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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended December 31, 2001

FREMONT GENERAL CORPORATION

Registrant’s Telephone Number, including Area Code: (310) 315-5500

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, $1.00 par value

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  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 February 28, 2002:

Common Stock, $1.00 Par Value — $252,806,000

The number of shares outstanding of each of the issuer’s classes of common stock as of February 28, 2002:

Common Stock, $1.00 Par Value — 70,933,000 Shares

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the proxy statement for the 2002 annual meeting of stockholders are incorporated by reference into Part III of this report.

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FREMONT GENERAL CORPORATION

ANNUAL REPORT ON FORM 10-K

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Item 1. Business

      This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include those related to the plans and objectives of management for future operations, projections of revenues, income, loan origination volume, earnings per share, capital expenditures, dividends, capital structure, economic performance and other expectations and beliefs concerning future developments and their potential effects on Fremont General Corporation (“Fremont”), and its subsidiaries (combined “the Company”). Actual developments and/or results could differ materially from those anticipated by the Company as a result of, among other things: the variability of business and economic conditions, the inherent difficulty of accurately forecasting revenues and expenses, the Company’s ability to sell its products, to make loans and to access capital resources and the associated costs of doing so, the accuracy in projecting loan loss and claims and policy reserves, changes in the frequency and severity of claims, the occurrence of catastrophic events, inability to secure regulatory approvals from, or certain determinations or actions by, the Federal Deposit Insurance Corporation (“FDIC”), the Department of Financial Institutions of the State of California (“DFI”) and the California Department of Insurance (“DOI”) on various matters, the ability of the Company to finalize an understanding in principal with the DOI related to its workers’ compensation insurance subsidiaries (See Discontinued Insurance Operations — Property and Casualty Insurance) or to complete an agreement that would transfer its workers’ compensation insurance new business, organization and facilities to a third party (see General), the impact of competition and pricing environments, changes in interest rates, effect of the performance of financial markets on investment income and fair values of loans and investments, adverse state and federal legislation, regulation and actions, adverse court decisions and judicial climate, changes in the medical, legal and rehabilitation cost control environment, increases in fraud and abuse, changes in loan and other asset valuations and general economic conditions and trends, and other risks and uncertainties detailed in this section and elsewhere in this Form 10-K and from time to time in Fremont’s other reports, press releases and filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update such forward-looking statements.

General

      Fremont General Corporation (“Fremont”), and its subsidiaries (combined “the Company”) is a financial services holding company. Fremont’s financial services’ segment is consolidated within Fremont General Credit Corporation (“FGCC”), which is engaged in commercial and consumer real estate lending nationwide through its California-chartered industrial bank subsidiary, Fremont Investment & Loan (“FIL”). Fremont’s operating strategy is to continue to grow its financial services business nationwide by focusing its resources on the development and expansion of profitable lending products and strong distribution channels, as well as on controlling expenses. Certain corporate revenues and expenses, comprised primarily of investment income, interest expense and certain general and administrative expenses, are not allocated by Fremont to FGCC or to the discontinued insurance operations.

      Fremont, having experienced significant losses in recent years, decided in the fourth quarter of 2001 to discontinue its property and casualty insurance operation, which was primarily represented by the underwriting of workers’ compensation insurance policies. Fremont will attempt to sell the premium renewal rights (new business) of its workers’ compensation insurance operation (“Fremont Comp”) and transfer most of the organization and facilities to a third party. Fremont is currently in negotiations with another organization to accomplish this, but cannot yet predict a final resolution. Since making the decision to discontinue the workers’ compensation insurance operation, Fremont Comp has continued to write new business in an attempt to retain the value of the organization as negotiations are actively pursued. Fremont Comp intends to cease to accept new business upon completion of a transfer of

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      The reported consolidated assets and stockholders’ equity of the Company as of December 31, 2001 were $8.0 billion (of which $2.6 billion were assets of the discontinued insurance operations) and $357.8 million, respectively. The Company reported income before taxes from continuing operations of $84.8 million and net income from continuing operations of $53.3 million for the year ended December 31, 2001. Additionally, the Company recognized $2.3 million in net income from its property and casualty insurance operations prior to its classification as a discontinued operation, as well as an extraordinary after tax gain of $4.9 million on the extinguishment of debt. Total net income for 2001 was $60.5 million.

      Fremont, a Nevada corporation, was incorporated in 1972. Its corporate office is located at 2020 Santa Monica Boulevard, Suite 600, Santa Monica, California 90404 and its phone number is (310) 315-5500. The Company’s common stock is traded on the New York Stock Exchange under the symbol “FMT”. At December 31, 2001, the Company had approximately 1,600 employees, none of whom is represented by a collective bargaining agreement. The Company believes its relations with its employees are satisfactory. As of December 31, 2001, officers and directors of the Company, their families and the Company’s benefit plans beneficially owned approximately 33% of Fremont’s outstanding common stock.

Financial Services Operation

      Fremont’s financial services primary operation is the origination of commercial and residential real estate loans on a nationwide basis. Fremont’s lending is done primarily on a senior and secured basis and it seeks to minimize credit exposure through conservative loan underwriting and appropriate loan to collateral valuations and cash flow coverages. Loans are originated through independent loan brokers, the Company’s own marketing representatives and referrals from various financial intermediaries and financial institutions. The financial services operation is primarily funded through deposit accounts that are insured by the FDIC.

      In December of 1999, the Company discontinued its commercial finance (secured working capital lines of credit) lending activities through the sale of Fremont Financial Corporation (“Fremont Financial”), a subsidiary of FGCC, to FINOVA Capital Corporation, a subsidiary of The FINOVA Group, Inc. for approximately $708 million in cash and assumption of existing debt. In September of 2000, the Company also sold substantially all of the assets of its insurance premium financing business.

      The outstanding loan portfolio of Fremont’s financial services operation has grown from $3.01 billion at December 31, 1998 to $3.86 billion at December 31, 2001. In addition, there were residential real estate loans of approximately $562.6 million under three securitizations at December 31, 2001 that are not included in the consolidated balance sheet. Fremont’s financial services operation earned $138.5 million, $102.2 million and $79.9 million in income before taxes for the years ended December 31, 2001, 2000 and 1999, respectively, on revenues of $482.9 million, $421.0 million and $411.6 million for the same respective periods. Included in the Company’s financial services operation’s income before taxes for the year ended December 31, 1999, is the recognition of a $10.3 million gain on the sale of Fremont Financial.

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      The Company’s financial services loan portfolio, as well as the amounts of loans held for sale (which are all residential real estate loans), as of the dates indicated, are summarized in the following table by loan type.

Commercial Real Estate Lending

      The commercial real estate lending operation, as of December 31, 2001, consists of 632 loans in its loan portfolio. The Company originates commercial real estate loans nationwide through its nine regional production offices. Loan origination is primarily through independent loan brokers and, to a lesser degree, directly through its own marketing representatives. The products and capabilities of the commercial real estate lending operation are marketed through the use of trade advertising, direct marketing, newsletters and trade show attendance and sponsorship. The emphasis is on service oriented delivery highlighted by responsiveness and reliability. Loan structures are tailored to meet the needs and risk profiles of individual transactions. The commercial real estate lending philosophy is collateral focused with emphasis on selecting properties that generate stable or increasing income cash flow streams, have strong asset quality and proven sponsorship with defined business plans. Loan structures, particularly in the case of bridge loans, include hold backs for such items as funding of all renovation costs, tenant improvements, leasing commissions and interest carry until property stabilization. The origination of commercial real estate loans are generally held for the Company’s own portfolio. Commercial real estate loans are reported net of participations to other financial institutions or investors in the amount of $118.0 million and $138.3 million as of December 31, 2001 and 2000, respectively. During 2001, $11.9 million of commercial real estate loans were sold through direct whole loan sale or participation, and $35.0 million were sold during 2000. Commercial real estate loan origination volume increased 33% to $1.80 billion in 2001 from $1.36 billion in 2000. The commercial real estate loan portfolio grew to $3.55 billion or 91.5% of the financial services loan portfolio at December 31, 2001 from $2.92 billion or 83.7% of the financial services loan portfolio at December 31, 2000.

      The commercial real estate loan portfolio is primarily secured by first mortgages on properties in California (48.3%) and, to a lesser degree, Virginia (6.5%), District of Columbia (5.6%), New York (5.1%) and Texas (5.0%). Loans were originated in 42 different states during 2001. The real estate securing these loans include a wide variety of property types including office, retail, industrial, multi-

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      Loans include short-term bridge facilities for the renovation and lease-up of existing properties, as well as permanent loans which generally have terms for up to five years. Loans also include construction loans, which are loans for the construction of new structures, and also for additions or alterations to existing structures that prohibit occupancy or generation of rental revenue of the property during the construction period. Loans also include longer term single tenant credit loans, however, origination of these loans ceased during the first quarter of 2000. Bridge loans generally are interest-only for up to two year terms. Principal amortization for permanent loans is generally up to 25 years. Approximately 47% of the commercial real estate loan balances outstanding are bridge loans, 37% are permanent loans, 9% are single tenant credit loans and 7% are construction loans. The majority of the commercial real estate loans originated are adjustable interest rate loans based upon six-month LIBOR and an applicable margin, and generally range in loan size between $1 million and $35 million. The commercial real estate loan portfolio is stratified by loan size as follows (thousands of dollars):

      The commercial real estate loan portfolio contains two loans in excess of $35 million as of December 31, 2001, the largest having an outstanding balance of $38.6 million. In addition, the portfolio has three concentrations by common investor or sponsor base that are in excess of $75 million. The largest concentration is from two affiliated investment funds (affiliated by common advisor) and totals $149.0 million, comprised of 7 separate loans. The second largest concentration is of five affiliated investment funds and totals $100.9 million, comprised of 10 separate loans. The other concentration is 15 loans, totaling $95.0 million, in transactions with a common developer and completed in partnership with various private and institutional investors. While the loans may have a common investor or sponsor base, each is made to a separate single asset ownership entity, which is collateralized by individual real estate projects. For some of these loans, as well as others in the portfolio, the Company has received guarantees of project completion and debt service from the sponsoring entity. All but one (in the amount of $14.4 million) of the loans under these three affiliate concentrations were performing as of December 31, 2001.

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      As of December 31, 2001, the average loan size was $5.6 million and the average loan-to-value ratio was 66.5%, using the most current available appraised values and current loan balances outstanding. At December 31, 2001, 13 commercial real estate loans were classified as non-accrual, totaling $68.9 million, and there were 3 commercial real estate properties owned, totaling $19.3 million, which were acquired through foreclosure on loans. In addition, 7 commercial real estate loans were 90 days or greater past due, but on accrual status. These loans totaled $15.6 million at December 31, 2001 and include loans that are contractually past maturity, but continue to make interest payments.

  Residential Real Estate Lending

      The Company’s residential real estate portfolio and loans held for sale, as of December 31, 2001 was comprised of approximately 7,300 loans. Residential real estate loans are originated nationwide through four regional production offices. Origination is done on a wholesale basis through independent loan brokers and through internal marketing representatives. The real estate securing these loans and the residential loans held for sale, are substantially all single family residences located in California (39.5%), and to a lesser degree Florida (8.4%), New York (8.0%), Illinois (5.3%) and New Jersey (5.2%). Loans were originated in 45 different states during 2001. Origination volume increased approximately 63% to $3.33 billion in 2001 from $2.04 billion in 2000. The growth in loan originations during 2001 was the result of further penetration of existing markets and the overall growth in the national sub-prime lending market. The residential real estate loan portfolio, excluding loans held for sale, was $195.6 million or 5.0% of financial services loan portfolio at December 31, 2001, down from $239.7 million or 6.9% of the financial services loan portfolio at December 31, 2000. This slight decrease in loans outstanding is due to an emphasis on selling residential loan production on a whole loan basis during 2001.

      Substantially all of the residential real estate loans are secured by first deeds of trust. These loans generally have principal amounts below $350,000, have maturities generally of thirty years and are underwritten in accordance with lending policies that include standards covering, among other things, collateral value, loan to value and the customer’s debt ratio and credit score. These loans generally are “hybrid” loans which have a fixed rate of interest for an initial period after origination, typically two to three years, after which the interest rate will be adjusted to a rate equal to the sum of six-month LIBOR and a margin as set forth in the mortgage note. This interest rate will then be adjusted at each six-month interval thereafter, subject to various lifetime and periodic rate caps and floors. These loans have been originated using underwriting standards that are less stringent than the Federal National Mortgage Association’s guidelines and are commonly known as “sub-prime” loans. To mitigate the higher potential for credit losses that accompanies these types of borrowers, the Company attempts to maintain underwriting standards that require conservative loan to collateral valuations. (See “Risk Factors.”) Residential real estate loans, secured by first deeds of trust, originated during 2001 had an average loan size of $148,000. Approximately 78% of the loans were “2/28” hybrid loans (fixed rate of interest for 2 years, adjustable interest rate thereafter) and 33% of the loans were from the purchase of a residence and 67% were for the refinance of an existing residential real estate loan.

      At December 31, 2001, the average single-family loan principal amount outstanding was approximately $135,000, and the average loan-to-value ratio for loans in portfolio and held for sale was 76.5%, using appraised values at the time of loan origination and current balances outstanding. Approximately 93% of the loans in portfolio and held for sale at December 31, 2001 were originated during 2001. At December 31, 2001, the Company had $19.2 million in residential real estate loans classified as non-accrual. Of the $19.2 million, $2.5 million were loans held in the portfolio and $16.7 million were loans classified as held for sale.

      The residential real estate loan disposition strategy is primarily dependent upon market conditions and pricing, and may include whole loan sales, retaining loans in its portfolio, or securitization. During 2001, $2.82 billion in residential real estate loans were sold, comprised completely of whole loan sales to other financial institutions. During 2001, whole loan sales to two separate financial institutions represented approximately 92% of the $2.82 billion in total whole loan sales. One institution represented approximately 49% of the volume and the other approximately 43%. (See “Risk Factors.”) In 2000 and

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      In the securitizations, the Company sells residential real estate loans to a special purpose entity, which is established for the limited purpose of purchasing the loans and issuing interest bearing securities that represent interests in the loans. The securitization is treated as a sale and the loans sold are removed from the balance sheet. The Company retains a residual interest in the securitization, which represents the right to receive certain net future cash flows from the loans. Most of the residual interests, however, are generally restricted until investors and other expenses have been paid or otherwise are subordinate to investors’ interests. (See “Risk Factors.”)

      In a whole loan sale for cash, the Company enters into an agreement to sell the loans for cash, without recourse, generally on a servicing released basis. After the sale, the Company retains no interest in the underlying loans.

  Syndicated Loans

      The Company has interests in large syndicated commercial loans which are originated and serviced by other financial institutions. These loans are senior obligations of the borrowers and are secured by substantially all of the assets of the borrower and, if applicable, its subsidiaries. These loans are variable interest rate loans with rates based upon various LIBOR time periods and applicable margins. The loans are primarily in fixed-term loans, typically with maturities of approximately 7 years and with the substantial portion of the loan principal amortization coming in the year of maturity. The syndicated commercial loan portfolio was $113.5 million at December 31, 2001, or 2.9% of the financial services loan portfolio, as compared to $317.5 million or 9.1% of the financial services loan portfolio at December 31, 2000. These loans are originated through development of relationships with various financial institutions. As of December 31, 2001, the average outstanding loan balance was $5.4 million and there was one loan classified as non-accrual with a balance of $3.4 million. Loan commitments to a single borrower do not exceed $10 million. The Company ceased investing in syndicated commercial loans during 2001 due to market conditions and expects to downsize this portfolio further.

  Funding Sources

      The commercial and residential real estate lending and syndicated commercial loan activities are financed primarily through deposit accounts offered by the industrial bank and which are insured by the FDIC. (See “Industrial Bank Regulation.”) FIL offers certificates of deposit and installment investment certificates (which are similar to passbook savings accounts and money market accounts) insured by the FDIC to the legal maximum through its 18 branches in California. FIL typically offers higher interest rates to its depositors than do most full service financial institutions. At the same time, it has minimized the costs associated with its accounts by not offering traditional checking, safe deposit boxes, ATM access and other traditional retail services, which have higher maintenance costs. Deposits totaled $4.26 billion at December 31, 2001 and are summarized as to type as follows (thousands of dollars):

      Additional financing is available to FIL from the Federal Home Loan Bank of San Francisco (“FHLB”). The financing by the FHLB is available at varying rates and terms. As of December 31, 2001, $956.1 million was available from the FHLB, with $309 million outstanding. In 2000, FIL obtained a line of credit with the Federal Reserve Bank of San Francisco, and at December 31, 2001 had a borrowing capacity of $125.8 million, with no amounts outstanding.

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  Competition

      The financial services business competes in markets that are highly competitive and are characterized by factors that vary based upon product and geographic region. The markets in which it competes are typically characterized by a large number of competitors who compete based primarily upon price, terms and loan structure. The Company primarily competes with banks, mortgage, insurance, and finance companies, many of which are larger and have greater financial resources. The competitive forces of these markets could adversely affect net interest income, loan origination volume or net loan losses.

Discontinued Insurance Operations

      The Company’s discontinued insurance operations consist primarily of its property and casualty insurance segment, which was engaged in the underwriting of workers’ compensation insurance business. This business was classified as discontinued in 2001. Discontinued insurance operations also include the Company’s assumed treaty and facultative reinsurance business and its life insurance business. The discontinued insurance operations’ assets at December 31, 2001 consisted of total assets of $2.57 billion, of which $1.25 billion were in cash and investment securities, and $992.4 million were in reinsurance recoverables. The Company estimates that the dedicated assets supporting these operations and all related future policy cash inflows will be adequate to fund future policy obligations. (See Note P of Notes to Consolidated Financial Statements.)

  Property and Casualty Insurance

      The property and casualty insurance operation segment posted net losses of $547.4 million and $94.7 million for the years ended December 31, 2000 and 1999, respectively. The significant net loss for 2000 is predominantly the result of increases in the gross liability for loss and LAE, and to a lesser degree, various non-recurring charges related to restructuring the property and casualty insurance operation. For 2001, the discontinued property and casualty insurance operation posted net income of $2.3 million prior to its classification as a discontinued operation.

      As a result of the substantial operating losses for the property and casualty insurance operation in 2000, Fremont Comp entered into an agreement on November 27, 2000 with the California Department of Insurance (“DOI”) which provides for increased regulatory oversight and supervision. Due to this additional regulatory supervision, A.M. Best downgraded the workers’ compensation insurance subsidiaries rating to “E” (Under Regulatory Supervision) in December 2000. An “E” rating is a “Vulnerable” rating and severely limited the workers’ compensation insurance business’ ability to underwrite new and renewal workers’ compensation insurance policies. To enable the workers’ compensation insurance subsidiaries to continue to underwrite new and renewal business, a fronting facility with “A” rated (by A.M. Best) affiliates of Clarendon Insurance Group was entered into in May 2001. Fremont subsequently made the decision in the fourth quarter of 2001, that due to the significant losses in its property and casualty insurance operation for 2000 and 1999, continued negative trends in the industry and an inability to generate adequate premium volume under the Clarendon facility, to discontinue this line of business. In March 2002, Fremont reached an understanding in principal with the DOI, which is subject to being finalized in a written agreement, that would allow Fremont Comp to self-administer the run-off of policies currently in force by paying claims and operating expenses in the ordinary course of business, discount its workers’ compensation insurance loss and LAE reserves for statutory purposes for all accident years, and would ensure the protection of Fremont’s net operating loss carryforwards attributable to Fremont Comp. The agreement would also preserve Fremont’s interest in any realizable equity of Fremont Comp. Under the agreement, Fremont will have certain obligations for contributing capital to its discontinued workers’ compensation insurance subsidiaries. See Note P of Notes to Consolidated Financial Statements for further details. As of December 31, 2001, Fremont believes that Fremont Comp’s workers’ compensation insurance loss and LAE reserves are adequate and that Fremont Comp’s investment portfolio, and other assets, are sufficient to fund all future policy obligations.

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      In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer’s payment of that loss. To recognize liabilities for future unpaid losses, insurers establish reserves, which represent estimates of future amounts needed to pay claims with respect to insured events that have occurred. Reserves are also established for LAE reserves representing the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Associated with the liabilities for future unpaid losses and LAE are estimates of reinsurance recoverables related to these future unpaid losses and LAE, which are reported as assets.

      Reserves for losses and LAE (“loss reserves”) are based not only on historical experience but also on management’s judgment of the effects of matters such as future economic and social forces likely to impact the insurer’s experience with the type of risk involved, circumstances surrounding individual claims, and trends that may affect the probable number and nature of claims arising from losses not yet reported. Consequently, loss reserves are inherently subject to a number of highly variable circumstances.

      Loss reserves and reinsurance recoverables on unpaid losses are valued periodically using a variety of actuarial and statistical techniques for producing current estimates of expected claim costs and reinsurance recoveries. Claim frequency and severity and other economic and social factors are considered in the evaluation process, as are other factors that are judged to be appropriate modifiers of past experience.

      Reinsurance is ceded primarily to reduce the liability on individual risks and to protect against catastrophic losses. Fremont Comp follows the industry practice of reinsuring a portion of its risks. For this coverage, Fremont Comp pays the reinsurer a portion of the premiums received on all covered policies.

      Fremont Comp maintains excess of loss reinsurance treaties with various reinsurers. Effective for the year 2001, Fremont Comp had in place excess of loss reinsurance for new and renewal workers’ compensation insurance policies with effective dates of January 1, 2001 or after, that assumes liability for up to a maximum of $299,750,000 of loss and certain allocated loss adjustment expenses in excess of $250,000 per loss occurrence. The term of this coverage extends to August 1, 2002. Although reinsurance makes the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded, it does not legally discharge an insurer from its primary liability for the full amount of the policy liability. All of the foregoing reinsurance is with non-affiliated reinsurers. Fremont believes that the terms of its reinsurance contracts are consistent with industry practice and, based on its understanding of the reinsurers’ financial condition and reputations in the reinsurance marketplace, that its reinsurers are financially sound.

      As of December 31, 2001, Gerling Global Reinsurance Corporation of America (“Gerling”) was the only reinsurer that accounted for more than 10% of Fremont Comp’s total reinsurance recoverables on paid and unpaid losses. Gerling represented approximately 30% of the total workers’ compensation insurance related reinsurance recoverables as of December 31, 2001. Gerling was rated “A” (Excellent) by A.M. Best at December 31, 2001.

  Assumed Reinsurance and Life Insurance

      The assumed treaty and facultative reinsurance business was discontinued between 1986 and 1991. The liabilities associated with this business are long term in duration and, therefore, this business continues to be subject to claims being reported. Claims under these reinsurance treaties include professional liability, product liability and general liability that include asbestos and environmental claims.

      Prior to January 1, 1996, Fremont offered life insurance products, including annuities, credit life and disability insurance and term life insurance for consumers, through a subsidiary. Effective December 31, 1995 and January 1, 1996, this subsidiary entered into reinsurance and assumption

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Industrial Bank Regulation

      The industrial bank is subject to supervision and regulation by the DFI and, as an insured institution, by the FDIC. None of the Company’s subsidiaries are regulated or supervised by the Office of Thrift Supervision, which regulates savings and loan institutions. Fremont is generally not directly regulated or supervised by the DFI, the FDIC, or any other bank regulatory authority, except with respect to guidelines concerning its relationship with its industrial bank subsidiary. The industrial bank is examined on a regular basis by both agencies. At December 31, 2001, the industrial bank was in compliance with the regulatory requirements of these agencies.

      Federal and state regulations prescribe certain minimum capital requirements and the industrial bank is currently in compliance with such requirements. Federal and state regulatory authorities also have the power to prohibit or limit the payment of dividends by the industrial bank. (See “Risk Factors.”)

      California Law. The industrial banking business conducted by the industrial bank is governed by the California Revised Banking Law (“Revised Banking Law”), which became effective September 30, 2000, and the rules and regulations of the Commissioner of the DFI.

      The effect of the Revised Banking Law is that an industrial bank is now defined as a bank. All statutory and regulatory references to banks or commercial banks apply equally to industrial banks, including, for example, establishment and closure of branches and loan productions offices, investment authority, mergers and acquisitions, interstate banking and banking activities, and trust business. Essentially this means that the industrial bank may offer all loan and credit programs and deposit accounts that commercial banks may offer, with the significant exception that industrial banks are not authorized to offer demand deposit accounts. While FIL may not offer demand deposit accounts, it may offer negotiable orders of withdrawal accounts (NOW accounts) and money market deposit accounts (MMDA).

      There are other differences in the Revised Banking Law from the former Industrial Loan Law. These include annual regulatory assessments equal to commercial banks and no charges for regular periodic regulatory examinations, elimination of limits on out of state lending, elimination of restrictions on affiliate transactions, application of Federal Reserve Regulation O, increase in the aggregate sum of obligations owing by a single borrower, and elimination of capital/thrift leverage ratios.

      Maximum unsecured loans to one borrower is limited to 15% of shareholders’ equity, allowance for loan losses, and capital notes and debentures of an industrial bank. Maximum secured and unsecured loans to one borrower is limited to 25% of shareholders’ equity, allowance for loan losses, and capital notes and debentures of an industrial bank. Unsecured and secured obligations may not be combined in the same note. Separate notes are required. Loans secured by corporate stock of a single corporation are limited to 5% of the bank’s assets.

      Prior approval must be obtained from the DFI before a person or entity acquires control of an industrial bank or its controlling person, i.e., the bank’s holding company. Control means direct or indirect ownership or power to vote 25% of the voting stock issued by a person or to direct management or its policies. There is a presumption, however, as there is under the Federal Deposit Insurance Act, that ownership or power of over 10% or more of the voting stock is presumed to constitute control. (See

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      Under the Revised Banking Law, the DFI may take possession of an industrial bank if, among other things, the tangible shareholders’ equity is less than the greater of 3% of the industrial bank’s total assets, or $1 million. Violations of a bank’s articles of incorporation or any California law, unsafe or unauthorized conduct of business, or unsafe or unsound conditions are also grounds for taking possession and for liquidation of an industrial bank.

      Federal Law. The industrial bank’s deposits are insured by the FDIC to the full extent permitted by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises the operations of institutions to which it provides deposit insurance. The approval of the FDIC is required prior to any merger, consolidation or change in control or the establishment or relocation of any branch office of the industrial bank. This supervision and regulation is intended primarily for the protection of the insured deposit funds. Prior written notice to the FDIC is required to close a branch office. FDIC approval, however, is not required to open, relocate, or close a loan production office.

      The industrial bank is subject to federal risk-based capital adequacy guidelines which provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on- and off-balance sheet items, including residential real estate loans sold with recourse, legally binding loan commitments and standby letters of credit. A financial institution’s risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Financial institutions are generally expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% of qualifying total capital must be in the form of core capital (“Tier 1”) — common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of consolidated subsidiaries and allowed mortgage servicing rights, less all intangible assets other than allowed mortgage servicing rights and eligible purchased credit card relationships. Supplementary capital (“Tier 2”) consists of the allowance for loan and lease losses up to 1.25% of risk-weighted assets, cumulative perpetual preferred stock, long-term preferred stock (original maturity of at least 20 years), hybrid capital instruments, term subordinated debt and intermediate term preferred stock (original average maturity of five years or more). The maximum amount of Tier 2 capital which may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles and certain deferred tax assets). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions also apply. As of December 31, 2001, the industrial bank’s allowance for loan losses for Tier 2 capital was $53.4 million. At December 31, 2000, the Tier 2 capital of the industrial bank consisted of approximately $49.5 million of allowance for loan losses. The following table presents the industrial bank’s risk-based capital position at the dates indicated:

      The FDIC has adopted a minimum leverage ratio which is intended to supplement risk-based capital requirements and to ensure that all financial institutions continue to maintain a minimum level of

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      The industrial bank is a “well-capitalized” institution at December 31, 2001 under the regulations promulgated under the Federal Deposit Insurance Corporation Improvement Act of 1991. A “well-capitalized” institution has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio of at least 6%, has a leverage ratio of at least 5%, and is not subject to any written agreement, capital directive or prompt corrective action directive issued by the FDIC under Section 8 or Section 38 of the Federal Deposit Insurance Act to meet and maintain a specific capital level for any capital measure. The total risk-based capital ratio is the ratio of qualifying total capital to risk-weighted assets and the Tier 1 risk-based capital ratio is the ratio of Tier 1 capital to risk-weighted assets.

      As a “well-capitalized” institution, the industrial bank’s annual FDIC insurance premiums currently are 1.9 cents per $100 of eligible domestic deposits. The insurance premium payable is subject to semi-annual adjustment. The FDIC, by the first day of the month preceding each semi-annual period, is required to notify each insured institution of its assessment risk-classification upon which the insurance premium assessment for the following period will be based. The FDIC has the authority to assess to all insured institutions collectively, additional premiums to cover losses and expenses associated with insuring deposits maintained at financial institutions and for other purposes it deems necessary. Currently the FDIC and Congress have under consideration a review of the status of the insurance fund which could result in increased insurance coverage of accounts as well as increased premium assessment.

      In January of 2001, the FDIC, together with other federal banking regulatory agencies, issued a joint release entitled “Expanded Guidance for Sub-prime Lending Programs” which contains supplemental guidelines regarding sub-prime lending. The supplemental guidelines primarily apply to institutions with sub-prime lending program of 25% or more of the institution’s Tier 1 regulatory capital. The guidelines are intended to intensify examination scrutiny of institutions that target the sub-prime market. Institutions are examined on a case by case basis to determine the sufficiency of capital to support the risk of sub-prime lending. Generally, additional capital is required depending upon the additional risk assessment. Although there are differences between holding a portfolio of sub-prime loans and the securitization of such loans, each requires special attention to assure the adequacy of capital and proper risk management.

      Limitations on Dividends. The industrial bank follows the limitations under the Revised Banking Law and its authorization to pay dividends is subject to provisions applicable to commercial banks, which is limited to the lesser of retained earnings or the industrial bank’s net income for its last three

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      In policy statements, the FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. Under the Financial Institutions Supervisory Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible that, depending upon the financial condition of the industrial bank and other factors, such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and could prohibit or limit the payment of dividends.

      Other Regulation. FIL is also subject to federal consumer protection laws, including the Truth In Savings Act, the Truth in Lending Act, the Community Reinvestment Act, the Real Estate Settlement Procedures Act, and the Gramm-Leach-Bliley Act with regard to privacy of consumer financial information.

      Privacy. Federal laws have been recently enacted to protect the privacy of non-public personal information of consumers. The laws principally require banks and other financial companies to provide notices to their customers identifying what information is collected, whether the company intends to share such information with other companies, rights of customers, and the manner by which a customer can protect himself or herself. These laws give a customer the right to opt out of some sharing of personal financial information. California and other states either have enacted or have under consideration privacy laws which may either augment or make more restrictive the use of such information.

      Real Estate Lending Practices. In addition to the federal Truth In Lending laws governing disclosure requirements and limitations upon residential mortgages and loans secured by a consumer’s principal dwelling, California and other states have enacted statutes which set certain restrictions on such loans, such as, limits on annual percentage interest rate thresholds, limitations on prepayment penalties, capacity to repay, prohibition against sale of certain insurance, and specific disclosures. California’s new law becomes effective July 1, 2002. The states’ laws are intended to curb and eliminate abusive lending practices. Several California municipalities have such laws under consideration. It is not expected that such enactments will have any material effect upon the residential real estate lending business of the industrial bank.

Risk Factors

Operating Results and Financial Condition May Vary

      The Company’s profitability can be affected significantly by many factors including competition, the valuation of its loans and other assets, access to capital, funding sources, and secondary markets, the severity and frequency of claims, fluctuation in interest rates and the rate of inflation, legislation and regulations, court decisions, the judicial and regulatory climate and general economic conditions and trends, all of which are outside of the Company’s control. In addition, results may be affected by the ability to contain expenses and to implement appropriate technological changes. Any of these factors could contribute to significant variation in the Company’s results of operations within the different aspects of its business, or businesses taken as a whole, from quarter to quarter and from year to year.

      During periods when economic conditions are unfavorable, the financial services business may not be able to originate new loan products or maintain the credit quality of its finance receivables, both in its portfolio and for those loans that have been securitized, at previously attained levels. This may result in increased levels of non-performing assets and net credit losses. Changes in market interest rates, or in the relationships between various interest rates, could cause interest margins to be reduced and may result in significant changes in the prepayment patterns of the Company’s finance receivables. These risk factors could adversely affect the value of the loans (both in portfolio and held for sale) and their related collateral, as well as the valuation of the residual interests in the securitized loans, both of which could

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      With respect to the discontinued insurance operations, changes in economic conditions can lead to increased claims due to the tendency of workers who are laid off to submit workers’ compensation insurance claims. Changes in the medical, rehabilitation and legal environment can impact the severity of claims and the average cost per claim. Changes in market interest rates and credit conditions can affect the amount of interest income that the Company earns on its investment portfolio, as well as the amount of realized gains or losses on specific holdings within the investment portfolio. The discontinued insurance operations include significant amounts of reinsurance recoverables. Reinsurance contracts do not relieve Fremont Comp from its obligations to policyholders. The failure of reinsurers to meet their obligations in a timely and complete manner could result in losses to the Company. Fremont Comp also has premium receivables and agents’ balances that represent amounts due from various third parties. Due to the discontinuance of the workers’ compensation insurance operations, there may be higher than normal delays in, or non-payment of, the amounts due. While an allowance for doubtful accounts has been established in an amount believed to be sufficient to cover such potentialities, higher than expected levels of delinquency and non-payment could have an adverse impact upon the run-off of the discontinued insurance operations. Legislative and regulatory changes can also cause uncertainty with respect to the Company’s discontinued workers’ compensation insurance business. In addition, the discontinued insurance operations could be adversely impacted if the operating expenses necessary to run-off the workers’ compensation insurance policy obligations are not maintained at appropriate levels.

Loss Reserves and Allowance for Loan Losses May Prove to Be Inadequate

      The financial services business maintains an allowance for loan losses on its portfolio of finance receivables in amounts that the Company believes is sufficient to provide adequate protection against potential losses. The finance receivables originated, both for portfolio, sale and securitization, are generally non-conventional and non-investment grade loans. To mitigate for the somewhat higher potential risk of the lending that is primarily engaged in and for the impact that adverse economic developments could have on the finance receivables, the Company lends primarily on a senior and secured basis. The Company also attempts to carefully evaluate the underlying collateral that secures these loans and to maintain underwriting standards that are designed to effect appropriate loan to collateral valuations and cash flow coverages. Although the Company believes that its level of allowance is sufficient to cover potential credit losses, the allowance could prove to be inadequate due to unanticipated adverse changes in economic conditions or discrete events that adversely affect specific borrowers, industries or markets. Any of these changes could impair the Company’s ability to realize the expected value of the collateral securing certain of its finance receivables or the timing of the realization thereof. While the Company has recently experienced an increase in non-performing commercial real estate loans, it has not incurred a commensurate increase in its level of commercial real estate net loan charge-offs. The Company, however, can give no assurance that an increase in net loan charge-offs will not subsequently develop. The Company also originates a substantial number of larger loans, and even one problem loan could cause a sharp increase in the level of non-performing loans. A group of several large problem loans could cause the levels of non-performing loans and net-charge offs to significantly exceed historical levels previously experienced by the Company.

      The discontinued insurance subsidiaries are required to maintain reserves to cover the ultimate liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period. These loss reserves do not represent an exact calculation of liabilities, but instead are

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Competition May Adversely Affect the Company’s Market Share and Operating Results

      The financial services business competes in markets that are highly competitive and are characterized by factors that vary based upon loan product and geographic region. The markets in which the Company competes are typically characterized by a large number of competitors who compete for loans based primarily upon price, terms and loan structure. The industrial bank also competes for deposits to fund its operations. Competition is highly price-sensitive and competitive forces could affect the industrial bank’s ability to source adequately priced deposits. The Company primarily competes with banks and mortgage and finance companies, many of which are larger and have greater financial resources. The competitive forces of these markets could adversely affect net finance income net gains on loan sales, loan origination volume or net credit losses.

Geographic Concentration of Business Could Adversely Affect the Company’s Operations

      While the Company attempts to diversify its loan origination by geographic region, the geographic concentration of commercial and residential real estate loans remains in California. At December 31, 2001, approximately half of the commercial and residential real estate loans, both in portfolio and those loans that have been securitized, were collateralized by properties located in California. Adverse events in California, such as real estate market declines or the occurrence of natural disasters upon property located therein, may have a more significant adverse effect upon the operating results and financial condition than if a higher percentage of loans were collateralized by properties located outside California.

      The discontinued workers’ compensation insurance operations have a significant concentration of in force policies in California. Of the total estimated annual premium in force at December 31, 2001, approximately 84% was California related. This concentration significantly increases the effect of variations in economic, legal and regulatory conditions in California upon the discontinued workers’ compensation insurance operations.

Regulatory Developments May Adversely Affect the Company’s Operations

      The financial services businesses include an FDIC insured industrial bank subject to supervision and regulation by the DFI and the FDIC. Federal and state regulations prescribe certain minimum capital requirements and, while the industrial bank is currently in compliance with such requirements, in the future, additional contributions to the industrial bank may be necessary in order to maintain compliance with such requirements. Future changes in government regulation and policy could adversely

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      As previously reported, the discontinued workers’ compensation insurance subsidiaries entered into an agreement on November 27, 2000 with the DOI in which the DOI is allowed additional regulatory supervision and oversight over their activities. Under the agreement, prior approval by the DOI is required for certain payments by the workers’ compensation insurance subsidiaries, including those to affiliates. These payments are generally for the reimbursement of certain expenses and for various services rendered. Previously, substantially all affiliate payments have been made to Fremont. Delay, or denial in whole or in part, by the DOI of such future payments may adversely impact the liquidity of Fremont. As of December 31, 2001, the Company believes that the discontinued insurance operation’s loss and LAE reserves are adequate and that the investment portfolio, and other assets, are sufficient to fund all future policy obligations. However, should the workers’ compensation insurance loss and LAE reserves experience significant adverse development, the DOI may institute various regulatory actions, including conservation. Should the Company’s significant workers’ compensation insurance subsidiaries come under regulatory conservation, or similar arrangement, this may cause an event of default under the Company’s senior notes (the “Senior Notes”) outstanding. If an event of default is declared under the Senior Notes, the outstanding principal may become immediately due and payable. The Company’s current financial position would not enable it to meet such an obligation and, as a result, the Company and the holders of its Senior Notes may pursue various alternatives. Such actions could have a significant adverse impact upon the Company and the holders of its various securities.

Item 2. Properties

      The Company leases substantially all of its office facilities in various cities for its corporate and subsidiary operations. The Company considers these facilities to be adequate for its operating needs. See Note M to the Company’s Notes to Consolidated Financial Statements in this Annual Report on Form 10-K, which note is incorporated herein by reference.

Item 3. Legal Proceedings

      Fremont and its subsidiaries and affiliates are parties to various legal proceedings, which in some instances include claims for punitive damages, most of which are considered routine and incidental to their business. The Company believes that ultimate resolution or settlement of such matters will not have a material adverse effect on its consolidated financial position.

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

      None.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

      The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the trading symbol “FMT.” The following table sets forth the high and low sales prices of the Company’s common stock as reported as composite transactions on the NYSE and the cash dividends declared on the Company’s common stock during each quarter presented.

      On December 31, 2001, the closing sale price of the Company’s common stock on the NYSE was $7.82 per share. There were 2,028 stockholders of record as of December 31, 2001.

      The Company has paid cash dividends in every quarter since its initial public offering in 1977. While the Company intends to continue to pay dividends, the decision to do so is made quarterly by the Board of Directors and is dependent on the earnings of the Company, management’s assessment of future capital needs, and other factors.

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Item 6. Selected Financial Data

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General

      Fremont General Corporation (“Fremont”) is a financial services holding company. Fremont’s financial services’ segment is consolidated within Fremont General Credit Corporation (“FGCC”), which is engaged in commercial and consumer real estate lending nationwide through its California-chartered industrial bank subsidiary, Fremont Investment & Loan (“FIL”). Additionally, there are certain corporate revenues and expenses, comprised primarily of investment income, interest expense and certain general and administrative expenses, that are not allocated by Fremont to FGCC or to the discontinued insurance operations.

      This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and notes thereto presented under Item 8. and the Business section presented under Item 1.

Results of Operations

      The following table presents a summary of the Company’s income (loss) before taxes and net after tax income (loss) for the years ended December 31, 2001, 2000 and 1999:

      The financial services segment recorded income before taxes of $138.5 million for 2001, as compared to $102.2 million and $79.9 million for 2000 and 1999, respectively. Included in the results for 1999 is the recognition of a gain in the amount of $10.3 million related to the sale of the commercial finance subsidiary, Fremont Financial, in December of 1999. Fremont Financial’s income before taxes of $9.0 million for 1999 is also included in the financial services segment results reported. The significant increase in income before taxes for 2001, as compared to 2000, is primarily related to a significant increase in gains from the whole loan sales of residential real estate loans, an approximate 15% increase in average interest-earning assets and a lower operating expense ratio. Offsetting this in 2001, was a significant increase in the provision for loan losses, and higher levels of loans on non-accrual status. The increase in income before taxes in 2000, as compared to 1999, was primarily related to an increase in the interest margin, lower operating expense ratios, and higher levels of gains on the whole loan sales of residential real estate loans. See the “Financial Services Operation” section herein for additional detail.

      With the discontinuance of the property and casualty insurance operation during the fourth quarter of 2001, the Company recognized net income of $2.3 million from these operations for the period in 2001 prior to their classification as a discontinued operation. The discontinued insurance operations are accounted for using the liquidation basis of accounting as prescribed under APB Opinion No. 30. As no loss is expected in the future under liquidation accounting from the run-off of the property and casualty insurance operation, no loss was reported for the discontinuance of this business. Any gain from

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      The substantial net loss for the year ended December 31, 2000 for the discontinued insurance operations is predominantly the result of the recognition of an increase of $450 million in the gross liability for loss and LAE reserves during the quarter ended June 30, 2000, and the recognition of $267.8 million in certain charges during the quarter ended December 31, 2000 associated with the restructuring of the workers’ compensation insurance operation, which was announced on December 14, 2000. The discontinued insurance operations net loss for the year ended December 31, 1999 was due primarily to the impact of two actions. First, in the third quarter of 1999, a charge in the amount of $147 million was recognized on a pre-tax basis, for the adverse effect on incurred loss and LAE of a lower than expected level of certain reinsurance recoverables than had been actuarially predicted at the inception of certain reinsurance agreements. Second, the recognition of a settlement agreement with Reliance Insurance Company (“Reliance”) under a reinsurance contract that was in effect from January 1, 1998 through December 31, 1999, which resulted in a pre-tax charge of $75 million. In addition, during 1999, a $38.5 million pre-tax charge was incurred for an observed increase in reported asbestos and environmental claims in excess of previous estimates in its discontinued assumed treaty and facultative reinsurance operation. The aforementioned increase in gross loss and LAE reserves, restructuring charges and reinsurance actions, are explained in more detail in the “Discontinued Insurance Operations” section herein.

      Unallocated corporate interest and other expenses during the year ended December 31, 2001 consisted primarily of investment income revenue, offset by unallocated corporate expenses consisting primarily of interest expense, net of any affiliate interest income, and general and administrative expenses, net of subsidiary reimbursement. The unallocated corporate interest and other expense loss before taxes for the year ended December 31, 2001, was $53.7 million as compared to $46.5 million and $30.0 million, for 2000 and 1999, respectively. The increase in 2001, as compared to 2000, is due primarily to decreased revenues at Fremont. Management fees (comprised of the allocation of certain costs incurred by Fremont for the rendering of various services to its subsidiaries), substantially all from Fremont Comp, decreased approximately $10.0 million, as the size of the workers’ compensation insurance operation was reduced and, under the agreement of November 27, 2000 with the DOI, a significant amount of these fees were deferred, and not recognized by Fremont as income due to the uncertainty of their ultimate collection. Fremont has historically not charged applicable management fees in any significant amount to FGCC. Lower interest rates on investments at Fremont resulted in investment income declining $2.0 million in 2001 from 2000. As discussed further in this paragraph, there was no affiliate interest income in 2001, compared to $5.4 million in 2000. This was offset by reductions of $6.0 million in interest expense (due to the reduced level of principal outstanding under the Senior Notes) and $4.2 million in other corporate expenses. The significant increase in 2000 as compared to 1999 is due primarily to lower affiliate interest income from the downstream holding company subsidiaries. The lower affiliate interest income resulted from the conversions on January 1, 2000 and April 1, 2000 of approximately $154 million and $267 million, respectively, in notes receivable due from these subsidiaries to common equity in the subsidiaries, thereby establishing capital contributions to them. The January 1, 2000 conversion transaction affected FGCC, the downstream holding company subsidiary that holds the industrial bank subsidiary. The April 1, 2000 conversion transaction impacted Fremont Comp, which is the downstream holding company subsidiary that holds the discontinued insurance subsidiaries. With these debt conversions, beginning January 1, 2000, and to a larger extent April 1, 2000, the unallocated corporate interest expense is, and will continue to be, higher.

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      During the year ended December 31, 2001, Fremont extinguished $8.5 million and $27.0 million, respectively, in principal amount of its publicly traded 7.7% Senior Notes due 2004 and 7.875% Senior Notes due 2009 (“Senior Notes”), which were originally issued by Fremont pursuant to an exchange offer in the second quarter of 1999. During the year ended December 31, 2000, Fremont extinguished $40.9 million and $7.3 million, respectively, in principal amount of its publicly traded 7.7% Senior Notes due 2004 and 7.875% Senior Notes due 2009. In addition, during 2000, Fremont extinguished $2.3 million of principal amount at maturity of its publicly traded Liquid Yield Option Notes due 2013 (the “LYONs”). After-tax gains of $4.9 million and $12.4 million, respectively, were recognized from these actions during 2001 and 2000. The after-tax gain is reported as an extraordinary item in the accompanying Consolidated Statements of Operations.

      Income tax expense of $31.6 million, $27.0 million and $20.6 million for 2001, 2000 and 1999, represents effective tax rates of 37.2%, 48.5%, and 41.2%, respectively, on income before taxes from continuing operations. The effective tax rates for the three periods presented are different than the federal enacted tax rate of 35%, due mainly to higher state income tax provisions within the financial services operation, and, to a lesser extent, tax exempt goodwill amortization, which is excluded from deductible expenses. The significant change in effective tax rates in 2000, as compared to 2001 and 1999, is a result of a decision to increase by $5.8 million an accrual for certain pending state tax issues. In 2001, $4.7 million of the accrued amount was reversed as a result of the expected favorable resolution of certain of these matters. See Note F of the Company’s consolidated financial statements for further detail on the income tax provisions and deferred tax asset.

Financial Services Operation

      The financial services operation’s income before taxes was $138.5 million for the year 2001. This is a 36% increase when compared to 2000’s income before taxes of $102.2 million. The primary factors related to the increase in earnings in 2001 is as follows:

	•	Net interest income increased to $203.1 million in 2001 from $180.3 million in 2000 on an increase in net interest-earning assets. Net interest-earning assets averaged $4.62 billion in 2001, up from an average of $4.02 billion in 2000. Net interest income, as a percentage of average net interest-earning assets, decreased slightly in 2001 to 4.39% from 4.49% in 2000. The primary

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		reason for the increase in the average net interest-earning assets for 2001 was a 26% increase in the average balance of commercial real estate loans in the portfolio.
	•	Net gains on the sales of residential real estate loans increased significantly from $12.0 million in 2000 to $46.2 million in 2001. This increase was due to an increase in the amount of loans sold, an increase in the prices realized on the sale of these loans, and a slight decrease in the allocable cost of the loans sold. Loans sold in 2001 totaled $2.82 billion, up from $2.06 billion in 2000. This is reflective of an increase in total residential real estate loans originated. During 2001, $3.33 billion in residential real estate loans were originated, as compared to $2.04 billion in 2000. Loans held for sale also increased from $298.6 million at December 31, 2000 to $755.4 million at December 31, 2001. The gross premium on loan sales during 2001 was 4.16%, up from 3.20% in 2000. This is reflective of improved market conditions and acceptability of the loans originated by the Company.
	•	Lower net operating expense levels as a percentage of average interest-earning assets. This percentage was 1.6% in 2001, as compared to 2.1% in 2000. This reflects the implementation in 2000 and 2001 of various cost reduction programs and various operating efficiencies associated with increased volumes of loan originations and outstandings.
	•	The increase in earnings in 2001 was offset by significantly increased provisions for loan losses. The provision for 2001 totaled $53.4 million, up from $17.5 million in 2000. The increase in the provision is due in part to an increase in the loan portfolio outstanding from $3.47 billion at December 31, 2000 to $3.86 billion at December 31, 2001, but is primarily due to the Company increasing its allowance for loan losses in response to its evaluation of expected, and often uncertain, future trends in general economic conditions and their impact upon the commercial real estate market in particular. Non-accrual loans in the loan portfolio increased during 2001, however loan losses, except for the syndicated commercial loan portfolio, remained relatively consistent at $7.5 million for 2001 and $6.4 million for 2000. Loan charge-offs totaled $9.3 million in 2001 for the syndicated loan portfolio, as compared to no charge-offs in 2000. The net charge-offs from the syndicated loan portfolio occurred primarily from the Company’s decision to significantly downsize this business during 2001 and from the effect of economic conditions in 2001 on this portfolio.

      The financial services operation’s income before taxes was $102.2 million for the year 2000. This is a 69% increase when compared to 1999’s income before taxes, excluding the gain on the sale of Fremont Financial and its $9.0 million in income before taxes for 1999. This increase in earnings is a result of the following:

	•	Net interest income as a percentage of average earning assets increased to 4.49% for 2000 as compared to 4.17% for 1999. This increase reflects improved pricing for the various lending products, lower relative costs of funding and a more favorable mix of higher yielding lending products.
	•	Increased levels of net gains recognized on residential real estate whole loan sales.
	•	Lower net operating expense levels as a percentage of average earning assets. This percentage was 2.1% in 2000, as compared to 2.5% in 1999.
	•	Net charge offs, as a percentage of the average loan portfolio, were only 0.17%, resulting in a lower provision for loan losses in 2000 than in 1999.

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      The following table identifies the interest income, interest expense, average interest-earning assets and interest-bearing liabilities, and interest margins for the financial services operation: