e424b4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-110244
5,450,000 Shares

(WESTCORP LOGO)

Common Stock


         We are selling 5,450,000 shares of our common stock in this offering. We will receive all of the net proceeds from the sale of shares of common stock offered hereby.

      To the extent that the underwriters sell more than 5,450,000 shares of common stock, the underwriters have the option to purchase up to an additional 817,500 shares from us at the initial price to public less the underwriting discount.

      Our common stock is listed on the New York Stock Exchange under the symbol “WES.” The last reported sale price of our common stock on November 18, 2003 was $34.39 per share.

      Investing in our common stock involves risks. See “Risk Factors” beginning on page 7.

      The shares of common stock offered hereby are not savings accounts or deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental authority or agency.

                         
Underwriting
Discounts and Proceeds to
Price to Public Commissions Westcorp



Per Share
    $34.39       $1.46       $32.93  
Total
    $181,493,225       $7,713,462       $173,779,763  

      The table above does not include 172,500 shares being sold by the underwriters to affiliates of Ernest Rady at a price equal to the price to public. The underwriters will not receive any underwriting discounts or commissions on these shares, resulting in proceeds to us in the amount of $5,932,275 and aggregate proceeds to us of $179,712,038, before expenses.

      Delivery of the shares of common stock will be made on or about November 24, 2003.

      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Credit Suisse First Boston


Goldman, Sachs & Co.

  Bear, Stearns & Co. Inc.
  JMP Securities

The date of this prospectus is November 18, 2003.


TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS
INDUSTRY DATA
PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS
PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION
CAPITALIZATION
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Table of Contents


TABLE OF CONTENTS

         
Page

FORWARD-LOOKING STATEMENTS
    ii  
INDUSTRY DATA
    ii  
PROSPECTUS SUMMARY
    1  
RISK FACTORS
    7  
USE OF PROCEEDS
    15  
PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION
    15  
CAPITALIZATION
    16  
SELECTED FINANCIAL DATA
    17  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    20  
BUSINESS
    49  
MANAGEMENT
    73  
PRINCIPAL STOCKHOLDERS
    77  
DESCRIPTION OF CAPITAL STOCK
    78  
UNDERWRITING
    79  
NOTICE TO CANADIAN RESIDENTS
    82  
UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
    83  
LEGAL MATTERS
    84  
EXPERTS
    84  
WHERE YOU CAN FIND MORE INFORMATION
    84  
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
    85  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
    F-1  


      You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may be used only where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

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FORWARD-LOOKING STATEMENTS

      This prospectus includes and incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended. Forward-looking statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These statements are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements.

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

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

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

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

      We do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.

INDUSTRY DATA

      In this prospectus, we rely on and refer to information regarding the automobile lending industry from market research reports, analyst reports and other publicly available information including, without limitation, reports issued or prepared by CNW Marketing/ Research. 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.

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PROSPECTUS SUMMARY

      This summary highlights certain information found in greater detail elsewhere in this prospectus. It does not contain all the information that may be important to you in making a decision to purchase our common stock. We urge you to read the entire prospectus carefully, including “Risk Factors” and our consolidated financial statements and related notes, before deciding to invest in our common stock. In this prospectus, the “company,” “we,” “us” and “our” refer to Westcorp and its subsidiaries, except where it is otherwise noted. Unless we indicate otherwise, all information in this prospectus assumes the underwriters will not exercise their option to purchase additional shares.

Westcorp

Our Company

      We are a diversified financial services holding company that provides automobile lending services through our second-tier subsidiary, WFS Financial Inc, which we refer to as WFS, and retail and commercial banking services through our wholly owned subsidiary, Western Financial Bank, which we refer to as the Bank. The Bank currently owns 84% of the capital stock of WFS. We primarily earn income by originating assets, including automobile contracts, that generate a yield in excess of the cost of the liabilities, including deposits, that fund these assets.

      We have grown substantially over the past three years. As of September 30, 2003, we had $14.2 billion in total assets, $10.5 billion in automobile loans and $859 million in common equity, representing a three-year compounded annual growth rate of 27.2%, 17.0% and 22.1%, respectively. For the trailing twelve months ended September 30, 2003 we originated $5.8 billion of automobile contracts and generated $104 million of net income and earnings per share of $2.53.

Automobile Lending Operations

      We are one of the nation’s largest independent automobile finance companies with over 30 years of experience in the automobile finance industry. We believe the automobile finance industry is the second largest consumer finance industry in the United States with over $895 billion of loan and lease originations during 2002. We originate new and pre-owned automobile installment contracts, otherwise known as contracts, through our relationships with approximately 8,000 franchised and independent automobile dealers nationwide. We originated $4.6 billion of contracts during the nine months ended September 30, 2003 and owned a portfolio of $10.5 billion contracts at September 30, 2003.

      For the nine months ended September 30, 2003, approximately 32% of our contract originations were for the purchase of new automobiles and approximately 68% of our contract originations were for the purchase of pre-owned automobiles. Approximately 83% of our contract originations were what we refer to as prime contracts and approximately 17% of our contract originations were what we refer to as non-prime contracts. Our determination of whether a contract is categorized as prime, non-prime or other is based on a number of factors including the borrower’s credit history and our expectation of credit loss.

      We underwrite contracts through a credit approval process that is supported and controlled by a centralized, automated front-end system. This system incorporates proprietary credit scoring models and industry credit scoring models and tools, which enhance our credit analysts’ ability to tailor each contract’s pricing and structure to maximize risk-adjusted returns. We believe that as a result of our sophisticated credit and underwriting systems, we are able to earn attractive risk-adjusted returns on our contracts. For the trailing twelve months ended September 30, 2003, the average net interest spread on our automobile contract originations was 7.77% and the net interest spread on our managed automobile portfolio was 6.67% while net credit losses averaged 2.77% for the same period.

      We structure our business to minimize operating costs while providing high quality service to our dealers. Those aspects of our business that require a local market presence are performed on a decentralized basis in our 40 offices. All other operations are centralized. We fund our purchases of

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contracts on an interim basis, with deposits raised through our banking operations, which are insured by the Federal Deposit Insurance Corporation, also known as the FDIC, and other borrowings. For long-term financing, we issue automobile contract asset-backed securities. Since 1985, we have sold or securitized over $33 billion of contracts in 60 public offerings of asset-backed securities, making us the fourth largest issuer of such securities in the nation. We have employed a range of securitization structures and our most recent $1.7 billion issuance of asset-backed securities was structured as a surety-wrapped transaction with a weighted average interest rate of 2.66%.

Banking Operations

      The primary focus of our banking operations is to generate diverse, low-cost funds to provide the liquidity needed to fund our acquisition of contracts. The Bank has the ability to raise significant amounts of liquidity by attracting both short-term and long-term deposits from the general public, commercial enterprises and institutions by offering a variety of accounts and rates. These funds are generated through the Bank’s retail and commercial banking divisions. The Bank also may raise funds by obtaining advances from the Federal Home Loan Bank, also known as the FHLB, selling securities under agreements to repurchase and utilizing other borrowings. The Bank’s retail banking division serves the needs of individuals and small businesses by offering a broad range of products through 18 retail branches located throughout Southern California. The Bank’s commercial banking division focuses on medium-sized businesses in Southern California. At September 30, 2003, the total deposits gathered by both the retail and commercial banking divisions were $2.0 billion. Approximately 88% of these accounts were demand deposits, money market accounts and certificate of deposit accounts under $100,000 in principal, which we believe represent a stable and attractive source of funding.

      The Bank also invests deposits generated by its retail and commercial banking divisions in mortgage-backed securities. Our investment in mortgage-backed securities, together with the cash balances that we maintain, create a significant liquidity portfolio that provides us with additional funding security.

Our Business Strategy

      Our business objective is to maximize long-term profitability by efficiently purchasing and servicing prime and non-prime credit quality automobile contracts that generate strong and consistent risk-adjusted returns. We achieve this objective by employing our business strategy, which includes the following key elements:

  •  produce consistent growth through our strong dealer relationships;
 
  •  price automobile contracts to maximize risk-adjusted returns by using advanced technology and experienced underwriters;
 
  •  create operating efficiencies through technology and best practices;
 
  •  generate low cost liquidity through positive operating cash flows and diverse funding sources; and
 
  •  record high quality earnings and maintain a conservative, well-capitalized balance sheet.

Recent Developments

      We priced our $1.4 billion WFS Financial 2003-4 Owner Trust transaction on November 4, 2003. This securitization transaction is structured as a senior/ subordinated transaction and will be accounted for as a secured financing, as have all of our securitization transactions since 2000. This transaction is scheduled to close on November 25, 2003, subject to customary terms and conditions for transactions of this type. This transaction involves the issuance of seven classes of contract backed notes with a weighted average interest rate of 2.68%.

Our Address

      Our principal executive office and mailing address is 23 Pasteur, Irvine, California 92618-3816, and our telephone number is (949) 727-1002. Our Web site address is http://www.westcorpinc.com. The information contained in our Web site does not constitute part of this prospectus.

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The Offering

 
Issuer Westcorp
 
Common stock offered 5,450,000 shares, including 172,500 shares to be purchased by affiliates of Mr. Rady.
 
Underwriters’ option to purchase additional shares 817,500 shares
 
Common stock outstanding after this offering(1) 50,852,592 shares
 
Use of proceeds A portion of the net proceeds will be used to redeem our subordinated debentures due in 2007, after they become callable in August 2004. The balance of the proceeds will be used to purchase automobile contracts from WFS, contributed to or invested in the Bank or WFS or used for general corporate purposes.
 
New York Stock Exchange symbol WES


(1)  The number of total shares outstanding after this offering excludes:

  •  547,059 shares of common stock issuable upon exercise of outstanding vested options under our stock incentive plan, at a weighted average share price of $14.74 per share;
 
  •  943,783 shares of common stock issuable upon exercise of outstanding nonvested options under our stock incentive plan, at a weighted average share price of $18.04 per share;
 
  •  1,509,158 shares available for future issuance under our stock incentive plan; and
 
  •  817,500 shares issuable under the underwriters’ option to purchase additional shares.

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Summary Financial Data

      Our summary balance sheet and operating data for the years ended December 31, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements. Certain amounts from the prior year consolidated financial statements have been reclassified to conform to the 2003 presentation. The balance sheet data at September 30, 2003 and 2002 and the operating data for the nine months ended September 30, 2003 and 2002 have been derived from our unaudited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all normal recurring adjustments necessary for the fair presentation of financial position and results of operations for those periods.

      The summary financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included or incorporated by reference elsewhere herein including the impact of changing the structure of our securitizations from sale transactions to secured financings. The financial data is qualified in its entirety by the more detailed financial information contained elsewhere or incorporated by reference herein. Information regarding our compliance with applicable regulatory capital requirements is included in this prospectus under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Capital Requirements.”

                                           
For the Nine Months Ended
September 30, For the Year Ended December 31,


2003 2002 2002 2001 2000





(Dollars in thousands, except per share amounts)
Consolidated Summary of Operations:
                                       
Interest income
  $ 928,336     $ 841,210     $ 1,142,940     $ 962,627     $ 583,821  
Interest expense
    407,257       393,156       530,916       491,944       313,872  
     
     
     
     
     
 
 
Net interest income
    521,079       448,054       612,024       470,683       269,949  
Provision for credit losses
    221,071       209,043       306,233       196,977       82,133  
     
     
     
     
     
 
 
Net interest income after provision for credit losses
    300,008       239,011       305,791       273,706       187,816  
Noninterest income
    83,316       64,301       90,430       78,899       177,884  
Noninterest expense
    207,840       187,841       251,306       244,871       220,973  
     
     
     
     
     
 
Income before income tax
    175,484       115,471       144,915       107,734       144,727  
Income tax
    69,544       44,974       52,044       41,675       58,132  
     
     
     
     
     
 
 
Income before minority interest
    105,940       70,497       92,871       66,059       86,595  
Minority interest in earnings of subsidiaries
    21,453       10,263       13,153       10,369       11,852  
     
     
     
     
     
 
Net income
  $ 84,487     $ 60,234     $ 79,718     $ 55,690     $ 74,743  
     
     
     
     
     
 
Weighted average number of shares and common share equivalents — diluted
    41,680,576       38,751,631       38,922,611       34,485,127       29,525,677  
Earnings per common share — diluted
  $ 2.03     $ 1.55     $ 2.05     $ 1.61     $ 2.53  
Dividends per common share
    0.39       0.36       0.47       0.44       0.30  
Dividend payout ratio
    19.2 %     23.2 %     22.9 %     27.3 %     11.9 %

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September 30, 2003 December 31,


Actual As Adjusted(1) 2002 2001 2000





(Dollars in thousands)
Consolidated Summary of Financial Condition:
                                       
Assets:
                                       
 
Cash and cash equivalents
  $ 182,963     $ 262,175     $ 84,215     $ 104,327     $ 128,763  
 
Loans:
                                       
   
Consumer(2)
    10,658,660       10,658,660       9,063,755       7,092,959       4,309,317  
   
Mortgage(3)
    246,532       246,532       282,930       373,455       507,431  
   
Commercial
    105,665       105,665       97,216       85,312       107,586  
 
Mortgage-backed securities
    2,664,156       2,664,156       2,649,657       2,092,225       2,230,448  
 
Investments and time deposits
    310,193       310,193       128,530       74,957       35,101  
 
Other assets
    368,697       368,697       445,688       427,380       653,270  
 
Less: allowance for credit losses
    298,278       298,278       269,352       178,218       104,006  
     
     
     
     
     
 
     
Total assets
  $ 14,238,588     $ 14,317,800     $ 12,482,639     $ 10,072,397     $ 7,867,910  
     
     
     
     
     
 
Liabilities:
                                       
 
Deposits
  $ 1,969,134     $ 1,969,134     $ 1,974,984     $ 2,329,326     $ 2,478,487  
 
Notes payable on automobile secured financings
    10,108,203       10,108,203       8,494,678       5,886,227       3,473,377  
 
FHLB advances and other borrowings
    638,682       638,682       618,766       723,675       616,193  
 
Subordinated debt
    394,494       294,494       400,561       147,714       189,962  
 
Amounts held on behalf of trustee
                    177,642       280,496       494,858  
 
Other liabilities
    144,197       144,197       101,145       85,994       71,221  
     
     
     
     
     
 
     
Total liabilities
    13,254,710       13,154,710       11,767,776       9,453,432       7,324,098  
Minority interest in equity of subsidiaries
    124,525       124,525       101,666       78,261       56,644  
Shareholders’ equity
    859,353       1,038,565       613,197       540,704       487,168  
     
     
     
     
     
 
     
Total liabilities and shareholders’ equity
  $ 14,238,588     $ 14,317,800     $ 12,482,639     $ 10,072,397     $ 7,867,910  
     
     
     
     
     
 
                                         
At or For the
Nine Months Ended
September 30, At or For the Year Ended December 31,


2003 2002 2002 2001 2000





(Dollars in thousands)
Operating Statistics — Automobile Only:
                                       
Automobile contract originations
  $ 4,622,071     $ 4,204,718     $ 5,415,734     $ 4,863,279     $ 4,219,227  
Percent of prime automobile contracts originated
    82.9 %     79.3 %     80.3 %     75.6 %     68.8 %
Automobile contracts managed at end of period
  $ 10,475,948     $ 9,269,265     $ 9,389,974     $ 8,152,882     $ 6,818,182  
Weighted average coupon on originated automobile contracts
    10.1 %     11.6 %     11.4 %     12.7 %     14.0 %
Operating expenses as a percentage of average managed automobile contracts
    2.4 %     2.5 %     2.4 %     2.7 %     3.1 %
Automobile contracts delinquent 60 days or greater
    0.8 %     1.0 %     1.0 %     1.1 %     0.9 %
Net chargeoffs as a percent of average managed automobile contracts
    2.6 %     2.6 %     2.8 %     2.3 %     1.9 %

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For the Nine Months Ended
September 30, For the Year Ended December 31,


2003 2002 2002 2001 2000





(Dollars in thousands)
Other Selected Financial Data:
                                       
Average automobile contracts managed
  $ 9,885,681     $ 8,672,049     $ 8,845,635     $ 7,576,681     $ 6,076,814  
Return on average automobile contracts managed(4)
    1.14 %     0.93 %     0.90 %     0.74 %     1.23 %
Average shareholders’ equity(5)
  $ 791,998     $ 659,799     $ 654,109     $ 570,298     $ 450,323  
Return on average shareholders’ equity(5)
    14.22 %     12.17 %     12.19 %     9.77 %     16.60 %
Book value per share(5)
  $ 20.89     $ 17.84     $ 18.23     $ 16.80     $ 15.72  
Originations:
                                       
 
Consumer loans(2)
  $ 4,626,928     $ 4,207,743     $ 5,419,296     $ 4,869,970     $ 4,232,115  
 
Mortgage loans(3)
    21,326       23,535       23,950       23,001       33,124  
 
Commercial loans
    304,078       196,525       354,439       291,944       266,342  
     
     
     
     
     
 
   
Total originations
  $ 4,952,332     $ 4,427,803     $ 5,797,685     $ 5,184,915     $ 4,531,581  
     
     
     
     
     
 
Interest rate spread(6)
    4.94 %     5.12 %     5.29 %     4.99 %     4.37 %


(1)  As adjusted to reflect the offering, including the anticipated redemption of our subordinated debentures due in 2007, after they become callable in August 2004, and assuming the underwriters will not exercise their option to purchase additional shares.
 
(2)  Net of unearned discounts.
 
(3)  Net of undisbursed loan proceeds.
 
(4)  Net income (annualized) divided by average automobile contracts managed.
 
(5)  Accumulated other comprehensive income (loss) excluded from shareholders’ equity.
 
(6)  Yield on interest earning assets less the cost of funds on interest bearing liabilities.

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RISK FACTORS

      This offering involves a high degree of risk. You should carefully consider the risks described below and the other information in this prospectus and the information incorporated by reference before deciding to invest in our common stock. Our business, operating results and financial condition could be adversely affected by any of the following specific risks. The trading price of our common stock could decline due to any of these risks and other industry risks, and you could lose all or part of your investment. In addition to the risks described below, we may encounter risks that are not currently known to us or that we currently deem immaterial, which may also impair our business operations and your investment in our common stock.

Risks Related to the Offering

We have broad discretion in how we use the proceeds from this offering and may use them in ways with which you disagree.

      We intend to use a portion of the net proceeds to redeem our subordinated debentures due in 2007, after they become callable in August 2004. We intend to use the balance of the proceeds from this offering to purchase automobile contracts from WFS, to contribute to or invest in the Bank or WFS or for general corporate purposes. However, our management will have significant flexibility in applying the net proceeds of this offering. The failure of management to use such funds effectively could have a material adverse effect on our financial position, liquidity and results of operations by reducing or eliminating our net income from operations. See “Use of Proceeds.”

Risks Related to Factors Outside Our Control

Adverse economic conditions may impact our profitability.

      Delinquencies, defaults, repossessions and credit losses generally increase during periods of economic slowdown, recession or higher unemployment. These periods also may be accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding contracts, which weakens collateral coverage and increases the amount of loss in the event of default. Significant increases in the inventory of pre-owned automobiles during periods of economic recession also may depress the prices at which repossessed automobiles may be sold or delay the timing of these sales. Because a portion of our borrowers are considered non-prime borrowers, the actual rates of delinquencies, defaults, repossessions and credit losses on these contracts are higher than those experienced in the general automobile finance industry for borrowers considered to be prime borrowers and could be more dramatically affected by a general economic downturn. In addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our servicing fee income. While we seek to manage the higher risk inherent in non-prime contracts through the underwriting criteria and collection methods we employ, we cannot assure you that these criteria or methods will afford adequate protection against these risks. Any sustained period of increased delinquencies, defaults, repossessions, credit losses or servicing costs could adversely affect our financial position, liquidity and results of operations and our ability to enter into future securitizations.

Interest rate fluctuations may impact our profitability.

      Our profitability may be directly affected by the level of and fluctuations in interest rates, which affects the gross interest rate spread we earn on our contracts. As interest rates change, our gross interest rate spread on new originations may increase or decrease depending upon the interest rate environment. In addition, the rates charged on the contracts originated or purchased from dealers are limited by statutory maximums, restricting our opportunity to pass on increased interest costs. We believe that our profitability and liquidity could be adversely affected during any period of changing interest rates, possibly to a material degree. We monitor the interest rate environment and employ our hedging strategies designed to mitigate the impact of changes in interest rates. We cannot assure you that our hedging strategies will mitigate the impact of changes in interest rates.

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Prepayment of contracts may impact our profitability.

      Our contracts may be repaid by borrowers at any time at their option. Early repayment of contracts will limit the amount of earnings we would have otherwise received under those contracts.

 
Wholesale auction values may impact our profitability.

      We sell repossessed automobiles at wholesale auction markets located throughout the United States. Auction proceeds from the sale of repossessed vehicles and other recoveries usually do not cover the outstanding balance of the contracts, and the resulting deficiencies are charged off. Decreased auction proceeds resulting from the depressed prices at which pre-owned automobiles may be sold during periods of economic slowdown or recession will result in higher credit losses for us. Furthermore, depressed wholesale prices for pre-owned automobiles may result from significant liquidations of rental or fleet inventories and from increased volume of trade-ins due to promotional financing programs offered by new vehicle manufacturers. There can be no assurance that our recovery rates will stabilize or improve in the future.

Risks Related to Us

The ownership of our common stock is concentrated, which may result in conflicts of interest and actions that are not in the best interests of other stockholders of the Company.

      Ernest S. Rady is the founder, Chairman of the Board of Directors and Chief Executive Officer of Westcorp. Mr. Rady is also the Chairman of the Board of Directors and Chief Executive Officer of the Bank and the Chairman of the Board of Directors of WFS. Immediately after the completion of this offering, including the sale of shares to Mr. Rady’s affiliates, Mr. Rady will be the beneficial owner of approximately 55% of the outstanding shares of common stock of Westcorp and will be able to exercise significant control over our company. The Westcorp common stock ownership of Mr. Rady enables him to elect all of Westcorp’s directors and effectively control the vote on all matters submitted to a vote of Westcorp, including mergers, sales of all or substantially all of our assets, “going private” transactions, conversions and other corporate restructurings or reorganizations. Because of the significant block of Westcorp common stock controlled by Mr. Rady, decisions may be made that, while in the best interest of Mr. Rady, may not be in the best interest of other stockholders.

We are a holding company with no operations of our own.

      The results of our operations and our financial condition are dependent upon the business activities of our two principal consolidated subsidiaries, the Bank and WFS. In addition, our ability to fund our operations and pay dividends on our common stock is dependent upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. Any distribution of funds to us from our subsidiaries is subject to statutory, regulatory or contractual restrictions, subsidiaries’ earnings and various other business considerations.

      A significant portion of our cash flow comes from our second-tier subsidiary, WFS. WFS is an 84% owned subsidiary of the Bank. The Bank is subject to limitations upon its ability to pay dividends to us by the terms of the subordinated debentures it has issued and regulations of the Office of Thrift Supervision, also known as the OTS. WFS does not have any obligation to pay amounts to the Bank except pursuant to the senior unsecured intercompany promissory notes issued by WFS to the Bank by which the Bank funds WFS’ operations. In addition, the ability of WFS to repay its obligations to the Bank may be impaired by deficiencies in WFS’ automobile finance operations. Furthermore, any amounts owed to creditors of WFS that may have priority over any obligations WFS has to the Bank under the senior promissory notes may impair the Bank’s ability to have funds available for dividend to us.

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We have substantial debt that could limit our ability to declare and pay dividends and reduce the effectiveness of our operations.

      Through our subsidiaries, we have substantial debt and debt service requirements. As of September 30, 2003, our total debt, as a percentage of total capitalization, was 94%. This substantial level of debt may have important consequences, including:

  •  limiting our ability to borrow additional amounts for origination of automobile contracts, capital expenditures and debt service requirements;
 
  •  limiting our ability to use operating cash flows in other areas of our business;
 
  •  increasing our vulnerability to general adverse economic conditions; and
 
  •  limiting our ability to capitalize on business opportunities and to react to competitive pressures.

      We cannot assure you that we will generate sufficient cash flows from operations, or that we will be able to obtain sufficient funding for our operations or to declare and pay dividends on our common stock. In addition, any future indebtedness would further increase our debt leverage and the associated risks.

The availability of our financing sources may depend on factors outside of our control.

      We depend on a significant amount of financing to operate our business. Our business strategy utilizes diverse funding sources to fund our operations. These sources include raising both short-term and long-term deposits from the general public, commercial enterprises and institutions by offering a variety of accounts and rates through our retail and commercial banking operations. In addition, we raise funds through the collection of principal and interest from loans, automobile asset-backed securities, commercial paper, advances from the FHLB, repurchase agreements, subordinated debentures and equity offerings. The sources used vary depending on such factors as rates paid, maturities and the impact on capital.

      The availability of these financing sources may depend on factors outside of our control, including regulatory issues such as the capital requirements of the Bank, debt ratings, competition, the market for automobile asset-backed securities and our ability to receive financing from other financial institutions. If we are unable to raise the funds we require at reasonable rates, we will either have to curtail our loan origination activities or incur the effects of increased costs of operation. Reducing our loan origination activities may adversely affect our ability to remain a preferred source of financing for the dealers from whom we purchase automobile contracts. An increase in our costs of operations will have an adverse effect on our financial position, liquidity and results of operations by increasing our interest expense and reducing our net interest income.

We may not be able to generate sufficient operating cash flows to run our automobile finance operations.

      Our automobile finance operations require substantial operating cash flows. Operating cash requirements include premiums paid to dealers for acquisition of automobile contracts, expenses incurred in connection with the securitization of automobile contracts, capital expenditures for new technologies and ongoing operating costs. Our primary source of operating cash comes from the excess cash flows received from securitizations and contracts held on the balance sheet. The timing and amount of excess cash flows from contracts varies based on a number of factors, including:

  •  the rates and amounts of loan delinquencies, defaults and net credit losses;
 
  •  how quickly and at what price repossessed vehicles can be resold;
 
  •  the ages of the contracts in the portfolio;
 
  •  levels of voluntary prepayments; and
 
  •  the terms of our securitizations, which include performance based triggers requiring higher levels of credit enhancements to the extent credit losses or delinquencies exceed certain thresholds. We have exceeded performance thresholds in the past and may do so again in the future.

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      Any adverse change in these factors could reduce or eliminate excess cash flows to us. Although we currently have positive operating cash flows, we cannot assure you that we will continue to generate positive cash flows in the future, which could have a material adverse effect on our financial position, liquidity and results of operations.

Changes in our securitization program could adversely affect our liquidity and earnings.

      Our business depends on our ability to aggregate and sell automobile contracts in the form of asset-backed securities. These sales generate cash proceeds that allow us to repay amounts borrowed and to purchase additional automobile contracts. Changes in our asset-backed securities program could materially adversely affect our earnings or ability to purchase and resell automobile contracts on a timely basis. Such changes could include:

  •  delay in the completion of a planned securitization;
 
  •  negative market perception of us; or
 
  •  failure of the automobile contracts we intend to sell to conform to insurance company and rating agency requirements.

      If we are unable to effectively securitize our automobile contracts, we may have to reduce or even curtail our automobile contract purchasing activities, which would have a material adverse effect on our financial position, liquidity and results of operations.

We utilize credit enhancements to maintain favorable interest rates and cash requirements for our automobile asset-backed securitizations.

      To date, all but three of our outstanding securitizations have used credit enhancement in the form of financial guaranty insurance policies issued by Financial Security Assurance Inc., also known as FSA, with the others using a senior/subordinated structure to credit enhance the securitization. An inability to credit enhance our securitizations using either approach could have a material adverse effect on our financial position, liquidity and results of operations by increasing the total costs of our securitization activities and thereby reducing our net income or resulting in our failure to meet regulatory limitations.

If we lose access to the cash produced by securitized automobile contracts, we may not be able to obtain comparable financing.

      We have access to the cash flows of the automobile contracts sold in each outstanding securitization credit enhanced by FSA (including the cash held in “spread accounts” associated with each securitization) through a series of agreements into which the Bank, WFS, WFS Financial Auto Loans 2, Inc., a special purpose subsidiary of WFS also known as WFAL2, and other parties have entered. We are permitted to use that cash as we determine, including in the ordinary business activities of originating automobile contracts.

      In each securitization credit enhanced by FSA, the governing agreements require that all cash flows of the relevant trust and the associated spread account be invested in an eligible investment. In connection with each securitization, the relevant trust has entered into a reinvestment contract, also known as a trust reinvestment contract, which is or qualifies as an eligible investment.

      A limited portion of the funds invested in trust reinvestment contracts may be used by WFAL2 and the balance may be used by the Bank. The Bank makes its portion of the invested funds available to WFS through another reinvestment contract, also known as the WFS reinvestment contract. Under the WFS reinvestment contract, WFS receives access to all cash available to the Bank under each trust reinvestment contract. WFS is obligated to repay the Bank as needed by the Bank to meet its obligations under the individual trust reinvestment contracts. The portion of the cash available to WFAL2 under the individual trust reinvestment contracts is used to purchase automobile contracts from WFS according to the terms of sale and servicing agreements entered into with WFS. If the trust reinvestment contracts were no longer

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deemed an eligible investment, which determination would be made by the rating agencies or FSA, the Bank and WFAL2 would no longer have the ability to use this cash in the ordinary course of business and would need to obtain alternative financing, which may only be available on less attractive terms. If the Bank and WFAL2 were unable to obtain alternative financing, WFS may have to curtail its automobile contract purchasing activities, which would have a material adverse effect on our financial position, liquidity and results of operations.

A loss of contractual servicing rights could have a material effect on our business.

      As servicer of all our securitized automobile contracts, WFS is entitled to receive contractual servicing fees. Contractual servicing fees are earned at a rate of 1.25% per annum on the outstanding balance of automobile contracts securitized. FSA, as insurer with respect to those currently outstanding securitizations as to which it has provided credit enhancement, can terminate WFS’ right to act as servicer for those transactions upon the occurrence of events defined in the sale and servicing agreements for securitized automobile contracts, such as our bankruptcy or material breach of warranties or covenants contained in the sale and servicing agreement. Any loss of such servicing rights could have a material adverse effect on our financial position, liquidity and results of operations by reducing our net income upon the elimination of that contractual servicing income.

We expect our operating results to continue to fluctuate, which may adversely impact our business.

      Our results of operations have fluctuated in the past and are expected to fluctuate in the future. Factors that could affect our quarterly earnings include:

  •  variations in the volume of automobile contracts originated, which historically tend to be lower in the first and fourth quarters of the year;
 
  •  interest rate spreads;
 
  •  the effectiveness of our hedging strategies;
 
  •  credit losses, which historically tend to be higher in the first and fourth quarters of the year; and
 
  •  operating costs.

Competition in the industry may adversely impact our ability to maintain our business at the current level of operations.

      The automobile finance business is highly competitive. We compete with captive automobile finance companies owned by major automobile manufacturers, banks, credit unions, savings associations and independent consumer finance companies. Many of these competitors have greater financial and marketing resources than we have. Additionally, from time to time the captive finance companies provide financing on terms significantly more favorable to automobile purchasers than we can offer. For example, captive finance companies can offer special low or no interest loan programs as incentives to purchasers of selected models of automobiles manufactured by their respective parent manufacturers.

      Many of our competitors also have longstanding relationships with automobile dealers and may offer dealers or their customers other forms of financing, including dealer floor plan financing and leasing, which we currently do not provide. Providers of automobile financing have traditionally competed on the basis of interest rates charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and customers. In seeking to establish WFS as one of the principal financing sources of the dealers we serve, we compete predominately on the basis of our high level of dealer service and strong dealer relationships and by offering flexible contract terms to automobile purchasers.

      Competition in the retail banking business comes primarily from commercial banks, credit unions, savings and loan associations, mutual funds and issuers of securities. Many of the nation’s largest savings and loan associations and other depository institutions have locations in Southern California. We compete

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for deposits primarily on the basis of interest rates paid and the quality of service provided to our customers.

Our business is subject to litigation.

      We are subject to various putative class actions alleging claims under the Equal Credit Opportunity Act or similar state laws, including under the California Business and Professions Code and the California Unruh Civil Rights Act. Although we are vigorously defending these actions, we cannot assure you that the outcome of these proceedings will not have a material adverse effect upon our financial condition, results of operations and cash flows. See “Business — Legal Proceedings.”

Risks Related to Regulatory Factors

 
Regulatory requirements may restrict our ability to do business.

      The Bank is subject to inspection and regulation by the OTS pursuant to the Home Owners Loan Act, as amended, also known as HOLA. The OTS is the primary federal banking agency responsible for its supervision and regulation. HOLA limits the amount of our consumer loans, commercial loans and investment in service corporations. The Bank is precluded from holding consumer loans, including automobile contracts, on its consolidated balance sheet, in an aggregate principal balance in excess of 30% of its total consolidated assets. The limitation is increased to 35% of consolidated assets if all of the consumer loans in excess of the 30% limit are obtained by the Bank and its operating subsidiaries directly from consumers. The Bank is precluded from holding commercial loans, including loans to our service corporations, on its consolidated balance sheet, in an aggregate principal balance in excess of 10% of its total consolidated assets. Commercial loans secured by real estate and small business loans with $2.0 million or less in outstanding principal are not included in the calculation of the percentage of commercial loans. Interests in consumer loans held by the Bank’s service corporations are not included in the limits on such assets described above. The Bank is precluded from investing more than 2% of its consolidated assets in service corporations, although it may invest an additional 1% in service corporations devoted to community service activities as specified in the regulations. Retained earnings or losses from the operations of our service corporations are not included in the calculation of our investment in service corporations. In addition, other regulatory actions taken by the OTS could have a negative impact on the price of our common stock.

      Our securitization activities are structured to enable the Bank to remove securitized automobile contracts from the HOLA consumer loan limitation calculation. Changes in the OTS’s interpretation of HOLA as it affects our securitization activities could cause us to change the manner in which we securitize automobile contracts or to limit our acquisition of such contracts, thereby negatively impacting the price of our common stock. Furthermore, if we are unable to continue to securitize the automobile contracts we purchase, this regulatory limitation may force us to limit our acquisition of new automobile contracts, thereby adversely affecting our ability to remain a preferred source of financing for the dealers from whom we purchase automobile contracts, or cause us to fail the regulatory limitations. Any such limitations may also have a material adverse effect on our financial position, liquidity and results of operations.

      The OTS has the power to enforce HOLA and its regulations by a variety of actions ranging from a memorandum of understanding to cease and desist proceedings under the Federal Deposit Insurance Act. As such, the OTS has broad powers to, among other things, require us to change our business practices, hold additional capital and change management. Such action could have a material adverse impact on our business and may impact our securities prices, including our common stock, and access to the capital markets.

OTS guidance regarding subprime lending may affect the Bank’s capital requirements.

      The OTS, along with other federal banking regulatory agencies, has adopted guidance pertaining to subprime lending programs. Pursuant to the guidance, lending programs which provide credit to borrowers

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whose credit histories reflect specified negative characteristics, such as recent bankruptcies or payment delinquencies, are deemed to be subprime lending programs for regulatory purposes. Many of the contracts that we originate possess one or more of the factors identified in the guidance as indicative of a subprime loan for this purpose. Pursuant to the guidance, examiners may require that an institution with a lending program deemed to be subprime hold additional capital that ranges from one and one-half to three times the normal capital required for similar loans made to borrowers who are not deemed to be subprime borrowers.

      Because many of the automobile contracts we originate possess one or more of the factors identified in the guidance as indicative of a subprime loan, we maintain our capital levels higher than would otherwise be required by regulations. Maintaining higher capital levels may slow our growth, require us to raise additional capital or sell assets, all of which could negatively impact our earnings. We cannot predict to what extent the Bank may be required to hold additional capital with respect to those automobile contracts we hold as to which the borrowers are deemed by the OTS to be subprime borrowers.

Other regulatory requirements may affect our ability to do business.

      Our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations.

      In most states in which we operate, a consumer credit regulatory agency regulates and enforces laws relating to consumer lenders and sales finance agencies such as WFS. These rules and regulations generally provide for licensing of sales finance agencies, limitations on the amount, duration and charges, including interest rates, for various categories of loans, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. So long as WFS is an operating subsidiary of the Bank, licensing and certain other of these requirements are not applicable to WFS due to federal preemption.

      We are also subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective borrowers and protect against discriminatory lending practices and unfair credit practices. The principal disclosures required under the Truth in Lending Act include the terms of repayment, the total finance charge and the annual percentage rate charged on each loan. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. In addition, the credit scoring system we use must comply with the requirements for such a system as set forth in the Equal Credit Opportunity Act and Regulation B. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency. Additionally, we are subject to the Gramm-Leach-Bliley Act, which requires us to maintain privacy with respect to certain consumer data in our possession and to periodically communicate with consumers on privacy matters. We are also subject to the Soldiers’ and Sailors’ Civil Relief Act, and similar state laws, which requires us to reduce the interest rate charged on each loan to customers who have subsequently joined the military.

      The dealers that originate automobile contracts we purchase also must comply with both state and federal credit and trade practice statutes and regulations. Failure of the dealers to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have an adverse effect on us.

      We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable local, state and federal regulations. There can be no assurance, however, that we will be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could have a material adverse effect on our operations.

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Further, the adoption of additional, or the revision of existing, rules and regulations could have a material adverse effect on our business.

      We are subject to routine periodic examinations by the OTS on a variety of financial and regulatory matters. The Bank’s most recent annual safety and soundness examination by the OTS was completed in July 2003.

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USE OF PROCEEDS

      We expect to receive approximately $179 million in net proceeds, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, from the sale of shares of our common stock in this offering. If the underwriters exercise in full their option to purchase an additional 817,500 shares of our common stock, we expect our additional net proceeds to be approximately $26.9 million. A portion of the net proceeds will be used to redeem our subordinated debentures due in 2007, after they become callable in August 2004. The balance of the proceeds from this offering will be used to purchase automobile contracts from WFS, contributed to or invested in the Bank or WFS or used for general corporate purposes.

PRICE RANGE OF COMMON STOCK AND DIVIDEND INFORMATION

      The common stock of our company has been publicly traded since August 8, 1986 and has been listed on the NYSE under the symbol WES since 1993. The following table sets forth the high and low sale prices by quarter in 2003, 2002 and 2001, as traded on the NYSE, and the dividends declared on the common stock during those quarters.

                           
Westcorp Common Stock

Cash
Dividends
High Low Declared



Calendar 2001
                       
 
First Quarter
  $ 18.66     $ 14.68     $ 0.11  
 
Second Quarter
    23.70       16.45       0.11  
 
Third Quarter
    23.41       16.00       0.11  
 
Fourth Quarter
    19.45       16.05       0.11  
Calendar 2002
                       
 
First Quarter
    22.55       15.70       0.12  
 
Second Quarter
    31.95       22.50       0.12  
 
Third Quarter
    31.41       18.10       0.12  
 
Fourth Quarter
    21.63       16.92       0.12  
Calendar 2003
                       
 
First Quarter
    23.25       18.30       0.13  
 
Second Quarter
    29.80       18.60       0.13  
 
Third Quarter
    36.86       27.30       0.13  
 
Fourth Quarter (through November 18, 2003)
    39.25       34.13          

      The closing price of our common stock on the NYSE on November 18, 2003 was $34.39 per share. There were approximately 5,054 stockholders of our common stock at October 24, 2003. The number of stockholders was determined by the number of record holders, including the number of individual participants, in security position listings.

      There are no contractual restrictions on the payment of dividends by Westcorp. However, the Bank is restricted by its outstanding subordinated debentures and by regulations of the OTS as to the amount of funds that can be transferred to us in the form of dividends. On September 30, 2003, under the most restrictive of these terms, the maximum dividend that the Bank could have paid was $192 million.

      Any future determination as to the payment of dividends on our common stock will be restricted by these limitations, will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements and other factors deemed relevant by the board of directors, including the General Corporation Law of the State of California, which provides that dividends are only payable out of surplus or current net profits.

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CAPITALIZATION

      The following table sets forth our capitalization as of September 30, 2003 on an actual basis and on an as adjusted basis to reflect the sale of the 5,450,000 shares of common stock offered hereby and application of the net proceeds therefrom as described under “Use of Proceeds.”

                   
September 30, 2003

Actual As Adjusted


(Dollars in thousands)
Cash and cash equivalents
  $ 182,963     $ 262,175  
     
     
 
 
Deposits
  $ 1,969,134     $ 1,969,134  
Notes payable(1)
    10,746,885       10,746,885  
     
     
 
 
Total deposits and notes payable
    12,716,019       12,716,019  
Subordinated debentures
    394,494       294,494  
     
     
 
 
Total debt
    13,110,513       13,010,513  
Shareholders’ equity:
               
  Common stock, par value $1.00 per share; authorized 65,000,000 shares; issued and outstanding 45,402,592 shares, actual; issued and outstanding 50,852,592 shares, as adjusted     45,403       50,853  
Paid-in capital
    508,775       682,537  
Retained earnings
    394,315       394,315  
Accumulated other comprehensive loss, net of tax
    (89,140 )     (89,140 )
     
     
 
 
Total shareholders’ equity
    859,353       1,038,565  
     
     
 
 
Total capitalization
  $ 13,969,866     $ 14,049,078  
     
     
 


(1)  Includes secured financings of automobile contracts, FHLB advances and other borrowings.

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SELECTED FINANCIAL DATA

      Our selected balance sheet and operating data for the years ended December 31, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements. Certain amounts from the prior year consolidated financial statements have been reclassified to conform to the 2003 presentation. The selected balance sheet data at September 30, 2003 and 2002 and the operating data for the nine months ended September 30, 2003 and 2002 have been derived from our unaudited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all normal recurring adjustments necessary for the fair presentation of financial position and results of operations for those periods.

      The selected financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included or incorporated by reference elsewhere herein including the impact of changing the structure of our securitizations from sale transactions to secured financings. The financial data is qualified in its entirety by the more detailed financial information contained elsewhere or incorporated by reference herein. Information regarding our compliance with applicable regulatory capital requirements is included in this prospectus under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Capital Requirements.”

                                                           
For the
Nine Months Ended
September 30, For the Year Ended December 31,


2003 2002 2002 2001 2000 1999 1998







(Dollars in thousands, except per share amounts)
Consolidated Summary of Operations:
                                                       
Interest income
  $ 928,336     $ 841,210     $ 1,142,940     $ 962,627     $ 583,821     $ 297,616     $ 272,166  
Interest expense
    407,257       393,156       530,916       491,944       313,872       152,788       161,713  
     
     
     
     
     
     
     
 
 
Net interest income
    521,079       448,054       612,024       470,683       269,949       144,828       110,453  
Provision for credit losses
    221,071       209,043       306,233       196,977       82,133       38,400       18,960  
     
     
     
     
     
     
     
 
 
Net interest income after provision for credit losses
    300,008       239,011       305,791       273,706       187,816       106,428       91,493  
Noninterest income
    83,316       64,301       90,430       78,899       177,884       212,138       128,654  
Noninterest expense(1)
    207,840       187,841       251,306       244,871       220,973       217,958       248,390  
     
     
     
     
     
     
     
 
Income (loss) before income tax (benefit)
    175,484       115,471       144,915       107,734       144,727       100,608       (28,243 )
Income tax (benefit)
    69,544       44,974       52,044       41,675       58,132       41,460       (11,330 )
     
     
     
     
     
     
     
 
Income (loss) before minority interest
    105,940       70,497       92,871       66,059       86,595       59,148       (16,913 )
Minority interest in earnings (loss) of subsidiaries
    21,453       10,263       13,153       10,369       11,852       6,522       (2,216 )
     
     
     
     
     
     
     
 
Net income (loss)
  $ 84,487     $ 60,234     $ 79,718     $ 55,690     $ 74,743     $ 52,626     $ (14,697 )
     
     
     
     
     
     
     
 
Weighted average number of shares and common share equivalents — diluted
    41,680,576       38,751,631       38,922,611       34,485,127       29,525,677       26,505,128       26,305,117  
Earnings per common share — diluted
  $ 2.03     $ 1.55     $ 2.05     $ 1.61     $ 2.53     $ 1.99     $ (0.56 )
Dividends per common share
    0.39       0.36       0.47       0.44       0.30       0.20       0.25  
Dividend payout ratio
    19.2 %     23.2 %     22.9 %     27.3 %     11.9 %     10.1 %     N/A  

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September 30, December 31,


2003 2002 2002 2001 2000 1999 1998







(Dollars in thousands)
Consolidated Summary of Financial Condition:
                                                       
Assets:
                                                       
 
Cash and cash equivalents
  $ 182,963     $ 236,053     $ 84,215     $ 104,327     $ 128,763     $ 171,365     $ 137,754  
 
Loans:
                                                       
   
Consumer(2)
    10,658,660       8,791,405       9,063,755       7,092,959       4,309,317       1,516,669       933,010  
   
Mortgage(3)
    246,532       305,934       282,930       373,455       507,431       598,302       1,006,933  
   
Commercial
    105,665       78,520       97,216       85,312       107,586       66,927       52,940  
 
Mortgage-backed securities
    2,664,156       2,489,300       2,649,657       2,092,225       2,230,448       1,431,376       980,044  
 
Investments and time deposits
    310,193       94,251       128,530       74,957       35,101       33,423       108,038  
 
Other assets
    368,697       429,480       445,688       427,380       653,270       744,929       651,761  
 
Less: allowance for credit losses
    298,278       244,229       269,352       178,218       104,006       64,217       37,660  
     
     
     
     
     
     
     
 
     
Total assets
  $ 14,238,588     $ 12,180,714     $ 12,482,639     $ 10,072,397     $ 7,867,910     $ 4,498,774     $ 3,832,820  
     
     
     
     
     
     
     
 
Liabilities:
                                                       
 
Deposits
  $ 1,969,134     $ 1,871,791     $ 1,974,984     $ 2,329,326     $ 2,478,487     $ 2,212,309     $ 2,178,735  
 
Notes payable on automobile secured financing
    10,108,203       8,015,546       8,494,678       5,886,227       3,473,377       461,104          
 
FHLB advances and other borrowings
    638,682       777,861       618,766       723,675       616,193       498,901       440,924  
 
Subordinated debt
    394,494       428,899       400,561       147,714       189,962       199,298       239,856  
 
Amounts held on behalf of trustee
            213,283       177,642       280,496       494,858       687,274       528,092  
 
Other liabilities
    144,197       188,411       101,145       85,994       71,221       59,140       94,311  
     
     
     
     
     
     
     
 
     
Total liabilities
    13,254,710       11,495,791       11,767,776       9,453,432       7,324,098       4,118,026       3,481,918  
Minority interest in equity of subsidiaries
    124,525       98,214       101,666       78,261       56,644       28,030       21,857  
Shareholders’ equity
    859,353       586,709       613,197       540,704       487,168       352,718       329,045  
     
     
     
     
     
     
     
 
     
Total liabilities and shareholders’ equity
  $ 14,238,588     $ 12,180,714     $ 12,482,639     $ 10,072,397     $ 7,867,910     $ 4,498,774     $ 3,832,820  
     
     
     
     
     
     
     
 
                                                         
At or For the
Nine Months Ended
September 30, At or For the Year Ended December 31,


2003 2002 2002 2001 2000 1999 1998







(Dollars in thousands)
Operating Statistics — Automobile Only:
                                                       
Automobile contract originations
  $ 4,622,071     $ 4,204,718     $ 5,415,734     $ 4,863,279     $ 4,219,227     $ 3,340,146     $ 2,670,696  
Percent of prime automobile contracts originated
    82.9 %     79.3 %     80.3 %     75.6 %     68.8 %     69.3 %     67.7 %
Automobile contracts managed at end of period
  $ 10,475,948     $ 9,269,265     $ 9,389,974     $ 8,152,882     $ 6,818,182     $ 5,354,385     $ 4,367,099  
Weighted average coupon on originated automobile contracts
    10.1 %     11.6 %     11.4 %     12.7 %     14.0 %     13.6 %     13.4 %
Operating expenses as a percentage of average managed automobile contracts
    2.4       2.5       2.4       2.7       3.1       3.6       4.5  
Automobile contracts delinquent 60 days or greater
    0.8       1.0       1.0       1.1       0.9       0.8       1.1  
Net chargeoffs as a percent of the average managed automobile contracts
    2.6       2.6       2.8       2.3       1.9       2.1       3.4  

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At or For the
Nine Months Ended
September 30, At or For the Year Ended December 31,


2003 2002 2002 2001 2000 1999 1998







(Dollars in thousands)
Other Selected Financial Data:
                                                       
Average automobile contracts managed
  $ 9,885,681     $ 8,672,049     $ 8,845,635     $ 7,576,681     $ 6,076,814     $ 4,840,363     $ 4,006,185  
Return on average automobile contracts managed(4)
    1.14 %     0.93 %     0.90 %     0.74 %     1.23 %     1.09 %     (0.37 )%
Average shareholders’ equity(5)
  $ 791,998     $ 659,799     $ 654,109     $ 570,298     $ 450,323     $ 351,162     $ 327,687  
Return on average shareholders’ equity(5)
    14.22 %     12.17 %     12.19 %     9.77 %     16.60 %     14.99 %     (4.49 )%
Book value per share(5)
  $ 20.89     $ 17.84     $ 18.23     $ 16.80     $ 15.72     $ 14.06     $ 12.29  
Originations:
                                                       
 
Consumer loans(2)
  $ 4,626,928     $ 4,207,743     $ 5,419,296     $ 4,869,970     $ 4,232,115     $ 3,355,732     $ 2,680,341  
 
Mortgage loans(3)
    21,326       23,535       23,950       23,001       33,124       276,936       2,754,398  
 
Commercial loans
    304,078       196,525       354,439       291,944       266,342       237,316       124,259  
     
     
     
     
     
     
     
 
   
Total originations
  $ 4,952,332     $ 4,427,803     $ 5,797,685     $ 5,184,915     $ 4,531,581     $ 3,869,984     $ 5,558,998  
     
     
     
     
     
     
     
 
Interest rate spread(6)
    4.94 %     5.12 %     5.29 %     4.99 %     4.37 %     3.59 %     2.83 %


(1)  Information for 1998 includes a one-time restructuring charge of $18.0 million, including $1.8 million for employee severance, $13.2 million for lease termination fees and the write-off of disposed assets, and $3.0 million relating to our decision to exit the mortgage banking business.
 
(2)  Net of unearned discounts.
 
(3)  Net of undisbursed loan proceeds.
 
(4)  Net income (annualized) divided by average automobile contracts managed.
 
(5)  Accumulated other comprehensive income (loss) excluded from shareholders’ equity.
 
(6)  Yield on interest earning assets less the cost of funds on interest bearing liabilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and notes thereto and other information included or incorporated by reference herein.

Overview

      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, from investments in mortgage-backed securities and from other short-term investments. We fund our loan portfolio and investments with deposits, advances from the FHLB, securities sold under agreements to repurchase, securitizations, other borrowings and equity.

      Noninterest income is primarily made up of revenues generated from the sale and servicing of contracts and real estate loans. The primary components of noninterest income include late charges and other collection related fee income on managed contracts, retained interest income or expense, gain on sale of contracts and real estate loans, and contractual servicing income on contracts in securitization transactions treated as sales for accounting purposes. Since March 2000, we have structured our securitizations as secured financings and no longer record non-cash gain on sale at the time of each securitization or record subsequent contractual servicing and retained interest income, the valuation of which is based upon subjective assumptions. Rather, the earnings of the contracts in the trust and the related financing costs are reflected over the life of the underlying pool of contracts as net interest income. In addition, our provision for credit losses has increased as we hold securitized loans on our balance sheet.

      Our decision to account for our securitizations as secured financings rather than as sales was based upon a business philosophy that focuses on presenting high quality, cash-based earnings and maintaining a conservative, well-capitalized balance sheet. We believe that a presentation in which assets and liabilities remain on the balance sheet for securitization transactions treated as secured financings provides a better understanding of our business and the inherent risks associated with our securitizations. Since March 2000, in order to account for some of our securitizations as secured financings rather than as sales, those securitizations include a provision that provides us with the right to repurchase contracts at any time. The percentage of contracts that we may repurchase was increased from 10% to 20% as of March 2000. Other securitization transactions since March 2000 allow the trust to invest in and sell other financial assets. We believe that our decision to make these accounting changes created a transitional period during which our earnings have been adversely impacted as we built our on balance sheet portfolio of loans. This change affected the comparability of our financial statements from 2000 through the third quarter of 2003.

      Effective January 1, 2003, we regained control over assets of the trusts for all of our pre-March 2000 outstanding securitization transactions previously treated as sales for accounting purposes. We regained control of these assets when each trust was given the ability to invest in financial assets not related to the securitization of contracts. In accordance with paragraph 55 of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, also known as SFAS No. 140, and Emerging Issues Task Force 02-9, Accounting for Changes that Result in a Transferor Regaining Control of Financial Assets Sold, we recorded $525 million of automobile contracts and the related notes payable on automobile secured financings on our Consolidated Statements of Financial Condition and have eliminated all remaining amounts due from trusts and amounts held on behalf of trustee. We no longer recognize retained interest income or expense or contractual servicing income on our Consolidated Statements of Income. Rather, we recognize interest income on automobile contracts held in these trusts and record interest expense on notes payable on automobile secured financings. These loans were considered in the overall evaluation of the adequacy of our allowance for credit losses. See “— Financial Condition — Asset Quality.”

      During the first quarter of 2003, delinquent accounts greater than 120 days past due that were subject to Chapter 13 bankruptcy proceedings were reclassified to contracts receivable and the related reserves

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were reclassified to the allowance for credit losses on the Consolidated Statements of Financial Condition. Previously, such amounts were reported as nonperforming assets and were included in other assets on the Statement of Financial Condition. The prior year amounts have been reclassified accordingly. These contracts were considered in the overall evaluation of the adequacy of our allowance for credit losses.

Critical Accounting Policies

      Management believes critical accounting policies are important to the portrayal of our financial condition and results of operations. Critical accounting policies require difficult and complex judgments, because they rely on estimates about the effect of matters that are inherently uncertain due to the impact of changing market conditions. The following is a summary of accounting policies we consider critical.

Securitization Transactions

      Contracts sold by us to our special purpose entity subsidiaries in connection with a securitization transaction are treated as having been sold for bankruptcy purposes and upon transfer to the securitization trust as secured financings under Generally Accepted Accounting Principles, also known as GAAP. For GAAP purposes, the contracts are retained on the balance sheet with the securities issued to finance the contracts recorded as notes payable on automobile secured financing. We record interest income on the securitized contracts and interest expense on the notes issued through the securitization transactions.

      As servicer of these contracts, we may hold and remit funds collected from the borrowers on behalf of the trustee pursuant to reinvestment contracts that we have entered into or we may send funds to a trustee to be held until the distribution dates, depending on the terms of our securitizations. For securitization transactions that were treated as sales, these amounts were reported as amounts held on behalf of trustee on our Consolidated Statements of Financial Condition.

Allowance for Credit Losses

      Management determines the amount of the allowance for credit losses based on a review of various quantitative and qualitative analyses. Quantitative analyses include the review of chargeoff trends by loan program and loan type, analysis of cumulative losses and evaluation of credit loss experience by credit tier and geographic location. Other quantitative analyses include the evaluation of the size of any particular asset group, the concentration of any credit tier, the level of nonperformance and the percentage of delinquency.

      Qualitative analyses include trends in chargeoffs over various time periods and at various statistical midpoints and high points, the severity of depreciated values of repossessions or foreclosures, trends in the number of days repossessions are held in inventory, trends in the number of loan modifications, trends in delinquency roll rates, trends in deficiency balance collections both internally and from collection agencies, trends in custom scores and the effectiveness of our custom scores and trends in the economy generally or in specific geographic locations. Despite these analyses, we recognize that establishing allowance for credit losses is not an exact science and can be highly judgmental in nature.

      The analysis of the adequacy of the allowance for credit losses is not only dependent upon effective quantitative and qualitative analyses, but also effective loan review and asset classification. We classify our assets in accordance with regulatory guidance. Our multifamily and commercial loan portfolios are evaluated individually while our single family and consumer portfolios are evaluated in pools. We classify our loan portfolios into five categories: Pass, Special Mention, Substandard, Doubtful and Loss. Based upon our asset classifications, we establish general and specific valuation allowances.

      General valuation allowances are determined by applying various factors to loan balances that are classified as Pass, Special Mention, Substandard or Doubtful. Specific valuation allowances represent loan amounts that are classified as Loss. Some assets may be split into more than one asset classification due to fair value or net realizable value calculations. This approach allows for enhanced analysis as it highlights the need for more allowance than would be generally allocated if held in one classification.

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      All contracts that are 60 to 90 days delinquent are automatically classified as Special Mention. Real estate loans that are manifesting a weakness in performance are classified as Special Mention. Any contract that is 90 or more days delinquent is automatically classified as Substandard. Real estate loans that are manifesting a significant weakness in performance are also classified as Substandard. Any multifamily loan that is impaired is classified as Substandard. Any contract where the borrower has filed for bankruptcy or where the vehicle has been repossessed by us and is subject to a redemption period is classified as Substandard, with the difference between the wholesale book value and loan balance classified as Loss.

      The allowance for credit losses is increased by charging the provision for credit losses and decreased by actual losses on the loans or by reversing the allowance for credit losses through the provision for credit losses when the amount of loans held on balance sheet is reduced through securitization transactions treated as sales.

Derivatives and Hedging Activities

Deposits and Securities Sold Under Agreements to Repurchase

      We may enter into cash flow hedges that will protect against potential changes in interest rates affecting interest payments on future deposits gathered by us and future securities sold under agreements to repurchase. The fair value of the interest rate swap agreements is included in deposits and securities sold under agreements to repurchase, respectively, and any change in the fair value is reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. Related interest income or expense is settled on a quarterly basis and is recorded in accumulated other comprehensive income (loss) and reclassified into earnings in the period during which cash flows on the hedged items affect income.

Notes Payable on Automobile Secured Financing

      The contracts originated and held by us are fixed rate and, accordingly, we have exposure to changes in interest rates. To protect against potential changes in interest rates affecting interest payments on future securitization transactions, we may enter into various hedge agreements prior to closing the transaction. The market value of these hedge agreements is designed to respond inversely to changes in interest rates. Because of this inverse relationship, we can effectively lock in a gross interest rate spread at the time of entering into the hedge transaction. Gains and losses on these agreements are recorded in accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. Any ineffective portion is recognized in interest expense during that period if the hedge is greater than 100% effective. Upon completion of the securitization transaction, the gains or losses are recognized in full as an adjustment to the gain or loss on the sale of the contracts if the securitization transaction is treated as a sale or amortized on a level yield basis over the duration of the notes issued if the transaction is treated as a secured financing.

      If we issue certain variable rate notes payable in connection with our securitization activities, we also may enter 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 interest expense during that period if the hedge is greater than 100% effective. Related interest income or expense is settled on a quarterly basis and recognized as an adjustment to interest expense in our Consolidated Statements of Income.

      We also enter into interest rate swap agreements or other derivatives that we choose not to designate as hedges or that do not qualify for hedge accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, also known as SFAS No. 133. These derivatives pertain to variable rate notes issued in conjunction with the securitization of our contracts. Any change in the market value of such derivatives is recorded to noninterest income each

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month. Any income or expense recognized on such derivatives is recognized as miscellaneous noninterest income or expense.

Results of Operations

Net Interest Income

      Net interest income is affected by the difference between the rate earned on our interest earning assets and the rate paid on our interest bearing liabilities (interest rate spread) and the relative amounts of our interest earning assets and interest bearing liabilities. For the nine months ended September 30, 2003 and 2002, net interest income totaled $521 million and $448 million, respectively. The increase in net interest income was the result of us holding more automobile contracts on the balance sheet even as overall net interest margins declined. Net interest income totaled $612 million, $471 million and $270 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in net interest income for each of the past three years is primarily the result of us holding a greater percentage of contracts on balance sheet as we utilized our own liquidity sources and completed public securitizations.

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      The following table presents information relating to the average balances and interest rates on an owned basis for the periods indicated:

                                                       
For the Nine Months Ended September 30,

2003 2002


Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate






(Dollars in thousands)
Interest earning assets:
                                               
 
Total investments:
                                               
   
Mortgage-backed securities
  $ 2,514,424     $ 61,950       3.29 %   $ 2,140,819     $ 86,440       5.38 %
   
Other short-term investments
    374,964       4,750       1.69       356,517       5,770       2.16  
   
Investment securities
    15,581       412       3.53       6,908       341       6.58  
   
Interest earning deposits with others
    8,383       55       0.87       6,245       70       1.50  
     
     
     
     
     
     
 
     
Total investments
    2,913,352       67,167       3.07       2,510,489       92,621       4.92  
 
Total loans:
                                               
   
Consumer loans
    10,056,540       846,270       11.25       7,921,167       728,566       12.30  
   
Mortgage loans(1)
    255,896       10,543       5.49       333,479       15,844       6.33  
   
Commercial loans
    120,639       4,356       4.76       93,124       4,179       5.92  
     
     
     
     
     
     
 
     
Total loans
    10,433,075       861,169       11.03       8,347,770       748,589       11.99  
     
     
     
     
     
     
 
     
Total interest earning assets
    13,346,427       928,336       9.30       10,858,259       841,210       10.35  
Noninterest earning assets:
                                               
 
Amounts due from trusts
                            125,803                  
 
Retained interest in securitized assets
                            20,599                  
 
Premises, equipment and real estate owned
    80,281                       80,411                  
 
Other assets
    298,605                       352,545                  
 
Less: allowance for credit losses
    284,164                       203,299                  
     
                     
                 
     
Total
  $ 13,441,149                     $ 11,234,318                  
     
                     
                 
Interest bearing liabilities:
                                               
 
Deposits
  $ 1,981,146       50,269       3.39     $ 2,216,250       61,642       3.72  
 
Securities sold under agreements to repurchase
    218,569       3,433       2.07       191,654       3,849       2.65  
 
FHLB advances and other borrowings
    444,529       4,775       1.45       206,733       3,566       2.32  
 
Notes payable on automobile secured financing
    9,426,038       319,136       4.51       7,112,337       301,083       5.64  
 
Subordinated debentures
    396,742       29,644       9.96       305,939       23,016       10.03  
     
     
     
     
     
     
 
     
Total interest bearing liabilities
    12,467,024       407,257       4.36       10,032,913       393,156       5.23  
Noninterest bearing liabilities:
                                               
 
Amounts held on behalf of trustee
                            259,057                  
 
Other liabilities
    279,552                       360,305                  
 
Shareholders’ equity
    694,573                       582,043                  
     
                     
                 
     
Total
  $ 13,441,149                     $ 11,234,318                  
     
     
     
     
     
     
 
Net interest income and interest rate spread
          $ 521,079       4.94 %           $ 448,054       5.12 %
             
     
             
     
 
Net yield on average interest earning assets
                    5.21 %                     5.50 %
                     
                     
 

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For the Year Ended December 31,

2002 2001 2000



Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate









(Dollars in thousands)
Interest earning assets:
                                                                       
 
Total investments:
                                                                       
   
Mortgage-backed securities
  $ 2,202,950     $ 113,327       5.14 %   $ 2,245,861     $ 133,539       5.95 %   $ 1,870,908     $ 128,231       6.85 %
   
Other short-term investments
    338,485       7,635       2.26       159,599       7,468       4.68       246,908       15,609       6.32  
   
Investment securities
    5,105       318       6.22       7,194       433       6.02       10,216       535       5.24  
   
Interest earning deposits with others
    30,044       343       1.14       2,628       74       2.80       2,069       110       5.32  
     
     
     
     
     
     
     
     
     
 
     
Total investments
    2,576,584       121,623       4.72       2,415,282       141,514       5.86       2,130,101       144,485       6.78  
 
Total loans:
                                                                       
   
Consumer loans
    8,012,003       993,417       12.40       5,746,413       779,256       13.56       2,672,690       386,182       14.45  
   
Mortgage loans(1)
    329,693       22,865       6.94       441,804       34,536       7.82       551,498       44,225       8.02  
   
Commercial loans
    90,642       5,035       5.55       99,904       7,321       7.33       97,586       8,929       9.15  
     
     
     
     
     
     
     
     
     
 
     
Total loans
    8,432,338       1,021,317       12.11       6,288,121       821,113       13.06       3,321,774       439,336       13.23  
     
     
     
     
     
     
     
     
     
 
     
Total interest earning assets
    11,008,922       1,142,940       10.38       8,703,403       962,627       11.06       5,451,875       583,821       10.71  
Noninterest earning assets:
                                                                       
 
Amounts due from trusts
    121,627                       227,890                       413,653                  
 
Retained interest in securitized assets
    15,888                       74,509                       141,724                  
 
Premises, equipment and real estate owned
    80,277                       82,277                       84,627                  
 
Other assets
    553,654                       318,674                       227,095                  
 
Less: allowance for credit losses
    208,341                       126,376                       76,306                  
     
                     
                     
                 
     
Total
  $ 11,572,027                     $ 9,280,377                     $ 6,242,668                  
     
                     
                     
                 
Interest bearing liabilities:
                                                                       
 
Deposits
  $ 2,196,261       80,015       3.64     $ 2,319,466       114,831       4.95     $ 2,380,155       133,610       5.61  
 
Securities sold under agreements to repurchase
    222,154       5,543       2.50       155,387       7,014       4.51       449,778       27,950       6.21  
 
FHLB advances and other borrowings
    244,284       5,281       2.16       443,337       20,424       4.61       270,043       16,694       6.18  
 
Notes payable on automobile secured financing
    7,426,265       406,851       5.48       5,018,456       333,768       6.65       1,655,936       118,421       7.15  
 
Subordinated debentures
    331,990       33,226       10.01       170,531       15,907       9.33       192,025       17,197       8.96  
     
     
     
     
     
     
     
     
     
 
     
Total interest bearing liabilities
    10,420,954       530,916       5.09       8,107,177       491,944       6.07       4,947,937       313,872       6.34  
Noninterest bearing liabilities:
                                                                       
 
Amounts held on behalf of trustee
    240,667                       365,376                       693,810                  
 
Other liabilities
    394,863                       278,325                       169,435                  
 
Shareholders’ equity
    515,543                       529,499                       431,486                  
     
                     
                     
                 
     
Total
  $ 11,572,027                     $ 9,280,377                     $ 6,242,668                  
     
     
     
     
     
     
     
     
     
 
Net interest income and interest rate spread
          $ 612,024       5.29 %           $ 470,683       4.99 %           $ 269,949       4.37 %
             
     
             
     
             
     
 
Net yield on average interest earning assets
                    5.56 %                     5.41 %                     4.95 %
                     
                     
                     
 


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

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     The total interest rate spread decreased 18 basis points for the nine months ended September 30, 2003 compared with the nine months ended September 30, 2002 due to a decrease of 105 basis points in the yield on interest earning assets while the cost of funds decreased by only 87 basis points. The decrease in yield on interest earning assets is due primarily to our shift to originating a higher percentage of prime credit quality contracts and an overall lower interest rate environment. The decline in the cost of funds was moderated by the increase in the amount of subordinated debentures held by us during 2003 as compared with the same period a year earlier.

      The total interest rate spread increased 30 basis points for 2002 compared with 2001 due to a decrease of 68 basis points in the yield on interest earning assets combined with a decrease in the cost of funds of 98 basis points. The decrease in the yield on interest earning assets is due primarily to originating a higher percentage of prime credit quality contracts and a lower interest rate environment. The decrease in the cost of funds in 2002 and 2001 is due primarily to a lower interest rate environment. The increase in yield on interest earning assets for 2001 compared with 2000 was due primarily to a higher percentage of contracts held on the balance sheet. The decrease in the cost of funds in 2001 compared with 2000 was due to a lower interest rate environment.

      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 Nine Months Ended
September 30, 2003
Compared to Nine Months Ended
September 30, 2002(1)

Volume Rate Total



(Dollars in thousands)
Interest income:
                       
 
Mortgage-backed securities
  $ 20,147     $ (44,637 )   $ (24,490 )
 
Other short-term investments
    448       (1,468 )     (1,020 )
 
Investment securities
    360       (289 )     71  
 
Interest earning deposits with others
    28       (43 )     (15 )
Total loans:
                       
 
Consumer loans
    215,733       (98,029 )     117,704  
 
Mortgage loans
    701       (6,002 )     (5,301 )
 
Commercial loans
    1,405       (1,228 )     177  
     
     
     
 
   
Total interest earning assets
  $ 238,822     $ (151,696 )   $ 87,126  
     
     
     
 
Interest expense:
                       
 
Deposits
  $ (6,194 )   $ (5,179 )   $ (11,373 )
 
Securities sold under agreements to repurchase
    743       (1,159 )     (416 )
 
FHLB advances and other borrowings
    1,794       (585 )     1,209  
 
Notes payable on automobile secured financings
    46,999       (28,946 )     18,053  
 
Subordinated debentures
    6,787       (159 )     6,628  
     
     
     
 
   
Total interest bearing liabilities
  $ 50,129     $ (36,028 )   $ 14,101  
     
     
     
 
Net change in net interest income
                  $ 73,025  
                     
 

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2002 Compared to 2001(1) 2001 Compared to 2000(1)


Volume Rate Total Volume Rate Total






(Dollars in thousands)
Interest income:
                                               
 
Mortgage-backed securities
  $ (2,488 )   $ (17,724 )   $ (20,212 )   $ 23,547     $ (18,239 )   $ 5,308  
 
Other short-term investments
    5,400       (5,233 )     167       (4,696 )     (3,445 )     (8,141 )
 
Investment securities
    (129 )     14       (115 )     (174 )     72       (102 )
 
Interest earning deposits with others
    339       (70 )     269       25       (61 )     (36 )
Total loans:
                                               
 
Consumer loans
    285,525       (71,364 )     214,161       418,248       (25,174 )     393,074  
 
Mortgage loans
    (8,085 )     (3,586 )     (11,671 )     (8,610 )     (1,079 )     (9,689 )
 
Commercial loans
    (631 )     (1,655 )     (2,286 )     206       (1,814 )     (1,608 )
     
     
     
     
     
     
 
   
Total interest earning assets
  $ 279,931     $ (99,618 )   $ 180,313     $ 428,546     $ (49,740 )   $ 378,806  
     
     
     
     
     
     
 
Interest expense:
                                               
 
Deposits
  $ (5,820 )   $ (28,996 )   $ (34,816 )   $ (3,496 )   $ (15,283 )   $ (18,779 )
 
Securities sold under agreements to repurchase
    2,344       (3,815 )     (1,471 )     (9,702 )     (11,234 )     (20,936 )
 
FHLB advances and other borrowings
    (6,935 )     (8,208 )     (15,143 )     8,748       (5,018 )     3,730  
 
Notes payable on automobile secured financings
    139,398       (66,315 )     73,083       224,186       (8,839 )     215,347  
 
Subordinated debentures
    16,081       1,238       17,319       (1,980 )     690       (1,290 )
     
     
     
     
     
     
 
   
Total interest bearing liabilities
  $ 145,068     $ (106,096 )   $ 38,972     $ 217,756     $ (39,684 )   $ 178,072  
     
     
     
     
     
     
 
Net change in net interest income
                  $ 141,341                     $ 200,734  
                     
                     
 


(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. If there was no balance in the previous year, the total change was allocated to volume.

Provision for Credit Losses

      We maintain an allowance for credit losses to cover probable losses that can be reasonably estimated for the loans held on the balance sheet. The allowance for credit losses is increased by charging the provision for credit losses and decreased by actual losses on the loans or reversing the allowance for credit losses through the provision for credit losses when the amount of loans held on balance sheet is reduced through securitization transactions treated as sales. The level of allowance is based principally on the outstanding balance of loans held on balance sheet and historical loss trends. We believe that the allowance for credit losses is currently adequate to absorb probable losses in our owned loan portfolio that can be reasonably estimated.

      For the nine months ended September 30, 2003, the provision for credit losses totaled $221 million compared with $209 million for the same period a year earlier. For the nine months ended September 30, 2003 and 2002, net chargeoffs were $192 million and $143 million, respectively. The increase in the provision for credit losses for the nine months ended September 30, 2003 as compared with the same period a year earlier was a result of our loans held on balance sheet increasing by approximately $1.6 billion or 16.6% from December 31, 2002 as well as an increase in chargeoffs due to the slowdown in the economy.

      The provision for credit losses was $306 million, $197 million and $82.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net chargeoffs were $215 million, $123 million and $42.3 million for the same respective periods. The increase in provision for credit losses for each of the past three years was the result of a higher level of contracts held on balance sheet as well as higher chargeoffs.

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Noninterest Income

Automobile Lending Income

      Since the first quarter of 2000, we have not completed a securitization that has been accounted for as a sale. For transactions treated as sales prior to April 2000, we recorded a non-cash gain equal to the present value of the estimated future cash flows from the portfolio of contracts sold less the write-off of dealer participation balances and the effect of hedging activities. For these securitizations, net interest earned on the contracts sold is recognized over the life of the transactions as contractual servicing income and retained interest income or expense.

      The components of automobile lending income were as follows:

                                           
For the Nine Months
Ended September 30, For the Year Ended December 31,


2003 2002 2002 2001 2000





(Dollars in thousands)
Fee income
  $ 67,764     $ 61,609     $ 78,723     $ 67,579     $ 57,786  
Contractual servicing income
            8,833       10,735       23,018       41,767  
Retained interest (expense) income, net of RISA amortization(1)
            (25,252 )     (29,490 )     (27,839 )     51,429  
Gain on sale of contracts
                                    7,719  
     
     
     
     
     
 
 
Total automobile lending income
  $ 67,764     $ 45,190     $ 59,968     $ 62,758     $ 158,701  
     
     
     
     
     
 

(1)  RISA means retained interest in securitized assets.

      Automobile lending income decreased primarily as a result of us no longer issuing asset-backed securities that are treated as sales for accounting purposes. This change is reflected in higher retained interest expense and decreases in contractual servicing income.

      Fee income consists primarily of documentation fees, late charges and deferment fees on our managed portfolio, including contracts securitized in transactions accounted for as sales and secured financings, as well as contracts not securitized. The increase in fee income is due to the growth in our average managed contract portfolio to $9.9 billion for the nine months ended September 30, 2003 compared with $8.8 billion, $7.6 billion and $6.1 billion for the years ended December 31, 2002, 2001 and 2000, respectively.

      According to the terms of each securitization, we earn contractual servicing income at a rate of 1.25% per annum on the outstanding balance of the contracts securitized. There was no contractual servicing income for the nine months ended September 30, 2003 compared to $8.8 million for the same period in 2002. Contractual servicing income totaled $10.7 million, $23.0 million and $41.8 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decline was due to our transition to treating our securitizations as secured financings rather than as sales as well as our regaining control over the assets of the trusts for all our outstanding securitization transactions previously treated as sales for accounting purposes.

      There was no retained interest expense for the nine months ended September 30, 2003 as a result of our reconsolidating all remaining off balance sheet trusts. This compares with retained interest expense of $25.3 million for the same period in 2002. Retained interest expense was $29.5 million and $27.8 million and retained interest income was $51.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. For accounting purposes, this expense or income is recognized only on contracts sold through securitizations treated as sales. Retained interest expense or income is dependent upon the average excess spread on the contracts sold, credit losses, the size of the sold portfolio and the amount of amortization of the RISA. The retained interest expense recognized in 2002 was the result of higher chargeoffs on our sold portfolio as well as revised estimates of future chargeoffs due to continued slowing in the economy. There were $23.8 million in net chargeoffs on the sold portfolio for the nine months ended September 30, 2002.

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Table of Contents

Net chargeoffs on the sold portfolio decreased to $30.4 million for the year ended December 31, 2002 from $50.4 million and $75.5 million for the years ended December 31, 2001 and 2000, respectively. The outstanding sold portfolio had a weighted average gross interest rate spread of 6.75% for the nine months ended September 30, 2003 compared with 6.71%, 6.97% and 7.38% for the years ended December 31, 2002, 2001 and 2000, respectively. The average balance of the sold portfolio was $840 million, $1.8 billion and $3.4 billion for the years ended December 31, 2002, 2001 and 2000, respectively.

      The following table sets forth our contract sales and securitizations and related gain on sales:

                                                             
For the Nine Months
Ended September 30, For the Year Ended December 31,


2003 2002 2002 2001 2000 1999 1998







(Dollars in thousands)
Contract sales and secured financings:
                                                       
 
Secured financings
  $ 4,485,750     $ 5,575,000     $ 6,925,000     $ 4,220,000     $ 3,930,000     $ 500,000          
 
Sales to securitization trusts
                                    660,000       2,500,000     $ 1,885,000  
     
     
     
     
     
     
     
 
   
Total secured financings and sales
  $ 4,485,750     $ 5,575,000     $ 6,925,000     $ 4,220,000     $ 4,590,000     $ 3,000,000     $ 1,885,000  
     
     
     
     
     
     
     
 
Gain on sale of contracts(1)
                                  $ 7,719     $ 51,345     $ 25,622  
Hedge gain (loss) on sale of contracts(2)
                                    5,300       7,419       (8,396 )
Gain on sale of contracts as a percent of total revenues
                                    1.72 %     14.47 %     10.72 %


(1)  Net of the write-off of outstanding dealer participation balances and the effect of hedging activities.
 
(2)  Included in gain on sale of automobile contracts.

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Table of Contents

      The following table lists each of our public securitizations:

                                                     
Remaining Gross
Remaining Balance as a Original Original Interest
Issue Original Balance at Percent of Weighted Weighted Average Rate
Number Close Date Balance September 30, 2003(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     $ 78,460       7.85 %     14.62       6.36       8.26  
1999-C
  November, 1999     500,000       58,514       11.70       14.77       7.01       7.76  
2000-A
  March, 2000     1,200,000       162,305       13.53       14.66       7.28       7.38  
2000-B
  May, 2000     1,000,000       150,222       15.02       14.84       7.78       7.06  
2000-C
  August, 2000     1,390,000       282,194       20.30       15.04       7.32       7.72  
2000-D
  November, 2000     1,000,000       261,382       26.14       15.20       6.94       8.26  
2001-A
  January, 2001     1,000,000       291,189       29.12       14.87       5.77       9.10  
2001-B
  May, 2001     1,370,000       419,028       30.59       14.41       4.23       10.18  
2001-C
  August, 2001     1,200,000       462,147       38.51       13.90       4.50       9.40  
2002-1
  March, 2002     1,800,000       941,933       52.33       13.50       4.26       9.24  
2002-2
  May, 2002     1,750,000       1,061,076       60.63       12.51       3.89       8.62  
2002-3
  August, 2002     1,250,000       832,456       66.60       12.30       3.06       9.24  
2002-4
  November, 2002     1,350,000       1,045,074       77.41       12.18       2.66       9.52  
2003-1
  February, 2003     1,343,250       1,073,279       79.90       11.79       2.42       9.37  
2003-2
  May, 2003     1,492,500       1,346,912       90.25       11.57       2.13       9.44  
2003-3
  August, 2003     1,650,000       1,650,000       100.00       10.59       2.66       7.93  
         
     
                                 
    Total   $ 33,207,180     $ 10,116,171                                  
         
     
                                 


(1)  Represents only the note payable amounts outstanding at the period indicated.
 
(2)  Represents the difference between the original weighted average annual percentage rate, also known as APR, and the estimated weighted average securitization rate on the closing date of the securitization.

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Other Noninterest Income

      Other noninterest income consists primarily of insurance income, mortgage banking income and miscellaneous income. For the nine months ended September 30, 2003 and 2002, other noninterest income totaled $15.6 million and $19.1 million, respectively. Other noninterest income totaled $30.5 million, $16.1 million and $19.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decline in other noninterest income for the year ended 2001 is due to our decision to exit the mortgage banking business. This decision resulted in the sale of our remaining mortgage banking operations in 1999. The increase in other noninterest income for the year ended December 31, 2002 was due to the sale of deposits and properties in conjunction with the sale of seven Northern California branch offices. The decrease in other noninterest income for the nine months ended September 30, 2003 compared with the nine months ended September 30, 2002 was due to the sale of properties related to the sale of these branch offices in 2002.

Noninterest Expense

      For the nine months ended September 30, 2003, noninterest expense totaled $208 million compared with $188 million for the same period in 2002. Noninterest expense as a percent of total revenues improved to 34% for the nine months ended September 30, 2003 compared to 37% for the same period a year ago as a result of fully amortizing our retained interest in securitized assets during 2002. Total noninterest expense was $251 million, $245 million and $221 million for the years ended December 31, 2002, 2001 and 2000, respectively. Noninterest expense as a percentage of total revenues improved to 36% in 2002 compared with 45% in 2001 and 49% in 2000, as a result of improved operating efficiencies achieved through the centralization and automation of certain processes as well as the deployment of new technologies.

      The efficiencies realized include increasing the conversion ratios on contracts purchased through dealer education, automating the loan application and underwriting system, increasing the percentage of applications received via the Internet, outsourcing the data entry process, centralizing the verification process and implementing proprietary credit scorecards and electronic funds transfers for our dealers. Operating efficiencies also include implementing automated dialers, centralizing and upgrading payment processing and asset recovery processes, upgrading toll-free lines for customer service and interactive voice response technology, implementing direct debit for our borrowers, imaging for record retention and retrieval and implementing a new behavioral scoring collection system.

Income Taxes

      We file federal and certain state tax returns as part of a consolidated group that includes Westcorp, the Bank and WFS. We file other state tax returns as a separate entity. Tax liabilities from the consolidated returns are allocated in accordance with a tax sharing agreement based on the relative income or loss of each entity on a stand-alone basis. Our effective tax rate was 40% for the nine months ended September 30, 2003 compared to 39% for the same period a year ago. Our effective tax rate was 36%, 39%, and 40% for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in the effective tax rate for the year ended December 31, 2002 is a result of a one-time benefit of new legislation enacted by the State of California that eliminated the use of the reserve method of accounting for bad debts for large banks and financial corporations for taxable income purposes. In the first year of this change, 50% of the ending reserve amount deducted from taxable income in prior periods will be included in the current year California taxable income. The remaining 50% of the reserve is not required to be recaptured into income, but rather represents a permanent difference between GAAP and California tax accounting. The deferred tax liability related to this permanent difference has been eliminated from our balance sheet and the current year state income tax provision has been reduced accordingly. See “Business — Taxation.”

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Financial Condition

 
Overview

      We originated $4.6 billion and $4.2 billion of automobile contracts for the nine months ended September 30, 2003 and 2002, respectively. Automobile contract originations totaled $5.4 billion, $4.9 billion and $4.2 billion for the years ended December 31, 2002, 2001 and 2000, respectively. As a result of higher contract originations, our portfolio of managed contracts reached $10.5 billion at September 30, 2003, up from $9.4 billion, $8.2 billion and $6.8 billion at December 31, 2002, 2001 and 2000, respectively.

      Total demand deposits and money market accounts at our retail banking division were $615 million at September 30, 2003 compared with $490 million, $812 million and $460 million at December 31, 2002, 2001 and 2000, respectively. Total demand deposit and money market accounts represented 46% of total retail banking deposits at September 30, 2003 compared with 36%, 39% and 23% at December 31, 2002, 2001 and 2000, respectively. The commercial banking division had deposits of $551 million at September 30, 2003 compared with $517 million, $220 million and $445 million at December 31, 2002, 2001 and 2000, respectively.

Investment and Other Securities

      Our investment and other securities portfolio consists of short-term securities, including repurchase agreements and overnight investments in federal funds. These short-term securities are maintained primarily for liquidity purposes. Additionally, we own FHLB stock as required by our affiliation with the FHLB System and carry it at cost. The FHLB stock is included in other assets on our Consolidated Statements of Financial Condition. We also hold owner trust certificates and obligations of states and political subdivisions, which are classified as available for sale. The owner trust certificates are recorded at cost, which approximates fair value. The obligations of states and political subdivisions are reported at fair value with unrealized gains and losses reflected as a separate component of shareholders’ equity on our Consolidated Statements of Financial Condition as accumulated other comprehensive income (loss), net of applicable taxes.

      The following table summarizes our investment securities at the dates indicated:

                                   
September 30, December 31,


2003 2002 2001 2000




(Dollars in thousands)
Interest bearing deposits from other institutions
  $ 23,178     $ 59,004     $ 720     $ 720  
Other short-term investments
    160,000               35,000       66,500  
Investment securities:
                               
 
Obligations of states and political subdivisions
    50,797       1,046       1,549       1,533  
 
Owner trust certificates
            3,348       4,668       6,517  
 
FHLB stock
    66,241       46,341       64,446       24,367  
 
Other
    6,837       6,031       4,294       2,684  
     
     
     
     
 
    $ 307,053     $ 115,770     $ 110,677     $ 102,321  
     
     
     
     
 

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      The following table sets forth the stated maturities of our investment securities at September 30, 2003:

                                           
Up to One One Year to Five Years to Ten Years No Stated
Year Five Years Ten Years or More Maturity





(Dollars in thousands)
Interest bearing deposits with other financial institutions
  $ 23,178                                  
Investment securities:
                                       
 
Obligations of states and political subdivisions
    160,000     $ 50,797                          
 
FHLB stock
                                  $ 66,241  
 
Other
    200       100             $ 3,795       2,742  
     
     
             
     
 
    $ 183,378     $ 50,897             $ 3,795     $ 68,983  
     
     
             
     
 
Weighted average interest rate(1)
    1.29 %     2.50 %             4.52 %     4.37 %


(1)  Calculated based on amortized cost.

Mortgage-Backed Securities

      We invest in mortgage-backed securities, also known as MBS, to generate net interest margin, manage interest rate risk, provide another source of liquidity through repurchase agreements and meet regulatory requirements. See “Business — Supervision and Regulation.” Our MBS portfolio is classified as available for sale. Accordingly, the portfolio is reported at fair value with unrealized gains and losses reflected as a separate component of shareholders’ equity on our Consolidated Statements of Financial Condition as accumulated other comprehensive income (loss), net of applicable taxes. The following table summarizes our MBS portfolio by issuer:

                                   
September 30, December 31,


2003 2002 2001 2000




(Dollars in thousands)
Available for sale securities:
                               
 
GNMA certificates
  $ 2,632,983     $ 2,607,457     $ 2,036,369     $ 2,157,076  
 
FNMA participation certificates
    28,793       39,124       51,894       68,870  
 
FHLMC participation certificates
    549       1,068       1,692       1,938  
 
Other
    1,831       2,008       2,270       2,564  
     
     
     
     
 
    $ 2,664,156     $ 2,649,657     $ 2,092,225     $ 2,230,448  
     
     
     
     
 

      The portfolio had a weighted average yield (including effects of amortization of premiums and discounts) of 3.29% and 5.37% for the nine months ended September 30, 2003 and 2002, respectively, and 5.14%, 5.95% and 5.95% for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted average coupon rate was 6.01% at September 30, 2003 compared with 6.96%, 7.48% and 7.32% at December 31, 2002, 2001 and 2000, respectively. Our MBS portfolio had remaining maturities of two years or greater at September 30, 2003 although payments are generally received monthly throughout the life of these securities.

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Loan Portfolios

      The following table sets forth the composition of our loan portfolio by type of loan, including loans held for sale, as of the dates indicated:

                                                                     
September 30, December 31,


2003 2002 2001 2000




Amount % Amount % Amount % Amount %








(Dollars in thousands)
Consumer loans:
                                                               
 
Automobile contracts
  $ 10,720,641       97.3 %   $ 9,147,937       96.9 %   $ 7,192,302       95.2 %   $ 4,390,265       89.2 %
 
Other
    7,924       0.1       7,531       0.1       8,826       0.1       13,456       0.3  
     
     
     
     
     
     
     
     
 
      10,728,565       97.4       9,155,468       97.0       7,201,128       95.3       4,403,721       89.5  
Less: unearned interest
    69,905       0.6       91,713       1.0       108,169       1.4       94,404       1.9  
     
     
     
     
     
     
     
     
 
   
Total consumer loans
    10,658,660       96.8       9,063,755       96.0       7,092,959       93.9       4,309,317       87.6  
Mortgage loans:
                                                               
 
Existing properties
    231,538       2.0       277,233       3.0       361,115       4.8       498,963       10.1  
 
Construction
    28,509       0.3       14,150       0.1       15,638       0.2       14,784       0.3  
     
     
     
     
     
     
     
     
 
      260,047       2.3       291,383       3.1       376,753       5.0       513,747       10.4  
Less: undisbursed loan proceeds
    13,515       0.1       8,453       0.1       3,298       0.0       6,316       0.1  
     
     
     
     
     
     
     
     
 
   
Total mortgage loans
    246,532       2.2       282,930       3.0       373,455       5.0       507,431       10.3  
Commercial loans
    105,665       1.0       97,216       1.0       85,312       1.1       107,586       2.1  
     
     
     
     
     
     
     
     
 
   
Total loans
  $ 11,010,857       100.0 %   $ 9,443,901       100.0 %   $ 7,551,726       100.0 %   $ 4,924,334       100.0 %
     
     
     
     
     
     
     
     
 

      There were no consumer loans serviced for the benefit of others at September 30, 2003 compared with $525 million, $1.2 billion and $2.6 billion at December 31, 2002, 2001 and 2000, respectively.

Mortgage Loan Portfolio

      We have from time to time originated mortgage products that we have held on our balance sheet rather than selling through the secondary markets. Other than mortgage loans originated through the commercial banking division on a limited basis, we do not expect to add mortgage loans to our balance sheet.

Commercial Loan Portfolio

      We had outstanding commercial loan commitments of $214 million at September 30, 2003 compared with $199 million, $135 million and $114 million at December 31, 2002, 2001 and 2000, respectively. We originated $304 million and $197 million of commercial loans for the nine months ended September 30, 2003 and 2002, respectively. We originated $354 million, $292 million and $266 million of commercial loans during 2002, 2001 and 2000, respectively. Though we continue to focus on expanding our commercial banking operation, it was not a significant source of revenue.

Amounts Due From Trusts

      The excess cash flows generated by contracts sold to each of the securitization trusts are deposited into spread accounts in the name of the trustee under the terms of the securitizations treated as sales. In addition, at the time a securitization closes, we advance additional monies to our subsidiary that originated the securitization trust to initially fund these spread accounts. As these spread accounts reach the balances required by the trust, excess amounts are released to us and are used to pay down these amounts. The amounts due from trusts represent initial advances made to spread accounts and excess cash flows that are still under obligation to be held in the spread accounts for securitizations treated as sales. We had no

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amounts due from trusts at September 30, 2003 compared with $101 million, $136 million and $357 million at December 31, 2002, 2001 and 2000, respectively. The decrease is the result of our transition to treating our securitizations as secured financings rather than as sales as well as our regaining control over the assets of the trust for all our outstanding securitizations treated as sales for accounting purposes.

Asset Quality

Overview

      Nonperforming assets, repossessions, loan delinquency and credit losses are considered by us as key measures of asset quality. Asset quality, in turn, affects our determination of the allowance for credit losses. We also take into consideration general economic conditions in the markets we serve, individual loan reviews and the level of assets relative to reserves in determining the adequacy of the allowance for credit losses.

Automobile Loan 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.

      At September 30, 2003, the percentage of managed accounts delinquent 30 days or greater was 2.70% compared with 3.50%, 3.72% and 3.18% at December 31, 2002, 2001 and 2000, respectively. We calculate delinquency based on the contractual due date. Net chargeoffs on average managed contracts outstanding were 2.59% and 2.56% for the nine months ended September 30, 2003 and 2002, respectively. Net chargeoffs on average managed contracts outstanding were 2.77%, 2.27% and 1.91% for the years ended December 31, 2002, 2001 and 2000, respectively.

      The following table sets forth information with respect to the delinquency of our portfolio of contracts managed, which includes automobile contracts that are owned by us and automobile contracts that have been sold but are managed by us:

                                                                     
September 30, December 31,


2003 2002 2001 2000




Amount % Amount % Amount % Amount %








(Dollars in thousands)
Automobile contracts managed
  $ 10,475,948             $ 9,389,974             $ 8,152,882             $ 6,818,182          
     
             
             
             
         
Period of delinquency:
                                                               
 
30 — 59 days
  $ 201,990       1.93 %   $ 238,204       2.54 %   $ 217,873       2.67 %   $ 157,843       2.32 %
 
60 days or more
    80,398       0.77       90,291       0.96       85,290       1.05       59,166       0.86  
     
     
     
     
     
     
     
     
 
    Total automobile contracts delinquent and delinquencies as a percentage of automobile contracts managed(1)   $ 282,388       2.70 %   $ 328,495       3.50 %   $ 303,163       3.72 %   $ 217,009       3.18 %
     
     
     
     
     
     
     
     
 


(1)  Excludes Chapter 13 bankruptcy accounts greater than 120 days past due of $44.4 million and $41.5 million at September 30, 2003 and December 31, 2002, respectively.

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

                                                                 
September 30, December 31,


2003 2002 2001 2000




Number of Number of Number of Number of
Automobile Automobile Automobile Automobile
Contracts Amount Contracts Amount Contracts Amount Contracts Amount








(Dollars in thousands)
Automobile contracts managed
    818,125     $ 10,475,948       757,269     $ 9,389,974       690,401     $ 8,152,882       616,011     $ 6,818,182  
     
     
     
     
     
     
     
     
 
Repossessed vehicles
    1,629     $ 11,025       2,375     $ 16,433       1,168     $ 7,553       946     $ 6,199  
     
     
     
     
     
     
     
     
 
Repossessed assets as a percentage of number and amount of automobile contracts managed
    0.20 %     0.11 %     0.31 %     0.18 %     0.17 %     0.09 %     0.15 %     0.09 %

      The following table sets forth information with respect to actual credit loss experience on our portfolio of contracts managed:

                                         
For the Nine Months
Ended September 30, For the Year Ended December 31,


2003 2002 2002 2001 2000





(Dollars in thousands)
Automobile contracts managed at end of period
  $ 10,475,948     $ 9,269,265     $ 9,389,974     $ 8,152,882     $ 6,818,182  
     
     
     
     
     
 
Average automobile contracts managed during period
  $ 9,885,681     $ 8,672,049     $ 8,845,635     $ 7,576,681     $ 6,076,814  
     
     
     
     
     
 
Gross chargeoffs
  $ 258,491     $ 229,216     $ 327,161     $ 236,834     $ 165,937  
Recoveries
    66,451       62,548       82,372       64,626       49,697  
     
     
     
     
     
 
Net chargeoffs
  $ 192,040     $ 166,668     $ 244,789     $ 172,208     $ 116,240  
     
     
     
     
     
 
Net chargeoffs as a percentage of average automobile contracts managed during period
    2.59 %     2.56 %     2.77 %     2.27 %     1.91 %
     
     
     
     
     
 

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      Cumulative static pool losses are another means of analyzing contract quality. The cumulative static pool loss of a securitization is the cumulative amount of losses actually recognized, net of recoveries, as to the contracts securitized, up to and including a given month, divided by the original principal balance of the contracts in that securitization. The following table sets forth the cumulative static pool losses by month for all outstanding securitized pools:

Cumulative Static Pool Loss Curves

At September 30, 2003
                                                                                                                                     

Period(1) 1999-B 1999-C 2000-A 2000-B 2000-C 2000-D 2001-A 2001-B 2001-C 2002-1 2002-2 2002-3 2002-4 2003-1 2003-2 2003-3

   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%       0.00%  
   2       0.04       0.02       0.03       0.02       0.04       0.04       0.03       0.03       0.04       0.01       0.00       0.02       0.02       0.01       0.00          
   3       0.11       0.10       0.10       0.09       0.13       0.11       0.09       0.10       0.09       0.06       0.03       0.06       0.07       0.04       0.02          
   4       0.26       0.25       0.20       0.24       0.27       0.24       0.20       0.21       0.20       0.15       0.10       0.14       0.16       0.11       0.06          
   5       0.47       0.40       0.36       0.39       0.46       0.39       0.33       0.33       0.35       0.29       0.18       0.27       0.26       0.18       0.14          
   6       0.66       0.56       0.55       0.59       0.65       0.54       0.50       0.50       0.49       0.43       0.32       0.44       0.38       0.29                  
   7       0.87       0.71       0.71       0.78       0.81       0.74       0.70       0.69       0.65       0.60       0.49       0.57       0.50       0.41                  
   8       1.00       0.86       0.91       0.99       0.93       0.93       0.84       0.87       0.81       0.84       0.66       0.70       0.61       0.53                  
   9       1.13       1.01       1.10       1.17       1.07       1.13       1.04       1.05       0.95       1.06       0.82       0.82       0.78                          
  10       1.24       1.14       1.27       1.33       1.24       1.34       1.24       1.22       1.07       1.28       0.96       0.96       0.94                          
  11       1.35       1.34       1.45       1.44       1.41       1.50       1.45       1.36       1.20       1.48       1.10       1.10       1.08                          
  12       1.44       1.52       1.58       1.57       1.62       1.74       1.67       1.53       1.37       1.67       1.26       1.24                                  
  13       1.58       1.74       1.73       1.72       1.86       1.95       1.90       1.67       1.55       1.82       1.39       1.38                                  
  14       1.74       1.94       1.85       1.86       2.04       2.21       2.09       1.81       1.74       1.99       1.51       1.53                                  
  15       1.85       2.09       2.00       2.04       2.25       2.48       2.25       2.00       1.97       2.14       1.68                                          
  16       2.03       2.27       2.15       2.24       2.45       2.71       2.41       2.19       2.16       2.27       1.83                                          
  17       2.16       2.39       2.37       2.39       2.68       2.89       2.54       2.37       2.36       2.45       1.99                                          
  18       2.30       2.53       2.52       2.55       2.88       3.08       2.73       2.60       2.59       2.62                                                  
  19       2.42       2.67       2.67       2.73       3.08       3.22       2.93       2.80       2.78       2.80                                                  
  20       2.50       2.81       2.83       2.93       3.23       3.40       3.11       3.01       2.95                                                          
  21       2.58       2.92       2.99       3.12       3.38       3.59       3.34       3.19       3.14                                                          
  22       2.67       3.10       3.16       3.27       3.54       3.78       3.54       3.34       3.29                                                          
  23       2.77       3.28       3.34       3.38       3.67       3.96       3.72       3.49       3.41                                                          
  24       2.87       3.38       3.49       3.52       3.83       4.18       3.92       3.62       3.57                                                          
  25       3.01       3.55       3.63       3.63       4.00       4.41       4.10       3.75       3.73                                                          
  26       3.14       3.68       3.75       3.73       4.16       4.58       4.23       3.87       3.88                                                          
  27       3.16       3.84       3.86       3.84       4.35       4.79       4.36       4.00                                                                  
  28       3.29       3.98       3.97       3.97       4.50       4.96       4.47       4.15                                                                  
  29       3.40       4.14       4.09       4.11       4.64       5.08       4.56       4.28                                                                  
  30       3.50       4.19       4.21       4.26       4.79       5.22       4.67                                                                          
  31       3.61       4.30       4.33       4.40       4.92       5.34       4.81                                                                          
  32       3.68       4.38       4.47       4.50       5.02       5.44       4.92                                                                          
  33       3.74       4.46       4.59       4.61       5.12       5.54                                                                                  
  34       3.81       4.57       4.68       4.70       5.22       5.66                                                                                  
  35       3.87       4.66       4.79       4.78       5.29       5.76                                                                                  
  36       3.91       4.76       4.86       4.85       5.38                                                                                          
  37       3.97       4.84       4.93       4.94       5.47                                                                                          
  38       4.03       4.96       5.01       4.99       5.53                                                                                          
  39       4.09       5.03       5.08       5.05                                                                                                  
  40       4.13       5.13       5.13       5.12                                                                                                  
  41       4.18       5.20       5.18       5.18                                                                                                  
  42       4.23       5.24       5.24                                                                                                          
  43       4.28       5.28       5.29                                                                                                          
  44       4.33       5.34                                                                                                                  
  45       4.35       5.38                                                                                                                  
  46       4.38       5.42                                                                                                                  
  47       4.39       5.44                                                                                                                  
  48       4.41       5.46                                                                                                                  
  49       4.43                                                                                                                          
  50       4.44                                                                                                                          
  51       4.46                                                                                                                          
  Prime Mix(2)       70%       67%       68%       69%       68%       68%       71%       71%       76%       70%       87%       85%       80%       80%       82%       84%  


(1)  Represents the number of months since the inception of the securitization.
 
(2)  Represents the original percentage of prime automobile contracts securitized within each pool.

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Table of Contents

Real Estate Loan Quality

      Our mortgage delinquencies over 60 days include both single family and multifamily mortgages. We had 1.25% of total mortgage loans past due over 60 days at September 30, 2003 compared with 1.32%, 1.85% and 1.50% at December 31, 2002, 2001 and 2000, respectively.

Nonperforming Assets

      Nonperforming assets, also known as NPAs, consist of repossessed automobiles and real estate owned, also known as REO. REO is carried at lower of cost or fair value. NPAs were $14.1 million at September 30, 2003 compared with $18.8 million, $16.6 million and $14.4 million, at December 31, 2002, 2001 and 2000 respectively. NPAs represented 0.1% of total assets at September 30, 2003 compared with 0.2% at December 31, 2002, 2001 and 2000. There were no impaired loans at September 30, 2003, December 31, 2002, 2001 and 2000.

      Nonperforming loans, also known as NPLs, are defined as all nonaccrual loans. This includes mortgage loans 90 days or more past due, impaired loans where full collection of principal and interest is not reasonably assured and Chapter 13 bankruptcy accounts contractually past due over 120 days. For those accounts that are in Chapter 13 bankruptcy that are contractually past due over 120 days, all accrued interest is reversed and income is recognized on a cash basis. When a loan is designated as nonaccrual, all previously accrued but unpaid interest is reversed. For the nine months ended September 30, 2003 and 2002, interest on NPLs excluded from interest income was $0.4 million and $0.5 million, respectively. For the years ended De