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UNITED STATES

FORM 10-K

(Mark One)

	þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the fiscal year ended December 31, 2001

OR

	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the transition period from            to                 .

Commission File Number 33-13646

WESTCORP

Registrant’s telephone number, including area code (949) 727-1002

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

      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 þ     No o

      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.     o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 21, 2002:

Common Stock, $1.00 Par Value — $271,258,847

The number of shares outstanding of the issuer’s class of common stock as of March 21, 2002:

Common Stock, $1.00 Par Value — 39,097,791

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held May 2, 2002 are incorporated by reference into Part III.

Table of Contents

WESTCORP AND SUBSIDIARIES

TABLE OF CONTENTS

Table of Contents

PART I

Item 1. Business

General

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

     Automobile Lending Operations

      Through WFS, we are one of the nation’s largest independent automobile finance companies with 29 years of experience in the automobile finance industry. We believe that the automobile finance industry is the second largest consumer finance industry in the United States with over $825 billion of loan and lease originations during 2001. We originate new and pre-owned automobile installment contracts through our relationships with over 7,500 franchised and independent automobile dealers nationwide. We originated $4.9 billion of contracts during 2001 and managed a portfolio of $8.2 billion at December 31, 2001.

      Approximately 25% of our automobile contract originations are for the purchase of new automobiles and approximately 75% of our automobile contract originations are for the purchase of pre-owned automobiles. Approximately 76% of our automobile contract originations are with borrowers who have strong credit histories, otherwise generally known as prime borrowers, and approximately 24% of our automobile contract originations are with borrowers who have overcome past credit difficulties, otherwise generally known as non-prime borrowers.

      We underwrite automobile contracts through a credit approval process that is supported and controlled by a centralized, automated front-end system. This system incorporates proprietary credit scoring models and industry credit scoring models and tools, which enhance our credit analysts’ ability to tailor each automobile contract’s pricing and structure to maximize risk-adjusted returns. As a result of our sophisticated credit and underwriting systems, we are able to earn attractive risk-adjusted returns on our automobile contracts. For the year ended December 31, 2001, the average net interest spread was 9.61% while net credit losses averaged 2.27% for the same period.

      We structure our business to minimize operating costs while providing high quality service to our dealers. Those aspects that require a local market presence are performed on a decentralized basis in our 43 offices. All other operations are centralized. We fund our purchases of automobile contracts, on an interim basis, with deposits raised through our banking operations, which are insured by the Federal Deposit Insurance Corporation, also known as the FDIC, and other borrowings of the Bank. For long-term financing, we issue automobile contract asset-backed securities. Since 1985, we have sold or securitized over $24 billion of automobile contracts in 54 public offerings of asset-backed securities, making us the fourth largest issuer of such securities in the nation. The relationship between WFS and our banking operations gives us a competitive advantage relative to other independent automobile finance companies by providing a significant source of liquidity at a low cost and affording us the ability to enter the automobile contract asset-backed securities market on an opportunistic basis.

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

     Bank Operations

      The primary focus of our banking operations is to generate diverse, low-cost funds to provide the liquidity needed to fund our acquisition of automobile contracts. We have the ability to raise significant amounts of liquidity by attracting both short-term and long-term deposits from the general public, commercial enterprises and institutions by offering a variety of accounts and rates. These funds are generated through our retail and commercial banking divisions. We may also raise funds by obtaining advances from the Federal Home Loan Bank, or FHLB, selling securities under agreements to repurchase and utilizing other borrowings. Our retail banking division serves the needs of individuals and small businesses by offering a broad range of products through 24 retail branches located throughout California. Our commercial banking division focuses on small and medium-sized businesses in Southern California. At December 31, 2001, the total deposits gathered by both banking divisions were $2.0 billion. Approximately 80% of these accounts were demand deposits, money market accounts and certificate of deposit accounts under $100,000 in principal, which we believe represent a stable and attractive source of funding.

      We also invest deposits generated by the retail and commercial banking divisions in mortgage-backed securities, also known as MBS. Our investment in MBS, together with the cash balances that we maintain, create a significant liquidity portfolio, which provides us with additional funding security and also affords us greater flexibility to structure securitizations with attractive terms. Net interest income from bank operations totaled $45.7 million, $26.3 million and $46.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. Net interest income from bank operations represented 10%, 21% and 32% of total net interest income for us on a consolidated basis for the same respective periods.

      In January 1999, we closed our prime mortgage lending operations. During the third quarter of 1999, we completed the sale of our sub-prime mortgage lending operations and sold the remaining $1.0 billion of mortgage servicing rights that we held. During the fourth quarter of 1999, we closed our mortgage loan servicing department and entered into an agreement to sell the rights to service our remaining owned mortgage loan portfolio, thereby completing our mortgage banking exit strategy. At December 31, 2001, we owned $373 million in single family and multifamily mortgage loans that were originated through previous mortgage lending activities.

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      The following table sets forth our loan origination, purchase and sale activity over the past five years:

The History of Westcorp

      Western Thrift & Loan Association, a California-licensed thrift and loan association, was founded in 1972. In 1973, we were formed as the holding company for Western Thrift & Loan Association under the name Western Thrift Financial Corporation. We later changed our name to Westcorp. In 1982, we acquired Evergreen Savings and Loan Association, a California-licensed savings and loan association, which became our wholly owned subsidiary. The activities of Western Thrift & Loan Association were merged into Evergreen Savings and Loan Association in 1982, and Evergreen Savings and Loan Association’s name was changed ultimately to Western Financial Bank.

      Western Thrift & Loan Association was involved in automobile finance activities from its incorporation until its merger with Evergreen Savings and Loan Association. Since such time, the automobile finance activities of Western Thrift & Loan Association were continued by the Bank. In 1988, Westcorp Financial Services, Inc. was incorporated as a wholly owned consumer finance subsidiary of the Bank to provide non-prime automobile finance services, a market not serviced by the Bank’s automobile finance division.

      In 1995, the Bank transferred its automobile finance division to Westcorp Financial Services, which changed its name to WFS Financial Inc. In connection with that restructuring, the Bank transferred to WFS all assets relating to its automobile finance division, including the automobile contracts held on balance sheet and all interests in the excess spread payable from outstanding securitization transactions. The Bank also

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      On January 22, 2002, we filed a registration statement with the Securities and Exchange Commission, also known as the SEC, to provide our shareholders an exclusive opportunity to purchase additional shares of stock through a rights offering. The registration statement for this offering became effective on February 11, 2002. Shareholders of record as of the close of business on February 12, 2002 were distributed rights to purchase additional shares at a price of $15.75 per share. For each share of common stock owned, the shareholders received one right, and for each 11 rights, the shareholder was entitled to purchase one share of common stock. Rights were exercisable until March 4, 2002. Ernest S. Rady, the Chairman of the Board of Directors of Westcorp, exercised his rights and his right to oversubscribe. Mr. Rady is the beneficial owner of approximately 68% of our common stock. We raised a total of $51.3 million through the issuance of 3.3 million additional common shares.

      On January 22, 2002, WFS filed a registration statement with the SEC to provide its shareholders an exclusive opportunity to purchase additional shares of stock through a rights offering. The registration statement for this offering became effective on February 11, 2002. Shareholders of record as of the close of business on February 12, 2002 were distributed rights to purchase additional shares at a price of $18.00 per share. For each share of common stock owned, the shareholders received one right, and for each 5.7 rights, the shareholder was entitled to purchase one share of common stock. Rights were exercisable until March 4, 2002. The Bank exercised its basic subscription right and its oversubscription right as part of this offering. WFS raised a total of $110 million through the issuance of 6.2 million additional common shares. At the completion of this rights offering, the Bank held 84% of WFS.

      The Bank and its subsidiaries are subject to examination and comprehensive regulation by the Office of Thrift Supervision, also known as the OTS, and the FDIC. It is further subject to certain regulations of the Board of Governors of the Federal Reserve System, also known as the FRS, which governs reserves required to be maintained against deposits and other matters. The Bank is also a member of the FHLB of San Francisco, one of twelve regional banks for federally insured savings and loan associations and banks comprising the FHLB System. The FHLB System is under the supervision of the Federal Housing Finance Board. WFS and certain other subsidiaries of the Bank are further regulated in part by various departments or commissions of the states in which they do business. Federal statutes and regulations primarily define the types of loans that the Bank and its subsidiary may originate.

Market and Competition

      The automobile finance industry is generally segmented according to the type of car sold (new versus pre-owned) and the credit characteristics of the borrower (prime, non-prime or sub-prime). Based upon industry data, we believe that during 2001, prime, non-prime and sub-prime loan originations in the United States were $550 billion, $150 billion and $125 billion, respectively. The United States captive automobile finance companies, General Motors Acceptance Corporation, Ford Motor Credit Company and Chrysler Credit Corporation account for approximately 40% of the automobile finance market. We believe that the balance of the market is highly fragmented and that no other market participant has greater than a 4% market share. Other market participants include the other captive automobile finance companies of other manufacturers, banks, credit unions, independent automobile finance companies and other financial institutions.

      Our dealer servicing and underwriting capabilities and systems enable us to compete effectively in the automobile finance market. Our ability to compete successfully depends largely upon our strong personal relationships with dealers and their willingness to offer to us automobile contracts that meet our underwriting criteria. Our relationship is fostered by the promptness with which we process and fund automobile contracts, as well as the flexibility and scope of the programs we offer. We purchase the full spectrum of prime and non-prime automobile contracts secured by both new and pre-owned vehicles.

      Competition in the retail banking business comes primarily from commercial banks, credit unions, savings and loan associations, mutual funds, and corporate and government securities markets. Many of the

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      Competition in the commercial banking business comes primarily from other commercial banks that maintain a presence in Southern California. In general, many commercial banks are more sizable institutions with larger lending capacities and depository services. We have differentiated ourselves by providing high quality service, local relationship management, prompt credit decisions, and competitive rates on both loans and depository products.

Our Business Strategy

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

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

      Over the past five years, we have experienced a compounded annual growth rate in automobile contract purchases of 18%. We provide a high degree of personalized service to our dealership base by marketing, underwriting and purchasing contracts on a local level. Our focus is to provide each dealer superior service by providing a single source of contact to meet the dealer’s prime and non-prime financing needs. We believe that the level of our service surpasses that of our competitors by making our business development representatives available any time a dealer is open, making prompt credit decisions, negotiating credit decisions within available programs by providing structural alternatives and funding promptly.

      Growth of originations is primarily through increased dealer penetration. We intend to increase automobile contract purchases from our current dealer base as well as develop new dealer relationships. Prior to 1995, we originated automobile contracts in seven, primarily western states. Subsequently, we increased our geographic penetration nationwide. Although our presence is well established throughout the country, we believe that we still have opportunities to build market share, especially in those states that we entered since 1994. In addition, we have improved our dealer education and delivery systems in order to increase the ratio of automobile contracts purchased to the number of applications received from a dealer, thereby improving the efficiency of our dealer relationships. We are also seeking to increase automobile contract purchases through new dealer programs targeting high volume, multiple location dealers. These programs focus on creating relationships with dealers to achieve higher automobile contract originations and improving efficiencies. We also originate loans directly from consumers and purchase loans from other finance companies on a limited basis. Additionally, we continue to explore other distribution channels, including the Internet. Recently, we acquired approximately a 10% interest in DealerTrack Holdings, Inc., also known as DealerTrack, an Internet business to business portal that brings together finance companies with dealers. DealerTrack has signed up nine finance companies and 13,500 dealers, and expects to have 15,000 dealers by the end of 2002. Currently, 20% of our applications are derived from our relationship with DealerTrack.

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      Quality underwriting and servicing are essential to effectively assess and price for risk and to maximize risk-adjusted returns. We rely on a combination of credit scoring models, system-controlled underwriting policies and the judgment of our trained credit analysts to make risk-based credit decisions. We use credit scoring to differentiate applicants and to rank order credit risk in terms of expected default probability. Based upon this statistical assessment of credit risk, the underwriter is able to appropriately tailor automobile contract pricing and structure.

      To achieve the return anticipated at origination, we have developed a disciplined behavioral servicing process for the early identification and cure of delinquent automobile contracts and for loss mitigation. In addition, we provide credit and profitability incentives to our associates to make decisions consistent with our underwriting policies by offering bonuses based both on individual and office-wide performance.

      The following table shows the improvement in risk-adjusted margins on automobile contracts originated over the past several years:

  Create Operating Efficiencies Through Technology and Best Practices

      Since 1997, we have spent approximately $40 million in new technology and we have evaluated all aspects of our operations in order to streamline processes and employ best practices throughout the organization.

      Our key technology systems implemented through this process include:

	•	automated front-end origination system which calculates borrower ratios, maintains lending parameters and approval limits, accepts electronic applications and directs applications to the appropriate credit analyst, all of which have reduced the cost of receiving, underwriting and funding automobile contracts;
	•	custom designed proprietary scoring models that rank order the risk of loss occurring on a particular automobile contract;
	•	behavioral delinquency management system which improves our ability to queue accounts according to the level of risk, monitor collector performance and track delinquent automobile accounts;
	•	centralized and upgraded borrower services department which includes remittance processing, interactive voice response technology and direct debit services;
	•	centralized imaging system that provides for the electronic retention and retrieval of account records; and
	•	data warehouse that provides analytical tools necessary to evaluate performance of our portfolio by multiple dimensions.

      As a result of these efforts, we have reduced our operating costs as a percent of managed loans from a high of 4.3% during the second quarter of 1998 to 2.8% during the fourth quarter of 2001. We have

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  Generate Low Cost Liquidity Through Diverse Funding Sources, Including Positive Operating Cash Flows

      The Bank provides diverse, low-cost funds through its retail and commercial banking divisions as well as its ability to obtain advances from the FHLB, sell securities under agreements to repurchase and utilize other borrowing sources. These significant and diverse sources of funds provide liquidity at a low cost to fund our automobile contract purchases and allow us to opportunistically enter the automobile contract asset-backed securities market. Cash flows from operations provide an additional source of liquidity for us. For the year ended December 31, 2001, we generated $180 million in positive cash flows from our automobile operations. We maintain a significant liquidity portfolio of cash and mortgage-backed securities on our balance sheet, which totaled $2.1 billion as of December 31, 2001. This liquidity portfolio provides us with additional funding security and also affords us greater flexibility to structure securitizations with attractive features.

  Record High Quality Earnings and Maintain a Conservative Well-capitalized Balance Sheet

      Presenting high quality earnings and maintaining a conservative and well-capitalized balance sheet has been our focus since our founding in 1972. We believe that this strategy ensures success over the long-term rather than providing extraordinary short-term results and is manifested by the success that we have enjoyed over the past 29 years. Components of this strategy include accounting for our automobile securitizations as secured financings rather than sales and maintaining solid allowances for credit losses.

      Since March 2000, we have structured our securitizations as secured financings. By accounting for our automobile securitizations as secured financings, the automobile contracts and notes issued remain on the balance sheet and the earnings of the automobile contracts in the trust and the related financing costs are reflected over the life of the underlying pool of automobile contracts as net interest income. Additionally, no retained interest in securitized assets, also known as RISA, is recorded on the balance sheet with a corresponding non-cash gain on sale. The RISA must be written off over the life of a securitization. This asset is subject to impairment if assumptions made about the performance of a securitization are not realized. At December 31, 2001, the RISA (net of tax) created from asset-backed securities issued prior to April 2000 represented 4.2% of total equity. This compares with a high of $181 million or 30% of equity in 1997. We expect the RISA to be fully amortized or otherwise eliminated by the end of 2002.

      We maintain an allowance for credit losses for both on and off balance sheet loans. Our on balance sheet allowance for credit losses as a percentage of loans receivable was 2.3% and 2.1% as of December 31, 2001 and 2000, respectively. Our off balance sheet allowance for credit losses as a percentage of outstanding automobile contracts sold through securitizations was 3.9% and 4.2%, respectively.

      At December 31, 2001, the Bank had a total risk-based capital ratio of 11.86%, a Tier 1 risk-based capital ratio of 8.49%, and a leverage ratio of 7.29%, compared to “well-capitalized” regulatory requirements of 10.0%, 6.0% and 5.0%, respectively. Because of the Bank’s “well-capitalized” status, it has no institution specific liquidity or regulatory constraints on its operations.

Operations

  Automobile Lending

     Locations

      We currently originate automobile contracts nationwide through 43 offices. Each office manager is accountable for the performance of automobile contracts originated in that office throughout the life of the automobile contracts, including acquisition, underwriting, funding and collection. We have two national service centers located in California and Texas with functions including data entry and verification, records management, remittance processing, customer service call centers and automated dialers. We maintain three

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     Business Development

      The business development representatives’ responsibilities include improving our relationship with existing dealers and enrolling and educating new dealers to increase the number of automobile contracts originated. The business development representatives target selected dealers within their territory based upon volume, potential for business, financing needs of the dealers, and competitors that are doing business with such dealers.

      Before we decide to do business with a new dealer, we perform a review process of the dealer and its business. If we then determine to proceed, we enter into a non-exclusive dealership agreement with the dealer. This agreement contains certain representations regarding the automobile contracts the dealer will sell to us. Due to the non-exclusive nature of our relationship with dealers, they retain discretion to determine whether to sell automobile contracts to us or another financial institution. The business development representative is responsible for educating the dealers’ finance managers about the types of automobile contracts that meet our underwriting standards. This education process ensures that we minimize the number of applications we receive that are outside of our underwriting guidelines, thereby increasing our efficiency and lowering our overall cost to originate automobile contracts.

      After this relationship is established, the business development representative continues to actively monitor the relationship with the objective of maximizing the overall profitability of each dealer relationship within his or her territory. This includes ensuring that a significant number of approved applications received from each dealer are actually funded by us, ensuring that the type of automobile contract received meets our underwriting standards, monitoring the risk-based pricing of automobile contracts acquired and reviewing the actual performance of the automobile contracts purchased. To the extent that a dealer does not meet minimum conversion ratio or lending volume standards, the dealer may be precluded from sending us applications in the future. During the past year, our dealer base declined from approximately 8,500 to 7,500, primarily as a result of us eliminating dealers that did not meet our standards. Our increase in volume is the result of funding more automobile contracts from dealers that meet our standards. Business development managers within each regional business center provide direct management oversight to each business development representative. In addition, the director of sales and marketing provides oversight management to ensure that all business development managers and representatives are following overall corporate guidelines.

     Underwriting and Purchasing of Automobile Contracts

      The underwriting process begins when an application is faxed to our centralized data entry center or sent to us via the Internet. Our data entry group enters the applicant information from faxed applications into our front-end underwriting computer system. Internet applications are automatically loaded into our front-end system. Once the application is in the front-end system, the system automatically obtains credit bureau information on the applicant and calculates our proprietary credit score.

      We use credit scoring to differentiate credit applicants and to rank order credit risk in terms of expected default probabilities, which enables us to tailor contract pricing and structure according to this statistical assessment of credit risk. For example, a consumer with a lower score would indicate a higher probability of default; therefore, we would structure and price the transaction to compensate for this higher default risk. Multiple scorecards are used to accommodate the full spectrum of automobile contracts we purchase. In addition to a credit score, the system highlights certain aspects of the credit application which have historically impacted the credit worthiness of the borrowers.

      Credit analysts are responsible for properly structuring and pricing deals to meet our risk-based criteria. They review the information, structure and price of an application and make a determination whether to approve, decline or make a counteroffer to the dealer. Each credit analyst’s lending levels and approval authorities are established based on the individual’s credit experience and portfolio performance, credit manager audit results and quality control review results. Higher levels of approvals are required for higher

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      Once adequate approval has been received, the computer system automatically sends a fax back to the dealer or through the Internet with our credit decision, specifying approval, denial or conditional approval based upon modification to the structure, such as increase in down payment, reduction of term, or the addition of a co-signer. As part of the approval process, the system or the credit analyst may require that some of the information be verified, such as income, employment, residence or credit history of the applicant. The system increases efficiency by automatically denying approval in certain circumstances without additional underwriting being performed. These automated notices are controlled by parameters set by us consistent with our credit policy.

      If the dealer accepts the terms of the approval, the dealer is required to deliver the necessary documentation for each automobile contract to the appropriate office. The funding group audits such documents for completeness and consistency with the application, providing final approval and funding of the automobile contract. A direct deposit is made or a check is prepared and is promptly sent to the dealer for payment. The dealer’s proceeds may include dealer participation for consideration of the acquisition of the automobile contract. The completed automobile contract file is then forwarded to the appropriate record center for imaging.

      Under the direction of the Credit and Pricing Committee, the Chief Credit Officer oversees credit risk management, sets underwriting policy, monitors automobile contract pricing, tracks compliance to underwriting policies and re-underwrites select automobile contracts. If re-underwriting statistics are unacceptable, all monthly and quarterly incentives are forfeited by the office that originated the automobile contracts. Our internal quality control group reviews automobile contracts on a statistical sampling basis to ensure adherence to established lending guidelines and proper documentation requirements. Credit managers within each regional business center provide direct management oversight to each credit analyst. In addition, the Chief Credit Officer provides oversight management to ensure that all credit managers and analysts are following overall corporate guidelines.

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      The following table sets forth information for automobile contracts originated, automobile contracts managed and number of dealers in the states in which we operate our business:

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          Servicing of Automobile Contracts

      We service all of the automobile contracts we purchase, both those held by us and those sold in securitizations. The servicing process includes the routine collection and processing of payments, responding to borrower inquiries, maintaining the security interest in the vehicle, maintaining physical damage insurance coverage and repossessing and selling collateral when necessary. During the second quarter of 2000, we implemented a new decision support system, which incorporates behavioral scoring models and allows us to continually seek the most efficient and effective collection methods.

      We use monthly billing statements to serve as a reminder to borrowers as well as an early warning mechanism in the event a borrower has failed to notify us of an address change. Payments received in the mail or through our offices are processed by our remittance processing center. To expedite the collection process, we accept payments from borrowers through automated payment programs including PC banking, direct debits and third party payment processing services. Our customer service center uses interactive voice response technology to answer routine account questions and route calls to the appropriate service counselor.

      Our fully integrated servicing, decision and collections system automatically forwards accounts to our automated dialer or regional collection centers based on the assessed risk of default or loss. Account assessment poses several courses of action, including delaying collection activity based on the likelihood of self curing, directing an account to the automated dialer for a predetermined number of days before being forwarded to a regional collections office, or directly forwarding to a collection specialist in the regional office for accelerated collection efforts as early as seven days past due. This process balances the efficiency of centralized collection efforts with the effectiveness of decentralized personal collection efforts. Our systems track delinquencies and chargeoffs, monitor the performance of our collection associates and assist in delinquency forecasting. To assist in the collection process, we can access original documents through our imaging system which stores all the documents related to each automobile contract. We limit deferments to a maximum of three over the life of the contract and rarely rewrite automobile contracts.

      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. We use independent contractors to perform repossessions. The automobile remains in our custody generally for 15 days, or longer if required by local law, to provide the obligor the opportunity to redeem the automobile contract. If after the redemption period the delinquency is not cured, we write down the vehicle to fair value and reclassify the automobile contract as a repossessed asset. After the redemption period expires, we prepare the automobile for sale. We sell substantially all repossessed automobiles through wholesale automobile auctions, subject to applicable law. We do not provide the financing on repossessions sold. We use regional remarketing departments to sell our repossessed vehicles. Once the vehicles are sold, any remaining deficiency balances are then charged off. At December 31, 2001, repossessed automobiles outstanding managed by us was $7.6 million or 0.09% of the total managed automobile contract portfolio, compared with $6.2 million or 0.09% of the total managed automobile contract portfolio at December 31, 2000.

      It is our policy to charge off an account when it becomes contractually delinquent by 120 days, except for accounts that are in Chapter 13 bankruptcy, even if we have not yet repossessed the vehicle. At the time that an automobile contract is charged off, all accrued interest is reversed. For those accounts that are in Chapter 13 bankruptcy and contractually past due 120 days, all accrued interest is reversed and income is recognized on a cash basis. Additionally, we mark down such automobile contracts to fair value and reclassify them as non-performing accounts. After chargeoff, we collect deficiency balances through our centralized asset recovery center. These efforts include contacting the borrower directly, seeking a deficiency judgment through a small claims court, or instituting other judicial action where necessary. In some cases, particularly where recovery is believed to be less likely, the account may be assigned to a collection agency for final resolution. We also monitor payment plans on those obligors who have filed for bankruptcy.

     Retail Banking

      Our retail banking operations are conducted through 24 branch offices located throughout California. At December 31, 2001, the total deposits gathered by the retail banking division were $1.8 billion compared to

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      Demand deposits and money market accounts obtained through our retail banking operations totaled $618 million at December 31, 2001 compared with $460 million at December 31, 2000. At December 31, 2001, demand deposits and money market accounts represented 34% of our total deposits compared with 23% at December 31, 2000. In addition, demand deposits, money market accounts and certificate of deposit accounts under $100,000 in principal represented approximately 80% of our total deposit accounts.

     Commercial Banking

      We focus our commercial banking operations in the Orange, Los Angeles and San Diego County metropolitan areas, operating through our Irvine headquarters office. We target commercial clients with sales between $10 million and $100 million. We offer our commercial clients a full array of deposit and loan products that are priced competitively and designed specifically for them. The commercial banking division’s strategy is to generate deposits in excess of the loans it funds to provide another source of liquidity for the Bank. Deposit products include money market, business checking and certificate of deposit accounts delivered either through direct contact or through cash management services. Loan products include term loans, lines of credit, asset-based loans, construction and real estate loans. We also offer consumer deposit and money market accounts as well as consumer loans and lines of credit to the company owners, management and their associates. Loan products are generally priced on a floating rate basis, based on the prime rate or the London Interbank Offer Rate, also known as LIBOR. Fixed rates are generally limited to a one-year term or less.

      Credit quality is managed by having each loan reviewed for approval by a credit committee comprised of the Bank’s President, Chairman of the Board, Board members and our executives. In addition, account officers are directly assigned to specific accounts to maintain close contact with the customer. Such contact allows for greater opportunity to cross sell products, as well as for observing and continually evaluating the customer for potential credit problems.

      At December 31, 2001, the commercial banking division had $161 million in deposits compared with $444 million at December 31, 2000. Commercial loans outstanding totaled $85.3 million and $108 million at December 31, 2001 and 2000, respectively.

      The following table presents information regarding total loans and deposits of our commercial banking operations:

     Mortgage Portfolios

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

     Construction Loans

      On a limited basis, we originate construction loans primarily for single family owner-occupied residences and commercial real estate. These include loans for the acquisition and development of unimproved property to be used for residential and commercial purposes. The construction loan portfolio generally consists of loans

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Transactions with Related Parties

      We believe that the transactions described herein under the caption “Transactions with Related Parties” have been on terms no less favorable to us than could be obtained from unaffiliated parties, notwithstanding that the transactions were not negotiated at arm’s length. However, the transactions were approved by our entire Board of Directors and the Boards of Directors of the Bank and WFS, including their respective independent directors. Each of these transactions described above eliminates upon consolidation. See “Supervision and Regulation.”

     Intercompany Borrowings

      WFS has various borrowing arrangements with the Bank. A $125 million note and a $135 million note are long-term, unsecured debt, while lines of credit are designed to provide financing for WFS and its subsidiaries. These borrowings are the only source of liquidity utilized by WFS outside of the asset-backed securities market. These transactions eliminate upon consolidation. The $125 million note was paid off in the third quarter of 2001 in connection with the retirement of the Bank’s 8.5% subordinated debentures.

      WFS borrowed $125 million from the Bank under the terms of the $125 million note. The $125 million note provided for principal payments of $25 million per year, commencing on April 30, 1999 and continuing through its final maturity, April 30, 2003. Interest payments on the $125 million note were due quarterly, in arrears, calculated at the rate of 7.25% per annum. WFS made paydowns on the $125 million note of $11.2 million for the year ended December 31, 2001 compared with $32.7 million and $66.1 million for the years ended December 31, 2000 and 1999, respectively, without prepayment penalties. There was no outstanding balance on the $125 million note at December 31, 2001 compared with $11.2 million outstanding at December 31, 2000. Interest expense on this note totaled $0.5 million, $1.5 million and $5.4 million for the years ended December 31, 2001, 2000 and 1999, respectively.

      Additionally, WFS borrowed $135 million under the terms of the $135 million note. WFS initially borrowed $50 million under this note in 1997, and the amount was increased to $135 million in 1999. According to the terms of the amendment in 1999, the $135 million note provided for two equal principal payments of $67.5 million per year, commencing July 31, 2001. Under its original terms, interest payments on the $135 million note were due quarterly, in arrears, calculated at the rate of 9.42% per annum. On January 1, 2002, the agreement was amended to increase the principal amount from $67.5 million to $150 million and to decrease the interest rate from 9.42% to 8.875% annum. The principal is now all due and payable on August 1, 2007, although the Bank has the option to require payment in part or in full at any time prior to that date. Pursuant to the terms of this note, WFS may not incur any other indebtedness which is senior to the obligations evidenced by this note except for (i) indebtedness under the $125 million note (ii) indebtedness collateralized or secured under the line of credit and (iii) indebtedness for similar types of warehouse lines of credit. There was $67.5 million outstanding on this note at December 31, 2001 compared with $135 million at December 31, 2000. Interest expense on this note totaled $10.1 million, $12.7 million and $9.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.

      WFS also has a secured line of credit extended by the Bank permitting it to draw up to $1.8 billion as needed to be used in its operations. WFS does not pay a commitment fee for the line of credit. The line of credit terminates on December 31, 2004, although the term may be extended by WFS for additional periods up to 60 months. There was $374 million and $236 million outstanding on this line of credit at December 31, 2001 and 2000, respectively. On November 30, 2001, WFS entered into additional unsecured lines of credit with the Bank. These lines permit WFS to draw up to a total of $180 million to fund its initial deposits to spread accounts on securitizations. The unsecured lines of credit terminate on December 1, 2006, although the terms may be extended by WFS for additional periods up to 60 months. At December 31, 2001, the amount outstanding was $47.3 million.

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      The lines of credit carry an interest rate based on the one-month LIBOR and an interest spread of 125 basis points and 75 basis points for the unsecured and secured lines, respectively. The Bank has the right under the lines of credit to refuse to permit additional amounts to be drawn on the lines of credit if, in the Bank’s discretion, the amount sought to be drawn will not be used to finance the purchase of automobile contracts or other working capital requirements. Interest on the amounts outstanding under the lines of credit is paid monthly, in arrears, and is calculated on the daily average amount outstanding that month. Interest expense totaled $8.9 million, $37.9 million, and $26.0 million for the years ended December 31, 2001, 2000 and 1999, respectively. The weighted average interest rates for the lines of credit were 4.43%, 7.09% and 5.33% for the years ended December 31, 2001, 2000 and 1999, respectively.

     Short-Term Investments

      WFS also invests its excess cash at the Bank under an investment agreement. The Bank paid WFS an interest rate equal to the federal composite commercial paper rate on this excess cash for the year ended December 31, 2001. On January 1, 2002, the agreement was amended to revise the interest rate to one-month LIBOR. The weighted average interest rate was 3.80%, 6.58% and 5.23% for the years ended December 31, 2001, 2000 and 1999, respectively. WFS held no excess cash with the Bank under the investment agreement at December 31, 2001 and 2000. Interest income earned by WFS under this agreement totaled $4.9 million, $1.2 million and $0.1 million for the years ended December 31, 2001, 2000 and 1999, respectively.

     Reinvestment Contracts

      Pursuant to a series of agreements to which WFS, the Bank, WFAL2, among others, are parties, WFS has access to the cash flows of each of the outstanding securitizations, including the cash held in each spread account. WFS is permitted to use that cash as it determines, including in the ordinary business activities of originating automobile contracts.

      In each securitization, the Bank and WFAL2 have entered into a reinvestment contract that 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. Under the WFS Reinvestment Contract, 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 automobile contracts from WFS pursuant to the terms of the sale and servicing agreements.

      In accordance with this agreement, the Bank and WFAL2 pledge property owned by each of us for the benefit of the trustee of each trust and the surety. 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 and for WFS’ access to cash under the WFS Reinvestment Contract. WFS paid the Bank $1.1 million, $0.7 million and $0.6 million for the years ended December 31, 2001, 2000 and 1999, respectively, 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 Financial Security Assurance, also known as 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 WFS Reinvestment Contract, 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. There was $942 million and $832 million outstanding on the trust reinvestment contracts at December 31, 2001 and 2000, respectively.

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     Tax Sharing Agreement

      We and our subsidiaries are parties to a tax sharing agreement with WFS, the Bank and their subsidiaries, 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 us its estimated share of that tax liability when otherwise due, but in no event may the amount paid exceed the amount of tax that 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 that 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 “Consolidated Financial Statements — Note 20 — Income Taxes.”

     Whole Loan Sales

      We purchased $1.4 billion of automobile contracts from WFS in whole loan sales for each of the years ended December 31, 2001 and 2000. In these transactions, we paid cash for the amount of the principal outstanding on the contracts plus a premium of $44.3 million and $41.2 million for the years ended December 31, 2001 and 2000, respectively. These premiums were recorded by WFS as a cash gain on sale, net of the write-off of outstanding dealer participation balances and the effect of hedging activities. These sales and the related gains were eliminated upon consolidation. These contracts were subsequently securitized by us and continue to be managed by WFS under the terms of the transactions.

     Management Agreements

      We have entered into certain management agreements with WFS and the Bank pursuant to which we pay an allocated portion of certain costs and expenses incurred by WFS and the Bank with respect to services or facilities of WFS and the Bank used by us or our subsidiaries, including our principal office facilities, our field offices, and overhead and associate benefits pertaining to Bank and WFS associates who also provide services to us or our subsidiaries. Additionally, as part of these management agreements, WFS and the Bank have agreed to reimburse us for similar costs incurred. Net amounts paid to WFS by us and our affiliates under these agreements were $5.9 million, $2.4 million, and $6.2 million for the years ended December 31, 2001, 2000 and 1999, respectively. The management agreements may be terminated by any party upon five 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.

Supervision and Regulation

     General

      Set forth below is a discussion of laws and regulations that have a material effect upon our business. To the extent, however, that any of the following discussion describes statutory or regulatory provisions, the exact language of the statute or regulatory provision qualifies any such discussion. Furthermore, any future changes in the applicable law or regulation or in the policies of various regulatory authorities may have a material effect on our business. Accordingly, we cannot assure you that we will not be affected by any such further changes.

     Westcorp

          The Savings and Loan Holding Company Act

      We, by virtue of our ownership of the Bank, are a savings and loan holding company within the meaning of the Home Owners’ Loan Act, as amended, also known as HOLA. Savings and loan holding companies and their savings association subsidiaries are extensively regulated by federal laws.

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      We are registered with the OTS, as a savings and loan holding company. Therefore, we are subject to the OTS’ regulations, examination and reporting requirements. The OTS may take substantive action if 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. Thus, the OTS has oversight authority for all holding company affiliates, not just us. Specifically, the OTS may, as necessary:

	•	limit the payment of dividends by the Bank;
	•	limit transactions between the Bank, the holding company and the subsidiaries or affiliates of either; and
	•	limit any activities of the holding company that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the Bank.

      Any of these limits may be issued in the form of regulations or a directive having the effect of a cease and desist order.

      Provisions of the HOLA also limit the type of activities and investments in which the savings association subsidiaries of a savings and loan holding company may participate if the investment and/or activity involves an affiliate of that savings association’s subsidiary. In general, savings associations are subject to Sections 23A and 23B of the Federal Reserve Act in the same manner and to the same extent as if the savings association was a member bank of the Federal Reserve System, as well as regulations adopted by the OTS. Section 23A of the Federal Reserve Act places certain quantitative limitations on certain transactions between a bank and its subsidiaries and an affiliate. The quantitative limitations are based upon a percentage of the savings association’s capital stock and surplus. Transactions covered by Section 23A of the Federal Reserve Act, include transactions involving:

	•	loans or extensions of credit to the affiliate;
	•	the purchase of or investment in securities issued by an affiliate;
	•	the purchase of certain assets from an affiliate;
	•	the acceptance of securities issued by an affiliate as security for a loan or extension of credit to any person; or
	•	the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

      In addition, Section 23B requires that transactions between a savings association subsidiary or its subsidiary and an affiliate must meet certain qualitative limitations. Section 23B requires that such transactions be on terms that are at least as favorable to the bank or its subsidiary as are the terms of the transactions with unaffiliated companies.

      Section 11 of the HOLA also specifically prohibits a savings association subsidiary of the savings and loan holding company from:

	•	making a loan or extension of credit to an affiliate, unless that affiliate is engaged only in activities permitted to bank holding companies under Section 4(c) of the Bank Holding Company Act, or
	•	purchasing or investing in the securities of an affiliate, other than a subsidiary of the savings association.

      Under most circumstances, the above prohibitions include a purchase of assets from an affiliate of the savings association subsidiary that is made subject to the affiliate’s agreement to repurchase the assets. The OTS regulations exclude transactions between a savings association subsidiary and its subsidiaries from the limitations of those sections. This exclusion is consistent with the provisions of Sections 23A and 23B of the Federal Reserve Act. However, the OTS regulations also define certain subsidiaries to be affiliates of the savings association subsidiary. Therefore, such certain subsidiaries are subject to the requirements of those

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      Savings association subsidiaries of holding companies must also comply with the requirements of Federal Reserve Act Sections 22(g) and 22(h), and Regulation O of the Federal Reserve System with respect to loans to executive officers, directors and principal shareholders, in the same manner as member banks. Loans secured by a first lien on an executive officer’s residence may be made without prior approval of the board of directors of the financial institution. As a matter of policy, we do not make loans to executive officers, directors or principal shareholders.

          The Gramm-Leach-Bliley Act

      The Gramm-Leach-Bliley Act, or GLBA, permits insurance, banking and securities firms to be owned by a single owner. GLBA generally prohibits unitary savings and loan holding companies, like us, from being acquired by commercial companies. We are permitted under GLBA, however, to continue to engage in any business opportunities in which we had a right to engage prior to the enactment of GLBA. In short, GLBA does not have any effect on our business, and we do not expect that any of its provisions will have an adverse effect on our operations or our financial condition.

      However, because GLBA liberalizes the activities permitted to a bank holding company from those closely related to banking to those activities that are financial in nature, entities which are well capitalized but previously could not own banks can now acquire a bank and become a bank holding company. Thus, GLBA creates the potential for well capitalized entities to enter into the banking business. As any such entity could have become a unitary savings and loan holding company prior to enactment of GLBA, we do not anticipate that this change in the laws applicable to bank holding companies will have a significant affect upon us or the Bank.

      Under GLBA, savings associations have gained the same treatment long applicable to banks and are now exempt from registering as an “investment company” when using common or collective trust funds to offer trust and other fiduciary services to their customers. GLBA expanded the exemption by amending Section 2(a)(5)(A) of the Investment Company Act to include “depository institutions” within the meaning of “bank.” That term encompasses savings associations insured by the FDIC. GLBA also amended Section 3(a)(2) of the Securities Act of 1933 to exempt the interests in common or collective trust funds from registration as securities.

      GLBA also creates additional obligations on financial institutions, such as the Bank and its subsidiaries, regarding the safeguarding of nonpublic personal information of their customers and creates affirmative duties to advise customers as to what the financial institutions do with their customers’ nonpublic personal information. The Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, FDIC and the OTS, collectively with the other agencies known as the Agencies, published final Guidelines establishing standards for safeguarding customer information that implement sections 5.01 and 505(b) of GLBA. The Guidelines apply to, inter alia, bank holding companies such as us, all savings associations whose deposits are FDIC insured, and their subsidiaries, with certain exceptions. These institutions must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate for the institution’s size and complexity and the nature and scope of the institution’s activities. Although all parts of the institution are not required to implement a uniform set of policies, all elements of the institution’s security program must be coordinated. The rule sets forth certain objectives and directives concerning development and implementation of the information security program, including the requirement that an appropriate report to the board of directors, or a board committee, be made at least annually. While an information security program pursuant to the Guidelines must be implemented by July 1, 2001, there is a two year “grandfathering” of agreements with service providers that were entered into on or before March 5, 2001. This rule also rescinds previously issued guidelines establishing Year 2000 safety and soundness standards for insured depository institutions since the Agencies concluded that such guidelines are no longer necessary. We do not believe that these privacy requirements will have a

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     The Bank

          USA Patriot Act

      On October 26, 2001, President Bush signed into law H.R. 3162, the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,” also known as the USA Patriot Act. Title III of the Patriot Act, known as “The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001,” also known as the Act, is intended to make it more difficult for terrorists to launder money in the United States. The Act, which generally applies to insured depository institutions as well as to the U.S. branches and agencies of foreign banks, codified numerous new and enhanced requirements for financial institutions to detect and deter money laundering. Among other things, the new law provides for the following:

	•	The Act prohibits covered financial institutions from establishing, maintaining, administering, or managing correspondent accounts with “shell banks,” which are foreign banks that have no physical presence in any jurisdiction.
	•	The Act requires the performance of heightened due diligence by banks and financial institutions in specific lines of business, such as private banking services for non-citizens, doing business with institutions that operate under “offshore” licenses, and correspondent account services for foreign banks operating in countries that do not observe international anti-laundering protocols.
	•	The Act amends the Bank Secrecy Act to require all financial institutions to establish anti-money laundering programs. These must include, at a minimum: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. This provision is effective April 24, 2002.
	•	The Act requires the Secretary of the Treasury to promulgate regulations effective no later than October 25, 2002 that would substantially increase the identification and verification requirements for customers of financial institutions.
	•	The Act requires the Secretary of the Treasury to promulgate regulations by February 23, 2002 to encourage cooperation among financial institutions, their regulators, and law enforcement officials.

      We do not anticipate that compliance with the provisions of the Act will have a material effect on our business.

          California Savings Association Law and the Law of Other States

      As a federally chartered institution, the Bank’s investments and borrowings, loans, issuance of securities, payments of interest and dividends, establishment of branch offices and all other aspects of its operations are subject to the exclusive jurisdiction of the OTS. In other words, the OTS jurisdiction preempts the jurisdiction of the California Financial Code or regulations of the California Commissioner of Financial Institutions. The OTS adopted regulations preempting state laws pertaining to the operations of federal savings associations and their operating subsidiaries.

          Federal Home Loan Bank System

      The GLBA amended the Federal Home Loan Bank Act and made FLHB System membership optional. The Bank is, nonetheless, a member of the FHLB of San Francisco and holds the required minimum investment in the FHLB System. Moreover, the Federal Housing Finance Board, also known as the Board, has recently proposed that either investment in capital stock of the FHLB System or payment of an annual membership fee should satisfy the membership investment requirement. The option of a membership fee might provide more flexibility for the Bank and once the final regulation is issued, we will consider that option.

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          Insurance of Accounts

      The FDIC administers the Savings Association Insurance Fund, also known as SAIF. Deposits with it are insured through the SAIF to the maximum amount permitted by law, which is currently $100,000.

      For the year ended December 31, 2001, we were required to pay insurance premiums of $0.9 million compared with $1.2 million for the year ended December 31, 2000. Every insured banking institution is classified by the FDIC as “well capitalized,” “adequately capitalized,” or “undercapitalized.” These three classifications use definitions substantially the same as the definitions adopted with respect to the “prompt corrective action” rules adopted by the regulatory agencies. See “Prompt Corrective Regulatory Action.” Within each of these three classifications, the FDIC has created three risk categories into which an institution may be placed based upon the supervisory evaluations of the institution’s primary federal financial institution regulatory agency and the FDIC. These three risk categories consist of:

	•	those institutions deemed financially sound;
	•	those with demonstrated weakness that could result in significant deterioration of the institution and risk of loss to the FDIC; and
	•	those which pose a substantial probability of loss to the FDIC.

      Each of these nine assessment categories for SAIF insured banking institutions, such as the Bank, is assigned an assessment rate. Under the regulations, a banking institution may not disclose the risk-based assessment category to which it has been assigned.

      The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution:

	•	either has engaged or is engaging in unsafe or unsound practices;
	•	is in an unsafe or unsound condition to continue operations; or
	•	has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC.

      The FDIC also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances that could result in termination of the Bank’s deposit insurance.

          Brokered Deposits

      FDIC regulations provide for differential regulation relating to brokered deposits based on capital adequacy. Institutions are divided into categories of “well capitalized,” “adequately capitalized” and “undercapitalized.” Only “well capitalized” institutions may continue to accept brokered deposits without restriction, as well capitalized institutions are excluded from the definition of deposit brokers.

      At December 31, 2001, the Bank met the capital requirements of a well capitalized association as defined by the regulation. At that date, the Bank held $56.3 million in brokered deposits.

          Regulatory Capital Requirements

      The HOLA mandates that the OTS promulgate capital regulations that include capital standards no less stringent than the capital standards applicable to national banks. The Bank exceeded the current minimum requirements for core capital, tangible capital and risk-weighted capital as of December 31, 2001 as more fully described below.

      The HOLA and the OTS regulations require savings associations to maintain “core capital” in an amount not less than 3% of adjusted total assets. However, effective April 1, 1999, all savings associations that do not

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      The Bank’s core capital ratio at December 31, 2001 was 7.29%. Core capital is defined in the OTS capital regulations as including, among other things:

	•	common shareholder’s equity (including retained earnings);
	•	a certain portion of the association’s qualifying supervisory goodwill;
	•	noncumulative perpetual preferred stock and related surplus; and
	•	capitalized servicing rights, also known as CSRs, and purchased credit card relationships, also known as PCCRs meeting certain valuation requirements.

      All CSRs and PCCRs that are includable in capital are each subject to a 90% fair value limitation. The maximum amount of CSRs and PCCRs which can be included in core capital and tangible capital may not exceed, in the aggregate, an amount equal to 100% of the institutions core capital, with nonmortgage servicing assets and PCCRs limited to 25% of core capital. All other intangible assets, other than qualifying PCCRs, must be deducted from core capital. At December 31, 2001, the Bank held no CSRs or PCCRs.

      A savings association must maintain “Tangible Capital” in an amount not less than 1.5% of adjusted total assets. “Tangible Capital” means core capital less any intangible assets, including supervisory goodwill, plus CSRs and PCCRs to the extent includable in core capital as described above. At December 31, 2001, the Bank’s tangible capital was 7.29%.

      As of December 31, 2001, the Bank’s core capital was $602 million, exceeding the Bank’s regulatory requirement by $355 million. The Bank’s tangible capital at December 31, 2001 was $602 million, exceeding the applicable regulatory requirement by $479 million.

      The risk-based component of the capital standards requires that a savings association have total capital equal to 8.0% of risk-weighted assets. The OTS risk-based capital regulation provides that for assets sold as to which any recourse liability is retained, including on balance sheet assets related to the assets sold which are at risk, a savings association must hold capital as a part of its risk-based capital requirement equal to the lesser of:

	•	the amount of that recourse liability; or
	•	the risk-weighted capital requirement for assets sold off balance sheet as though the assets had not been sold.

      In addition, in the former instance, when calculating the Bank’s risk-based capital ratio (a) the value of those on balance sheet assets which are subject to recourse, to the extent of that recourse liability, also known as fully capitalized assets, is deducted from the Bank’s total capital and (b) neither the risk-weighted value of the asset sold off balance sheet nor the amount of the fully capitalized assets is included in the Bank’s total risk-weighted assets. The Bank’s risk-based capital requirement at December 31, 2001 included $122 million due to its recourse liability relating to trust financings, including fully capitalized assets.

      The Bank’s total risk-weighted assets are determined by taking the sum of the products obtained by multiplying each of the Bank’s assets and certain off balance sheet items by a designated risk-weight. Before an off balance sheet item can be assigned a risk-weight, it must be converted to an on balance sheet credit equivalent amount.

      Four risk-weight categories exist for on balance sheet assets. The four risk-weighted categories are:

	•	zero percent, which are generally cash and securities issued by or backed by the full faith and credit of the United States;
	•	twenty percent, which are generally United States government-backed mortgage securities;

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	•	fifty percent, which are generally qualifying mortgage loans and mortgage-backed securities not within lower categories; and
	•	one hundred percent, which are all other assets.

      Before a risk-weight category can be applied to a consolidated off balance sheet item, the item must be converted into a credit-equivalent amount by multiplying its face amount by whichever of four credit conversion factors is appropriate. Consider the following:

	•	there is a one hundred percent conversion of direct credit substitutes and net assets sold under an agreement to repurchase;
	•	a fifty percent conversion factor for transaction-related contingencies and the unused portions of nonexempt loan commitments;
	•	a twenty percent conversion for trade-related contingencies, such as commercial letters of credit; and
	•	a zero percent conversion for the unused portion of exempt loan commitments and unused, unconditionally cancelable retail credit card lines.

      Interest rate automobile contracts have special credit equivalent amounts equal to the sum of their current credit exposure plus their potential credit exposure. The risk-weight category to be applied to these amounts in determining the credit risk component would depend on the obligor, but in no event would be higher than fifty percent risk-weight. As of December 31, 2001, the Bank’s total risk-weighted assets equaled $7.1 billion.

      Total capital, as defined by OTS regulations, is core capital plus supplementary capital, with supplementary capital not to exceed 100% of core capital, less:

	•	direct equity investments not permissible to national banks, subject to a phase-in schedule;
	•	reciprocal holdings of depository institution capital investments; and
	•	that portion of land loans and nonresidential construction loans in excess of 80% loan-to-value ratio.

      Supplementary capital is comprised of three elements:

	•	permanent capital instruments not included in core capital;
	•	maturing capital instruments; and
	•	general valuation loan and lease loss allowance.

      During the year, we redeemed the remaining balance of the subordinated debentures with an interest rate of 8.5% due in 2003. At December 31, 2001, there was one issuance remaining with an outstanding balance excluding discounts and issuance costs of $150 million and an interest rate of 8.875% due in 2007. It is redeemable at our option, in whole or in part, on or after August 1, 2004, at 100% of the principal amount being redeemed plus accrued interest as of the date of redemption. Pursuant to the approval from the OTS to treat those debentures as supplementary capital, the amount of those debentures which may be included as supplementary capital may not exceed one-third of the Bank’s total capital. The amount of the 8.875% debentures which may be included as supplementary capital will decrease at the rate of 20% of the amount originally outstanding per year, net of redemptions, commencing on August 1, 2002. The Bank’s total capital at December 31, 2001 was $841 million and its risk-based capital ratio was 11.86%.

      The OTS has adopted an interest rate risk component to its capital rules. The rule establishes a method for determining an appropriate level of capital to be held by savings associations subject to the supervision of the OTS, such as the Bank, against interest rate risk, also known as IRR. The rule generally provides that if a savings association’s IRR, calculated in accordance with the rule, exceeds a specified percentage, the savings association must deduct from its total capital an IRR component when calculating its compliance with the risk-based capital requirement.

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      The OTS has postponed the effective date as of which an IRR component will be required to be deducted from a savings association’s capital to permit the OTS to review the interest rate risk regulations currently being promulgated by the other federal banking agencies for their respective institutions. Even were the rule currently being applied, the Bank would not be required to reduce its total capital by an IRR component. The Bank does not anticipate being required to do so during 2002.

      Any savings association that fails any of the capital requirements is subject to possible enforcement actions by the OTS or the FDIC. These actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on an association’s operations, and the appointment of a conservator or receiver. The OTS’ capital regulation provides that these actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. The OTS must prohibit asset growth by any institution that is in violation of the foregoing minimum capital requirements, and must require any such institution to comply with a capital directive issued by the OTS. See “Prompt Corrective Regulatory Action.”

      In summary, the Bank exceeded the current minimum requirements for core capital, tangible capital and risk-weighted capital as of December 31, 2001.

          OTS Regulations Regarding Assessments and Fees

      The OTS has amended its assessments rule to more accurately reflect the increased cost of supervising 3, 4 and 5 rated institutions. The OTS determines the assessment for an individual savings association by adding together three components reflecting the size, condition and complexity of an institution. The OTS computes the size component on which the basic assessment is based by multiplying an institution’s total assets by the applicable assessment rate of the association. The institution’s supervisory condition would result in percentage increases for any savings institution with a composite rating of 3, 4 or 5 in its most recent safety and soundness examination. The OTS imposes the complexity component for a savings association that manages over $1 billion in trust assets, services for others loans aggregating more than $1 billion, or has certain off-balance sheet assets aggregating more than $1 billion. Under the previous rule, the OTS computed the condition component at 25% of the size component for 3 rated institutions, and 50% of the size component for 4 and 5 rated institutions. Under the new regulation, the OTS will compute the condition component at 50% of the size component for 3 rated institutions, and 100% of the size component for 4 and 5 rated institutions.

          Interagency Guidance Statement Regarding Asset-Backed Securitization

      The OTS, in conjunction with the other federal banking regulatory agencies, issued a guidance statement regarding asset securitization activities of banks and savings associations which applies to the Bank and its subsidiary, WFS. The guidance states that reported values for retained interest assets should be reasonable, conservative and supported by objective and verifiable documentation. Furthermore, institutions engaged in asset securitization activities should ensure that sufficient capital is held to support the risks associated with those activities and that appropriate management oversight and reporting is accomplished with respect to the institution’s asset securitization activities. The agencies noted that on a case-by-case basis, additional capital may be required to be held by those institutions whose asset securitization activities are not in compliance with the guidance provisions, or the retained interests may be classified as loss and not permitted to be included in calculating the institution’s regulatory capital. The Bank and WFS believe that WFS’ valuation of its retained interest assets and its securitization activities as an operating subsidiary of the Bank are in compliance with the guidance provisions. Moreover, as WFS’ recent securitization activities have been accounted for as secured financings or involved a sale of contracts servicing released, WFS has substantially reduced and does not anticipate creating in the future any non-cash gain on sale residual interests, the valuation of which would be subject to the guidance statement. The Bank and WFS believe that WFS’ securitization activities to date, including the creation, valuation and monitoring of our existing non-cash gain on sale residual interests, have been conducted in full compliance with the guidance statement.

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          OTS Regulation Regarding Asset Securitization

      The OTS, along with the other federal banking regulatory agencies, has adopted a new regulation pertaining to the capital treatment of recourse, direct credit substitutes and residual interests in asset securitizations. The new regulation combines two proposals previously published for comment by the OTS and the other agencies. The new regulation treats recourse obligations and direct credit substitutes more consistently than was previously the case. More importantly, the new regulation modifies the capital rules for residual interests arising upon the transfer of assets, including limiting the amount of residual interests that are credit-enhancing interest-only strips that may be included in calculating an institution’s capital. The new regulation requires all institutions to hold “dollar-for-dollar” capital against their total contractual exposure to loss resulting from residual interest assets arising from the transfer of assets accounted for as a sale. The regulation also requires that all residual interest assets which are credit-enhancing interest-only strips in excess of 25% of an institution’s Tier 1 capital be deducted from capital. Finally, the regulation reduces the amount of risk-based capital an institution must hold for certain positions in asset securitizations acquired by an institution, based upon the credit rating given to such interests by a nationally recognized statistical rating agency (such as Standard & Poor’s Ratings Services, a division of McGraw-Hill, Inc., also known as S&P, or Moody’s Investor Service, Inc., also known as Moody’s).

      The new regulation became effective on January 1, 2002 for any transaction that closes on or after that date. For transactions closed before that date, an institution can elect to have the regulation apply to those earlier transactions if it will result in a reduced capital requirement for the institution. Conversely, if application of the new regulation to transactions closed before January 1, 2002 will result in increased capital requirements, the affected institution may defer application of the regulation to those transactions until December 31, 2002. As the effect of the regulation will be to increase the Bank’s capital requirements, the regulation will not become applicable to pre-January 1, 2002 transactions until December 31, 2002. We anticipate that by that date the Bank will realize increased capital through retained earnings and possible capital raising transactions. In addition, by that date the residual interests we hold, both non-cash gain on sale and amounts due from trusts, are expected to continue to amortize. Accordingly, the amount of additional capital that the Bank may be required to hold as of December 31, 2002, in order to remain a well capitalized institution, is uncertain and dependent upon its results of operations and other capital raising transactions it may undertake by that date.

      In addition, as the new regulation also provides that lesser amounts of capital need be held by purchasers of asset-backed securities, based upon the ratings assigned to such securities by the nationally-recognized statistical rating organizations, this may have the effect of increasing the marketability of our asset-backed securities, thereby reducing the yields we may be required to offer to complete future securitizations.

      Finally, the new regulation will not cause any adverse capital effect upon us as a result of our securitizations accounted for as secured financings which we have undertaken commencing in early 2000 and consistently since then. The regulation only applies to residual interests arising from the transfer of assets or participations accounted for as sales under GAAP. We do not anticipate, at this time, of engaging in any securitizations accounted for as sales under GAAP. Accordingly, whatever the effect of this regulation upon us due to the residual interests we may hold at December 31, 2002 which arose as a result of securitizations closed prior to January 1, 2002 which were accounted for as sales, that effect will be reduced each quarter thereafter as the amount of those residual interests continue to amortize. We anticipate that all of such residual interests will have been fully amortized or otherwise eliminated by the end of 2002.

          Proposed Rules Affecting Regulations

      On October 20, 2000, the Agencies published for comment proposed regulations implementing the provisions of the Fair Credit Reporting Act, also known as the FCRA, that permit institutions to communicate consumer information to their affiliates (affiliate information sharing) without incurring the obligations of consumer reporting agencies. To allow financial institutions to plan for and meet the requirements of the privacy regulations, the Agencies provided this update on the FCRA proposal, and to advise financial

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          Interagency Guidance Statement Regarding Sub-prime Lending Programs

      The OTS, along with the other agencies, has adopted guidance pertaining to sub-prime lending programs. Pursuant to the guidance, lending programs that provide credit to borrowers whose credit histories reflect specified negative characteristics, such as bankruptcies or payment delinquencies, are deemed to be sub-prime lending programs. Pursuant to the guidance, examiners may require that an institution with a sub-prime lending program hold additional capital which ranges from one and one-half to three times the normal capital required for similar loans made to borrowers who are not sub-prime borrowers, although institutions whose sub-prime loans are well secured and well managed may not be required to hold additional capital.

      We cannot predict whether the Bank will be required, following its next examination, to hold additional capital with respect to those automobile contracts on its consolidated balance sheet as to which the borrowers are determined to be sub-prime borrowers as defined by the agencies. To the extent that either the regulations, if adopted, or the guidance, as implemented, require the Bank to raise and continue to maintain higher levels of capital, our ability to originate, service and securitize new and pre-owned automobile installment contracts, especially as to which the borrower is determined to be a sub-prime borrower, may be adversely affected. Any changes to regulations that would negatively impact us may require us to curtail our automobile contract purchasing activities or change the relative percentage of types of automobile contracts we originate, either of which could have a material adverse effect on our financial position, liquidity and results of operations.

     Prompt Corrective Regulatory Action

      Federal Regulators are required to take prompt corrective action to resolve the problems of insured depository institutions that fall below certain capital ratios. This action must be accomplished at the least possible long-term cost to the appropriate deposit insurance fund.

      In connection with this action, each agency must promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the adequacy of its regulatory capital level:

	•	well capitalized;
	•	adequately capitalized;
	•	undercapitalized;
	•	significantly undercapitalized; and
	•	critically undercapitalized.

      The critically undercapitalized level cannot be set lower than 2% of total assets or higher than 65% of the required minimum leverage capital level. An institution’s primary federal regulatory agency may treat an institution as if it were in the next lower category if that agency determines, after notice and an opportunity for hearing, that the institution is in an unsafe or unsound condition, or that the institution is engaged in an unsafe or unsound practice.

      At each successive downward level of capital, institutions are subject to more restrictions and regulators are given less flexibility in deciding how to deal with the bank or thrift. For significantly undercapitalized institutions, the appropriate agency must:

	•	require the institution to sell shares in order to raise capital;
	•	restrict interest rates offered by the institution; and
	•	restrict transactions with affiliates.

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      For critically undercapitalized institutions, the agency must require prior agency approval for any transaction outside the ordinary course of business and the institution must be placed in receivership or conservatorship, unless the appropriate agency and FDIC make certain affirmative findings regarding the viability of the institution, which must be reviewed every 90 days.

      Any insured institution, regardless of its capitalization category, is precluded from making capital distributions to anyone or paying management fees to any persons having control of the institution if, after the transaction, the institution would be undercapitalized. Any undercapitalized institution must submit an acceptable capital restoration plan to the appropriate agency within 45 days of becoming undercapitalized.

      The OTS, in conjunction with the other agencies, adopted regulations defining the five categories of capitalization and implementing a framework of supervisory actions, including those described above, applicable to savings associations in each category. The regulations provide that a savings association will be deemed to be:

	•	“well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1, or core, risk-based capital ratio of 6% or greater, a leverage ratio of 5% or greater and is not subject to any OTS order or directive to meet and maintain a specific capital level for any capital measure;
	•	“adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater and has either:
	•	a leverage ratio of 4% or greater; or
	•	a leverage ratio of 3% or greater and is rated composite 1 under the CAMELS rating system in the most recent examination of the institution;
	•	“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, has a Tier 1 risk-based capital ratio that is less than 4%, has a leverage ratio that is less than 4% or, if rated composite 1 under the CAMELS rating system in the most recent examination of the institution, has a leverage ratio less than 3%;
	•	“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and
	•	“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%.

      At December 31, 2001, the Bank met the capital requirements of a “well capitalized” institution, as its total risk-based capital ratio was 11.86%, its Tier 1 risk-based capital ratio was 8.49% and its leverage ratio was 7.29%.

     Loans to One Borrower

      Under the HOLA, the loans to one borrower limitations for national banks apply to all savings associations in the same manner and to the same extent as they do to national banks. Thus, savings associations generally are not permitted to make loans to a single borrower in excess of 15% to 25% of the savings associations’ unimpaired capital and unimpaired surplus, depending upon the type of loan and the collateral provided therefore. In addition, further restrictions on a savings association’s loans to one borrower authority may be imposed by the OTS if necessary to protect the safety and soundness of the savings association. At December 31, 2001, 15% of the Bank’s unimpaired capital and unimpaired surplus for loans to one borrower purposes was $126 million. The largest amount outstanding at December 31, 2001 to one borrower and related entities was $16.0 million.

     Equity Risk Investment Limitations

      The Bank generally is not authorized to make equity investments other than investments in subsidiaries. A savings association may not acquire a new subsidiary or engage in a new activity through an existing subsidiary without giving 30 days prior notice to the OTS and the FDIC. In addition, a savings association

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     Qualified Thrift Lender Test

      A Qualified Thrift Lender, also known as QTL, test is included in the HOLA. An association that fails to become or remain a QTL must either:

	•	convert to a bank subject to the banking regulations; or
	•	be subject to severe restrictions, including being forbidden to invest in or conduct any activity that is not permissible to both a savings association and a national bank, and certain other restrictions on branching, advances from its FHLB, and dividends.

      For a three year period after an association fails to meet its QTL requirements, the association is forbidden from retaining any investment or continuing any activity not permitted for a national bank and must repay promptly all FHLB advances. In addition, companies that control savings associations that fail the QTL test must, within one year of the failure, become a bank holding company subject to the Bank Holding Company Act.

      Under the existing QTL requirements, a savings association’s “qualified thrift investments” must equal not less than 65% of the association’s “portfolio assets” measured on a monthly basis in nine of every twelve consecutive months. Savings associations have the option of substituting compliance with the Internal Revenue Code, also known as IRC, “Domestic Building and Loan Association”, also known as DBLA, test for compliance with the amended QTL requirements. Qualified thrift investments include:

	•	all loans or mortgage-backed securities held by an association which are secured or relate to domestic residential or manufactured housing;
	•	investments in educational, small business, credit card, and credit card account loans; and
	•	FHLB stock and certain obligations of the FDIC and related entities.

      Certain other investments are included as qualified thrift investments, but are limited to 20% of an association’s portfolio assets, including:

	•	50% of residential mortgage loans sold by an association within 90 days of their origination;
	•	investments in subsidiaries which derive at least 80% of their revenue from domestic residential or manufactured housing;
	•	subject to certain limitations, 200% of investments relating to “starter homes” or housing and community facilities in “credit-needy areas”;
	•	consumer loans in the aggregate of not more than 20% of portfolio assets; and
	•	FHLMC and FNMA stock.

      Portfolio assets are total assets less goodwill and other intangible assets, the value of the association’s facilities and the association’s liquid assets, but not over 20% of its total assets.

      At December 31, 2001, the Bank’s percentage of qualified thrift investments to portfolio assets was 75.22%. We anticipate that the Bank will continue to remain a QTL.

     Dividend Regulations

      The OTS has adopted regulations for determining if capital distributions of a savings association are permitted. A capital distribution includes dividends to shareholders, redemptions or repurchases of equity or debt and any transaction charged against the Bank’s capital accounts if it was not well capitalized. In general, capital distributions are limited to the Bank’s net income for the year to date plus retained net income for the

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      However, the Bank is also subject to certain limitations on the payment of dividends by the terms of the indenture for its 8.875% debentures. Those limitations are more severe than the OTS capital distribution regulations. Under the most restrictive of those limitations, the greatest capital distribution that the Bank could currently make is $136 million. We received dividends from the Bank during 2001 in the aggregate amount of $57.1 million.

     Community Reinvestment Act

      Congress passed the Community Reinvestment Act, also known as CRA, to encourage each financial institution to help meet the credit needs of the communities it serves, including low to moderate income neighborhoods. The CRA, as amended and supplemented by applicable regulations, establishes certain performance standards under which the Bank is to be examined. Periodically, the OTS reviews the Bank’s performance and publishes a “Community Reinvestment Act Performance Evaluation.”

      Following the Bank’s most recent scheduled examination in February 2001, it received an updated performance evaluation of “satisfactory.”

      Effective July 1, 2001, the Agencies published final rules to implement the CRA sunshine provisions of section 48 of the Federal Deposit Insurance Act. These provisions require insured depository institutions, and affiliates of insured depository institutions, among others, that are parties to certain agreements that are in fulfillment of the Community Reinvestment Act of 1977 to make the agreements available to the public and the appropriate agency and file annual reports concerning the agreements with the appropriate agency. The rule identifies the types of written agreements that are covered by section 48, also known as the Covered Agreements, and defines many of the terms used in the statute. The rule also describes how the parties to a Covered Agreement must make the agreement available to the public and the appropriate agencies and explains the type of information that must be included in the annual report filed by a party to a Covered Agreement.

     Classification of Assets

      Insured institutions are required to classify their own assets and to establish general valuation allowances (reserves) where appropriate. Assets classified as substandard or doubtful may be reviewed by the OTS examiner and valuation allowances may be required to be increased subject to review by the OTS Regional Director. For the portion of assets classified as loss, the OTS permits 100% of the amount classified to be charged off or the establishment of a specific valuation allowance. As of December 31, 2001, the Bank had established allowances for loan and real estate losses of $143 million.

     Investment and Lending Powers

      Pursuant to the Interagency Guidelines for Real Estate Lending Policies, the Bank is required to have lending policies consistent with the guidelines. The Bank’s standards are consistent with the supervisory limitations. In addition, the OTS and the other agencies have adopted uniform real estate appraisal guidelines. Those guidelines require the board of directors of financial institutions to adopt appraisal and evaluation programs, which the Bank has done.

      Federal savings associations can make total loans secured by business or agricultural real estate in amounts up to 400% of capital. They can also make additional secured and unsecured loans to businesses and farms in total amounts up to 20% of total assets. However, amounts in excess of 10% of assets may only be used for “small business loans.” The OTS also no longer aggregates commercial loans made by a savings association’s service corporation with commercial loans made by the savings association and its operating subsidiaries for purposes of the statutory 10% of assets limitation.

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      The OTS has also amended its regulations to clarify that a federal savings association may act as guarantor under Section 5(b)(2) of HOLA. In addition, the OTS liberalized its restriction on suretyship and guaranty agreements under Section 5(b)(2). The OTS also clarified that a federal savings association may issue letters of credit and may issue other independent undertakings as are approved by the OTS subject to certain statutory restrictions. The Bank has not engaged in any such agreements.

     Pass-Through Investments

      A federal savings association may invest in entities, such as limited partnerships and mutual funds that hold only assets, and engage only in activities, permissible for federal savings associations. Loans that a savings association makes to an entity in which it has made a pass-through equity investment will be subject to the loans to one borrower rule, as are loans by a savings association to any third party. A thrift’s investment in its operating subsidiaries is not subject to these restrictions. The Bank does not currently have any pass-through investments.

     Annual Examinations

      The OTS is required to conduct a full scope, on-site examination of the Bank every twelve months. Its last annual examination ended in March 2002.

     FDIC Back-Up Enforcement Authority

      The FDIC has the statutory authority under FDICIA to direct an insured institution’s principal regulator to take enforcement action. The FDIC can also take that action itself either if the principal regulator fails to act timely, or in an emergency situation.

     Financial Reporting

      Insured institutions are required to submit independently audited annual reports to the FDIC and the other appropriate regulated agencies. These publicly available reports must include:

	•	annual financial statements prepared in accordance with GAAP and other disclosure requirements, as required by the FDIC or the appropriate agencies; and
	•	a report, signed by the chief executive officer and the chief financial officer or chief accounting officer of the institution which contains statements, attested to by independent auditors, about the adequacy of internal controls and procedures for financial reporting.

      Insured institutions such as the Bank are required to monitor these activities through an independent audit committee.

     Standards for Safety and Soundness

      The agencies must, either by regulation or guidelines, provide standards for all insured depository institutions and depository institution holding companies relating to:

	•	internal controls, information systems and audit systems;
	•	loan documentation;
	•	credit underwriting;
	•	interest rate risk exposure;
	•	asset growth; and
	•	compensation, fees and benefits.

      In addition, the federal banking regulatory agencies are required to prescribe standards relating to asset quality, earnings and stock valuation as they determine to be appropriate.

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      The OTS, in conjunction with the agencies, has adopted a final regulation and Interagency Guidelines Prescribing Standards for Safety and Soundness to meet the amended FDICIA requirements. In general, the guidelines are designed to identify emerging safety and soundness problems and ensure that action is taken to address those concerns before they pose a risk to the deposit insurance fund. The guidelines call for each insured institution to have policies, procedures and systems appropriate to its size and the nature of its assets and liabilities. These policies must address the specific criteria identified in the guidelines for each of the six items identified above. The guidelines do not set any specific numerical targets or minimum requirements.

      If the OTS determines that a savings association has failed to satisfy the safety and soundness standards called for by the guidelines, the OTS may, upon requisite notice, require the association to submit a compliance plan that sets forth the steps it will take and the time frame required to correct the deficiency. If the association fails to comply with the OTS request, the OTS may then issue a notice of intent to issue an order requiring that association to correct a safety and soundness deficiency or to take or refrain from other actions. In an appropriate case, the OTS may issue an immediate order, subject to appeal by the association.

Taxation

  Federal Income Taxes

      We file a calendar year consolidated federal income tax return. All entities included in the consolidated financial statements are included in the consolidated tax return.

      The Bank is a savings and loan association for federal income tax purposes. Prior to 1996, savings and loan associations satisfying certain conditions were permitted under the IRC to establish reserves for bad debts and to make annual additions to these reserves which qualified as deductions from income. However, in 1996 new legislation was enacted which eliminated the reserve method of accounting for bad debts for tax purposes for savings and loan associations. The repeal of the reserve method is effective for tax years beginning after December 31, 1995. Savings and loan associations are now subject to the same tax laws regarding bad debt reserves as banks. The Bank is considered a “large bank” for federal income tax purposes and is required to use the specific charge off method for deducting bad debts for federal income tax purposes.

      The tax reserves for bad debt which were added after 1987 and which still exist as of the date of this change, are required to be recaptured into income ratably over a period of six years starting with the first taxable year after 1995. However, savings and loan associations that meet the “residential loan requirement” will be allowed to defer the recapture of their reserves for up to two years. The Bank met the residential loan requirement and, therefore, deferred recapture of its reserves in 1996 and 1997. The tax reserves related to pre-1988 additions to the reserve are not required to be recaptured into income as a result of this legislation. The total amount of the Bank’s post-1987 reserve that will be required to be recaptured into income is $10 million. This amount differs from the amounts previously reported in the financial statements due to the effects of Internal Revenue Service adjustments to bad debt reserves in their examinations of the 1993 through 1996 tax years. The remaining balances required to be recaptured at December 31, 2000 and 2001 are $5.0 million and $3.3 million, respectively. We are required to recapture $1.7 million into income for 2001 and each of the next two years.

      Prior to the new legislation discussed above, the Bank, if it met certain criteria, was permitted to compute its addition to its bad debt reserve on loans using one of the following two methods: (i) the percentage of taxable income method; or (ii) the experience method. The Bank has used whichever method has provided the maximum tax deduction in the past. A savings and loan association that utilized the percentage of taxable income method is subject to recapture taxes on such reserves if it makes certain distributions to its shareholders. Dividends may be paid without the imposition of any tax on the Bank if the amounts paid as dividends do not exceed the Bank’s current or accumulated earnings and profits as calculated for federal income tax purposes. Dividends paid in excess of current and accumulated earnings and profits, stock redemptions and other distributions with respect to stock, are deemed to be made from the bad debt reserve for qualifying real property loans, to the extent that this reserve exceeds the amount that could have been accumulated under the experience method. The amount of tax that would be payable upon any distribution which is treated as having been made from the bad debt reserve for qualifying real property loans is also

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      We will be subject to the alternative minimum tax if that tax is larger than the regular federal tax otherwise payable. Generally, alternative minimum taxable income is a taxpayer’s regular taxable income, increased by the taxpayer’s tax preference items for the year and adjusted by computing certain deductions in a special manner which negates the acceleration of such deductions under the regular federal tax. This amount is then reduced by an exemption amount and is subject to tax at a 20% rate. In the past, we have not generally paid alternative minimum tax and do not expect that we will in the current year.

      We and our subsidiaries are under examination by the Internal Revenue Service for the tax years ended December 31, 1997 through 1999. We do not anticipate any significant changes based upon these examinations.

  California Franchise Tax and Other State Provisions

      At the end of 2001, we had a tax presence in approximately 37 states. However, we expect that over 50% of the activity of the group and the resulting income will be taxed as California source income, with the remaining amounts apportioned or allocated outside California.

      The California franchise tax applicable to the Bank is higher than the rate of tax applicable to non-financial corporations because it includes an amount “in lieu” of local personal property and business license taxes paid by non-financial corporations, but not generally paid by financial institutions such as the Bank. For taxable years ending on or after December 31, 1995, the tax rate for a financial corporation is equal to the tax rate on a regular corporation plus 2%. For income years beginning after January 1, 1997, the California regular corporate tax rate is 8.84% and the financial corporation tax rate is 10.84%.

      Under California law, a financial corporation may determine its bad debt deduction using one of two methods. The first method allows a deduction for debts that become wholly or partially worthless during the tax year (i.e., the specific charge off method). The second method allows a reasonable addition to a reserve to be deducted. A reasonable addition can be calculated using an experience ratio, or may be determined by management to be greater than the experience ratio, but not greater than the amount deducted for regulatory and financial statement purposes, and not greater than 1% of outstanding loans at year end. California has not conformed to the federal repeal of the reserve method of accounting for bad debts for a savings and loan association.

      We compute our taxable income for California purposes on a unitary basis, or as if we were one business unit, and file one combined California franchise tax return (excluding Westhrift Life Insurance Company).

Subsidiaries

      The following subsidiaries are included in our Consolidated Financial Statements.

  WFS Receivables Corporation 2

      WFS Receivables Corporation 2, also known as WFSRC2, is our wholly owned, Nevada based, limited purpose service corporation. WFSRC2 was organized for the purpose of purchasing contracts from WFS and securitizing them in the asset-based securities market. Automobile contracts securitized through WFSRC2 are treated as secured financings for accounting purposes.

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  Westran Services Corp.

      Westran Services Corp., also known as Westran, is our wholly owned California based subsidiary, which provides travel-related services for us and all of our subsidiaries. Westran does not provide a significant source of revenues or expenses.

  Western Consumer Products

      Western Consumer Products is a wholly owned, California based subsidiary. Western Consumer Products was created in 2001 to market non-lending related products such as automobile warranties, maintenance agreements and vehicle security systems. There was no activity in this subsidiary as of December 31, 2001.

  Western Financial Bank

      The Bank is our wholly owned, federally chartered and federally insured savings bank. The Bank provides diversified financial services through its community banking operations, which include a retail banking division and a commercial banking division. Substantially all of our operations are conducted through the Bank and its subsidiary, WFS. The Bank’s subsidiaries are WFS, which in turn owns all of the stock of WFAL, WFAL2, WFS Investments, Inc., also known as WFSII, WFS Funding, Inc., also known as WFSFI, WFS Receivables Corporation, also known as WFSRC, and WFS Web Investments, also known as WFSWEB. Other subsidiaries of the Bank include Westfin Insurance Agency, also known as WFIA, Westhrift Life Insurance Company, also known as Westhrift, WestFin Securities Corporation, also known as WestFin, Western Reconveyance Company, Inc., also known as RECON, Western Consumer Services, Inc., also known as WCS, Western Auto Investments, also known as WAI, and The Hammond Company, The Mortgage Bankers, also known as THCMB. Each of these entities are described in further detail below.

  WFS Financial Inc

      WFS is an 84% owned subsidiary of the Bank that is in the business of financing automobile contracts purchased from new and pre-owned car dealers. The remaining interest is traded on the Nasdaq National Market® under the ticker symbol WFSI. Each of its offices is licensed to the extent required by law to conduct business in each respective state. The contracts that WFS originates are generally securitized by its subsidiaries, WFAL or WFSRC. See “General — Automobile Lending Operations.” During 2001, WFS originated $4.9 billion of automobile contracts.

  WFS Financial Auto Loans, Inc.

      WFAL is a wholly owned, Nevada based, limited purpose operating subsidiary of WFS. WFAL was organized primarily for the purpose of purchasing contracts from WFS and securitizing them in the automobile contract asset-backed securities market. All sales to securitization trusts directly from WFAL are treated as sales for accounting purposes.

  WFS Financial Auto Loans 2, Inc.

      WFAL2 is a wholly owned, Nevada based, limited purpose operating subsidiary of WFS. WFAL2 purchases contracts from WFS that are then used as collateral for its reinvestment contract activities. See “Transactions with Related Parties — Reinvestment Contracts.”

  WFS Investments, Inc.

      WFSII is a wholly owned, California based, limited purpose operating subsidiary of WFS. WFSII was incorporated for the purpose of purchasing limited ownership interests 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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  WFS Funding, Inc.

      WFSFI is a wholly owned, Nevada based, limited purpose service corporation subsidiary of WFS. WFSFI was incorporated for the purpose of providing conduit financings. WFSFI completed a $775 million, a $650 million, and a $500 million conduit financing transaction during January 2002, November 2001 and September 1999, respectively.

  WFS Receivables Corporation

      WFSRC is a wholly owned, Nevada based, limited purpose service corporation subsidiary of WFS. WFSRC was organized for the purpose of purchasing contracts from WFS and securitizing them in the asset-backed securities market. Securitizations in which contracts are sold through WFSRC are treated as secured financings for accounting purposes.

  WFS Web Investments

      WFSWEB is our wholly owned, California based, limited purpose service corporation subsidiary. WFSWEB was incorporated for the purpose of investing in an Internet service company called DealerTrack. Our investment in DealerTrack provides us with the unique opportunity to be involved with a company that provides a business to business Internet portal, specifically designed for the indirect automobile lending market.

  Western Auto Investments, Inc.

      WAI is a wholly owned, Nevada based, limited purpose operating subsidiary of the Bank. WAI was incorporated for the purpose of purchasing limited ownership interests in automobile loan securitization transactions. WAI is limited by its Articles of Incorporation from engaging in any business activities not incidental or necessary to its stated purpose. WAI does not provide a significant source of revenues or expenses.

  WestFin Insurance Agency

      WFIA is a wholly owned, California based, insurance agency of the Bank. WFIA acts as an agent for independent insurers in providing property and casualty insurance, collateral protection insurance and other non-credit related life and disability coverage on automobile contracts made by WFS. WFIA is also a licensed broker-dealer, which sells fixed annuities to the general public. WFIA’s revenues consist primarily of commissions received on policies sold to customers.

  Westhrift Life Insurance Company

      Westhrift is a wholly owned, Arizona based, subsidiary of the Bank. Westhrift is engaged in the business of reinsuring credit life and credit disability insurance offered to borrowers of the Bank. An independent insurer underwrites these policies. The credit life insurance policies provide us with full payment of the insured’s financial obligation in the event of the insured’s death. The credit disability insurance policies provide us with payment of an insured’s financial obligation during a period of disability resulting from illness or physical injury. Westhrift has a Certificate of Authority from the California Insurance Commissioner authorizing it to conduct insurance business in California. At December 31, 2001, credit life and disability insurance in force was $3.0 million.

      For Arizona statutory purposes, Westhrift is required to maintain reserves for losses on credit life and credit disability policies. Westhrift’s aggregate reserves for credit life and credit disability policies at December 31, 2001 were $0.3 million.

      The aggregate reserves are computed in accordance with commonly accepted actuarial standards consistently applied and are based on actuarial assumptions that are in accordance with or stronger than those called for in policy provisions. The policies reinsured are underwritten by the independent insurer for no more than the amount that the insured owes us, not to exceed $25 thousand per loan. Westhrift also maintains a

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  WestFin Securities Corporation

      WestFin is a wholly owned subsidiary of the Bank. Management decided to discontinue its operations in 2000. Prior to discontinuing its operations, WestFin was a National Association of Securities Dealers licensed securities broker-dealer of the Bank.

     Western Reconveyance Company, Inc.

      RECON is a wholly owned, California based, subsidiary of the Bank. RECON acted primarily as the trustee under trust deed loans made by the Bank. After the elimination of all mortgage banking activities, RECON discontinued its operations. RECON did not provide a significant source of revenues or expenses.

     Western Consumer Services, Inc.

      WCS is a wholly owned, California based, subsidiary of the Bank. WCS historically conducted real estate development activities through two California limited liability companies, also known as LLCs. The purpose of the LLCs was to acquire, develop and ultimately sell single family residences. WCS has also held properties that were prohibited to be held by the Bank due to regulatory guidelines. The Bank is required to hold dollar for dollar risk-based capital for its investment in WCS. WCS does not currently hold any real estate investments or conduct any real estate development activities.

     The Hammond Company, The Mortgage Bankers

      THCMB is a wholly owned, California based, subsidiary of the Bank. THCMB was acquired in 1995 for the purposes of providing retail mortgage banking services. In 1996, THCMB activities were moved into the Bank. THCMB does not currently conduct any business.

Associates

      At December 31, 2001, we had 2,111 full-time and 145 part-time associates. None of our associates are represented by a collective bargaining unit or union. We believe we have good relations with our associates.

Forward-Looking Statements

      This Form 10-K includes and incorporates by reference forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These statements are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause actual results to differ materially from those expressed in or implied by these forward-looking statements.

      These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” and similar terms and phrases, including references to assumptions.

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

	•	changes in general economic and business conditions;
	•	interest rate fluctuations;
	•	our financial condition and liquidity, as well as future cash flows and earnings;
	•	competition;

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	•	our level of operating expenses;
	•	the effect of new laws, regulations and court decisions;
	•	the availability of sources of funding;
	•	the level of chargeoffs on the automobile contracts that we originate; and
	•	significant litigation.

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

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

Item 2. Properties

      At December 31, 2001, we owned 11 properties in California and one property in Texas and leased 61 properties at various locations in various states.

      Our executive offices are located at 23 Pasteur, Irvine, California. The remaining owned and leased properties are used as retail branch offices, automobile lending regional business centers, and other operational centers. At December 31, 2001, the net book value of property and leasehold improvements was approximately $50.3 million. We lease space at two locations from a company controlled by our major shareholder.

Item 3. Legal Proceedings

      We or our subsidiaries are parties to certain legal proceedings incidental to our business, including consumer class action lawsuits pertaining to our automobile finance activities. We are vigorously defending these actions and do not believe that the outcome of these proceedings will have a material effect on our financial condition, results of operations or cash flows.

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

      None.

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PART II

Price Range by Quarter

      Our common stock has been publicly traded since 1986 and is currently traded on the New York Stock Exchange, also known as the NYSE, identified by the symbol, WES. The following table illustrates the high and low prices by quarter in 2001 and 2000, as reported by the NYSE, which prices are believed to represent actual transactions:

      We had approximately 1,257 shareholders of our common stock at February 28, 2002. The number of shareholders was determined by the number of record holders, including the number of individual participants, in security position listings.

Dividends

      We paid cash dividends of $0.43, $0.30 and $0.20 per share for the years ended December 31, 2001, 2000 and 1999, respectively. On December 18, 2001, we declared a quarterly cash dividend of $0.11 per share for shareholders of record as of February 6, 2002. This dividend was paid on February 20, 2002. There are no restrictions on the payment of dividends by Westcorp.

      Our wholly owned subsidiary, the Bank, is restricted by regulation and by the indenture relating to the subordinated debentures as to the amount of funds which can be transferred to us in the form of dividends. Under the most restrictive of these terms, on December 31, 2001, the Bank’s restricted shareholder’s equity totaled $336 million with a maximum dividend of $136 million.

      The Bank must notify the OTS of its intent to declare cash dividends 30 days before declaration and may not pay a dividend or make a loan to us for any purpose to the extent we engage in any activities not permitted for a bank holding company.

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Item 6. Selected Financial Data

      The following table presents summary audited financial data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997. Since this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read our Consolidated Financial Statements contained elsewhere herein. Certain amounts from the prior years’ consolidated financial statements have been reclassified to conform to the current year presentation.