WFS FINANCIAL INC, 10-K, 1999-03-31

WFS FINANCIAL INC
10-K, 1999-03-31
PERSONAL CREDIT INSTITUTIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 33-93068

WFS FINANCIAL INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
CALIFORNIA 33-0291646
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

23 PASTEUR, IRVINE, CALIFORNIA 92618-3816
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 727-1000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, no par value Nasdaq National Market
</TABLE>

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1999:
COMMON STOCK, NO PAR VALUE -- $24,672,338

The number of shares outstanding of the issuer's class of common stock as
of February 28, 1999:

COMMON STOCK, NO PAR VALUE -- 25,708,611

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 1998 Annual Meeting of
Shareholders to be held April 27, 1999, are incorporated by reference into Part
III.
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WFS FINANCIAL INC AND SUBSIDIARIES

TABLE OF CONTENTS

PAGE

PART I

<TABLE>
<S> <C> <C>
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 30
Item 8. Financial Statements and Supplementary Data................. 31
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 31

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 31
Item 11. Executive Compensation...................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 31
Item 13. Certain Relationships and Related Transactions.............. 31

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 32
</TABLE>

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PART I
ITEM 1. BUSINESS

GENERAL

Since 1973, WFS Financial Inc, a California corporation ("WFS" or the
"Company"), and its predecessors, has been in the business of purchasing fixed
rate consumer auto loans ("contracts") from its network of new and used car
dealers ("dealers"). WFS then securitizes the majority of these contracts
through underwritten public sales of AAA/Aaa rated asset backed securities and
retains the rights to service them. As of February 28, 1999, WFS purchased
contracts in California and 41 other states. Over the past five years, WFS has
increased its volume of contracts purchased from $1.2 billion in 1994 to $2.7
billion in 1998, representing an 18% compounded annual growth rate. WFS serviced
a total of $4.4 billion, $3.7 billion and $3.0 billion of contracts at December
31, 1998, 1997 and 1996, respectively.

The following is a roll forward of serviced contract activity for the last
three years:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance...................................... $3,680,817 $3,046,585 $2,209,594
Originations........................................... 2,670,696 2,285,279 2,121,689
Principal reductions(1)................................ 1,984,414 1,651,047 1,284,698
---------- ---------- ----------
Ending Balance......................................... $4,367,099 $3,680,817 $3,046,585
========== ========== ==========
</TABLE>

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(1) Includes scheduled payments, prepayments and chargeoffs.

Based upon published data, the auto finance industry exceeded $500 billion
in 1998, and is the second largest consumer finance market in the United States.
The Company's contract purchase and securitization activities have made it one
of the largest sellers, in aggregate dollar amount, of auto receivable backed
securities in the United States after the captive auto finance companies,
Chrysler Credit Corporation ("Chrysler Credit"), General Motors Acceptance
Corporation ("GMAC") and Ford Motor Credit Company ("Ford Credit"). Aside from
these and other captive auto finance companies, the balance of the auto finance
industry is highly fragmented among banks, credit unions, savings associations
and independent auto finance companies.

WFS competes in both the prime and non-prime segments of the auto finance
industry. During 1998, WFS purchased approximately 69% of its contracts from
franchised new car dealers, 30% from independent used car dealers and originated
1% directly from consumers. During that same period, contracts for new and used
autos represented 21% and 79%, respectively, of the Company's volume of
contracts purchased. References herein to "purchase" and "contracts" refer to
both the purchase of contracts by WFS from new and used car dealers and the
origination of auto loans directly from consumers by WFS.

The following table presents a summary of the Company's production volumes
of prime and non-prime contracts and those secured by new and used vehicles for
the periods indicated below:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
New vehicles........................................... $ 547,898 $ 417,075 $ 441,529
Used vehicles.......................................... 2,122,798 1,868,204 1,680,160
---------- ---------- ----------
Total volume................................. $2,670,696 $2,285,279 $2,121,689
========== ========== ==========
Prime contracts........................................ $1,808,013 $1,245,027 $1,129,314
Non-prime contracts.................................... 862,683 1,040,252 992,375
---------- ---------- ----------
Total volume................................. $2,670,696 $2,285,279 $2,121,689
========== ========== ==========
</TABLE>

WFS purchases contracts across the full spectrum of prime and non-prime
credit quality contracts and offers competitive rates commensurate with the risk
inherent in its obligor's ability to make payments under

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their contracts. During 1997 and 1998, WFS tightened its underwriting standards
on the lowest tier of its non-prime contract purchases based upon WFS' credit
performance experience. As a result, WFS purchased a higher percentage of prime
contracts in 1998. This shift in product mix is providing WFS with higher
returns based upon loss expectations.

THE HISTORY OF WFS

Westcorp, the ultimate parent of WFS, was formed in 1973 as the holding
company for Western Thrift and Loan Association ("Western Thrift"), a California
licensed thrift and loan association founded in 1972. Western Thrift was
involved in auto finance activities from its incorporation until its merger with
Western Financial Bank ("the Bank") in 1982, at which time the auto finance
activities of Western Thrift were continued by the Bank. In 1988, Westcorp
Financial Services, Inc. ("Westcorp Financial") was incorporated as a
wholly-owned consumer finance subsidiary of the Bank to provide auto finance
services to a market not serviced by the Bank's auto finance division.

On May 1, 1995, the Bank transferred its auto finance division to Westcorp
Financial and changed the name of Westcorp Financial to WFS Financial Inc. In
connection with that acquisition, the Bank transferred to WFS all assets
relating to its auto finance division including the contracts held on balance
sheet and all interests of the Bank in the excess spread payable from the
outstanding securitization transactions. The Bank also transferred all of the
outstanding stock of WFS Financial Auto Loans, Inc. ("WFAL") and WFS Financial
Auto Loans 2, Inc. ("WFAL2"), the securitization entities of the Bank, thereby
making these companies subsidiaries of WFS. In August 1995, WFS sold
approximately 20% of its shares in a public offering. Currently, the Bank owns
87% of WFSs stock.

BUSINESS STRATEGIES

WFS pursues its business objective of maximizing earnings through the
profitable purchase, securitization and servicing of contracts using four
strategies: (i) provide a consistent source of prime and non-prime financing to
its nationwide network of dealers, (ii) maintain solid asset quality, (iii)
maximize liquidity through relationship with parent and securitization
transactions, and (iv) improve operating efficiencies.

Prime and Non-Prime Financing

WFS has provided a consistent source of auto financing since 1973 and is
dedicated to continuing to provide a consistent source of prime and non-prime
financing to its network of over 11,300 dealers. While other lenders have
retreated from time to time, WFS has consistently and continuously expanded its
operations in the auto finance market. WFS' focus is to provide each dealer
maximum service by providing a single source of contact to meet the dealer's
prime and non-prime financing needs. Substantially all contracts are purchased
without recourse to the dealer. WFS pays an upfront dealer participation to the
originating dealer for each contract purchased.

Maintain Solid Asset Quality

Consistent and Expeditious Underwriting -- The Company relies on a
combination of multiple credit scoring models, system controlled underwriting
policies and the judgment of its trained credit analysts to make risk based
credit decisions. In order to make timely credit decisions, WFS personnel are
trained to obtain, examine and verify all relevant underwriting information
quickly utilizing the Company's automated credit application processing system.
The Company's credit analysts are closely monitored by management through trend
analysis, risk management reporting and internal quality control professionals
to insure adherence to the Company's underwriting guidelines. Credit analyst
lending levels and approval authorities are established based on the
individual's credit experience, portfolio performance, Credit Manager audit
results and quality control review results. The goal in underwriting contracts
is to correctly determine whether an applicant has the ability and intent to
perform on his or her obligations under the contract, thereby maximizing returns
while optimizing credit quality.

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Collection Activities -- WFS services all of the contracts it purchases,
both those held by the Company and those sold in securitization transactions.
The servicing process includes the routine collection and allocation of payments
to WFS or to the appropriate securitization transaction into which the contract
has been sold.

WFS has developed procedures for the early identification and cure of
delinquent contracts. During the early stages of delinquency, WFS utilizes an
automated telephone dialing system to aid in the servicing and collection
process. If the early collection efforts do not result in a satisfactory
resolution of the delinquent account, then the account is forwarded to the
appropriate regional collection specialist.

If satisfactory payment arrangements are not made, the automobile is
generally repossessed within 60 to 90 days of the date of delinquency, subject
to compliance with applicable law. WFS uses independent contractors to perform
repossessions. The automobile remains in the custody of WFS for 15 days (or
longer if required by local law) to provide the obligor the opportunity to
redeem the contract. If after the redemption period the delinquency is not
cured, WFS writes down the vehicle to fair value and reclassifies the contract
as a repossessed asset. After the redemption period expires, WFS prepares the
automobile for sale. WFS sells substantially all repossessed automobiles through
wholesale auto auctions, subject to applicable law. WFS does not provide the
financing on repossessions sold. WFS uses regional remarketing departments to
sell its repossessed vehicles. Once the vehicle is sold, any remaining
deficiency balances are then charged off. At December 31, 1998, the total amount
of repossessed autos managed by WFS was $7.8 million or 0.18% of the total
serviced portfolio compared with $9.7 million or 0.26% of the total serviced
portfolio at December 31, 1997.

After chargeoff, WFS will seek to collect deficient balances through its
centralized asset recovery center ("ARC"). The ARC will first attempt to collect
directly from the obligor with its in-house collection staff. If efforts are not
successful, the ARC will seek a deficiency judgment through a small claims court
procedure, where available, or an attorney employed by WFS takes more formal
judicial action against customers with deficiency balances in excess of that
which may be brought in a small claims court proceeding. In some cases,
particularly when the likelihood of recovery is believed to be less likely, the
account is assigned to a collection agency for final resolution. The ARC will
attempt to obtain vehicles that could not be found for repossession by skip
tracing to locate the vehicle. WFS also monitors payment plans on those obligors
who have filed for bankruptcy. If the obligor is not following the payment plan
stipulated by the courts in a Chapter 13 bankruptcy, WFS will seek a judgment
for dismissal or discharge from the bankruptcy court, or will seek an order
permitting it to repossess the vehicle.

Maximize Liquidity Through Relationship with Parent and Securitization
Transactions

As a subsidiary of a federally chartered savings bank, WFS may utilize the
Bank's liquidity sources through the use of intercompany financing arrangements.
See "Transactions with Related Parties". WFS believes that this relationship
provides it a competitive advantage relative to other independent auto finance
companies that must enter into financing arrangements with outside financial
institutions. WFS also utilizes both securitization and hedging strategies to
leverage its capital efficiently and substantially reduce its interest rate
risk, while also limiting its credit loss exposure on contracts sold. See
"Hedging and Securitization". During the third quarter of 1998 when adverse
conditions existed in the secondary markets, WFS was able to increase its
borrowing with its parent and delay its securitization transaction until market
conditions improved. WFS expects to continue to utilize both its funding sources
with its parent company and securitization as conditions warrant.

Improve Operating Efficiencies

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States. Phase II of the plan, completed in the third quarter of 1998 and
patterned after Phase I, consisted of the restructuring of operations in the
Central and Eastern United States.

As a result of the restructuring, a total of 400 positions, or 19% of the
Company's workforce, were eliminated and 96 offices were closed. The Company now
purchases contracts through 21 regional business centers ("RBCs") and 26
satellite offices, each offering the full spectrum of prime and non-prime
products. The total pre-tax restructuring charge in 1998 for the completed plan
was $15.0 million. Restructuring related costs included $1.8 million for
employee severance and $13.2 million for lease termination fees and the write
off of disposed assets. The restructuring charge was substantially utilized
during 1998. Operating costs as a percent of serviced contracts has declined
from 5.4% in 1997 to 3.8% in 1998, resulting in a decrease in operating costs of
$65 million on an annual run rate basis.

Through the restructuring, WFS increased its contract production volume to
$2.7 billion compared with $2.3 billion in 1997. Prior to the restructuring, the
Company purchased contracts in 143 offices, each serving either the prime or
non-prime market. As part of the restructuring, the Company closed poorly
performing offices and combined its prime and non-prime marketing into a single,
unified marketing effort. By combining the marketing of the two products under a
single marketing force, WFS is able to more fully leverage its existing dealer
relationships across the full spectrum of credit.

Each of the 47 offices underwrites contracts by employing separate credit
analysts that specialize in either reviewing prime or non-prime contracts. The
underwriting process is further enhanced by credit policies and contract
approval authorities controlled by the front-end contract production system and
through the use of the Company's proprietary scorecard which was implemented in
the fourth quarter of 1998. See "Maintain Solid Asset Quality -- Consistent and
Expeditious Underwriting."

As part of the restructuring, early delinquency collection efforts were
centralized at two national servicing centers that employ automated queuing and
dialing techniques to contact customers. When these efforts are unsuccessful,
the collection process is transferred to the RBCs where loan service counselors
undertake more extensive collection efforts up to and including repossession.
The Company plans to further improve its collection efforts by implementing a
new collection system, including risk-based collections, in 1999.

During 1998, the Company also established a more effective management
structure. Each RBC is managed by a RBC manager who directs and is responsible
for the performance of the region. Four functional managers who oversee
marketing, credit, collections and operations report directly to the RBC
manager. This organization is designed to provide overall coordination of the
activities within the RBC with appropriate focus and specialization in each of
these four critical business areas. Each of these critical functions also has a
national director who provides expertise, training and policy development,
management and enforcement. This matrix structure has been effective in
providing greater oversight, compliance and focus for each aspect of the
organization and has helped standardize operating practices by identifying best
practices and employing these practices throughout the organization.

HEDGING AND SECURITIZATION

The Company employs a hedging and securitization strategy to leverage its
capital efficiently, lock in interest rate spreads and materially reduce its
interest rate risk while also limiting its credit loss exposure on contracts
sold. Securitizations enable the Company to sell contracts on a regular basis
while continuing to receive servicing fees and to use the proceeds from such
sales to purchase additional contracts.

Between December 1985 and December 1998, WFS sold, in 43 transactions,
approximately $11.9 billion of contracts in publicly underwritten securitization
transactions. WFS also sold $1.0 billion of contracts in February of 1999. The
first issue was rated AA by Standard & Poor's Rating Service, a division of
McGraw-Hill, Inc. ("S&P") and Aa by Moody's Investor Service, Inc. ("Moody's")
and all 43 issues since that time were rated AAA by S&P and Aaa by Moody's,
their highest rating categories, as a result of the structure of the
transactions and the quality of the contracts securitized or the credit
enhancement provided by Financial Security Assurance Inc. ("FSA"). In all of its
securitization transactions, WFS continues to service the contracts sold. Each
transaction is independent of all others, with no cross-collateralization or
cross-default

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provisions applicable. Each securitization transaction and each class of
security with a maturity date prior to the date hereof has been paid in full on
or before its contracted final maturity date and no recourse has been made to
FSA on any transaction.

In 1996, WFS began to securitize its contracts using an owner trust
structure, issuing both collateralized notes and pass-through certificates.
Securitizations using the owner trust structure are treated as sales without
recourse thereby removing the contracts sold from the balance sheet. WFS retains
the servicing of the contracts sold to the owner trust and receives excess
interest from the contracts sold. The owner trust structure enables WFS to
maximize the residual return from a securitization transaction by matching the
yield paid to the investor to the yield curve existing at the time the
securitization transaction is consummated. WFS securitized $1.9 billion, $2.2
billion and $2.1 billion of contracts using this structure during 1998, 1997 and
1996, respectively.

WFS derives multiple benefits from the securitization of contracts,
including a stable source of low cost funding, reduction of interest rate and
credit risk for sold contracts, enhanced return on assets and regulatory
compliance.

Low Cost of Funds -- Other than the first transaction, all of the
securitization transactions completed by WFS to date hereof have
been rated in the highest credit categories by both S&P and Moody's.
Accordingly, WFS has been able to sell these securities at
attractive yields relative to its cost of alternative funding
sources at the time of pricing.

Reduction of Interest Rate Risk -- Since these transactions are
structured as asset sales, interest rate risk is largely transferred
to the third party buyers of the related asset backed securities.
The interest rate and maturity of the pool of contracts have
durations that are matched with the securities, thereby locking-in
the excess spread of the contracts securitized.

Enhanced Return on Assets -- These securitizations reduce the level
of average assets on balance sheet while providing WFS with ongoing
retained interest income and contractual servicing fee income.

Regulatory Compliance -- As a Federal savings bank, the Bank may not
have more than 35% of its consolidated assets invested in consumer
loans, including contracts, purchased from dealers. Contracts
securitized are not included in the calculation of consolidated
assets.

SUBSIDIARIES

WFS Financial Auto Loans, Inc.

WFAL is a wholly-owned, limited purpose subsidiary of WFS. WFAL was
organized primarily for the purpose of purchasing contracts, originated by WFS,
and securitizing those contracts in the asset-backed market. A total of three
securitization transactions totalling $1.9 billion were completed during 1998.

WFS Financial Auto Loans 2, Inc.

WFAL2 is a wholly-owned, limited purpose subsidiary of WFS. WFAL2 purchases
contracts, originated by WFS, to be used as collateral for its reinvestment
contract activities (see "WFS Reinvestment Contract").

WFS Investments, Inc.

WFS Investments, Inc. ("WFSII") is a wholly-owned, limited purpose
subsidiary of WFS. WFSII was incorporated for the purpose of purchasing a
limited ownership interest in owner trusts in connection with securitization
transactions. WFSII is limited by its Articles of Incorporation from engaging in
any business activities not incidental or necessary to its stated purpose.

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TRANSACTIONS WITH RELATED PARTIES

Senior Note

WFS has $125 million outstanding under the terms of the Senior Note from
the Bank. The Senior Note provides for principal payments of $25 million per
year, commencing on April 30, 1999 and continuing through its final maturity,
April 30, 2003. During 1998, the Company made a paydown of $15.0 million without
prepayment penalties. Interest payments on the Senior Note are due quarterly, in
arrears, calculated at the rate of 7.25% per annum. The Senior Note is not
secured. Pursuant to the terms of the Senior Note, WFS may not incur any other
indebtedness which is senior to the obligations evidenced by the Senior Note
except for (i) indebtedness collateralized or secured under the Line of Credit
and (ii) indebtedness for similar types of warehouse lines of credit. The Senior
Note had interest expense of $9.0 million and $9.1 million for 1998 and 1997,
respectively.

Promissory Note

WFS has $50 million outstanding under the terms of a Promissory Note with
the Bank dated August 1, 1997. The Promissory Note provided for principal
payments in two equal annual installments of $25 million. Subsequent to year
end, the Promissory Note was amended to increase the amount by $30 million and
to provide for principal payments in two equal annual installments of $40
million commencing on July 31, 2001. Interest payments on the Promissory Note
are due quarterly, in arrears, calculated at the rate of 9.42% per annum.
Pursuant to the terms of the Promissory Note and the Senior Note, WFS may not
incur any other indebtedness which is senior to the obligations evidenced by the
Promissory Note except for (i) indebtedness under the Senior Note (ii)
indebtedness collateralized or secured under the Line of Credit and (iii)
indebtedness for similar types of warehouse lines of credit. The Promissory Note
had interest expense of $4.7 million and $2.0 million during 1998 and 1997,
respectively.

Line of Credit

The Line of Credit extended by the Bank permits WFS to draw up to $900
million as needed to be used in its operations. WFS does not pay a commitment
fee for the Line of Credit. The term of the Line of Credit commenced on May 1,
1995 and terminates on December 31, 1999 except that such term may be extended
by WFS for additional periods up to 56 months under certain conditions. When
secured by contracts, the first $600 million of the Line of Credit carries an
interest rate equal to the Federal composite commercial paper rate plus 10 basis
points, with the margin increasing to 50 basis points to the extent the
obligation is not secured. The next $300 million of the Line of Credit carries
an interest rate equal to the Federal composite commercial paper rate plus 40
basis points when secured by contracts, with the margin increasing to 80 basis
points to the extent the obligation is not secured. Interest on the amount
outstanding under the Line of Credit is paid monthly, in arrears, and is
calculated on the average amount outstanding that month. The Bank has the right
under the Line of Credit to refuse to permit additional amounts to be drawn on
the Line of Credit if, in the Bank's discretion, the amount sought to be drawn
will not be used to finance the Company's purchase of contracts or other working
capital requirements. At December 31, 1998, $555 million was outstanding on the
Line of Credit. Interest expense was $16.8 million for the year ended December
31, 1998. The average amount outstanding during 1998 was $278 million.

Short Term Investments-Parent

WFS invests its excess cash at the Bank under an Investment Agreement. The
Bank pays WFS an interest rate equal to the Federal composite commercial paper
rate on this excess cash. The weighted average interest rate was 5.45% and 5.78%
for 1998 and 1997, respectively. The average balance of the excess cash was $9.0
million and the interest income earned was $0.5 million during 1998. At December
31, 1998, WFS held no excess cash with the Bank under the Investment Agreement.

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WFS Reinvestment Contract

Pursuant to a series of agreements to which WFS, the Bank and WFAL2, among
others, are parties, WFS is able to access the cash flows of each of the
outstanding securitization transactions and the cash held in each spread account
for each of those transactions. WFS is permitted to use that cash as it
determines, including in its ordinary business activities of originating
contracts.

In each securitization transaction, the Bank and WFAL2 have entered into a
reinvestment contract, which is deemed to be an eligible investment under the
relevant securitization agreements. The securitization agreements require,
provided certain conditions are met, that all cash flows of the relevant trust
and the associated spread accounts be invested in the applicable reinvestment
contract. A limited portion of the invested funds may be used by WFAL2 and the
balance may be used by the Bank. The Bank makes its portion available to WFS
pursuant to the terms of the WFS Reinvestment Contract ("RIC"). Under the RIC,
WFS receives access to all of the cash available to the Bank under each trust
reinvestment contract and is obligated to repay to the Bank an amount equal to
the cash so used when needed by the Bank to meet its obligations under the
individual trust reinvestment contracts. With the portion of the cash available
to it under the individual trust reinvestment contracts, WFAL2 purchases
contracts from WFS pursuant to the terms of Sale and Servicing Agreements.

Pursuant to an agreement with FSA, the trust reinvestment contracts may be
eligible investments provided the Bank and WFAL2 pledge adequate collateral to
secure their respective obligations. In accordance with this agreement, the Bank
and WFAL2 pledge property owned by each for the benefit of the trustee of each
trust and FSA. WFS pays the Bank a fee equal to 12.5 basis points of the amount
of collateral pledged by the Bank as consideration for the pledge of collateral
by the Bank and for WFS' access to cash under the RIC. During 1998, WFS paid the
Bank $0.7 million for this purpose. As WFAL2 directly utilizes the cash made
available to it to purchase contracts for its own account from WFS, no
additional consideration from WFS is required to support WFAL2's pledge of its
property under the agreement with FSA. While WFS is under no obligation to
repurchase contracts from WFAL2 to the extent WFAL2 needs to sell any such
contracts to fund its repayment obligations under the trust reinvestment
contracts, it is anticipated that WFS would prefer to purchase those contracts
than for WFAL2 to sell those contracts to a third party. The RIC, by its terms,
is to remain in effect so long as any of the trust reinvestment contracts is an
eligible investment for its related securitization transaction. During 1998, the
average amount outstanding under the RIC was $585 million and the average amount
of contracts purchased by WFAL2 from WFS was $119 million. At December 31, 1998,
the amount outstanding under the RIC was $364 million and the amount of
contracts held by WFAL2 purchased from WFS was $355 million.

Tax Sharing Agreement

WFS and its subsidiaries (WFAL, WFAL2 and WFSII) are parties to a tax
sharing agreement with Westcorp, the Bank and other subsidiaries of Westcorp,
pursuant to which a consolidated federal tax return is filed for all of the
parties to the agreement. Under the agreement, the tax due by the group is
allocated to each member based upon the relative percentage of each member's
taxable income to that of all members. Each member pays to Westcorp its
estimated share of that tax liability when otherwise due, but in no event may
the amount paid exceed the amount of tax which would have been due if a member
were to file a separate return. A similar process is used with respect to state
income taxes, for those states which permit the filing of a consolidated or
combined return. Tax liabilities to states which require the filing of separate
tax returns for each company are paid by each company. The term of the tax
sharing agreement commenced on the first day of the consolidated return year
beginning January 1, 1994 and continues in effect until the parties to the tax
sharing agreement agree in writing to terminate it. See "Note 12 -- Income
Taxes" to WFS' Consolidated Financial Statements.

Management Agreements

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to services or facilities of the Bank and Westcorp used by WFS or its
subsidiaries, including their principal office facilities, field offices of WFS
and overhead and employee benefits pertaining to Bank and Westcorp employees who
also provide services to WFS or its subsidiaries. Additionally, as part of these
management agreements, the Bank and Westcorp have agreed to reimburse WFS for
similar costs incurred. The management agreements may be terminated by any party
upon 5 days prior written notice without cause, or immediately in the event of
the other party's breach of any covenant, obligation, or duty contained in the
applicable management agreement or for violation of law, ordinance, statute,
rule or regulation governing either party to the applicable management
agreement.

WFS has entered into an agreement with Westran Services Corp ("Westran"),
which is a subsidiary of Westcorp, to receive travel related services. WFS
believes that the services rendered by Westran are reasonable and representative
of what such costs would have been had WFS used an unaffiliated entity for such
services. Total amounts paid to Westran in 1998, 1997 and 1996 was $0.2 million,
$0.1 million, and $0.4 million, respectively

WFS leases office space for its Encino, California office from Insurance
Company of the West ("ICW"), an affiliate of Mr. Rady, Chairman of WFS, the Bank
and Westcorp. The basic annual rent is adjusted annually and includes a portion
of direct operating expenses. The Encino lease arrangement expires in 2001. The
Company paid $152,211 in rent to ICW in 1998.

The Kearny Mesa Business Center is landlord to WFS' office in San Diego.
Kearny Mesa Business Center is an affiliate of Mr. Rady. The total amount paid
in 1998 pursuant to this lease, which expires in 2001, was $53,057.

RELATIONSHIP WITH THE BANK AND ITS AFFILIATES

In the opinion of the Company, the transactions described herein under the
caption "Transactions with Related Parties" have been on terms no less favorable
to WFS than could be obtained from unaffiliated parties, notwithstanding that
the transactions were not negotiated at arm's length. However, the transactions
were approved by the entire Board of Directors of WFS, the Bank and Westcorp,
including all of their respective independent directors. Furthermore, any future
transactions with the Bank or affiliated persons will continue to be approved by
a majority of disinterested directors of the Company. See "Supervision and
Regulation -- Westcorp".

SUPERVISION AND REGULATION

THE COMPANY

The Company is an operating subsidiary of the Bank and a second tier
subsidiary of Westcorp. The Company purchased automobile loans in 42 states at
February 28, 1999. While WFS has historically been licensed in each state in
which it operates, WFS is now relying upon the preemption of such state
licensing laws afforded by regulations adopted by the Office of Thrift
Supervision ("OTS"). To the extent WFS relies on preemption it is no longer
subject to audit and examination by the applicable state agencies for these
states, but remains subject to examination and supervision by the OTS and the
Federal Deposit Insurance Corporation ("FDIC"), the Federal entity which
provides insurance of deposits to the Bank. WFS engages local counsel familiar
with the applicable consumer finance and auto finance, licensing and titling
laws and regulations of general application of each of the states in which it
has offices and from which it purchases contracts to the extent it purchases
contracts out of states in which it has no office. At December 31, 1998, and as
of the date hereof, WFS believes that it is in compliance with the laws and
regulations applicable to each of its offices in these states.

Numerous federal and state consumer protection laws and regulations not
preempted by OTS regulations impose requirements applicable to the contracts
originated and serviced by WFS. Among these enactments are the federal
Truth-in-Lending Act, the Federal Trade Commission Act, the Fair Credit Billing
Act, The Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the California Rees-Levering Act and similar
retail installment sales laws and similar laws of other states in which

8
<PAGE> 11

WFS originates contracts. Most of the states in which WFS is originating
contracts have statutes or regulations pertaining to the repossession and sale
process the Company must follow when seeking to recover on defaulted contracts.
Generally, the Company must follow those requirements with precision to ensure
its ability to maximize its recovery on a defaulted contract. In addition, some
states, such as Texas and Washington, have consumer protection laws which limit
the assets WFS may seize in order to recover on any deficiency following
repossession and sale of the vehicle which secures a defaulted contract.

As an operating subsidiary of the Bank, WFS is precluded by regulations of
the OTS from engaging in any business activity which the Bank could not itself
undertake. All of its current business activities are permitted activities for
the Bank. Also, as WFS is an operating subsidiary of the Bank, the Bank is
required to retain ownership of at least a majority of the voting stock of WFS.
WFS may not engage in any new business activity nor may it acquire a business
from a third party, even if such business activities are permitted to the Bank
and thereby to WFS, until the Bank has first given notice thereof to the FDIC
and to the OTS.

WESTCORP

Westcorp, by virtue of its ownership of the Bank, is a savings and loan
holding company within the meaning of the Home Owners' Loan Act, as amended
("HOLA"). Savings and loan holding companies, their savings association
subsidiaries and subsidiaries thereof are extensively regulated under federal
laws.

Under the HOLA, the OTS is permitted to take substantive action when it
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of any particular activity constitutes a
serious risk to the financial safety, soundness or stability of that holding
company's subsidiary savings association. Specifically, the OTS may, as
necessary: (i) limit the payment of dividends by the Bank; (ii) limit
transactions between the Bank, Westcorp and the subsidiaries or affiliates of
either; and (iii) limit any activities of Westcorp that might create a serious
risk that the liabilities of Westcorp and its affiliates may be imposed on the
Bank or subsidiaries of the Bank. Any such limits may be issued in the form of
regulations, or a directive having the effect of a cease and desist order.

Savings association subsidiaries of a savings and loan holding company, and
subsidiaries of such savings associations, are limited by HOLA in the type of
activities and investments in which they may participate if the investment
and/or activity involves an affiliate. In general, savings association
subsidiaries of a savings and loan holding company, and the subsidiaries of such
savings association, are subject to Sections 23A and 23B of the Federal Reserve
Act ("FRA") in the same manner and to the same extent as if the savings
association or its subsidiary were a member bank of the Federal Reserve System,
as well as being subject to similar regulations adopted by the OTS. Section 23A
of the FRA puts certain quantitative limitations, based upon a percentage of a
bank's capital stock and surplus, on certain transactions between a bank or its
subsidiary and an affiliate, including transactions involving (i) loans or
extensions of credit to the affiliate; (ii) the purchase of or investment in
securities issued by an affiliate; (iii) purchase of certain assets from an
affiliate; (iv) the acceptance of securities issued by an affiliate as security
for a loan or extension of credit to any person; or (v) the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate. The Board
of Governors of the Federal Reserve System (the "Board") has revised the
definition of capital stock and surplus for purposes of Section 23A to conform
that definition to that used by the Board in calculating the limits in
Regulation O for insider lending and by the Office of the Comptroller of the
Currency ("OCC") in calculating the limit on loans by a national bank to a
single borrower. The revised definition will permit subordinated debt issued by
the Bank that qualifies for inclusion in Tier 2 capital to be included in the
calculation of capital stock and surplus.

In addition, under Section 23B, transactions between a bank or its
subsidiary and an affiliate must meet certain qualitative limitations. Such
transactions must be on terms at least as favorable to the bank or its
subsidiary as transactions with unaffiliated companies.

Section 11 of the HOLA also specifically prohibits a savings association
subsidiary of the savings and loan holding company, or a subsidiary of that
savings association, from making a loan or extension of credit to an affiliate
(which also includes, under most circumstances, a purchase of assets from an
affiliate that is subject to the affiliate's agreement to repurchase those
assets) unless that affiliate is engaged only in activities

9
<PAGE> 12

permitted to bank holding companies under Section 4(c) of the Bank Holding
Company Act or from purchasing or investing in the securities of any affiliate
(other than a subsidiary of the savings association). The OTS regulations,
consistent with the provisions of Sections 23A and 23B, exclude transactions
between a savings association and its subsidiaries from the limitations of those
sections, but those regulations also define certain subsidiaries to be
affiliates and subject to the requirements of those sections. At the present
time, neither WFS nor any of its subsidiaries are within the definition of an
affiliate of the Bank for purposes of those regulations.

THE BANK

The Bank, as the parent of WFS, is extensively regulated in its activities
by the OTS and the FDIC. Were the Bank to become insolvent or otherwise become
subject to being placed in conservatorship or receivership by the OTS, the FDIC
is required to be appointed as the conservator or receiver of the Bank. As
conservator or receiver, the FDIC would not have the authority to treat the
assets of WFS as the assets of the Bank, and the assets of WFS would not be
subject to the authority of the FDIC as conservator or receiver. However, as
conservator or receiver of the Bank, the FDIC, through control of the majority
of shares of the Common Stock of WFS, would be permitted to exercise control
over those shares to the same extent as the Bank prior to that conservatorship
or receivership. In addition, the FDIC as receiver or conservator would have the
right to preclude the Bank from making further advances under the Line of
Credit.

An operating subsidiary, such as WFS, is permitted by the applicable
regulations of the OTS to only engage in such business activities as the Bank
itself is permitted to engage in for its own account. The investments of
operating subsidiaries are required to be consolidated with those of its parent
Federal savings bank for purposes of determining whether the parent Federal
savings bank, on a consolidated basis, is in full compliance with those
regulations limiting its activities to a percentage of its total consolidated
assets. In that regard, the Bank is permitted by the HOLA to invest up to 35% of
its consolidated assets in consumer loans, commercial paper and qualifying
corporate debt instruments; provided however, that all consumer loans in excess
of 30% of the Bank's consolidated assets must be made directly to the consumer.
Accordingly, not more than 30% of the Bank's consolidated assets may be invested
in contracts purchased from new and used car dealers. At December 31, 1998, WFS
held $825 million of contracts which were purchased from dealers, which amount
represented 21.8% of the Bank's consolidated assets. The Company was purchasing
contracts at the average rate of $223 million per month for the year then ended.
However, WFS also securitized $1.9 billion of such contracts in 1998, and an
additional $1.0 billion of such contracts in February of 1999. The Company
intends to regularly securitize contracts purchased from dealers to insure that
the Bank will remain in compliance with this regulatory limitation on its
consolidated activities.

In addition, the regulations governing operating subsidiaries also require
that operating subsidiaries be subject to examination and supervision by the OTS
to the same extent as their parent Federal savings bank. The OTS may, following
such an examination, direct the parent savings association to take remedial
action to cure any violation of law, regulation or OTS policy, including
disposing of all or part of the subsidiary. In addition, the OTS may at any time
limit a savings association's investment in an operating subsidiary, limit any
operating subsidiary's activities or refuse to permit activities, for
supervisory, legal or safety and soundness reasons. WFS is not aware of any
actions it has taken or is planning to take which it believes would be deemed by
the OTS to be unsafe or unsound.

COMPETITION

The auto finance business is highly competitive. With the successful
implementation of its business strategies, including its recent restructurings,
the Company believes it is competitive with other auto finance providers. WFS
strives to consistently apply established and time proven underwriting
standards, thus providing new and used car dealers a dependable source of auto
financing for contracts falling within the full spectrum of prime and non-prime
credit quality contracts. WFS then securitizes contracts to lock in excess
spread and enhance liquidity.

10
<PAGE> 13

Strong competition in the purchase of contracts is provided by Chrysler
Credit, GMAC, Ford Credit and other captive auto finance companies, commercial
banks, other consumer auto finance companies and credit unions. WFS competes for
the purchase of contracts on the basis of price and the level of service
provided to the dealers. The entity financing a dealer's inventory is ordinarily
that dealer's primary source of financing for auto sales. WFS does not finance
dealers' inventories. WFS depends on its share of a particular dealer's
contracts through the Company's strong personal relationship with that dealer.
That relationship is fostered by the promptness with which WFS can process and
approve an application submitted by a dealer and by the Company's expressed
willingness to work with its network of dealers and its flexibility in programs
offered.

WFS must also compete with dealer interest rate subsidy programs offered by
the captive auto finance companies. However, frequently those programs are
limited to certain models or to certain loan terms which may not be attractive
to many new auto purchasers. WFS is more flexible in that it may offer longer
terms or be willing to accept a lower down payment than the captive auto finance
companies require. Also, these programs are rarely offered on used vehicles.

The competition for contracts available within the prime and non-prime
credit quality contract spectrum is more intense when the rate of sales of autos
declines. While WFS has experienced consistent growth for many years, it can
give no assurance that it will be able to continue to do so. While auto leasing
has increased significantly in recent years, WFS has no present intention of
offering leases. WFS believes that many of such leases are for relatively short
terms of two or three years; therefore, the number of used auto contracts
available will continue to increase as these leases terminate. WFS believes that
this will continue to provide to it opportunities to purchase used auto
contracts in the quantity and of the quality it seeks.

YEAR 2000 STANDARDS FOR SAFETY AND SOUNDNESS

The OTS issued interim guidelines establishing Year 2000 safety and
soundness standards for insured depository institutions. As an operating
subsidiary, the Company is subject to these guidelines. The development and
implementation of a written due diligence process to monitor and evaluate Year
2000 efforts by third-party service providers and software vendors is a critical
component of an institution's initial assessment period. The guidelines also
require each insured depository institution to develop and adopt a written
project plan that addresses each phase of the planning process. Insured
depository institutions are expected to perform adequate testing of admission
critical systems. The guidelines require an insured depository institution to
design contingency plans appropriate for the institutions technological systems
and operating structure that describe how the institution will mitigate the
risks associated with the failure of systems (the business resumption
contingency plan) and as applicable the failure to complete renovation testing
or implementation of a emission critical system. The guidelines require insured
depository institutions to implement a due diligence process that identifies
customers posing material Year 2000 risk, evaluate the Year 2000 preparedness,
assess the Year 2000 risk and implement the appropriate risk controls. Finally,
the guidelines require that the Board of Directors and management must be
involved in all stages of the institutions efforts to achieve the Year 2000
readiness.

EMPLOYEES

At December 31, 1998, WFS had 1,752 full-time and 53 part-time employees.
None of these employees is represented by a collective bargaining unit or union,
and WFS and its subsidiaries believe they have good relations with their
personnel.

FORWARD-LOOKING STATEMENTS

Included in our Business Section are several "forward-looking statements."
Forward-looking statements are those which use words such as "believe",
"expect", "anticipate", "intend", "plan", "may", "will", "should", "estimate",
"continue" or other comparable expression. These words indicate future events
and trends. Forward-looking statements are our current views with respect to
future even and financial performance. These forward-looking statements are
subject to many risks and uncertainties which could cause actual

11
<PAGE> 14

results to differ significantly from historical results or from those
anticipated by us. The most significant risks and uncertainties we face are:

1. the level of charge-offs, as an increase in the level of charge-offs
will decrease our earnings;

2. our ability to originate new contracts in a sufficient amount to reach
our needs, as a decrease in the amount of contracts we originate will
decrease our earnings;

3. a decrease in the difference between the average interest rate we
receive on the contracts we originate and the rate of interest we must
pay to fund our cost of originating those contracts; as a decrease will
reduce our earnings;

4. the continued availability of sources of funding for our operations, as
a reduction in the availability of funding will reduce our ability to
originate contracts;

5. maintaining the level of operating costs; as an increase in those costs
will reduce our net earnings; and

6. the Year 2000 issues; as a disruption of our collection efforts as a
result of Year 2000 problems or an increase in our costs to correct Year
2000 issues will reduce earnings.

There are other risks and uncertainties we face, including the effect of
changes in general economic conditions and the effect of new laws, regulations
and court decisions. You are cautioned not to place undue reliance on our
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

ITEM 2. PROPERTIES

At December 31, 1998, WFS owned one property in Dallas, Texas.
Additionally, WFS leased 88 properties at various locations in numerous states.

The executive offices of WFS are located at 23 Pasteur, Irvine, California
and are leased from the Bank. The remaining leased properties are used as
production offices. WFS leases space at two locations from companies controlled
by the Chairman of the Company. For further information see "Transactions with
Related Parties."

ITEM 3. LEGAL PROCEEDINGS

WFS is involved as a party in certain legal proceedings incidental to its
business. Management of WFS believes that the outcome of such proceedings will
not have a material effect upon its business or combined financial condition.
See "Note 7 -- Commitments and Contingencies" to WFS' Consolidated Financial
Statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the quarter ended December 31, 1998.

12
<PAGE> 15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE BY QUARTER

The common stock of WFS Financial Inc has been publicly traded since August
8, 1995 on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") identified by the symbol, WFSI. The following table
illustrates the high and low sale prices by quarter in 1998 and 1997, as
reported by NASDAQ, which prices are believed to represent actual transactions.

<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
HIGH LOW HIGH LOW
------ ----- ------ ------
<S> <C> <C> <C> <C>
First Quarter............................ $14.88 $9.00 $23.25 $10.75
Second Quarter........................... 11.85 7.00 16.75 8.69
Third Quarter............................ 8.50 5.00 22.50 16.31
Fourth Quarter........................... 6.94 4.63 22.13 8.63
</TABLE>

There were approximately 756 shareholders of WFS Financial Inc common stock
at February 28, 1999. The number of shareholders was determined by the number of
record holders, including the number of individual participants, in security
position listings.

DIVIDENDS

WFS did not have public shareholders prior to August 8, 1995 and has not
declared or paid cash dividends to the Bank as its parent corporation since 1989
nor to public shareholders after August 8, 1995. WFS has no current plan to
declare or pay any dividends on its Common Stock. WFS is not currently under any
regulatory or contractual limitation on its ability to declare or pay any
dividends. There is no assurance that WFS will declare or pay any dividends in
the future.

13
<PAGE> 16

ITEM 6. SELECTED FINANCIAL DATA

The balance sheet data and statement of operations data for all years have
been derived from the Company's audited consolidated financial statements. The
operating data and servicing data have been derived from other unaudited
financial information of the Company. The financial data set forth below should
be read in conjunction with the Consolidated Financial Statements of the Company
and related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994(2)
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Servicing income..................... $ 76,110 $ 137,753 $ 111,969 $ 71,824 $ 67,683
Net interest income.................. 64,978 52,657 53,533 44,248 24,104
Gain on sale of contracts............ 25,438 39,399 41,518 18,856 1,321
---------- ---------- ---------- ---------- ----------
Total revenues....................... 166,526 229,809 207,020 134,928 93,108
Provision for credit losses.......... 15,146 8,248 10,275 6,483 8,037
Restructuring charge(1).............. 15,000
Operating expenses................... 165,042 167,418 130,325 77,315 52,627
---------- ---------- ---------- ---------- ----------
Total expenses....................... 195,188 175,666 140,600 83,798 60,664
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (28,662) 54,143 66,420 51,130 32,444
Income taxes......................... (12,095) 22,829 27,779 20,963 13,951
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (16,567) $ 31,314 $ 38,641 $ 30,167 $ 18,493
========== ========== ========== ========== ==========
Net income (loss) per common share --
diluted (3)........................ $ (0.64) $ 1.22 $ 1.50 $ 1.33 $ 0.90
========== ========== ========== ========== ==========
OPERATING DATA:
Prime contract purchases............. $1,808,013 $1,245,027 $1,129,314 $ 936,429 $ 848,486
Non-prime contract purchases......... 862,683 1,040,252 992,375 591,220 328,545
---------- ---------- ---------- ---------- ----------
Total contract purchases... $2,670,696 $2,285,279 $2,121,689 $1,527,649 $1,177,031
========== ========== ========== ========== ==========
Contract securitizations............. $1,885,000 $2,190,000 $2,090,000 $1,480,000 $ 842,000
Number of states in which contracts
were purchased..................... 42 37 31 16 7
Number of dealers from which
contracts were acquired............ 11,323 11,978 9,372 6,247 4,491
SERVICING DATA:
Servicing portfolio at end of
period............................. $4,367,099 $3,680,817 $3,046,585 $2,209,594 $1,633,177
Average servicing portfolio during
the period......................... 4,006,185 3,383,570 2,627,622 1,886,359 1,438,582
Delinquencies as a percentage of
amount of contracts outstanding at
end of period(4)................... 3.64% 2.20% 1.80% 1.24% 0.74%
Net chargeoffs as a percentage of the
average amount of contracts
outstanding during the period(4)... 3.42% 3.02% 2.30% 1.61% 1.09%
</TABLE>

14
<PAGE> 17

- ---------------
(1) See "Business -- Improve Operating Efficiencies".

(2) The data presented reflect the combined operations of both the auto finance
division of the Bank and its wholly-owned operating subsidiaries, WFS, WFAL
and WFAL2. See "Note 1 -- Summary of Significant Accounting Policies" to
WFS' Consolidated Financial Statements.

(3) Restated to reflect a 10% stock dividend in 1996

(4) Includes delinquency and loss information relating to contracts that were
sold, but which were originated and serviced by WFS. See "Asset Quality" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

15
<PAGE> 18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The primary sources of revenue for WFS are servicing income, net interest
income and gain on sale of contracts. During 1998, WFS purchased $2.7 billion of
contracts compared to $2.3 billion in 1997, an increase of 17%. After purchasing
contracts, WFS generally securitizes its contracts and earns servicing income.
Servicing income is primarily generated following the securitization of
contracts purchased by WFS and consists of: (i) contractual servicing fees, (ii)
retained interest income and (iii) other fee income such as late charges and
documentation fees which are earned regardless of whether or not a
securitization has occurred. Contractual servicing is the servicing fee
contractually due from a trust for servicing contracts which have been
securitized. Retained interest income represents realized gross retained
interest income from securitized contracts net of the amortization of the RISA.
Late charges, deferment fees, documentation fees and other fees are also
collected on contracts serviced and are retained by the Company. While contracts
are held on balance sheet, WFS earns net interest income. Net interest income is
the difference between the interest earned on contracts not yet sold in
securitization transactions and the interest paid on the liabilities used to
fund such contracts. Gain on sale of contracts is recognized based on the
estimated present value of the estimated future earnings to be received from the
excess spread on securitized contracts at the time of sale.

The Company's securitization transactions involved the sale of contracts to
a trust in exchange for asset-backed securities issued by the trust which WFS
sells to investors. See "Business -- Hedging and Securitization". WFS continues
to service the contracts following their securitization and receives a
contractual servicing fee for such activities. In connection with the
securitization of contracts, WFS retains the right to receive excess spread
which is equal to the difference between the stated interest rate on the
contracts securitized and the interest rate on the asset-backed securities,
after adjustments for credit losses, administrative expenses and contractual
servicing fees. WFS securitized $1.9 billion, $2.2 billion and $2.1 billion of
contracts during 1998, 1997 and 1996, respectively.

The following table lists each of the Company's outstanding securitization
transactions. Each of these transactions was rated AAA by S&P, and Aaa by
Moody's, their respective highest ratings. All earlier securitization
transactions and each class of security with an earlier maturity date were
timely paid off in full prior to December 31, 1998.

<TABLE>
<CAPTION>
REMAINING REMAINING
BALANCE AT BALANCE AS A ORIGINAL ORIGINAL GROSS
ISSUE ORIGINAL DECEMBER 31, PERCENT OF WEIGHTED WEIGHTED AVERAGE INTEREST RATE
NUMBER CLOSE DATE BALANCE 1998 ORIGINAL BALANCE AVERAGE APR SECURITIZATION RATE SPREAD (1)
- ------ --------------- ---------- ------------ ---------------- ----------- ------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1995-1 January, 1995 $ 190,000 $ 10,596 5.58% 15.58% 8.05% 7.53%
1995-2 April, 1995 190,000 13,583 7.15% 15.71% 7.10% 8.61%
1995-3 June, 1995 300,000 27,709 9.24% 16.36% 6.05% 10.31%
1995-4 September 1995 375,000 52,839 14.09% 15.05% 6.20% 8.85%
1995-5 December, 1995 425,000 73,407 17.27% 15.04% 5.88% 9.16%
1996-A March, 1996 485,000 99,902 20.60% 15.35% 6.13% 9.22%
1996-B June, 1996 525,000 135,039 25.72% 15.46% 6.75% 8.71%
1996-C September, 1996 535,000 165,490 30.93% 15.74% 6.66% 9.08%
1996-D December, 1996 545,000 194,390 35.67% 15.83% 6.17% 9.66%
1997-A March, 1997 500,000 209,202 41.84% 15.43% 6.60% 8.83%
1997-B June, 1997 590,000 287,386 48.71% 15.33% 6.37% 8.96%
1997-C September, 1997 600,000 342,070 57.01% 15.36% 6.17% 9.19%
1997-D December, 1997 500,000 314,664 62.93% 15.43% 6.34% 9.09%
1998-A March, 1998 525,000 369,831 70.44% 15.19% 6.01% 9.18%
1998-B June, 1998 660,000 530,982 80.45% 14.72% 6.06% 8.66%
1998-C November, 1998 700,000 664,362 94.91% 14.68% 5.81% 8.87%
---------- ----------
Total $7,645,000 $3,491,452
========== ==========
</TABLE>

- ---------------
(1) Represents the difference between the original weighted average annual
percentage rate ("APR") and the weighted average securitization rate at the
close date.

16
<PAGE> 19

RESULTS OF OPERATIONS

Servicing Income

Servicing income decreased to $76 million during 1998 compared to $138
million during 1997 and $112 million during 1996, representing a decrease of 45%
and a decrease of 32%, respectively. Servicing income declined during 1998 due
to (1) higher amortization of retained interest in securitized assets as a
result of higher credit losses; (2) lower retained interest income as a result
of WFS not executing a securitization transaction in the third quarter and; (3)
increased levels of bankruptcies.

Contractual servicing is earned at a rate of 1.0% to 1.25% per annum on the
outstanding balance of contracts securitized and is consistent with industry
standards. Retained interest income is dependent upon the average excess spread
on the contracts sold and the size of the serviced portfolio. Servicing fee
income is related to the size of the serviced portfolio. During the past three
years, WFS increased its average serviced portfolio to $4.0 billion in 1998 from
$3.4 billion and $2.6 billion in 1997 and 1996, respectively. Other fee income,
consisting primarily of documentation fees, late charges and deferment fees,
decreased to $37.0 million during 1998 compared to $37.1 million and $32.3
million in 1997 and 1996, respectively, representing a decrease of less than 1%
and an increase of 15%, respectively.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1997 1996
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retained interest income........................ $ 1,961 $ 69,844 $ 55,219
Contractual servicing income.................... 37,180 30,803 24,404
Other fee income................................ 36,969 37,106 32,346
------- -------- --------
Total servicing income................ $76,110 $137,753 $111,969
======= ======== ========
</TABLE>

WFS has completed 44 securitization transactions to date since its first
transaction in December 1985. The first eleven of these transactions were on
balance sheet collateralized bond offerings and the remaining 32 were off
balance sheet trusts. Twenty-three transactions have been paid in full and all
were paid on or before their contractual maturity dates.

Net Interest Income

Net interest income is the difference between the rate earned on contracts
held on balance sheet and the interest costs associated with the Company's
borrowings. Net interest income totalled $65.0 million in 1998 compared to $52.7
million and $53.5 million in 1997 and 1996, respectively. The following table
shows the average rate earned on contracts and the average rate paid on
borrowings, consisting primarily of advances from the Bank, together with the
corresponding net interest rate spread for years ended 1998, 1997 and 1996.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Yield on contracts...................................... 14.37% 13.81% 14.83%
Cost of borrowings...................................... 7.37 8.16 6.44
----- ----- -----
Net interest rate spread................................ 7.00% 5.65% 8.39%
===== ===== =====
</TABLE>

The increase in the net interest rate spread in 1998 was the result of
lower overall financing costs as WFS utilized the line of credit in order to
retain contracts on its balance sheet while obtaining higher yields on those
contracts retained.

As WFS securitizes its contracts, revenue previously recognized as net
interest income will, upon such securitization, be recognized as retained
interest income. Prior to securitizing contracts, WFS earns interest income on
its contracts, pays interest expense to fund the contracts and absorbs any
credit losses. After securitization, the net earnings are recorded as retained
interest income.

17
<PAGE> 20

To protect against changes in interest rates, WFS hedges contracts
purchased until their securitization with two-year Treasury securities forward
agreements. The gain or loss on these forward agreements is deferred and
included as part of the basis of the underlying contracts and recognized when
the contracts are securitized. See "Capital Resources and Liquidity".

The Company's primary source of borrowings has been advances from its
parent. These advances were provided on an as-needed basis at a weighted average
rate equal to 7.37% in 1998, 8.16% in 1997 and 6.44% in 1996. For 1998, 1997 and
1996, the cost of borrowings represents the average combined rate of the Senior
Note, Promissory Note and the Line of Credit. See "Capital Resources and
Liquidity" and "Transactions with Related Parties".

Gain on Sale of Contracts

WFS recorded gain on sale of contracts of $25.4 million, $39.4 million and
$41.5 million in 1998, 1997 and 1996, respectively. Gain on sale of contracts
declined compared to prior periods due to not executing a securitization
transaction in the third quarter of 1998, and as a result of changes in the
gross interest rate spread of contracts securitized (see the table under
"Overview"), the amount of dealer participation paid, changes in credit loss
assumptions, and the effect of hedging activities. Gross interest rate spread is
affected by product mix, general market conditions and overall market interest
rates. The risks inherent in interest rate fluctuation are reduced through
hedging activities.

WFS computes a gain on sale with respect to contracts securitized based on
the present value of the estimated future retained interest earnings to be
received from such contracts using a market discount rate. Two methods have
arisen in practice to determine the fair value of these future retained interest
earnings, the cash-in method and the cash-out method. The Securities and
Exchange Commission ("SEC") has set forth specific guidance that the cash-out
method is the only appropriate method to be used in determining the fair value
of such assets as defined by the Financial Accounting Standards Board Statement
No. 125. The cash-out method discounts expected future retained interest
earnings from the period in which the transferor expects to receive the cash,
thereby taking into consideration the period of time that the cash is received
from obligors but restricted from distribution to the transferor. WFS has
historically and will continue to use the cash-out method in measuring such
assets. In order to determine the gain on sale, WFS also considers prepaid
dealer commissions, issuance costs and the effect of hedging activities.
Retained interest in securitized contracts is capitalized upon securitization of
contracts and represents the present value of the estimated future earnings to
be received by WFS from the excess spread created in securitization transactions
and is amortized against servicing income over the life of the contracts. See
"Note 1 -- Summary of Significant Accounting Policies" to WFS' Consolidated
Financial Statements.

Provision for Credit Losses

The Company maintains an allowance for credit losses to cover anticipated
losses on the contracts held on balance sheet. The allowance for credit losses
is increased by charging the provision for credit losses and decreased by actual
losses on the contracts held on balance sheet or as a result of the reduction of
contracts held on balance sheet due to a securitization transaction. The level
of the allowance is based principally on the outstanding balance of contracts
held on balance sheet, pending sales of contracts and historical loss trends.
When WFS sells contracts in a securitization transaction, it reduces its
allowance for credit losses and factors potential losses into its gain on sale
calculation. WFS believes that the allowance for credit losses is currently
adequate to absorb inherent losses in the owned contract portfolio. See "Note
1 -- Summary of Significant Accounting Policies" to WFS' Consolidated Financial
Statements.

During 1998, the provision for credit losses totaled $15.1 million compared
to $8.2 million and $10.3 million in 1997 and 1996, respectively. The increase
in provision for credit losses in 1998 was due primarily to an increased amount
of loans held on balance sheet.

18
<PAGE> 21

Operating Expenses

Operating expenses consist of salaries and employee benefits, credit and
collections expense and other miscellaneous costs. Over the past three years,
these expenses have increased as WFS' operations have expanded. At the end of
1994, WFS operated in seven states. Since 1994, WFS has expanded its operations
to include 42 states. As the servicing portfolio increases, costs related to
credit, collection and other related expenses increase as well.

Total operating expenses were $165 million, $167 million and $130 million
for 1998, 1997 and 1996, respectively. The Company reduced its cost of
operations in 1998 in both dollars and as a percent of average serviced
contracts with the completion of the restructuring programs as well as other
operating efficiencies achieved during the year. Operating expenses as a
percentage of average serviced contracts declined 83 basis points to 4.12% in
1998 compared with 4.95% in 1997. Salaries and employee benefit expenses
remained at $95.7 million in both 1998 and 1997, up from $71.9 million in 1996.
Miscellaneous expenses, which includes occupancy, telephone and other
miscellaneous expenses, were $48.1 million, down 16% and 3% from $57.2 million
and $49.4 million in 1997 and 1996, respectively.

WFS pays a monthly management fee to the Bank and Westcorp which covers
various expenses, including accounting, legal, tax, cash management, purchasing
and auditing services. Additionally, the Bank and Westcorp pay fees to WFS for
information services. The management fee is based upon the actual costs incurred
and estimates of actual usage. WFS believes that the management fee approximates
the cost to perform these services on its own behalf or to acquire them from
third parties. WFS has the option, under the management agreements, to procure
these services on its own should it be more economically beneficial to WFS to do
so. See "Transactions with Related Parties -- Management Agreements".

Restructuring

In 1998, the Company completed a restructuring plan initially announced on
February 10, 1998. The plan had four objectives: to reduce operating costs, to
increase contract production volume, to strengthen credit quality and to improve
the quality of personnel. The plan was achieved in two phases. Phase I of the
plan, completed in the first quarter of 1998, consisted of the restructuring of
operations in the Western United States. Phase II of the plan, completed in the
third quarter of 1998 and patterned after Phase I, consisted of the
restructuring of operations in the Central and Eastern United States.

As a result of the restructuring, a total of 400 positions, or 19% of the
Company's workforce, were eliminated and 96 offices were closed. The Company now
purchases contracts through 21 regional business centers (RBCs) and 26 satellite
offices, each offering the full spectrum of prime and non-prime products. The
total pre-tax restructuring charge in 1998 for the completed plan was $15.0
million. Restructuring related costs included $1.8 million for employee
severance and $13.2 million for lease termination fees and the write off of
disposed assets. The restructuring charge was substantially utilized during
1998. Operating costs as a percent of serviced contracts has declined from 5.4%
in 1997 to 3.8% in 1998, resulting in a decrease in operating costs of $65
million on an annual run rate basis.

Each of the 47 offices underwrites contracts by employing separate credit
analysts that specialize in either reviewing prime or non-prime paper. The
underwriting process is further enhanced by credit policies and contract
approval authorities controlled by the front-end contract production system and
through the use of the Company's proprietary scorecard which was implemented in
the fourth quarter of 1998. See "Business -- Maintain Solid Asset
Quality -- Consistent and Expeditious Underwriting."

19
<PAGE> 22

Income Taxes

WFS files federal and certain state tax returns as part of a consolidated
group that includes the Bank and Westcorp, the holding company parent of the
Bank. Other state tax returns are filed by WFS 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. The effective tax rate for WFS was 42% for 1998, 1997 and
1996. See "Transactions with Related Parties -- Tax Sharing Agreement".

FINANCIAL CONDITION

Contracts Receivable and Contracts Held for Sale

WFS holds a portfolio of contracts on balance sheet for investment that
totaled $70.8 million at December 31, 1998 and $52.6 million at December 31,
1997. Contracts held for sale totaled $825 million at December 31, 1998 compared
to $184 million at December 31, 1997. The balance in the held for sale portfolio
is largely dependent upon the timing of the origination and securitization of
contracts. WFS completed securitization transactions of $1.9 billion during
1998, down from $2.2 billion in 1997 as a result of the Company's decision not
to execute a securitization transaction in the third quarter, during a time when
asset-backed transactions were adversely affected by wider spreads thereby
leaving a greater amount of automobile contracts on the balance sheet. WFS
securitized $1.0 billion of contracts in February 1999, and plans to continue to
securitize contracts on a regular basis when favorable market conditions exist.
See "Note 1 -- Summary of Significant Accounting Policies" to WFS' Consolidated
Financial Statements.

Amounts Due From Trusts

The excess cash flow generated by contracts sold to trusts is deposited
into spread accounts by the trustee under the terms of the securitization
transactions. In addition, at the time a securitization transaction closes, WFS
advances additional monies to WFAL to initially fund these spread accounts. WFS
establishes a liability associated with its use of the spread account funds
which is reduced as such funds reach predetermined funding levels. WFS is
released from obligation after the spread account reaches a predetermined
funding level. Amounts due from trusts represents amounts due to WFS that are
still under obligation to be held in the spread accounts. The amounts due from
trusts at December 31, 1998 was $333 million compared with $295 million at
December 31, 1997. The increase is a result of the increase in total contracts
securitized and outstanding. See "Transactions with Related Parties -- WFS
Reinvestment Contract".

Retained Interest in Securitized Assets

Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125
requires that, following a transfer of financial assets, the transferor
recognizes the

20
<PAGE> 23

assets it controls and the liabilities it has incurred, and derecognizes assets
for which control has been surrendered and liabilities that have been
extinguished. For securitization transactions, SFAS 125 defines two separate
financial assets retained at the time of securitization, a retained interest in
securitized assets, which represents the excess spread created from
securitization, and a servicing rights asset which represents the benefit
derived from retaining the rights to service the contracts securitized. Previous
accounting guidance did not separately distinguish these rights.

Retained interests in securitized assets ("RISA") capitalized upon
securitization of contracts represent the present value of the estimated future
earnings to be received by WFS from the excess spread created in securitization
transactions. Excess spread is calculated by taking the difference between the
coupon rate of the contracts sold and the certificate rate paid to the investors
less contractually specified servicing and guarantor fees.

Prepayment and credit loss assumptions are utilized to project future
excess spread and are based upon historical experience. Credit losses are
estimated using a cumulative loss rate estimated by management to reduce the
likelihood of asset impairment. All assumptions used are evaluated each quarter
and adjusted, if appropriate, to reflect actual performance of the contracts.

Future earnings are discounted at a rate management believes to be
representative of the market at the time of securitization. The balance of the
RISA is amortized against actual excess spread income earned on a monthly basis
over the expected repayment life of the underlying contracts. RISA's are
classified in a manner similar to available for sale securities and as such are
marked to market each quarter. Market value changes are calculated by
discounting the excess spread using a current market discount rate. Any changes
in the market value of the RISA is reported as a separate component of other
comprehensive income (loss) on the Consolidated Statement of Income (loss) and
Comprehensive Income (loss) and shareholders' equity on the Consolidated
Statements of Financial Condition as an unrealized gain or loss, net of
applicable taxes.

Two methods have arisen in practice to determine the fair value of future
retained interest earnings, the cash-in method and the cash-out method. The
Securities and Exchange Commission ("SEC") has set forth specific guidance that
the cash-out method is the only appropriate method to be used in determining the
fair value of such assets as defined by the Financial Accounting Standards Board
Statement No. 125. The cash-out method discounts future retained interest
earnings from the period in which the transferor expects to receive the cash,
thereby taking into consideration the period of time that the cash is received
from obligors but restricted from distribution to the transferor. WFS has
historically and will continue to use the cash-out method in measuring such
assets.

WFS retains the rights to service all contracts it securitizes. Consumer
servicing rights assets ("CSRA") represent the present value of the estimated
future earnings to be received from servicing securitized contracts. These
earnings are calculated by estimating future servicing revenues, including
contractually specified servicing fees, late charges, other ancillary income,
and float benefit and netting them against the actual cost to service contracts.
WFS has not capitalized any servicing rights as of December 31, 1998.

The following table presents the activity of the RISA:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance................................. $ 181,177 $121,597 $ 78,045
Additions......................................... 91,914 112,230 104,071
Amortization...................................... (103,610) (53,421) (60,519)
Change in unrealized gain on securities available
for sale........................................ 1,749 771
--------- -------- --------
Ending balance.................................... $ 171,230 $181,177 $121,597
========= ======== ========
</TABLE>

21
<PAGE> 24

computing RISA. Cumulative net credit loss assumptions utilized for 1998
securitizations ranged from 6% to 7%. The Company used a discount rate of 425
basis points over the two-year Treasury rate at the time of securitization in
discounting future earnings.

The following table presents the estimated future undiscounted retained
interest earnings to be received from securitizations. Estimated future
undiscounted RISA earnings are calculated by taking the difference between the
coupon rate of the contracts sold and the certificate rate paid to the
investors, less the contractually specified servicing fee and guarantor fees,
after giving effect to estimated prepayments and assuming no losses. To arrive
at the RISA, this amount is reduced by the off balance sheet allowance
established for potential future losses and by discounting to present value.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted cash flows....................... $ 361,209 $ 438,190
Off balance sheet allowance for losses...................... (170,664) (236,796)
Discount to present value................................... (19,315) (20,217)
---------- ----------
Retained interest in securitized assets..................... $ 171,230 $ 181,177
========== ==========
Outstanding balance of contracts sold through
securitizations........................................... $3,491,452 $3,449,590
Off balance sheet allowance for losses as a percent of
contracts sold through securitizations.................... 4.89% 6.86%
</TABLE>

The decline in the off balance sheet allowance is due to lower potential
future losses as a result of a higher percentage of prime contracts securitized.
WFS believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio.

22
<PAGE> 25

CUMULATIVE STATIC POOL LOSS CURVES
AT DECEMBER 31, 1998

PERIOD 1995-1 1995-2 1995-3 1995-4 1995-5 1996-A 1996-B 1996-C 1996-D
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
1 0.00% 0.03% 0.00% 0.00% 0.01% 0.00% 0.01% 0.00% 0.02%
2 0.10% 0.15% 0.09% 0.06% 0.09% 0.06% 0.09% 0.09% 0.10%
3 0.26% 0.23% 0.20% 0.16% 0.16% 0.17% 0.20% 0.22% 0.24%
4 0.43% 0.43% 0.36% 0.31% 0.32% 0.29% 0.35% 0.52% 0.44%
5 0.68% 0.58% 0.58% 0.52% 0.48% 0.48% 0.61% 0.74% 0.71%
6 0.79% 0.77% 0.80% 0.70% 0.62% 0.63% 0.88% 0.98% 0.93%
7 0.96% 0.95% 1.04% 0.86% 0.78% 0.81% 1.14% 1.27% 1.16%
8 1.10% 1.09% 1.27% 1.02% 0.98% 1.08% 1.42% 1.52% 1.43%
9 1.32% 1.28% 1.46% 1.13% 1.16% 1.35% 1.67% 1.77% 1.72%
10 1.49% 1.49% 1.62% 1.26% 1.32% 1.63% 1.91% 1.98% 2.03%
11 1.68% 1.64% 1.79% 1.41% 1.54% 1.87% 2.18% 2.21% 2.34%
12 1.86% 1.81% 1.92% 1.52% 2.01% 2.06% 2.38% 2.49% 2.62%
13 2.05% 1.94% 2.01% 1.66% 2.03% 2.28% 2.58% 2.73% 2.97%
14 2.20% 2.09% 2.17% 1.86% 2.25% 2.47% 2.79% 2.99% 3.27%
15 2.38% 2.16% 2.26% 2.07% 2.41% 2.63% 2.95% 3.21% 3.53%
16 2.51% 2.24% 2.42% 2.26% 2.59% 2.79% 3.14% 3.47% 3.79%
17 2.67% 2.36% 2.57% 2.47% 2.77% 2.97% 3.38% 3.70% 4.02%
18 2.79% 2.46% 2.86% 2.59% 2.88% 3.12% 3.55% 3.94% 4.19%
19 2.90% 2.55% 3.08% 2.72% 3.00% 3.31% 3.80% 4.18% 4.43%
20 2.98% 2.69% 3.23% 2.88% 3.12% 3.49% 3.98% 4.36% 4.65%
21 3.08% 2.83% 3.38% 2.95% 3.24% 3.63% 4.14% 4.53% 4.80%
22 3.21% 2.96% 3.49% 3.04% 3.39% 3.80% 4.31% 4.67% 5.07%
23 3.27% 3.06% 3.59% 3.13% 3.53% 3.95% 4.46% 4.84% 5.27%
24 3.41% 3.17% 3.68% 3.22% 3.64% 4.10% 4.58% 5.01% 5.47%
25 3.53% 3.24% 3.74% 3.30% 3.72% 4.22% 4.74% 5.17% 5.65%
26 3.59% 3.28% 3.81% 3.37% 3.83% 4.33% 4.87% 5.34% 5.80%
27 3.68% 3.33% 3.88% 3.47% 3.95% 4.41% 4.98% 5.50%
28 3.72% 3.42% 3.97% 3.50% 4.08% 4.51% 5.11% 5.67%
29 3.77% 3.46% 4.01% 3.58% 4.16% 4.60% 5.21%
30 3.82% 3.49% 4.06% 3.65% 4.25% 4.70% 5.31%
31 3.87% 3.52% 4.07% 3.75% 4.31% 4.79% 5.42%
32 3.91% 3.56% 4.14% 3.80% 4.35% 4.85%
33 3.95% 3.55% 4.20% 3.83% 4.40% 4.91%
34 3.99% 3.60% 4.26% 3.87% 4.46% 4.99%
35 4.02% 3.62% 4.31% 3.91% 4.54%
36 4.00% 3.67% 4.34% 3.94% 4.58%
37 4.05% 3.70% 4.38% 3.96% 4.61%
38 4.06% 3.73% 4.40% 3.99%
39 4.10% 3.74% 4.41% 4.01%
40 4.14% 3.76% 4.44% 4.04%
41 4.15% 3.77% 4.48%
42 4.16% 3.80% 4.49%
43 4.16% 3.80% 4.51%
44 4.16% 3.82%
45 4.16% 3.84%
46 4.16%
47 4.16%
48 4.15%
</TABLE>

23
<PAGE> 26

CUMULATIVE STATIC POOL LOSS CURVES
AT DECEMBER 31, 1998

<TABLE>
<CAPTION>
PERIOD 1997-A 1997-B 1997-C 1997-D 1998-A 1998-B 1998-C
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
2 0.08% 0.07% 0.06% 0.05% 0.04% 0.02% 0.04%
3 0.20% 0.18% 0.15% 0.14% 0.11% 0.08%
4 0.36% 0.33% 0.29% 0.31% 0.25% 0.18%
5 0.62% 0.56% 0.46% 0.56% 0.44% 0.38%
6 0.85% 0.77% 0.67% 0.75% 0.66% 0.59%
7 1.12% 1.10% 0.93% 0.99% 0.95% 0.83%
8 1.45% 1.40% 1.16% 1.24% 1.23%
9 1.70% 1.70% 1.37% 1.47% 1.50%
10 2.02% 2.00% 1.66% 1.75% 1.79%
11 2.32% 2.22% 1.94% 2.06%
12 2.61% 2.43% 2.16% 2.35%
13 2.92% 2.66% 2.40% 2.63%
14 3.14% 2.91% 2.65%
15 3.30% 3.15% 2.90%
16 3.55% 3.56% 3.15%
17 3.77% 3.77% 3.36%
18 3.94% 3.97%
19 4.21% 4.20%
20 4.40% 4.39%
21 4.59%
22 4.81%
23 5.00%
</TABLE>

Asset Quality

Servicing income is affected by the quality of the underlying contracts
purchased and securitized by WFS. Servicing contracts includes payment
processing, customer service, managing delinquent contracts, repossessing and
selling autos, securing defaulted contracts and recovering deficiency balances.
At December 31, 1998, delinquencies for the serviced portfolio was 3.64% based
on the dollar amount of contracts outstanding compared to 2.20% and 1.80% at
December 31, 1997 and 1996. Delinquency is calculated based on the contractual
due date. Net chargeoffs on average contracts outstanding during the period
totaled 3.42% at December 31, 1998 compared to 3.02% and 2.30% at December 31,
1997 and 1996, respectively. WFS believes the increase in delinquency and loss
experience is due to the shift in product mix from prime to non-prime contracts
in 1996 and 1997, the disruption in collection efforts during the current year
restructurings, and higher than expected bankruptcies. See "Business -- Maintain
Solid Asset Quality".

The following tables reflect the delinquency, repossession and loss
experience that WFS has achieved as a result of its collection efforts. It is
the Company's policy to charge off all contracts once they become 120 days past
due, including those that are not in compliance with a court ordered bankruptcy
plan and whether or not the automobile has been repossessed or sold by that
date. WFS continues to accrue interest on a contract until it is charged off. At
the time a contract is charged off, all accrued but unpaid interest which has
been previously included as income is reversed. No assurance can be given that
the future performance of the contracts purchased by the Company will be similar
to the delinquency, repossession and loss rates disclosed in the following
tables.

24
<PAGE> 27

The following table sets forth information with respect to the delinquency
of the Company's portfolio of automobile loans serviced.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
AUTOMOBILE AUTOMOBILE AUTOMOBILE
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Automobile loans
serviced(1)................ 464,257 $4,367,099 408,958 $3,680,817 341,486 $3,046,585
======= ========== ======= ========== ======= ==========
Period of delinquency(2)
31 - 59 days............... 13,885 $ 112,208 6,605 $ 54,450 4,511 $ 38,173
60 - 89 days............... 3,966 32,100 2,161 18,652 1,305 11,470
90 days or more............ 1,768 14,441 918 7,762 567 5,144
------- ---------- ------- ---------- ------- ----------
Total automobile
loans
delinquent....... 19,619 $ 158,749 9,684 $ 80,864 6,383 $ 54,787
======= ========== ======= ========== ======= ==========
Delinquencies for automobile
loans as a percentage of
number and amount of
automobile loans
outstanding................ 4.23% 3.64% 2.37% 2.20% 1.87% 1.80%
======= ========== ======= ========== ======= ==========
</TABLE>

- ---------------
(1) Includes delinquency information relating to automobile loans which are
owned by the Company which have been sold and securitized but are serviced
by the Company.

(2) The period of delinquency is based on the number of days payments are
contractually past due.

The following table sets forth information with respect to the delinquency
of the Company's portfolio of automobile loans owned. Due to the timing of
securitizations, owned delinquency statistics may, from time to time, experience
wide fluctuations as a result of the amount of newly originated contracts
pending securitization.

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- -------------------- --------------------
NUMBER NUMBER NUMBER
OF OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Contracts owned...................... 76,474 $875,642 21,562 $231,228 22,208 $233,947
======= ======== ====== ======== ====== ========
Period of delinquency(1)
31-59 days......................... 7,579 $ 12,743 3,587 $ 3,053 2,376 $ 3,285
60-89 days......................... 2,442 3,622 1,313 1,595 820 1,488
90 days or more.................... 1,129 1,868 557 587 350 617
------- -------- ------ -------- ------ --------
Total contracts
delinquent............... 11,150 $ 18,233 5,457 $ 5,235 3,546 $ 5,390
======= ======== ====== ======== ====== ========
Delinquencies as a percentage of
number and amount of contracts
outstanding........................ 14.58% 2.08% 26.31% 2.26% 5.25% 2.30%
</TABLE>

- ---------------
(1) The period of delinquency is based on the number of days payments are
contractually past due.

25
<PAGE> 28

The following table sets forth information with respect to repossessions in
WFS' portfolio of serviced contracts.

<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ---------------------- ----------------------
NUMBER NUMBER NUMBER
OF OF OF
CONTRACTS AMOUNT CONTRACTS AMOUNT CONTRACTS AMOUNT
--------- ---------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio (1).......... 464,257 $4,367,099 408,958 $3,680,817 341,486 $3,046,585
======= ========== ======= ========== ======= ==========
Repossessed autos................ 1,232 $ 7,790 1,554 $ 9,672 1,133 $ 6,135
======= ========== ======= ========== ======= ==========
Repossessed autos as a percentage
of number and amount of
contracts outstanding.......... 0.27% 0.18% 0.38% 0.26% 0.33% 0.20%
</TABLE>

- ---------------
(1) Includes delinquency information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced by
WFS.

The following table sets forth information with respect to actual loss
experience of WFS' portfolio of contracts serviced:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Contracts serviced (1)..................................... $4,367,099 $3,680,817 $3,046,585
========== ========== ==========
Average serviced portfolio during the period............... $4,006,185 $3,383,570 $2,627,622
========== ========== ==========
Gross chargeoffs of contracts during the period............ $ 173,422 $ 136,773 $ 86,464
Recoveries of contracts charged off in current and prior
periods.................................................. 36,230 34,634 25,946
---------- ---------- ----------
Net chargeoffs............................................. $ 137,192 $ 102,139 $ 60,518
========== ========== ==========
Net chargeoffs as a percentage of average contracts
outstanding during period................................ 3.42% 3.02% 2.30%
</TABLE>

- ---------------
(1) Includes contract loss information relating to contracts which are owned by
WFS and contracts which have been sold and securitized but are serviced by
WFS.

Delinquency and loss experience was impacted by the disruption in
collection efforts during the current year restructurings, (see "Improve
Operating Efficiencies"), the shift to a greater ratio of non-prime paper during
1996 and 1997, and higher levels of bankruptcies.

CAPITAL RESOURCES AND LIQUIDITY

WFS requires substantial capital resources to support its business. The
primary cash requirements related to operating activities include (i) amounts
needed to purchase contracts, (ii) dealer participation, (iii) securitization
costs including spread account advances, and (iv) interest advances to trusts.
WFS also uses significant amounts of cash for operating. Sources of cash
available to WFS include contract securitizations, borrowings under the Line of
Credit and Notes payable and collections of principal and interest from
contracts. These sources provide the liquidity needed to fund the purchase of
contracts.

Although WFS does not have publicly rated debt, its parent, the Bank,
receives long term deposit and subordinated debt ratings. In November 1998,
Moody's downgraded the long term deposit (to Ba3 from Ba2), issuer (to B1 from
Ba3) and subordinated debt (to B2 from B1) ratings of the Bank. This downgrade
could result in higher future financing costs for WFS.

26
<PAGE> 29

PRINCIPAL USES OF CASH

Purchase of Contracts

The most significant cash flow requirement is for the purchase of
contracts. WFS primarily uses the Line of Credit with the Bank, to fund its
purchase of contracts from dealers and consumers, which are held for sale until
securitized. WFS purchased $2.7 billion of contracts during 1998 compared to
$2.3 billion in 1997 and $2.1 billion in 1996.

Dealer Participation

Consistent with industry practice, WFS pays an up-front dealer
participation to the originating dealer for each contract purchased.
Participation paid by the Company to dealers during 1998 was $76.7 million
compared to $68.0 million in 1997 and $68.6 million in 1996.

Contract Securitizations

At the time a securitization transaction closes, the Company is required to
advance monies to initially fund spread accounts. The Company funds these spread
accounts by foregoing receipt of excess cash flow until these accounts exceed
predetermined levels. The amounts due from trusts represent funds due to the
Company which have not yet been disbursed from the spread accounts. The amounts
due from trusts at December 31, 1998 , including initial advances not yet
returned, was $333 million compared to $295 million at December 31, 1997. See
"Transactions with Related Parties -- Reinvestment Contract".

Advances Due to Servicer

As the servicer of contracts sold in securitizations and in accordance with
servicing agreements, WFS periodically makes advances to the securitization
trusts to provide for temporary delays in the receipt of required payments from
obligors. WFS receives reimbursement of these advances through payments from the
obligor on the contracts or from the trustee at the time a contract liquidates.

PRINCIPAL SOURCES OF CASH

Contract Securitizations

The primary source of funds for WFS is the securitization of contracts. WFS
has regularly securitized contracts through underwritten public sales of
securities since 1985. Although the underlying interest costs associated with
securitizations fluctuate, they are primarily market driven and not necessarily
related to the operations of WFS. WFS expects to continue to utilize
securitization transactions as part of its liquidity strategy when the
appropriate market conditions exist.

Other Sources

WFS also obtains cash under the Senior Note, Promissory Note, Line of
Credit, WFS Reinvestment Contract and Short Term Investment from its parent, the
Bank. See "Business -- Transactions with Related Parties'

These financing sources, provided through our parent Company, are expected
to provide adequate funding of the Company's operations, and while no assurances
can be given, the Company believes that its sources of liquidity are sufficient
to meet its long and short term cash requirements.

ASSET/LIABILITY MANAGEMENT

Asset/liability management is the process of measuring and controlling
interest rate risk through matching the maturity and repricing characteristics
of interest earning assets with those of interest bearing liabilities.

The contracts originated and held by WFS are all fixed rate and accordingly
WFS has exposure to changes in interest rates. WFS' prepayment experience on
contracts has not been historically sensitive to

27
<PAGE> 30

changes in interest rates and WFS therefore believes it is not exposed to
significant prepayment risk relative to changes in interest rates. As a result
of this approach to interest rate management, combined with the Company's
hedging strategies, WFS does not anticipate that changes in interest rates will
materially affect the Company's results of operations or liquidity, although no
assurance can be given in this regard.

The Company's hedging strategy includes the use of two-year Treasury
securities forward agreements. Generally, these agreements are entered into by
the Company in amounts which correspond to the principal amount of the
securitization transactions. The market value of these forward agreements is
designed to respond inversely to the market value changes of the underlying
contracts. Because of this inverse relationship, WFS can effectively lock in its
gross interest rate spread at the time of entering into the hedge transaction.
Gains and losses relative to these agreements are deferred and recognized in
full at the time of securitization as an adjustment to the gain or loss on the
sale of the contracts. WFS enters into these forward agreements either with the
Bank or highly rated counterparties and further reduces its risk by avoiding any
material concentration with a single counterparty. Credit exposure is limited to
those agreements with a positive fair value and only to the extent of that fair
value. WFS hedges substantially all of its contracts pending securitization. See
"Note 14 -- Financial Instrument Agreements" to WFS' Consolidated Financial
Statements.

Management monitors the Company's hedging activities to ensure that the
value of hedges, their correlation to the contracts being hedged and the amounts
being hedged continue to provide effective protection against interest rate
risk. The amount and timing of hedging transactions are determined by senior
management of WFS based upon the monitoring activities of the Company. WFS
hedges substantially all of its contracts pending securitization either through
outside parties or affiliated entities.

YEAR 2000

During 1997, the Company began a formal risk evaluation of potential Year
2000 issues. The Year 2000 issues arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20" instead of the
familiar "19". If not corrected, many computer applications could fail and
create erroneous results. The outcome of the risk evaluation was the formation
of a Year 2000 Committee that consists of officers and employees of the Company.
In addition, there is a committee that consists of directors that provide
oversight and direction to the Year 2000 Committee. The purpose of the Year 2000
Committee is to assess all risks, analyze current systems, coordinate upgrades
and replacements, and report current and projected status of all known Year 2000
compliance issues.

As a subsidiary of a federally chartered savings bank, WFS is subject to
supervision and regulation by the Office of Thrift Supervision ("OTS"). As such,
WFS and the Bank's compliance to Year 2000 issues are subject to the examination
of the OTS.

The Company has initiated a five-phase program to address the issues
related to the Year 2000 and the impact on the Company's information and
non-information technology systems. In addition, as part of the program, the
Company is in contact with its principal vendors to assess whether their Year
2000 issues, if any, will affect the Company.

The Company, in phase one, identified Year 2000 issues and created a plan.
In phase two, the Company took inventory of the systems and programs affected by
the Year 2000 issues. Currently, the Company is in the third, fourth and fifth
phases of its Year 2000 plan. In these phases, the Company ensures that the
systems have been fixed and tested. It is expected that the third and fourth
phases be completed by March 1999. The final phase implements the tested Year
2000 compliant systems. For some applications, this phase has begun. The Company
expects to have all applications implemented by June 30, 1999.

The Company's replacement or remedied costs for Year 2000 compliance issues
is estimated at approximately $0.9 million, which the Company will expense as
incurred. This estimated cost consists primarily of software upgrades that
include new features which are combined with Year 2000 corrections. The
Company's inception to date Year 2000 cost is approximately $0.5 million.

28
<PAGE> 31

Due to the uncertainty and the lack of current disclosure by the electrical
utility industry regarding the progress toward becoming Year 2000 compliant, the
company estimates that the worst case Year 2000 issue scenario would be a
possible discontinuance of electrical power. In the event of an electrical power
failure, the Company has the capability to run its information systems at the
corporate location on diesel powered generators. There is no guarantee, however,
that all issues will be foreseen and corrected, or that no material disruption
of our business will occur.

EFFECT OF INFLATION AND CHANGING PRICES

Unlike many industrial companies, substantially all of the assets and
liabilities of WFS are monetary in nature. As a result, interest rates have a
more significant effect on WFS' performance than the general level of inflation.
See "Asset/Liability Management".

CURRENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued "SFAS No. 130, Reporting Comprehensive
Income". This statement is effective with the year-end 1998 financial
statements; however, a total for comprehensive income is required in the
financial statements of interim periods beginning with the first quarter of
1998. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This Statement establishes standards for
reporting and displaying comprehensive income and its components in the
financial statements. It requires that a company classify items of other
comprehensive income, as defined by accounting standards, by their nature (e.g.,
unrealized gains or losses on securities available for sale and retained
interests in securitized assets) in a financial statement with the same
prominence as other financial statements, but does not require a specific format
for that statement. The accumulated balance of comprehensive income is to be
displayed separately from retained earnings and additional paid-in capital in
the equity section of the consolidated statements of financial condition.

In June 1998 the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133"). This statement provides guidance for the way public enterprises report
information about derivatives and hedging in annual financial statements and in
interim financial reports. The derivatives and hedging disclosure is required
for financial statements for fiscal years beginning after June 15, 1999. The
Statement will require WFS to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must by adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
WFS is in the process of evaluating the effect SFAS 133 will have, if any, on
the earnings and financial position of the Company.

FORWARD-LOOKING STATEMENTS

Included in our Management's Discussion and Analysis of Financial Condition
and Results of Operations section of this Annual Report on Form 10-K are several
"forward-looking statements." Forward-looking statements are those which use
words such as "believe", "expect", "anticipate", "intend", "plan", "may",
"will", "should", "estimate", "continue" or other comparable expression. These
words indicate future events and trends. Forward-looking statements are our
current views with respect to future even and financial performance. These
forward-looking statement are subject to many risks and uncertainties which
could cause actual results to differ significantly from historical results or
from those anticipated by us. The most significant risks and uncertainties we
face are:

1. the level of charge-offs, as an increase in the level of charge-offs
will decrease our earnings;

2. our ability to originate new contracts in a sufficient amount to reach
our needs, as a decrease in the amount of contracts we originate will
decrease our earnings;

29
<PAGE> 32

4. the continued availability of sources of funding for our operations, as
a reduction in the availability of funding will reduce our ability to
originate contracts;

5. maintaining the level of operating costs; as an increase in those costs
will reduce our net earnings; and

6. the Year 2000 issues; as a disruption of our collection efforts as a
result of Year 2000 problems or an increase in our costs to correct Year
2000 issues will reduce earnings.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Credit risk and interest rate risk are the primary risks facing the
Company. The Company relies upon sound underwriting practices, credit scoring
and adequate loan loss reserves in order to address credit risk (see
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Asset Quality).

The Company's Asset/Liability committee is responsible for the management
of interest rate risk. This committee closely monitors interest rate risk and
recommends policy for managing this risk. The primary measurement tool for
evaluating this risk is the use of interest rate shock analysis. It should be
noted that shock analysis is objective but not entirely realistic in that it
assumes an instantaneous and isolated set of events.

Contracts originated and held by WFS are all fixed rate and accordingly
have exposure to changes in interest rates. WFS prepayment experience on
contracts has not been historically sensitive to changes in interest rates and
WFS, therefore, believes it is not expected to be exposed to significant
prepayment risk relative to changes in interest rates.

As a result of this approach to interest rate management, combined with the
Company's hedging strategies, WFS does not anticipate that changes in interest
rate will materially affect the Company's results of operations or liquidity,
although no assurance can be given in this regard.

The following table provides information about the Company's derivative
financial instruments and other financial instruments used that are sensitive to
changes in interest rates. For loans and liabilities with contractual
maturities, the table presents principal cash flows and related weighted average
interest rates by

30
<PAGE> 33

contractual maturities as well as the Company's historical experience of the
impact of interest rate fluctuations on the prepayment of contracts.

<TABLE>
<CAPTION>
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
-------- -------- -------- -------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Fixed interest rate loans..... $290,822 $229,727 $167,393 $124,137 $76,388 $7,604 $896,071 $943,393
Average interest rate....... 14.48% 14.62% 14.70% 14.71% 14.26% 11.97% 14.55%
RATE SENSITIVE LIABILITIES:
Fixed interest rate
borrowings.................... $ 10,000 $ 25,000 $ 50,000 $ 50,000 $25,000 $160,000 $128,450
Average interest rate........... 7.25% 7.25% 8.34% 8.34% 7.25% 8.61%
Variable interest rate
borrowings.................... $554,836 $554,836 $554.836
Average interest rate........... 6.04% 6.04%
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Forward agreements in net
receivable position........... $ 4,389
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

WFS Consolidated Financial Statements begin on page F-3 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

Certain information required by Part III is omitted from this report, as
WFS will file a definitive proxy statement (the "Proxy Statement") within 120
days after the end of its fiscal year pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for its Annual Meeting of Stockholders to be
held April 27, 1999 and the information included therein is incorporated herein
by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors appears under the caption "Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
Information regarding executive officers appears under the caption "Executive
Officers Who Are Not Directors" in the Proxy Statement and is incorporated
herein by reference. Information regarding Section 16 (a) Beneficial Ownership
Reporting Compliance appears under that caption in the Proxy Statement and is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation appears under the caption
"Executive Compensation Summary" in the Proxy Statement and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management appears under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement and is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions
appears under the caption "Item 1. Business -- Transactions with Related
Parties".

31
<PAGE> 34

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:

(1) FINANCIAL STATEMENTS

The following consolidated financial statements and report of
independent auditors of WFS Financial Inc and Subsidiaries are included
in this Report commencing on page F-2.

Report of Independent Auditors

Consolidated Statements of Financial Condition at the years ended
December 31, 1998 and 1997.

Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996.

Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997, and 1996.

Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996.

Notes to Consolidated Financial Statements

(2) FINANCIAL STATEMENT SCHEDULES

Schedules to the consolidated financial statements are omitted because
the required information is inapplicable or the information is
presented in WFS' consolidated financial statements or related notes.

(3) EXHIBITS

32
<PAGE> 35

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
10.12 Master Reinvestment Contract between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.13 Amendment No. 1, dated as of June 1, 1995 to the Restated
Master Reinvestment Reimbursement Agreement
10.14 Amended and Restated Master Collateral Assignment Agreement
10.15 Management Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.16 Management Agreement among WFS Financial Inc, Western
Financial Bank, F.S.B., WFS Financial Auto Loans, Inc. and
WFS Financial Auto Loans 2, Inc. dated May 1, 1995(1)
10.17 Form of WFS Financial Inc Dealer Agreement(5)
10.18 Form of WFS Financial Inc Loan Application(5)
10.19 WFS 1996 Incentive Stock Option Plan(6)
10.20 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
10.21 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated August 1, 1997
10.21.1 Amendment No. 1, dated as of August 1, 1997 to the
Promissory Note of WFS Financial in favor of Western
Financial Bank, F.S.B.
10.22 Investment Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1996
10.23 Management Services Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated January 1, 1997
10.24 Employment Agreement(8)(9)(10)
21.1 Subsidiaries of WFS Financial Inc
23.1 Consent of Ernst & Young LLP
24 Power of Attorney(1)
27 Financial Data Schedule
</TABLE>

- ---------------
(1) Exhibits previously filed with WFS Financial Inc Registration Statement on
Form S-1 (File No. 33-93068), filed August 8, 1995 incorporated herein by
reference under Exhibit Number indicated.

(2) Exhibits previously filed with Westcorp Registration Statement on Form S-1
(File No. 33-4295), filed May 2, 1986 incorporated herein by reference
under Exhibit Number indicated.

(3) Exhibits previously filed with Westcorp Registration Statement on Form S-4
(File No. 33-34286), filed April 11, 1990 incorporated herein by reference
under Exhibit Number indicated.

(4) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 33-43898), filed December 11, 1991 incorporated herein by
reference under Exhibit Number indicated.

(5) Amendment No. 1, dated as of July 14, 1995 to the WFS Financial Inc
Registration statement on Form S-1 (File No. 33-93068) incorporated herein
by reference under Exhibit Number indicated.

(6) Exhibit previously filed with WFS Registration Statement on Form S-8 (File
No. 33-7485), filed July 3, 1996 incorporated by reference under the
Exhibit Number indicated. Amendment No. 1 dated as of November 13, 1997
filed with the WFS Registration Statement on Form S-8 (File No. 333-40121)
incorporated herein by reference under Exhibit Number indicated.

(7) Exhibits previously filed with Westcorp Registration Statement on Form S-8
(File No. 333-11039), filed August 29, 1996 incorporated herein by
reference under Exhibit Number indicated.

33
<PAGE> 36

(8) Employment Agreement, in letter form, dated March 11, 1997 between Westcorp
and Andrey R. Kosovych (will be provided to the SEC upon request).

(9) Employment Agreement dated February 27, 1998 between the registrant and Joy
Schaefer (will be provided to the SEC upon request).

(10) Employment Agreement dated February 27, 1998 between the registrant,
Westcorp and Lee A. Whatcott (will be provided to the SEC upon request).

34
<PAGE> 37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

WFS FINANCIAL INC

Dated: March 23, 1999 By: /s/ JOY SCHAEFER
------------------------------------
Joy Schaefer
Vice Chairman, Director and
Chief Executive Officer

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ ERNEST S. RADY Chairman of the Board March 23, 1999
- ---------------------------------------------
Ernest S. Rady

/s/ JOY SCHAEFER Vice Chairman, Director and March 23, 1999
- --------------------------------------------- Chief Executive Officer
Joy Schaefer

/s/ JAMES DOWLAN Vice Chairman, Director and March 23, 1999
- --------------------------------------------- Senior Executive Vice President
James R. Dowlan

/s/ HOWARD C. REESE Vice Chairman and Director March 23, 1999
- ---------------------------------------------
Howard C. Reese

/s/ STANLEY E. FOSTER Director March 23, 1999
- ---------------------------------------------
Stanley E. Foster

Director March , 1999
- ---------------------------------------------
Bernard E. Fipp

Director March , 1999
- ---------------------------------------------
Duane A. Nelles

/s/ LEE A. WHATCOTT Executive Vice President March 23, 1999
- --------------------------------------------- (Principal Financial and
Lee A. Whatcott Accounting Officer) and Chief
Financial Officer
</TABLE>

35
<PAGE> 38

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

WFS FINANCIAL INC

CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT AUDITORS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS.............................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Financial Condition at December
31, 1998 and 1997......................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 39

REPORT OF INDEPENDENT AUDITORS

Board of Directors
WFS Financial Inc

We have audited the accompanying consolidated statements of financial
condition of WFS Financial Inc and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These consolidated financial statements are the responsibility of WFS
Financial Inc's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly
in all material respects, the consolidated financial position of WFS Financial
Inc and subsidiaries at December 31, 1998 and 1997 and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Los Angeles, California
January 25, 1999

F-2
<PAGE> 40

WFS FINANCIAL INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short term investments -- parent............................ $ 15,020 $143,805
Contracts receivable........................................ 70,814 52,596
Contracts held for sale..................................... 825,257 183,529
Allowance for credit losses................................. (11,246) (6,787)
---------- --------
Contracts receivable, net................................. 884,825 229,338
Amounts due from trusts..................................... 332,732 295,123
Retained interest in securitized assets..................... 171,230 181,177
Property, plant and equipment............................... 26,482 21,406
Accrued interest receivable................................. 5,859 1,867
Other assets................................................ 8,192 5,444
---------- --------
$1,444,340 $878,160
========== ========
LIABILITIES
Notes payable -- parent..................................... $ 160,000 $175,000
Line of credit -- parent.................................... 554,836
Amounts held on behalf of trustee........................... 528,092 488,654
Other liabilities........................................... 37,071 34,613
---------- --------
1,279,999 698,267
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 25,708,611 shares in 1998 and in
1997...................................................... 73,564 73,564
Additional paid-in capital.................................. 4,000 4,000
Retained earnings........................................... 85,315 101,882
Accumulated other comprehensive income, net of tax.......... 1,462 447
---------- --------
164,341 179,893
---------- --------
$1,444,340 $878,160
========== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 41

WFS FINANCIAL INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Interest income................................... $ 89,758 $ 62,988 $ 63,300
Interest expense -- parent........................ 24,780 10,331 9,767
----------- ----------- -----------
Net interest income................................. 64,978 52,657 53,533
Servicing income.................................... 76,110 137,753 111,969
Gain on sale of contracts........................... 25,438 39,399 41,518
----------- ----------- -----------
TOTAL REVENUES............................ 166,526 229,809 207,020
EXPENSES:
Provision for credit losses....................... 15,146 8,248 10,275
Operating expenses:
Salaries and employee benefits................. 95,740 95,731 71,897
Credit and collections......................... 21,248 14,522 9,065
Miscellaneous.................................. 48,054 57,165 49,363
----------- ----------- -----------
TOTAL OPERATING EXPENSES.................. 165,042 167,418 130,325
Restructuring charge...................... 15,000
----------- ----------- -----------
TOTAL EXPENSES............................ 195,188 175,666 140,600
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... (28,662) 54,143 66,420
Income tax (benefit)................................ (12,095) 22,829 27,779
----------- ----------- -----------
NET INCOME (LOSS)......................... $ (16,567) $ 31,314 $ 38,641
----------- ----------- -----------
Net income (loss) per common share -- Basic......... $ (0.64) $ 1.22 $ 1.50
=========== =========== ===========
Net income (loss) per common share -- Diluted....... $ (0.64) $ 1.22 $ 1.50
=========== =========== ===========
Weighted average number of shares
outstanding -- Basic.............................. 25,708,611 25,691,892 25,684,175
=========== =========== ===========
Weighted average number of shares
outstanding -- Diluted............................ 25,708,611 25,696,513 25,723,378
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 42

WFS FINANCIAL INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN INCOME RETAINED
SHARES STOCK CAPITAL NET OF TAX EARNINGS TOTAL
---------- ------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996........ 23,349,250 $73,124 $4,000 $ 31,927 $109,051
Net Income.................... 38,641 38,641
Unrealized gain on retained
interests in securitized
assets
--------
Comprehensive income.......... 38,641
10% stock dividend............ 2,334,918
---------- ------- ------ ------ -------- --------
Balance, December 31, 1996...... 25,684,168 73,124 4,000 70,568 147,692
Net Income.................... 31,314 31,314
Unrealized gain on retained
interests in securitized
assets(1).................. $ 447 447
--------
Comprehensive income....... 31,761
Stock options exercised.... 24,443 440 440
---------- ------- ------ ------ -------- --------
Balance, December, 1997....... 25,708,611 73,564 4,000 447 101,882 179,893
Net loss...................... (16,567) (16,567)
Unrealized gain on retained
interests in securitized
assets(1).................. 1,015 1,015
--------
Comprehensive loss............ (15,552)
---------- ------- ------ ------ -------- --------
Balance, December 31, 1998...... 25,708,611 $73,564 $4,000 $1,462 $ 85,315 $164,341
========== ======= ====== ====== ======== ========
</TABLE>

- ---------------
(1) The pre-tax increase in unrealized gains on retained interest in securitized
assets at December 31, 1998 and 1997 was $1.8 million and $0.8 million,
respectively.

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 43

WFS FINANCIAL INC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. ($ 16,567) $ 31,314 $ 38,641
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating
activities:
Provision for credit losses....................... 15,146 8,248 10,275
Depreciation...................................... 8,066 9,731 739
Amortization of retained interest in securitized
assets......................................... 103,610 53,421 60,519
Loss on disposal of assets........................ 7,092
(Increase) decrease in assets:
Automobile contracts:
Purchase of contracts.......................... (2,670,696) (2,285,279) (2,121,689)
Proceeds from sale of contracts................ 1,885,000 2,190,000 2,090,000
Other change in contracts...................... 115,180 89,826 105,757
Other assets................................... (6,855) (3,038) 5,122
Increase in liabilities:
Other liabilities................................. 1,724 24,984 1,586
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES........................................ (558,300) 119,207 190,950
INVESTING ACTIVITIES
Purchase of property, plant and equipment......... (20,236) (14,233) (13,362)
Increase in trust receivable...................... (37,609) (103,654) (81,238)
Increase in retained interest in securitized
asset.......................................... (91,914) (112,230) (104,071)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............... (149,759) (230,117) (198,671)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock............ 440
(Payments) on/proceeds from notes payable......... (15,000) 50,000
Increase in line of credit........................ 554,836
Increase in trustee accounts...................... 39,438 95,205 51,757
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........... 579,274 145,645 51,757
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (128,785) 34,735 44,036
Cash and cash equivalents at beginning of period.... 143,805 109,070 65,034
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 15,020 $ 143,805 $ 109,070
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest....................................... $ 23,322 $ 10,746 $ 9,542
Income taxes................................... 5,397 17,294
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 44

WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying consolidated financial statements
include the accounts of WFS Financial Inc ("WFS") and its subsidiaries, WFS
Financial Auto Loans, Inc. ("WFAL"), WFS Financial Auto Loans 2, Inc. ("WFAL2")
and WFS Investments, Inc. ("WFSII"). All significant intercompany transactions
and accounts have been eliminated in consolidation. Certain amounts have been
reclassified to conform to the 1998 presentation. After the initial public
offering on August 8, 1995, WFS became a majority owned subsidiary of Western
Financial Bank ("the Bank"), which is a wholly owned subsidiary of Westcorp.

WFS pays a monthly management fee to the Bank and Westcorp which covers
various expenses, including accounting, legal, tax, cash management, purchasing
and auditing services. Additionally, the Bank and Westcorp pay a fee to WFS for
information services. The management fee is based upon the actual costs incurred
and estimates of actual usage. WFS believes that the management fee approximates
the cost to perform these services on its own behalf or to acquire them from
third parties. WFS has the option, under the management agreements, to procure
these services on its own should it be more economically beneficial to WFS to do
so.

Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Nature of Operations: WFS is a consumer finance company that specializes in
the purchase, securitization and service of fixed rate consumer auto loans
("contracts"). WFS purchases contracts from franchised new and independent used
car dealers on a nonrecourse basis and originates loans directly with consumers
which are collectively known as contracts. WFS purchased contracts in 42 states
from over 11,000 dealers.

Cash and Cash Equivalents: Cash and cash equivalents includes short term
investments with the Bank. There are no material restrictions as to the
withdrawal or usage of this amount.

Allowance for Credit Losses: The allowance for credit losses is maintained
at a level believed adequate by management to absorb inherent losses in the on
balance sheet contract portfolio. Management's determination of the adequacy of
the allowance is based on an evaluation of the portfolio, past contract loss
experience, current economic conditions, volume, pending contract sales, growth
and composition of the contract portfolio, and other relevant factors. The
allowance is increased by provisions for credit losses charged against income.

Sales of Contracts: Contracts are originated and sold to investors with
servicing rights retained by WFS. WFS does not retain any recourse with respect
to the contracts securitized. As part of the sale, the trustee reimburses the
Company for borrowing costs incurred between the cut-off date of the loans and
the closing date of the sale.

Gain on sale of contracts represents the present value of the estimated
future earnings to be received from the excess spread created in the
securitization transactions less prepaid dealer participations, issuance costs,
and the effect of hedging activities. These retained interest in securitized
assets ("RISA") are capitalized and amortized over the expected repayment life
of the underlying contracts. WFS utilizes the cash-out method in determining the
valuation of the RISA.

WFS evaluates quarterly the carrying value of its RISA in light of the
actual repayment experience of the underlying contracts and makes adjustments to
reduce the carrying value, if appropriate. Servicing income and amortization of
RISA are included in servicing income in the Consolidated Statements of
Operations.

F-7
<PAGE> 45
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

As servicer of these contracts, WFS holds and remits funds collected from
the borrowers on behalf of the trustee pursuant to a reinvestment contract that
WFS has entered into with the Bank. These amounts are reported as amounts held
on behalf of trustee. WFS retains servicing rights and is entitled to servicing
income. Amounts due from trusts represents servicing income earned by WFS for
which WFS has not yet received repayment from the trust.

Nonaccrual Contracts: WFS continues to accrue interest income on contracts
until the contract is charged off, which occurs automatically after the contract
is contractually past due 120 days. At the time that the contract is charged
off, all accrued interest is also reversed.

Contracts Held for Sale: Contracts held for sale are stated at the lower of
aggregate amortized cost or market. The carrying amount of the specific contract
pool sold is used to compute gains or losses. Market value is based on
discounted cash flow calculations, which approximates the amounts realized upon
securitization of the contracts.

WFS' hedging strategy includes the use of two-year Treasury securities
forward agreements. These agreements are entered into by the Company in numbers
and amounts which generally correspond to the principal amount of the
securitization transactions. The market value of these forward agreements
responds inversely to the market value changes of the underlying contracts.
Because of this inverse relationship, WFS can effectively lock in its gross
interest rate spread at the time of the hedge transaction. Gains and losses
relative to these agreements are deferred and recognized in full at the time of
securitization as an adjustment to the gain or loss on the sale of the
contracts. WFS uses only highly rated counterparties and further reduces its
risk by avoiding any material concentration with a single counterparty. Credit
exposure is limited to those agreements with a positive fair value and only to
the extent of that fair value.

Property, Plant and Equipment: Property, plant and equipment are recorded
at cost less accumulated depreciation and amortization and are depreciated over
their estimated useful lives principally using the straight line method for
financial reporting and accelerated methods for tax purposes. Leasehold
improvements are amortized over the lives of the respective leases or the
service lives of the improvements, whichever is shorter.

Interest Income and Fee Income: Interest income is earned in accordance
with the terms of the contracts. For pre-computed contracts, interest is earned
monthly and for simple interest contracts, interest is earned daily. Interest
income on certain contracts is earned using the effective yield method and
classified on the balance sheet as interest receivable to the extent not
collected. Other contracts use the sum of the months digits method, which
approximates the effective yield method.

WFS defers contract origination fees and premiums paid to dealers. The net
amount is amortized as an adjustment to the related contract's yield, over the
contractual life of the related contract or until the contract is sold at which
time any remaining amounts are included as part of the gain on sale of
contracts. Fees for other services are recorded as income when earned.

Stock Options: Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), provides for companies
to recognize compensation expense associated with stock-based compensation plans
over the anticipated service period based on the fair value of the award on the
date of grant. However, SFAS 123 allows companies to continue to measure
compensation costs prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to
continue accounting for stock-based compensation plans under APB 25 must make
pro forma disclosures of net income and earnings per share as if SFAS 123 has
been adopted, if the fair value of the options has a material impact on
earnings. WFS has continued to account for stock-based compensation plans under
APB 25. The impact of applying SFAS 123 in 1998, 1997 and 1996 is immaterial to
the financial statements of WFS.

F-8
<PAGE> 46
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

Income Taxes: WFS files consolidated federal and state tax returns as part
of a consolidated group that includes the Bank and Westcorp. WFS taxes are paid
in accordance with a tax sharing agreement that allocates taxes based on the
relative income or loss of each entity on a stand-alone basis.

Fair Value of Financial Instruments: Fair value information about financial
instruments whether or not recognized in the balance sheet, for which it is
practicable to estimate that value, are reported using quoted market prices. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and in
many cases, could not be realized in immediate settlement of the instrument.
Fair values for certain financial instruments and all non-financial instruments
are not required to be disclosed. Accordingly, the aggregate fair value of
amounts presented do not represent the underlying value of WFS.

WFS' financial instruments as defined by Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments,"
including short term investments, retained interest in securitized assets and
amounts held on behalf of trustee are accounted for on a historical cost basis
which , due to the nature of these financial instruments, approximates fair
value. The fair value for contracts receivable is based on quoted market prices
of similar contracts sold in conjunction with securitization transactions,
adjusted for differences in contract characteristics. The fair value of forward
agreements is estimated by obtaining market quotes from brokers. The fair value
of notes payable -- parent is estimated using discounted cash flow analysis,
based on current borrowing rates for similar instruments.

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133"). This statement provides guidance for the way public enterprises report
information about derivatives and hedging in annual financial statements and in
interim financial reports. The derivatives and hedging disclosure is required
for financial statements for fiscal years beginning after June 15, 1999. The
Statement will require WFS to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
WFS is in the process of evaluating the effect SFAS 133 will have, if any, on
the earnings and financial position of the Company.

F-9
<PAGE> 47
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

NOTE 2 -- NET CONTRACTS RECEIVABLE

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

Net contracts receivable consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Contracts.............................................. $923,662 $253,455
Unearned discounts..................................... (48,015) (22,226)
-------- --------
Net contracts................................ 875,647 231,229
Allowance for credit losses............................ (11,246) (6,787)
Dealer participation, net of deferred contract fees.... 20,424 4,896
-------- --------
Net contracts receivable..................... $884,825 $229,338
======== ========
</TABLE>

The following table presents the changes in amounts deferred and carried as
adjustments to the contract balance including deferred contract fees and dealer
participation.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............. $ 4,896 $ 5,642 $ 7,401
New deferrals.............................. 72,255 62,662 62,585
Amortization............................... (6,128) (4,107) (4,618)
Sales...................................... (50,599) (59,301) (59,726)
-------- -------- --------
Balance at end of period................... $ 20,424 $ 4,896 $ 5,642
======== ======== ========
</TABLE>

The contracts purchased by the Company are fixed-rate loans. The Company
bears the risk of interest-rate increases during the period between the setting
of the rate at which the contract will be acquired and their sale in a
securitization transaction. In order to mitigate this risk, the Company uses
two-year Treasury securities forward agreements to minimize its exposure to
interest rate risk during the relevant period. The fair value of these
instruments may vary with changes in interest rates. Generally, these agreements
are entered into by WFS in amounts which correspond to the principal amount of
the securitization transactions. The market value of these forward agreements is
designed to respond inversely to the market value changes of the underlying
contracts. Because of this inverse relationship, WFS can effectively lock in its
gross interest rate spread at the time of entering into the hedge transaction.
Gains and losses relative to these agreements are deferred and recognized in
full at the time of securitization as an adjustment to the gain or loss on the
sale of the contracts. WFS enters into these forward agreements either with the
Bank, or highly rated counterparties and further reduces its risk by avoiding
any material concentration with a single counterparty. Credit exposure is
limited to those agreements with a positive fair value and only to the extent of
that fair value. WFS hedges substantially all of its contracts pending
securitization.

Contracts serviced by WFS for the benefit of others totaled approximately
$3.5 billion at December 31, 1998 and $3.4 billion at December 31, 1997.

F-10
<PAGE> 48
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

NOTE 3 -- ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period............. $ 6,787 $ 7,648 $ 7,795
Provision for credit losses................ 15,146 8,248 10,275
Charged off contracts...................... (14,832) (13,412) (15,580)
Recoveries................................. 4,145 4,303 5,158
-------- -------- --------
Balance at end of period................... $ 11,246 $ 6,787 $ 7,648
======== ======== ========
</TABLE>

NOTE 4 -- RETAINED INTEREST IN SECURITIZED ASSETS

SFAS 125 requires that following a transfer of financial assets, an entity
is to recognize the assets it controls and the liabilities it has incurred, and
derecognizes assets for which control has been surrendered and liabilities that
have been extinguished. For securitization transactions, SFAS 125 defines two
separate financial assets retained at the time of securitization, a retained
interest in securitized assets, which represents the excess spread created from
securitization, and a servicing rights asset which represents the benefit
derived from retaining the rights to service the contracts securitized. Previous
accounting guidance did not separately distinguish these rights.

Retained interests in securitized assets capitalized upon securitization of
contracts represent the present value of the estimated future earnings to be
received by WFS from the excess spread created in securitization transactions.
Excess spread is calculated by taking the difference between the coupon rate of
the contracts sold and the interest rate paid to the investors less
contractually specified servicing and guarantor fees.

Prepayment and credit loss assumptions are utilized to project future
earnings and are based upon historical experience. Credit losses are estimated
using a cumulative loss rate estimated by management to reduce the likelihood of
asset impairment. All assumptions used are evaluated each quarter and adjusted,
if appropriate, to reflect actual performance of the contracts.

Future earnings are discounted at a rate management believes to be
representative of the market at the time of securitization. The balance of the
RISA is amortized against actual excess spread income earned on a monthly basis
over the expected repayment life of the underlying contracts. RISAs are
classified in a manner similar to available for sale securities and as such are
marked to market each quarter. Market value changes are calculated by
discounting the excess spread using a current market discount rate. Any changes
in the market value of the RISA is reported as a separate component of
shareholders' equity as an unrealized gain or loss, net of applicable taxes.

Two methods have arisen in practice to determine the fair value of credit
enhancement assets: the cash-in method and the cash-out method. The Securities
and Exchange Commission ("SEC") has set forth specific guidance that the
cash-out method is the only appropriate method to be used in determining the
fair value of such assets as defined by the SFAS No. 125. The cash-out method
discounts expected cash flows from the period in which the transferor expects to
receive the cash, thereby taking into consideration the period of time that the
cash is received from obligors but restricted from distribution to the
transferor. WFS has historically used the cash-out method in measuring such
assets.

F-11
<PAGE> 49
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

servicing fee, late charges, other ancillary income, and float benefit and
netting them against the actual cost to service contracts. WFS has not
capitalized any servicing rights as of December 31, 1998.

Changes in the RISA were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance.......................... $181,177 $121,597 $ 78,045
Additions.................................. 91,914 112,230 104,071
Amortization............................... (103,610) (53,421) (60,519)
Change in unrealized gain on securities
available for sale....................... 1,749 771
-------- -------- --------
Ending balance............................. $171,230 $181,177 $121,597
======== ======== ========
</TABLE>

At the time of a securitization, the Company utilizes prepayment speed, net
credit loss and discount rate assumptions to initially compute the value of the
RISA. These assumptions may change periodically based on actual performance or
other factors. During 1998, the Company utilized prepayment rates of 1.6% ABS in
computing RISA. Cumulative net credit loss assumptions utilized for 1998
securitizations ranged from 6% to 7%. The Company used a discount rate of 425
basis points over the two-year Treasury rate at the time of securitization in
discounting future earnings.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Estimated net undiscounted RISA earning............. $ 361,209 $ 438,190
Off balance sheet allowance for losses.............. (170,664) (236,796)
Discount to present value........................... (19,315) (20,217)
---------- ----------
Retained interest in securitized assets............. $ 171,230 $ 181,177
========== ==========
Outstanding balance of contracts sold through
securitizations................................... $3,491,452 $3,449,590
Off balance sheet allowance for losses as a percent
of contracts sold through securitizations......... 4.89% 6.86%
</TABLE>

WFS believes that the off balance sheet allowance for losses is currently
adequate to absorb potential losses in the sold portfolio.

F-12
<PAGE> 50
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following at:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 2,017 $ 2,017
Construction in progress................................. 3,085 2,749
Buildings................................................ 8,230
Computers and software................................... 14,826 28,885
Furniture, fixtures and leasehold improvements........... 4,950 4,554
Equipment................................................ 3,415 3,617
Automobiles.............................................. 259 214
------- -------
36,782 42,036
Less: accumulated depreciation........................... 10,300 20,630
------- -------
$26,482 $21,406
======= =======
</TABLE>

The increase in property, plant and equipment, net of accumulated
depreciation, of $5.1 million or 23.7% was primarily due to the construction and
completion of the Company's regional servicing center located in Dallas, Texas.

NOTE 6 -- INTERCOMPANY AGREEMENTS

In 1995, WFS entered into a Line of Credit agreement and a Senior Note with
the Bank. The Line of Credit agreement permits WFS to draw up to $900 million to
be used in its operations. The Line of Credit terminates on December 31, 1999
although the term may be extended by WFS for additional periods up to 56 months.
When secured by contracts, the first $600 million of the Line of Credit carries
an interest rate equal to the Federal composite commercial paper rate plus 10
basis points, with the margin increasing to 50 basis points to the extent the
obligation is not secured. The next $300 million of the Line of Credit carries
an interest rate equal to the Federal composite commercial paper rate plus 40
basis points when secured by contracts, with the margin increasing to 80 basis
points to the extent the obligation is not secured. The average balance of the
Line of Credit was $278 million and $107 million for 1998 and 1997,
respectively. The weighted average interest rate was 6.04% and 5.70% and the
interest expense was $16.8 million, $6.1 million, and $8.1 for 1998 and 1997 and
1996, respectively. The Line of Credit had $555 million outstanding at December
31, 1998.

WFS also borrowed $125 million from the Bank under the terms of the Senior
Note. The Senior Note provides for principal payments of $25 million per year,
commencing on April 30, 1999 and continuing through its final maturity, April
30, 2003. During 1998, the Company made a paydown of $15.0 million without
prepayment penalties. Interest payments on the Senior Note are due quarterly, in
arrears, calculated at the rate of 7.25% per annum. The Senior Note is not
secured. Pursuant to the terms of the Senior Note, WFS may not incur any other
indebtedness which is senior to the obligations evidenced by the Senior Note
except for (i) indebtedness collateralized or secured under the Line of Credit
and (ii) indebtedness for similar types of warehouse lines of credit. The Senior
Note had interest expense of $9.0 million and $9.1 million for 1998 and 1997,
respectively.

Additionally, WFS borrowed $50 million from the Bank under the terms of the
Promissory Note dated August 1, 1997. The Promissory Note provided for principal
payments in two equal annual installments of $25 million. Subsequent to year
end, the Promissory Note was amended to increase the amount by $30 million and
to provide for principal payments in two equal annual installments of $40
million commencing on July 31,

F-13
<PAGE> 51
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

2001. Interest payments on the Promissory Note are due quarterly, in arrears,
calculated at the rate of 9.42% per annum. Pursuant to the terms of the
Promissory Note, WFS may not incur any other indebtedness which is senior to the
obligations evidenced by the Promissory Note except for (i) indebtedness under
the Senior Note (ii) indebtedness collateralized or secured under the Line of
Credit and (iii) indebtedness for similar types of warehouse lines of credit.
The Promissory Note had interest expense of $4.7 million and $2.0 million during
1998 and 1997, respectively.

WFS also invests its excess cash at the Bank under an Investment Agreement.
The Bank pays WFS an interest rate equal to the Federal composite commercial
paper rate on this excess cash. The weighted average interest rate was 5.45% and
5.78% for 1998 and 1997, respectively. The average balance of the excess cash
was $9.0 million and $30.0 million, and the interest income earned was $0.5
million and $1.7 million during 1998 and 1997, respectively.

WFS has entered into certain management agreements with the Bank and
Westcorp pursuant to which WFS pays its allocated portion of certain costs and
expenses incurred by the Bank and Westcorp with respect to services or
facilities of the Bank and Westcorp used by WFS or its subsidiaries, including
their principal office facilities, field offices of WFS and overhead and
employee benefits pertaining to Bank and Westcorp employees who also provide
services to WFS or its subsidiaries. Additionally, as part of these management
agreements, the Bank and Westcorp have agreed to reimburse WFS for similar costs
incurred. The management agreements may be terminated by any party upon 5 days
prior written notice without cause, or immediately in the event of the other
party's breach of any covenant, obligation, or duty contained in the applicable
management agreement or for violation of law, ordinance, statute, rule or
regulation governing either party to the applicable management agreement.

In each securitization transaction, the Bank and WFAL2 have entered into a
reinvestment contract, which is deemed to be an eligible investment under the
relevant securitization agreements. The securitization agreements require,
provided certain conditions are met, that all cash flows of the relevant trust
and the associated spread accounts be invested in the applicable reinvestment
contract. A limited portion of the invested funds may be used by WFAL2 and the
balance may be used by the Bank. The Bank makes its portion available to WFS
pursuant to the terms of the WFS Reinvestment Contract ("RIC"). Under the
RIC,WFS receives access to all of the cash available to the Bank under each
trust reinvestment contract and is obligated to repay to the Bank an amount
equal to the cash so used when needed by the Bank to meet its obligations under
the individual trust reinvestment contracts. With the portion of the cash
available to it under the individual trust reinvestment contracts, WFAL2
purchases contracts from WFS pursuant to the terms of Sale and Servicing
Agreements.

FSA, the trust reinvestment contracts may be eligible investments provided
the Bank and WFAL2 pledge adequate collateral to secure their respective
obligations. In accordance with this agreement, the Bank and WFAL2 pledge
property owned by each for the benefit of the trustee of each trust and FSA. WFS
pays the Bank a fee equal to 12.5 basis points of the amount of collateral
pledged by the Bank as consideration for the pledge of collateral by the Bank
and for WFS' access to cash under the RIC. During 1998, WFS paid the Bank $0.7
million for this purpose. As WFAL2 directly utilizes the cash made available to
it to purchase contracts for its own account from WFS, no additional
consideration from WFS is required to support WFAL2's pledge of its property
under the agreement with FSA. While WFS is under no obligation to repurchase
contracts from WFAL2 to the extent WFAL2 needs to sell any such contracts to
fund its repayment obligations under the trust reinvestment contracts, it is
anticipated that WFS would prefer to purchase those contracts than for WFAL2 to
sell those contracts to a third party. The RIC, by its terms, is to

F-14
<PAGE> 52
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

remain in effect so long as any of the trust reinvestment contracts is an
eligible investment for its related securitization transaction. During 1998 the
average amount outstanding under the RIC was $585 million and the average amount
of contracts purchased by WFAL2 from WFS was $119 million. At December 31, 1998,
the amount outstanding under the RIC was $364 million and the amount of
contracts held by WFAL2 purchased from WFS was $355 million.

WFS has entered into an agreement with Westran Services Corp. ("Westran"),
which is a subsidiary of Westcorp, to receive travel related services. WFS
believes that the services rendered by Westran are reasonable and representative
of what such costs would have been had WFS used an unaffiliated entity. Total
amounts paid to Westran in 1998, 1997 and 1996 was $0.2 million, $0.1 million
and $0.4 million, respectively.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

Future minimum payments under noncancelable operating leases on premises
and equipment with terms of one year or more as of December 31 are as follows:

<TABLE>
<CAPTION>
1998
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
1999...................................... $ 3,903
2000...................................... 3,325
2001...................................... 2,127
2002...................................... 752
2003...................................... 477
Thereafter................................ 510
-------
$11,094
=======
</TABLE>

These agreements include, in certain cases, various renewal options and
contingent rental agreements. Rental expense amounted to $7.6 million, $9.0
million and $5.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.

WFS is involved as a party to certain legal proceedings incidental to its
business. Management of WFS believes that the outcome of such proceedings will
not have a material effect upon its business or financial condition.

NOTE 8 -- SERVICING INCOME

Servicing income consists of the following components:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retained interest income.................... $ 1,961 $ 69,844 $ 55,219
Contractual servicing income................ 37,180 30,803 24,404
Other fee income............................ 36,969 37,106 32,346
------- -------- --------
Total servicing income............ $76,110 $137,753 $111,969
======= ======== ========
</TABLE>

NOTE 9 -- EMPLOYEE STOCK OWNERSHIP AND SALARY SAVINGS PLAN

WFS participates in the Westcorp Employee Stock Ownership and Salary
Savings Plan ("the Plan"), which covers essentially all full-time employees who
have completed one year of service. Contributions to the Plan are discretionary
and determined by the Board of Directors of Westcorp within limits set forth
under the

F-15
<PAGE> 53
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

Employee Retirement Income Security Act of 1974. Contributions to the Plan are
fully expensed in the year in which the contribution is made.

Westcorp's contributions to the Plan for all Westcorp employees amounted to
$0.8 million, $2.4 million and $3.4 million in 1998, 1997 and 1996,
respectively.

NOTE 10 -- STOCK OPTIONS

In 1996, WFS reserved 550,000 shares of common stock for future issuance to
certain employees under an incentive stock option plan ("the Plan"). In 1997,
WFS reserved an additional 550,000 shares of common stock for future issuance
under the Plan. An additional 130,343 shares of existing options expired during
1998. There were 757,608 shares available for future grants at December 31,
1998. The options may be exercised within five to seven years after the date of
grant. Additionally, the weighted average life of the options at December 31,
1998 was 6.3 years and the exercise price of the options outstanding at December
31, 1998 ranged from $6.94 to $18.00 per share.

At December 31, 1998 there were no exercisable stock options under the
plan. In October 1998 the Company canceled 624,539 of existing options as part
of a voluntary stock option exchange program. All option holders taking part in
this program forfeited their existing options and were issued a proportionately
smaller number of new options based upon a reduced exercise price. Stock option
activity is summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
SHARES PRICE
-------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996
Issued............................................ 519,569 $18.00
Exercised.........................................
Cancelled.........................................
-------- ------
Outstanding at December 31, 1996.................... 519,569 $18.00
Issued............................................ 343,498 13.14
Exercised......................................... (24,443) 18.00
Cancelled......................................... (83,742) 17.58
-------- ------
Outstanding at December 31, 1997.................... 754,882 $15.83
Issued............................................ 326,052 7.32
Exercised.........................................
Cancelled......................................... (762,985) 15.53
-------- ------
Outstanding at December 31, 1998.................... 317,949 $ 8.14
======== ======
</TABLE>

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because WFS' employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

F-16
<PAGE> 54
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

The fair value of options granted in 1998, 1997 and 1996 was estimated at
the date of grant using a Black-Scholes option pricing model with the following
assumptions:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate............................. 4.7% 5.7% 6.2%
Volatility factor................................... .53 .57 .30
Expected option life................................ 7 years 7 years 5 years
</TABLE>

The weighted average fair value of options per share granted during 1998,
1997 and 1996 was $4.57, $8.26 and $6.82, respectively.

The Company elected to follow APB 25 and related Interpretations in
accounting for its employee stock options. Under APB 25, the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant and, therefore, no compensation expense is
recognized. Proforma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock option under the fair value method of that
statement. Proforma net income/(loss) and earnings/(loss) per diluted share for
1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE AMOUNTS)
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Proforma net income/(loss)........................... $(16,636) $30,983 $38,302
Proforma earnings/(loss) per diluted share........... $ (0.65) $ 1.21 $ 1.49
</TABLE>

The impact of applying SFAS 123 in 1998, 1997 and 1996 is immaterial to the
financial statements of WFS.

NOTE 11 -- RESTRUCTURING

In 1998, the Company completed a restructuring plan initially announced on
February 10, 1998. The goal of the plan was to consolidate offices and eliminate
redundant staff positions on a national level. The plan was achieved in two
phases. Phase I of the plan, completed in the first quarter of 1998, consisted
of the restructuring of operations in the Western United States. Phase II of the
plan, completed in the third quarter of 1998 and patterned after Phase I,
consisted of the restructuring of operations in the Central and Eastern United
States. As a result of these two restructurings, a total of 400 positions, or
19% of the Company's workforce, were eliminated and 96 offices were closed. The
total pre-tax restructuring charge in 1998 for the completed plan was $15.0
million. Restructuring related costs included $1.8 million for employee
severance and $13.2 million for lease termination fees and the write off of
disposed assets. The restructuring charge was substantially utilized during
1998.

Through the restructuring, WFS merged prime and non-prime office locations
with close geographic proximity and closed poorly performing offices. The
remaining offices now offer its dealer base the full spectrum of prime and
non-prime products through a single sales and marketing force. However, WFS
employs separate credit analysts that specialize in either reviewing prime or
non-prime paper. These analysts provide more consistent underwriting practices
through the use of a proprietary scorecard with its system-enforced credit
requirements which was also implemented during the year.

F-17
<PAGE> 55
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

NOTE 12 -- INCOME TAXES

Income tax (benefit) expense consisted of the following:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ (1,773) $ 4,967 $ 6,612
State franchise................................ (554) 1,841 1,643
-------- ------- -------
(2,327) 6,808 8,255
Deferred:
Federal........................................ (7,171) 11,913 14,880
State franchise................................ (2,597) 4,108 4,644
-------- ------- -------
(9,768) 16,021 19,524
-------- ------- -------
$(12,095) $22,829 $27,779
======== ======= =======
</TABLE>

The difference between total tax provisions and the amounts computed by
applying the statutory federal income tax rate of 35% to income before taxes is
due to:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tax at statutory rate............................ $(10,032) $18,950 $23,247
State tax (net of Federal tax benefit)........... (2,048) 3,867 4,087
Other............................................ (15) 12 445
-------- ------- -------
$(12,095) $22,829 $27,779
======== ======= =======
</TABLE>

Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Amounts previously reported as
current and deferred income tax expense have been restated. Such changes to the
components of the expense occur because all tax alternatives available to WFS
are not known for a number of months subsequent to year end.

F-18
<PAGE> 56
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

Significant components of WFS' deferred tax liabilities and assets are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Loan loss reserves..................................... $ 4,848 $ 2,990
State tax deferred benefit............................. 2,147 3,219
Other assets........................................... 2,658 1,127
-------- --------
Total deferred tax assets...................... 9,653 7,336
Deferred tax liabilities:
Accelerated depreciation for tax purposes.............. (1,738)
Asset securitization income recognized for book
purposes............................................... (28,948) (28,662)
Other liabilities........................................ (4,272) (3,284)
-------- --------
Total deferred tax liabilities................. (33,220) (33,684)
-------- --------
Net deferred tax liability............................... $(23,567) $(26,348)
======== ========
</TABLE>

NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of WFS' financial instruments are as follows at
December 31:

<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Short term investments -- parent................ $ 15,020 $ 15,020 $143,805 $143,805
Contracts receivable............................ 896,071 943,393 236,125 251,131
Retained interest in securitized assets......... 171,230 171,230 181,177 181,177
FINANCIAL INSTRUMENT AGREEMENTS HELD FOR
PURPOSES OTHER THAN TRADING:
Forward agreements.............................. 4,389 (55)
FINANCIAL LIABILITIES:
Notes payable -- parent......................... 160,000 128,450 175,000 179,238
Line of credit -- parent........................ 554,836 554,836
Amounts held on behalf of trustee............... 528,092 528,092 488,654 488,654
</TABLE>

NOTE 14 -- FINANCIAL INSTRUMENT AGREEMENTS

WFS Financial uses Forward Agreements to minimize its exposure to interest
rate risk. The fair value of these instruments may vary with changes in interest
rates. At December 31, 1998, WFS' portfolio consisted of Forward Agreements with
a notional amount of $775 million.

Notional amounts do not represent amounts exchanged with other parties and,
thus are not a measure of WFS' exposure to loss through its use of these
agreements. The amounts exchanged are determined by reference to the notional
amounts and the other terms of the agreements.

F-19
<PAGE> 57
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

NOTE 15 -- EARNINGS PER SHARE

Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
and does not include the impact of any potentially dilutive common stock
equivalents. Diluted earnings per share is arrived at by dividing net income by
the weighted average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options.

The calculation of net income per common share follows:

Options to purchase 317,949 and 469,980 shares of common stock at a range
of $6.94 to $18 per share, respectively, were outstanding during 1998 and 1997
but were not included in the computation of diluted earnings per share because
the Company experienced a loss and the options' exercise price was greater than
the average market price of the common shares, and therefore, the effect would
be antidilutive. There were no antidilutive options for 1996.

F-20
<PAGE> 58
WFS FINANCIAL INC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998

NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for
the years ended December 31, 1998 and 1997. Certain quarterly amounts have been
adjusted to conform with the year end presentation.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Interest income.................................... $ 15,290 $17,902 $25,809 $30,757
Interest expense................................... 3,270 3,991 7,666 9,853
Net interest income................................ 12,020 13,911 18,143 20,904
Provision for credit losses........................ 5,741 1,356 2,291 5,758
Income (loss) before income taxes.................. (23,068) 526 (6,835) 715
Income taxes (benefit)............................. (9,727) 234 (2,887) 285
Net income......................................... (13,341) 292 (3,948) 430
Net income (loss) per common share -- basic........ $ (0.52) $ 0.01 $ (0.15) $ 0.02
Net income (loss) per common share -- diluted...... (0.52) 0.01 (0.15) 0.02
1997
Interest income.................................... $ 14,292 $16,299 $17,044 $15,353
Interest expense................................... 1,608 2,602 2,678 3,443
Net interest income................................ 12,684 13,697 14,366 11,910
Provision for credit losses........................ 3,304 1,233 1,211 2,500
Income before income taxes......................... 15,010 17,314 10,741 11,078
Income taxes....................................... 6,378 7,364 4,370 4,717
Net income......................................... 8,632 9,950 6,371 6,361
Net income per common share -- basic............... $ 0.34 $ 0.39 $ 0.25 $ 0.25
Net income per common share -- diluted............. 0.34 0.39 0.25 0.25
</TABLE>

F-21
<PAGE> 59

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
1 Underwriting Agreement(1)
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
4 Specimen WFS Financial Inc Common Stock Certificate(5)
10.1 Westcorp Incentive Stock Option Plan(2)
10.2 Westcorp, Inc. Employee Stock Ownership and Salary Savings
Plan(3)
10.3 Westcorp 1991 Stock Option Plan(4)
10.4 1985 Executive Deferral Plan(1)
10.5 1988 Executive Deferral Plan II(1)
10.6 1992 Executive Deferral Plan III(1)
10.7 Transfer Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.8 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.9 Line of Credit Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.10 Amendment No. 3 dated as of May 1, 1995 to the Revolving
Line of Credit between WFS Financial Inc and Western
Financial Bank, F.S.B.
10.11 Tax Sharing Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1994(1)
10.12 Master Reinvestment Contract between WFS Financial Inc and
Western Financial Bank, F.S.B., dated May 1, 1995(1)
10.13 Amendment No. 1, dated as of June 1, 1995 to the Restated
Master Reinvestment Reimbursement Agreement
10.14 Amended and Restated Master Collateral Assignment Agreement
10.15 Management Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated May 1, 1995(1)
10.16 Management Agreement among WFS Financial Inc, Western
Financial Bank, F.S.B., WFS Financial Auto Loans, Inc. and
WFS Financial Auto Loans 2, Inc. dated May 1, 1995(1)
10.17 Form of WFS Financial Inc Dealer Agreement(5)
10.18 Form of WFS Financial Inc Loan Application(5)
10.19 WFS 1996 Incentive Stock Option Plan(6)
10.20 Westcorp Employee Stock Ownership and Salary Savings Plan(7)
10.21 Promissory Note of WFS Financial Inc in favor of Western
Financial Bank, F.S.B., dated August 1, 1997
10.21.1 Amendment No. 1, dated as of August 1, 1997 to the
Promissory Note of WFS Financial in favor of Western
Financial Bank, F.S.B.
10.22 Investment Agreement between WFS Financial Inc and Western
Financial Bank, F.S.B., dated January 1, 1996
10.23 Management Services Agreement between WFS Financial Inc and
Western Financial Bank, F.S.B., dated January 1, 1997
10.24 Employment Agreement(8)(9)(10)
21.1 Subsidiaries of WFS Financial Inc
23.1 Consent of Ernst & Young LLP
24 Power of Attorney(1)
27 Financial Data Schedule
</TABLE>