluted	$	1.44	$	0.82		$	2.70	$	2.45


Weighted average number of common shares outstanding:
Basic		41,065,211		41,035,719			41,057,296		41,034,892

Diluted		41,066,461		41,079,727			41,058,551		41,078,625

See accompanying notes to consolidated financial statements.

WFS FINANCIAL INC 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		41,033,901	$	338,291	$	6,280	$	507,188	$	(32,890	)	$	818,869
Net income								182,241					182,241
Unrealized gains on cash flow hedges, net of tax (1)										10,389			10,389
Reclassification adjustment for losses on cash flow hedges included in net income, net of tax (2)										18,897			18,897

Comprehensive income													211,527
Issuance of common stock		4,102		37		44							81

Balance at December 31, 2004		41,038,003		338,328		6,324		689,429		(3,604	)		1,030,477
Net income								111,063					111,063
Unrealized gains on cash flow hedges, net of tax (1)										7,061			7,061
Reclassification adjustment for gains on cash flow hedges included in net income, net of tax (2)										(2,843	)		(2,843	)

Comprehensive income													115,281
Issuance of common stock		48,909		340									340


Balance at June 30, 2005		41,086,912	$	338,668	$	6,324	$	800,492	$	614		$	1,146,098


(1)		The pre-tax amount of unrealized gains on cash flow hedges was $11.8 million for the six months ended June 30, 2005 compared with $17.3 million for the year ended December 31, 2004.

(2)		The pre-tax amount of unrealized gains on cash flow hedges reclassified into net income was $4.7 million for the six months ended June 30, 2005 compared with unrealized losses of $31.5 million for the year ended December 31, 2004.

See accompanying notes to consolidated financial statements.

WFS FINANCIAL INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended
	June 30,
	2005			2004
	(Dollars in thousands)
OPERATING ACTIVITIES:
Net income	$	111,063		$	100,454
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		89,486			73,397
Amortization of contract fees and costs		48,724			44,064
Amortization of losses on cash flow hedges		1,953			7,573
Depreciation		4,439			3,831
Gain on sale of contracts					(13,792	)
(Increase) decrease in other assets		(22,287	)		56,216
Increase in other liabilities		36,550			15,061

NET CASH PROVIDED BY OPERATING ACTIVITIES		269,928			286,804

INVESTING ACTIVITIES:
Increase in restricted cash		(84,721	)		(57,471	)
Contracts receivable:
Purchase of contracts, net of fees and costs		(3,863,115	)		(3,326,988	)
Proceeds from contract sales, net					1,548,432
Contract payments and payoffs		2,425,147			1,983,378
Purchase of premises and equipment		(3,744	)		(4,488	)

NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(1,526,433	)		142,863

FINANCING ACTIVITIES:
Proceeds from lines of credit, net		703,150			12,388
Notes payable on automobile secured financing:
Proceeds from issuance		3,005,045			1,474,666
Payments on notes		(2,414,472	)		(2,177,067	)
Payments on notes payable –– parent					(22,000	)
(Decrease) increase in amounts held on behalf of trustee		(55,169	)		28,705
Proceeds from issuance of common stock		340			18
Proceeds from cash flow hedges		2,846			13,661

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		1,241,740			(669,629	)

DECREASE IN CASH AND CASH EQUIVALENTS		(14,765	)		(239,962	)

Cash and cash equivalents at beginning of period		87,963			843,235

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	73,198		$	603,273

See accompanying notes to consolidated financial statements.

WFS FINANCIAL INC 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 subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year’s presentation. We are a majority owned subsidiary of Western Financial Bank, also known as the Bank, which is a wholly owned subsidiary of Westcorp, our ultimate parent company.

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 – Net Contracts Receivable

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

Net contracts receivable consisted of the following:


	June 30,			December 31,
	2005			2004
	(Dollars in thousands)
Contracts	$	10,741,722		$	9,438,118
Unearned discounts		(29,904	)		(33,845	)

Contracts, net of discounts		10,711,818			9,404,273
Dealer participation		187,622			158,958
Deferred contract fees		(15,918	)		(174	)

Contracts receivable		10,883,522			9,563,057
Allowance for credit losses		(273,172	)		(252,465	)

Contracts receivable, net	$	10,610,350		$	9,310,592

Contracts managed by us, excluding dealer participation and deferred contract fees, totaled $12.3 billion and $11.6 billion at June 30, 2005 and December 31, 2004, respectively. Of the $12.3 billion contracts managed at June 30, 2005, $10.7 billion were owned by us and $1.6 billion were owned by Westcorp. Of the $11.6 billion contracts managed at December 31, 2004, $9.4 billion were owned by us and $2.2 billion were owned by Westcorp. Nonperforming contracts, or contracts on which we have discontinued the accrual of interest income, included in net contracts receivable were $39.9 million and $40.9 at June 30, 2005 and December 31, 2004, respectively. Repossessed assets were $4.8 million and $6.4 million at June 30, 2005 and December 31, 2004, respectively, and are included in other assets on our Consolidated Statements of Financial Condition.

Note 3 – 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	$	262,027		$	209,137		$	252,465		$	239,697
Chargeoffs		(48,454	)		(57,098	)		(107,301	)		(128,320	)
Recoveries		19,375			18,704			38,522			39,390

Net chargeoffs		(29,079	)		(38,394	)		(68,779	)		(88,930	)
Provision for credit losses		40,224			53,421			89,486			73,397

Balance at end of period	$	273,172		$	224,164		$	273,172		$	224,164

Ratio of net chargeoffs during the period (annualized) to average contracts outstanding during the period		1.1	%		1.9	%		1.4	%		2.2	%
Ratio of allowance for credit losses to contracts at the end of the period		2.5	%		2.7	%		2.5	%		2.7	%

Note 4 – Whole Loan Sale

During the six months ended June 30, 2004, we sold $1.5 billion of automobile contracts to Westcorp in a whole loan sale at a price of 103%. These receivables were subsequently securitized by Westcorp and continue to be managed by us under the terms of the securitization. As a result of selling contracts in a whole loan sale rather than securitizing them in a secured financing transaction, we recorded a cash gain on sale of $13.8 million. Included in this amount was $2.2 million of losses from accumulated other comprehensive loss related to hedges of future interest payments on the forecasted secured financing. The hedge loss was included in the gain on sale on the Consolidated Statements of Income. We did not execute a similar transaction during the six months ended June 30, 2005.

Note 5 – Notes Payable on Automobile Secured Financing

In connection with our public asset-backed securitization activities, we issued $1.5 billion of notes secured by contracts during the three months ended June 30, 2004. We did not issue notes secured by contacts during the three months ended June 30, 2005. We issued $3.0 billion of notes secured by contracts during the six months ended June 30, 2005 compared with $1.5 billion for the same period in 2004. There were $8.7 billion of notes payable on automobile secured financing outstanding at June 30, 2005 compared with $8.1 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 $82.0 million and $155 million for the three and six months ended June 30, 2005, respectively, compared with $63.0 million and $135 million for the same respective periods in 2004.

Note 6 – Notes Payable – Parent

We borrowed $450 million from the Bank under the terms of a $150 million note and a $300 million note with rates of 8.875% and 10.25% per annum, respectively. The $150 million note was paid in full in the third quarter of 2004. The $300 million note was outstanding at both June 30, 2005 and December 31, 2004. Interest payments on the notes totaled $7.7 million and $15.4 million for the three and six months ended June 30, 2005, respectively, compared with $9.8 million and $19.8 million for the same respective periods in 2004.

Note 7 – Accumulated Other Comprehensive Income (Loss), Net of Tax

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


	June 30,		December 31,
	2005		2004
	(Dollars in thousands)
Unrealized gain (loss) on interest rate swaps (1)	$	487	$	(852	)
Realized gain (loss) on settled cash flow hedges (1)		127		(2,752	)

Total accumulated other comprehensive income (loss)	$	614	$	(3,604	)


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

Note 8 – Comprehensive income

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


	For the Three Months Ended					For the Six Months Ended
	June 30,					June 30,
	2005			2004		2005			2004
				(Dollars in thousands)
Net income	$	59,317		$	33,546	$	111,063		$	100,454
Unrealized gains on cash flow hedges, net of tax		515			16,402		7,061			13,640
Reclassification adjustment for (gains) losses on cash flow hedges included in income, net of tax		(2,151	)		5,524		(2,843	)		12,473

Comprehensive income	$	57,681		$	55,472	$	115,281		$	126,567

Note 9 – Proposed Merger

On May 23, 2004, we entered into a definitive agreement pursuant to which Westcorp would acquire our outstanding 16% common stock minority interest not already owned by the Bank. The transaction is structured as a merger of us with and into the Bank. If the merger is consummated, the public holders of our shares would receive 1.11 shares of Westcorp’s common stock for each share of our 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 our minority shareholders, other than shares controlled by Westcorp. 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 us into the Bank as part of the acquisition of our minority interest.

The conversion is contingent upon the approval by the Board of Governors of the Federal Reserve, also known as the Federal Reserve, of Westcorp’s application to become a bank holding company, which process is taking longer than originally expected. As a result, Westcorp believes 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 Westcorp’s proposal and has requested additional information from Westcorp. These concerns and questions will need to be addressed to the Federal Reserve’s satisfaction before it will deem Westcorp’s application complete.

moving forward with the proposed conversion and the related merger of us into the Bank. We are currently exploring other alternatives in the event that the proposed conversion and related merger cannot go forward as planned.

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 10 – 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 Westcorp and us that we had entered into a merger agreement, pursuant to which Westcorp would acquire our outstanding 16% common stock interest not already owned by the Bank, and we would be merged with and into the Bank were filed in the Orange County, California Superior Court against Westcorp, us, our individual board members, and individual board members of Westcorp. 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 11 — Subsequent Events

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 one of the nation’s largest independent automobile finance companies with 32 years of experience in the automobile finance industry. We believe that the automobile finance industry is the second largest consumer finance industry in the United States with approximately $500 billion of loan originations during 2004. We originate, service and securitize new and pre-owned automobile installment contracts, which are generated through our relationships with approximately 8,600 franchised and independent automobile dealers in 46 states. We originated $2.0 billion and $3.8 billion of automobile contracts during the three and six months ended June 30, 2005, respectively, compared with $1.7 billion and $3.3 billion for the same respective periods in 2004. We managed a portfolio of $12.3 billion at June 30, 2005 compared with $11.6 billion at December 31, 2004. We are a majority owned subsidiary of Western Financial Bank, also known as the Bank, which is a wholly owned subsidiary of Westcorp, our ultimate parent company.

Our primary sources of revenue are net interest income and servicing income. Net interest income is the difference between the income earned on interest earning assets and the interest paid on interest bearing liabilities. The primary components of servicing income include late charges and other collection related fee income on managed contracts and contractually specified servicing income on contracts sold in whole loan sales that we continue to service. The primary components of operating expenses 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	$	269,046	$	210,266	$	521,654	$	434,275
Interest expense		92,904		74,266		176,179		157,833

Net interest income		176,142		136,000		345,475		276,442
Provision for credit losses		40,224		53,421		89,486		73,397

Net interest income after provision for credit losses		135,918		82,579		255,989		203,045
Noninterest income		20,624		34,732		43,546		83,877
Noninterest expense		58,697		61,630		117,061		120,547

Income before income tax		97,845		55,681		182,474		166,375
Income tax		38,528		22,135		71,411		65,921

Net income	$	59,317	$	33,546	$	111,063	$	100,454


Earnings per common share — diluted	$	1.44	$	0.82	$	2.70	$	2.45


	June 30,		December 31,
	2005		2004
	(Dollars in thousands)
Consolidated Statements of Financial Condition Data:
Contracts receivable, net	$	10,610,350	$	9,310,592
Total assets		11,342,318		9,949,218
Lines of credit — parent		916,890		213,741
Notes payable — parent		300,000		300,000
Notes payable on automobile secured financing		8,698,221		8,105,275
Total shareholders’ equity		1,146,098		1,030,477


	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 Data:
Average automobile contracts managed	$	12,019,325		$	10,946,273		$	11,860,935		$	10,836,160
Average shareholders’ equity (1)	$	1,114,622		$	936,086		$	1,086,469		$	910,978
Return on average shareholders’ equity (1)		21.29	%		14.33	%		20.44	%		22.05	%
Book value per share (1)	$	27.88		$	23.20		$	27.88		$	23.20
Equity to assets (1)		10.10	%		10.30	%		10.10	%		10.30	%
Automobile contract originations	$	2,013,622		$	1,666,842		$	3,796,036		$	3,252,016
Interest rate spread		5.85	%		5.88	%		6.00	%		5.85	%


(1)		Excludes other comprehensive loss.

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 Merger

requested additional information from Westcorp. These concerns and questions will need to be addressed to the Federal Reserve’s satisfaction before it will deem Westcorp’s application complete.

Although Westcorp intends 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 us into the Bank. We are currently exploring other alternatives in the event that the proposed conversion and related merger cannot go forward as planned.

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 $176 million and $345 million for the three and six months ended June 30, 2005, respectively, compared with $136 million and $276 million for the same respective periods in 2004. The increase in net interest income was primarily the result of us holding more contracts on the balance sheet.

The following table presents information relative to the average balances and interest rates on an owned basis 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:
Contracts receivable (1)	$	10,457,457	$	262,866		10.08	%	$	7,908,976	$	208,034		10.58	%
Investment securities		849,421		6,180		2.92			843,620		2,232		1.06

Total interest earning assets	$	11,306,878		269,046		9.54	%	$	8,752,596		210,266		9.66	%


Interest bearing liabilities:
Lines of credit — parent	$	225,570		2,380		4.23	%	$	44,291		270		2.45	%
Notes payable — parent		300,000		7,688		10.25			396,909		9,838		9.91
Notes payable on automobile secured financing		9,379,502		82,017		3.50			7,085,768		62,966		3.55
Other		162,811		819		2.02			336,749		1,192		1.42

Total interest bearing liabilities	$	10,067,883		92,904		3.69	%	$	7,863,717		74,266		3.78	%

Net interest income and interest rate spread			$	176,142		5.85	%			$	136,000		5.88	%

Net yield on average interest earning assets						6.26	%						6.27	%


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


	For the Six Months Ended June 30,
	2005							2004
	Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
			(Dollars in thousands)
Interest earning assets:
Contracts receivable (1)	$	10,154,512	$	511,162		10.15	%	$	8,086,787	$	429,611		10.68	%
Investment securities		779,346		10,492		2.72			882,415		4,664		1.06

Total interest earning assets	$	10,933,858		521,654		9.62		$	8,969,202		434,275		9.74


Interest bearing liabilities:
Lines of credit — parent	$	206,491		4,245		4.15		$	43,353		493		2.29
Notes payable — parent		300,000		15,375		10.25			398,864		19,762		9.91
Notes payable on automobile secured financing		9,028,757		154,825		3.43			7,355,887		135,169		3.68
Other		195,152		1,734		1.79			320,743		2,409		1.51

Total interest bearing liabilities	$	9,730,400		176,179		3.62		$	8,118,847		157,833		3.89

Net interest income and interest rate spread			$	345,475		6.00	%			$	276,442		5.85	%

Net yield on average interest earning assets						6.40	%						6.22	%


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

The following table sets forth the changes in net interest income attributable to changes in volume (change in average portfolio volume multiplied by prior period average rate) and changes in rates (change in weighted average interest rate multiplied by prior period average portfolio balance):


	For the Six Months Ended June 30, 2005
	Compared to the Six Months Ended June 30, 2004 (1)
	Volume			Rate			Total
	(Dollars in thousands)
Increase (decrease) in interest income:
Contracts receivable	$	140,083		$	(58,532	)	$	81,551
Investment securities		(1,630	)		7,458			5,828

Total interest income	$	138,453		$	(51,074	)	$	87,379

Increase (decrease) in interest expense:
Lines of credit — parent	$	3,086		$	666		$	3,752
Notes payable — parent		(6,236	)		1,849			(4,387	)
Notes payable on automobile secured financing		43,455			(23,799	)		19,656
Other		(1,677	)		1,002			(675	)

Total interest expense	$	38,628		$	(20,282	)	$	18,346

Increase in net interest income							$	69,033


(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. The level of the allowance is based principally on the outstanding balance of contracts 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 owned contract portfolio that can be reasonably estimated. The provision for credit losses was $40.2 million and $89.5 million for the three and six months ended June 30, 2005, respectively, compared with $53.4 million and $73.4 million for the same respective periods in 2004. For the three months ended June 30, 2005, the provision for credit losses declined as a result

of improved credit performance due to an improving economy as well as our continued emphasis on risk-focused underwriting. The increase in the provision for credit losses for the six months ended June 30, 2005 was a result of reversing the allowance for credit losses in the three months ended March 31, 2004, commensurate with the $1.5 billion of automobile contracts sold to Westcorp.

Contract Sales and Securitizations

The following table lists each of the securitizations we manage. We receive servicing fees and other ancillary income on loans sold to Westcorp that we continue to manage. All securitizations prior to 2001-C were paid in full on or before their contractual maturity dates and none of the remaining securitizations, including 2001-C, have yet reached their contractual maturity dates.

Securitizations


						Remaining									Gross
				Remaining		Balance as a			Original			Original			Interest
Issue		Original		Balance at		Percent of			Weighted			Weighted Average			Rate
Number	Close Date	Balance		June 30, 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			7.57
1987-A	March, 1987		125,000	Paid in full						12.42			6.75			5.67
1987-B	July, 1987		110,000	Paid in full						12.68			7.80			4.88
1988-A	February, 1988		155,000	Paid in full						13.67			7.75			5.92
1988-B	May, 1988		100,000	Paid in full						14.01			8.50			5.51
1988-C	July, 1988		100,000	Paid in full						15.41			8.50			6.91
1988-D	October, 1988		105,000	Paid in full						14.95			8.85			6.10
1989-A	March, 1989		75,000	Paid in full						15.88			10.45			5.43
1989-B	June, 1989		100,000	Paid in full						15.96			9.15			6.81
1990-A	August, 1990		150,000	Paid in full						16.05			8.35			7.70
1990-1	November, 1990		150,000	Paid in full						15.56			8.50			7.06
1991-1	April, 1991		200,000	Paid in full						16.06			7.70			8.36
1991-2	May, 1991		200,000	Paid in full						15.75			7.30			8.45
1991-3	August, 1991		175,000	Paid in full						15.69			6.75			8.94
1991-4	December, 1991		150,000	Paid in full						15.53			5.63			9.90
1992-1	March, 1992		150,000	Paid in full						14.49			5.85			8.64
1992-2	June, 1992		165,000	Paid in full						14.94			5.50			9.44
1992-3	September, 1992		135,000	Paid in full						14.45			4.70			9.75
1993-1	March, 1993		250,000	Paid in full						13.90			4.45			9.45
1993-2	June, 1993		175,000	Paid in full						13.77			4.70			9.07
1993-3	September, 1993		187,500	Paid in full						13.97			4.25			9.72
1993-4	December, 1993		165,000	Paid in full						12.90			4.60			8.30
1994-1	March, 1994		200,000	Paid in full						13.67			5.10			8.57
1994-2	May, 1994		230,000	Paid in full						14.04			6.38			7.66
1994-3	August, 1994		200,000	Paid in full						14.59			6.65			7.94
1994-4	October, 1994		212,000	Paid in full						15.58			7.10			8.48
1995-1	January, 1995		190,000	Paid in full						15.71			8.05			7.66
1995-2	March, 1995		190,000	Paid in full						16.36			7.10			9.26
1995-3	June, 1995		300,000	Paid in full						15.05			6.05			9.00
1995-4	September, 1995		375,000	Paid in full						15.04			6.20			8.84
1995-5	December, 1995		425,000	Paid in full						15.35			5.88			9.47
1996-A	March, 1996		485,000	Paid in full						15.46			6.13			9.33
1996-B	June, 1996		525,000	Paid in full						15.74			6.75			8.99
1996-C	September, 1996		535,000	Paid in full						15.83			6.60			9.23
1996-D	December, 1996		545,000	Paid in full						15.43			6.17			9.26
1997-A	March, 1997		500,000	Paid in full						15.33			6.60			8.73
1997-B	June, 1997		590,000	Paid in full						15.36			6.37			8.99
1997-C	September, 1997		600,000	Paid in full						15.43			6.17			9.26
1997-D	December, 1997		500,000	Paid in full						15.19			6.34			8.85
1998-A	March, 1998		525,000	Paid in full						14.72			6.01			8.71
1998-B	June, 1998		660,000	Paid in full						14.68			6.06			8.62
1998-C	November, 1998		700,000	Paid in full						14.42			5.81			8.61
1999-A	January, 1999		1,000,000	Paid in full						14.42			5.70			8.72
1999-B	July, 1999		1,000,000	Paid in full						14.62			6.36			8.26
1999-C	November, 1999		500,000	Paid in full						14.77			7.01			7.76
2000-A	March, 2000		1,200,000	Paid in full						14.66			7.28			7.38
2000-B	May, 2000		1,000,000	Paid in full						14.84			7.78			7.06
2000-C (3)	August, 2000		1,390,000	Paid in full						15.04			7.32			7.72
2000-D	November, 2000		1,000,000	Paid in full						15.20			6.94			8.26
2001-A	January, 2001		1,000,000	Paid in full						14.87			5.77			9.10
2001-B (3)	May, 2001		1,370,000	Paid in full						14.41			4.23			10.18
2001-C	August, 2001		1,200,000	$	124,407		10.37	%		13.90			4.50			9.40
2002-1	March, 2002		1,800,000		284,374		15.80			13.50			4.26			9.24
2002-2	May, 2002		1,750,000		343,435		19.62			12.51			3.89			8.62
2002-3	August, 2002		1,250,000		291,668		23.33			12.30			3.06			9.24
2002-4	November, 2002		1,350,000		388,745		28.80			12.18			2.66			9.52
2003-1	February, 2003		1,343,250		410,824		30.58			11.79			2.42			9.37
2003-2	May, 2003		1,492,500		536,099		35.92			11.57			2.13			9.44
2003-3 (3)	August, 2003		1,650,000		763,306		46.26			10.59			2.66			7.93
2003-4	November, 2003		1,403,625		657,981		46.88			10.89			2.70			8.19
2004-1 (3)	February, 2004		1,477,500		754,970		51.10			10.89			2.35			8.54
2004-2	May, 2004		1,477,500		878,789		59.48			10.98			3.02			7.96
2004-3	August, 2004		1,552,000		1,071,651		69.05			10.64			3.49			7.15
2004-4	October, 2004		1,358,000		1,030,283		75.87			11.19			3.10			8.09
2005-1	January, 2005		1,552,000		1,326,464		85.47			11.25			3.66			7.59
2005-2	March, 2005		1,458,750		1,368,455		93.81			11.51			4.27			7.24
2005-3	July, 2005		2,723,000							11.66			4.35			7.31

	Total	$	46,209,555	$	10,231,451

Noninterest Income and Noninterest Expense

Noninterest income decreased to $20.6 million for the three months ended June 30, 2005 compared with $34.7 million for the same period a year earlier. For the six months ended June 30, 2005, noninterest income decreased to $43.5 compared with $83.9 million for the same period a year ago. Noninterest income was reduced by $16.5 million and $31.2 million of loan origination fees that were deferred during the three and six months ended June 30, 2005, respectively. Noninterest expense decreased to $58.7 million or 1.95% of average managed contracts for the second quarter compared with $61.6 million or 2.25% of average managed contracts for the same period a year earlier. For the six months ended June 30, 2005, noninterest expense decreased to $117 million or 1.97% of average managed contracts compared with $121 million or 2.22% of average managed contracts a year ago. Noninterest expense was reduced by $7.0 million and $13.4 million of direct origination costs that were deferred during the three and six months ended June 30, 2005, respectively. 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 decided to defer and amortize these amounts prospectively beginning January 2005. These deferred amounts are being amortized to interest income using the interest method.

Income Taxes

We file federal and certain state tax returns as part of a consolidated group that includes the Bank and Westcorp. 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 39% for both the three and six months ended June 30, 2005 compared with 40% for the same respective periods in 2004.

Financial Condition

Contracts Receivable

We held a portfolio of contracts on balance sheet that totaled $10.9 billion at June 30, 2005 and $9.6 billion at December 31, 2004. The increase is due primarily to an increase in automobile contracts originated.

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(Dollars in thousands)
New vehicles	$	675,416	$	618,079	$	1,181,607	$	1,169,649
Pre-owned vehicles		1,338,206		1,048,763		2,614,429		2,082,367

Total volume	$	2,013,622	$	1,666,842	$	3,796,036	$	3,252,016


Prime	$	1,535,162	$	1,358,930	$	2,898,245	$	2,662,120
Non-prime		478,460		307,912		897,791		589,896

Total volume	$	2,013,622	$	1,666,842	$	3,796,036	$	3,252,016

Asset 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 managed, which includes contracts that are owned by us and contracts that have been sold to Westcorp through whole loan sales and are managed by us:


	June 30, 2005					December 31, 2004
	Amount		%			Amount		%
	(Dollars in thousands)
Contracts managed at end of period	$	12,307,454				$	11,560,890

Period of delinquency
30-59 days	$	162,474		1.32	%	$	191,001		1.65	%
60 days or more (1)		58,923		0.48			67,660		0.59

Total contracts delinquent and delinquencies as a percentage of contracts managed (1)	$	221,397		1.80	%	$	258,661		2.24	%


(1)		Excludes Chapter 13 bankruptcy accounts on nonaccrual status of $47.5 million and $49.2 million at June 30, 2005 and December 31, 2004, respectively.

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


	June 30, 2005						December 31, 2004
	Number of						Number of
	Contracts			Amount			Contracts			Amount
	(Dollars in thousands)
Contracts managed		919,722		$	12,307,454			876,695		$	11,560,890

Repossessed vehicles		772		$	5,723			1,049		$	7,982

Repossessed vehicles as a percentage of number and amount of contracts outstanding		0.08	%		0.05	%		0.12	%		0.07	%

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 and our continued emphasis on risk-focused underwriting.


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Dollars in thousands)
Average contracts managed during period	$	12,019,325		$	10,946,273		$	11,860,935		$	10,836,160


Gross chargeoffs	$	58,059		$	70,213		$	130,011		$	155,707
Recoveries		23,368			22,917			46,841			47,617

Net chargeoffs	$	34,691		$	47,296		$	83,170		$	108,090


Net chargeoffs as a percentage of average contracts managed during period		1.15	%		1.73	%		1.40	%		1.99	%

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

Cumulative Static Pool Loss Curves
At June 30, 2005



Period (1)	2001-C			2002-1			2002-2			2002-3			2002-4			2003-1			2003-2			2003-3 (3)			2003-4			2004-1 (3)			2004-2			2004-3			2004-4			2005-1			2005-2
1		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
2		0.04	%		0.01	%		0.00	%		0.02	%		0.02	%		0.01	%		0.00	%		0.00	%		0.01	%		0.00	%		0.00	%		0.02	%		0.00	%		0.00	%		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	%		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	%		0.06	%		0.07	%
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	%		0.13	%
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	%		0.20	%
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	%		0.30	%
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	%		0.37	%
9		0.95	%		1.06	%		0.82	%		0.82	%		0.78	%		0.66	%		0.59	%		0.47	%		0.44	%		0.42	%		0.51	%		0.56	%		0.45	%
10		1.07	%		1.28	%		0.96	%		0.96	%		0.94	%		0.80	%		0.70	%		0.55	%		0.54	%		0.52	%		0.59	%		0.64	%
11		1.20	%		1.48	%		1.10	%		1.10	%		1.08	%		0.93	%		0.80	%		0.62	%		0.61	%		0.59	%		0.65	%		0.69	%
12		1.37	%		1.67	%		1.26	%		1.24	%		1.28	%		1.06	%		0.89	%		0.71	%		0.73	%		0.67	%		0.70	%
13		1.55	%		1.82	%		1.39	%		1.38	%		1.43	%		1.21	%		0.98	%		0.80	%		0.83	%		0.75	%		0.76	%
14		1.74	%		1.99	%		1.51	%		1.53	%		1.59	%		1.31	%		1.08	%		0.88	%		0.93	%		0.81	%		0.83	%
15		1.97	%		2.14	%		1.68	%		1.70	%		1.77	%		1.40	%		1.20	%		0.97	%		1.03	%		0.88	%
16		2.16	%		2.27	%		1.83	%		1.88	%		1.92	%		1.50	%		1.31	%		1.07	%		1.09	%		0.93	%
17		2.36	%		2.45	%		1.99	%		2.03	%		2.05	%		1.60	%		1.41	%		1.16	%		1.19	%		1.00	%
18		2.59	%		2.62	%		2.16	%		2.15	%		2.16	%		1.70	%		1.53	%		1.25	%		1.24	%
19		2.78	%		2.80	%		2.31	%		2.28	%		2.25	%		1.85	%		1.66	%		1.33	%		1.30	%
20		2.95	%		2.99	%		2.46	%		2.41	%		2.37	%		1.99	%		1.76	%		1.40	%		1.36	%
21		3.14	%		3.15	%		2.60	%		2.52	%		2.49	%		2.14	%		1.87	%		1.45	%
22		3.29	%		3.31	%		2.72	%		2.62	%		2.62	%		2.27	%		1.95	%		1.50	%
23		3.41	%		3.45	%		2.86	%		2.74	%		2.73	%		2.37	%		2.02	%		1.57	%
24		3.57	%		3.58	%		2.95	%		2.83	%		2.84	%		2.47	%		2.09	%
25		3.73	%		3.69	%		3.03	%		2.96	%		2.95	%		2.57	%		2.16	%
26		3.88	%		3.80	%		3.13	%		3.08	%		3.06	%		2.63	%		2.21	%
27		4.04	%		3.92	%		3.22	%		3.21	%		3.17	%		2.68	%
28		4.20	%		4.02	%		3.33	%		3.31	%		3.25	%		2.73	%
29		4.35	%		4.12	%		3.41	%		3.41	%		3.32	%		2.78	%
30		4.46	%		4.22	%		3.50	%		3.48	%		3.38	%
31		4.57	%		4.30	%		3.58	%		3.56	%		3.43	%
32		4.69	%		4.39	%		3.66	%		3.62	%		3.48	%
33		4.77	%		4.49	%		3.73	%		3.67	%
34		4.85	%		4.56	%		3.78	%		3.71	%
35		4.92	%		4.63	%		3.84	%		3.74	%
36		5.01	%		4.69	%		3.86	%
37		5.09	%		4.74	%		3.90	%
38		5.16	%		4.77	%		3.93	%
39		5.22	%		4.80	%
40		5.27	%		4.84	%
41		5.32	%
42		5.38	%
43		5.42	%
44		5.46	%
45		5.48	%
46		5.49	%
47		5.51	%
Prime Mix (2)		76	%		70	%		87	%		85	%		80	%		80	%		82	%		84	%		82	%		82	%		82	%		81	%		78	%		78	%		77	%

Nonperforming Assets

Nonperforming loans, also known as NPLs, are defined as Chapter 13 bankruptcy that became accounts contractually past due over 120 days. For those accounts, all accrued interest is reversed and income is recognized on a cash basis. For the three and six months ended June 30, 2005, interest on NPLs excluded from interest income was $0.2 million and $0.5 million, respectively, compared with $0.2 million and $0.6 million for the same respective periods in 2004.

Nonperforming assets, also known as NPAs, consist of NPLs and repossessed automobiles. Repossessed automobiles are carried at lower of cost or fair value. NPAs were $44.7 million at June 30, 2005 compared with $47.3 million at December 31, 2004. NPAs represented 0.39% and 0.50% of total assets at June 30, 2005 and December 31, 2004, respectively. There were no impaired loans at June 30, 2005 or December 31, 2004.

Allowance for Credit Losses

Our allowance for credit losses was $273 million at June 30, 2005 compared to $252 million at December 31, 2004. Net chargeoffs totaled $29.1 million and $68.8 million for the three and six months ended June 30, 2005, respectively, compared with $38.4 million and $88.9 million for the same respective periods in 2004. The increase in the allowance for credit losses was the result of us holding more contracts receivable at June 30, 2005. The allowance for credit losses as a percentage of owned contracts outstanding was 2.5% at June 30, 2005 compared with 2.6% at 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 contract portfolio that can be reasonably estimated.

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, our ability to manage risk-adjusted returns, and our efficient operations.

Principal Sources of Cash

•		Contract Sales and Securitizations – Sales and securitizations totaled $1.5 billion for the three months ended June 30, 2004. We did not sell or securitize contracts during the three months ended June 30, 2005. Sales and securitizations totaled $3.0 billion for both the six months ended June 30, 2005 and six months ended June 30, 2004. The $3.0 billion issued in 2005 was through two public securitization transactions. Of the $3.0 billion issued in 2004, $1.5 billion was through a whole loan sale to Westcorp and $1.5 billion was through a public securitization transaction.

•		Collections of Principal and Interest from Contracts and Release of Cash from Spread Accounts – Total principal and interest collections on contracts owned by us, contacts securitized under a financial guarantee insurance policy issued by Financial Security Assurance, and release of cash from spread accounts on securitizations that are credit enhanced through the issuance of subordinated notes totaled $608 million and $1.3 billion for the three and six months ended June 30, 2005, respectively, compared with $911 million and $1.9 billion for the same respective periods in 2004. The decrease is due to our shift to senior/subordinated securitizations where principal and interest collections are held in restricted cash accounts until distributed in accordance with the terms of the transactions.

Principal Uses of Cash

•		Purchase of Contracts – We purchased $2.0 billion and $3.8 billion of contracts for the three and six months ended June 30, 2005, respectively, compared with $1.7 billion and $3.3 billion for the same respective periods in 2004.

•		Payments of Principal and Interest on Securitizations – Payments of principal and interest to noteholders related to securitizations we serviced totaled $1.5 billion and $3.2 billion for the three and six months ended June 30, 2005, respectively, compared with $1.4 billion and $2.9 billion for the same respective periods in 2004.

•		Amounts Paid to Dealers – Participation paid by us to dealers totaled $45.6 million and $85.0 million for the three and six months ended June 30, 2005, respectively, compared with $38.9 million and $75.0 million for the same respective periods in 2004.

•		Operating Our Business – Noninterest expenses totaled $58.7 million and $117 million for the three and six months ended June 30, 2005, respectively, compared with $61.6 million and $121 million for the same respective periods in 2004.

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. The 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 on a consolidated basis with our parent 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 effect 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 June 30, 2005, we maintained minimal interest rate risk exposure within a change in interest rates of plus or minus 100 basis points.

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 monthly or quarterly basis and recognized as an adjustment to interest expense in our Consolidated Statements of Income.

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. Any change in the market value of such derivatives and any income or expense recognized on such derivatives is recorded to noninterest income.

The Asset/Liability Committee monitors our hedging activities to ensure that such activities 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.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operations of our disclosure controls and procedures within 90 days of the filing date of this quarterly report. In evaluating our disclosure controls, our Chief Executive Officer and Chief Financial Officer considered that our Controller and Director of Tax resigned during the second quarter of 2005. We have been conducting an active and ongoing search to fill these open positions. In the interim, other accounting personnel have assumed additional responsibility in order to ensure that we maintain effective disclosure controls. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. There have been no other significant changes in our internal controls or in other factors that could significantly affect the controls and procedures subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

On April 26, 2005, we held our annual shareholders’ meeting. There were 41,057,789 shares of common stock outstanding entitled to vote, and a total of 40,617,569, or 98.93%, were represented at the meeting in person or by proxy. The following summarizes vote results of proposals submitted to our shareholders:

Proposal to elect Directors:


NAME	FOR		WITHHELD
Judith M. Bardwick		40,578,153		39,416
James R. Dowlan		39,784,677		832,892
Duane A. Nelles		40,578,153		39,416
Ernest S. Rady		40,551,141		66,428
Ronald I. Simon		40,578,153		39,416
Fredricka Taubitz		40,578,153		39,416
Thomas A. Wolfe		40,573,853		43,716

Proposal to ratify the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 2005:


FOR	AGAINST	ABSTAIN
40,564,086	53,482	0

Item 5. Other Information

(a)

On August 5, 2005, our previously disclosed policy compensating the holders of non-qualified stock options to the extent of the tax benefit obtained by us upon the exercise of such non-qualified stock options was terminated by the Board of Directors.

Item 6. Exhibits


Exhibit No.		Description of Exhibit
2.1		Agreement and Plan of Merger and Reorganization, dated as of May 23, 2004, among Westcorp, Western Financial Bank and WFS Financial Inc (1)

10.1		Summary of Executive Salary and Bonus Arrangements

10.2		Summary of Director Compensation Arrangements

31.1		Section 302 Certification of CEO

31.2		Section 302 Certification of CFO

32.1		Section 906 Certification of CEO

32.2		Section 906 Certification of CFO


(1)		Exhibit previously filed with Westcorp Registration Statement on Form S-4 (File No. 333-117424) filed July 16, 2004, incorporated herein by reference under Exhibit Number indicated.

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.

WFS Financial Inc

(Registrant)



Date: August 8, 2005	By:	/s/ Thomas A. Wolfe
		Thomas A. Wolfe
		President and Chief Executive Officer



Date: August 8, 2005	By:	/s/ Robert J. Costantino
		Robert J. Costantino
		Senior Executive Vice President, Chief Financial Officer and Chief Operating Officer

INDEX TO EXHIBITS


Exhibit No.		Description of Exhibit
2.1		Agreement and Plan of Merger and Reorganization, dated as of May 23, 2004, among Westcorp, Western Financial Bank and WFS Financial Inc (1)

10.1		Summary of Executive Salary and Bonus Arrangements

10.2		Summary of Director Compensation Arrangements

31.1		Section 302 Certification of CEO

31.2		Section 302 Certification of CFO

32.1		Section 906 Certification of CEO

32.2		Section 906 Certification of CFO


(1)		Exhibit previously filed with Westcorp Registration Statement on Form S-4 (File No. 333-117424) filed July 16, 2004, incorporated herein by reference under Exhibit Number indicated.

Represents only the note payable amounts outstanding at the date indicated.

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.

Represents loans sold to Westcorp in whole loan sales and subsequently securitized by Westcorp. We manage these contracts pursuant to an agreement with Westcorp and the securitization trust.

WFS FINANCIAL INC 10-Q