Westcorp 10-Q 2002 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2002

OR

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

For the transition period from _________ to _________

Commission file number 33-13646

Westcorp

(Exact name of registrant as specified in its charter)

CALIFORNIA	51-0308535
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

23 Pasteur, Irvine, California 92618-3816

(Address of principal executive offices)

(949) 727-1002

(Registrant’s telephone number, including area code)

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

As of April 30, 2002, the registrant had 39,132,438 outstanding shares of common stock, $1.00 par value. The shares of common stock represent the only class of common stock of the registrant.

The total number of sequentially numbered pages is 32.

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES

WESTCORP AND SUBSIDIARIES

FORM 10-Q

March 31, 2002

TABLE OF CONTENTS

		Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition at March 31, 2002 and December 31, 2001		3
	Consolidated Statements of Income for the Three Months Ended March 31, 2002 and 2001		4
	Consolidated Statements of Changes in Shareholders’ Equity for the Periods Ended March 31, 2002 and December 31, 2001		5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001		6
	Notes to Unaudited Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		29
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 2.	Changes in Securities		31
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Submission of Matters to a Vote of Security Holders		31
Item 5.	Other Information		31
Item 6.	Exhibits and Reports on Form 8-K		31
SIGNATURES			32

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

			March 31,
			2002			December 31,
			(Unaudited)			2001
			(Dollars in thousands)
ASSETS
Cash and cash equivalents			$	354,606		$	104,327
Investment securities available for sale				10,682			10,511
Mortgage-backed securities available for sale				2,182,105			2,092,225
Loans receivable				7,976,152			7,533,150
Allowance for credit losses				(188,263	)		(171,432	)
	Loans receivable, net			7,787,889			7,361,718
Amounts due from trusts				127,851			136,131
Retained interest in securitized assets				22,536			37,392
Premises and equipment, net				82,569			79,258
Other assets				244,295			250,835
		TOTAL ASSETS	$	10,812,533		$	10,072,397
LIABILITIES
Deposits			$	2,252,441		$	2,329,326
Notes payable on automobile secured financing				7,211,910			5,886,227
Securities sold under agreements to repurchase				136,365			155,190
Federal Home Loan Bank advances				2,881			543,417
Amounts held on behalf of trustee				262,214			280,496
Subordinated debentures				147,850			147,714
Short-term borrowings				8,700			25,068
Other liabilities				83,075			85,994
		TOTAL LIABILITIES		10,105,436			9,453,432
Minority interest				95,423			78,261
SHAREHOLDERS’ EQUITY
Common stock, (par value $1.00 per share; authorized 45,000,000 shares; issued and outstanding 39,113,618 shares in March 2002 and 35,802,491 in December 2001)				39,113			35,802
Paid-in capital				348,083			301,955
Retained earnings				276,768			263,853
Accumulated other comprehensive loss, net of tax				(52,290	)		(60,906	)
		TOTAL SHAREHOLDERS’ EQUITY		611,674			540,704
		TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	10,812,533		$	10,072,397

See accompanying notes to unaudited consolidated financial statements.

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WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

			Three Months Ended
			March 31,
			2002		2001
			(Dollars in thousands,
			except share and per share amounts)
Interest income:
		Loans, including fees	$	232,912	$	172,642
		Other		29,284		40,025
	TOTAL INTEREST INCOME			262,196		212,667
Interest expense:
		Deposits		21,010		33,506
		Notes payable on automobile secured financing		92,018		73,009
		Other long-term borrowings		3,692		4,631
		Short-term borrowings		3,350		8,281
	TOTAL INTEREST EXPENSE			120,070		119,427
NET INTEREST INCOME				142,126		93,240
Provision for credit losses				65,698		26,982
NET INTEREST INCOME AFTER
		PROVISION FOR CREDIT LOSSES		76,428		66,258
Noninterest income:
		Automobile lending		11,674		26,934
		Other		5,485		3,534
	TOTAL NONINTEREST INCOME			17,159		30,468
Noninterest expenses:
		Salaries and associate benefits		34,871		35,677
		Credit and collections		8,077		6,418
		Data processing		4,580		4,490
		Other		13,331		14,740
	TOTAL NONINTEREST EXPENSES			60,859		61,325
INCOME BEFORE INCOME TAX				32,728		35,401
Income tax				12,964		14,333
INCOME BEFORE MINORITY INTEREST				19,764		21,068
Minority interest in earnings of subsidiaries				2,911		3,360
INCOME BEFORE EXTRAORDINARY ITEM				16,853		17,708
Extraordinary gain from early extinguishment of debt (net of income taxes of $6)						8
NET INCOME			$	16,853	$	17,716
Net income per common share — basic:
		Income before extraordinary item	$	0.46	$	0.55
		Extraordinary item		0.00		0.00
		Net income	$	0.46	$	0.55
Net income per common share — diluted:
		Income before extraordinary item	$	0.46	$	0.55
		Extraordinary item		0.00		0.00
		Net income	$	0.46	$	0.55
Weighted average number of common shares outstanding:
		Basic		36,791,744		31,949,647
		Diluted		36,980,861		32,120,274

See accompanying notes to unaudited consolidated financial statements.

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WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)

												Accumulated
												Other
												Comprehensive
				Common		Paid-in			Retained			Income (Loss),
		Shares		Stock		Capital			Earnings			Net of Tax			Total
		(Dollars in thousands, except share amounts)
Balance at January 1, 2001			31,931,826	$	31,932	$	246,889		$	223,163		$	(14,816	)	$	487,168
	Net income									55,690						55,690
	Unrealized gains on securities available for sale and retained interest in securitized assets, net of tax (1)												12,309			12,309
	Reclassification adjustment for losses on securities available for sale included in net income (2)												1,050			1,050
	Unrealized hedge losses on cash flow hedges, net of tax (3)												(75,048	)		(75,048	)
	Reclassification adjustment for losses on cash flow hedges included in income (4)												15,599			15,599
	Comprehensive income															9,600
	Issuance of subsidiary common stock						(3,205	)								(3,205	)
	Issuance of common stock		3,870,665		3,870		58,271									62,141
	Cash dividends									(15,000	)					(15,000	)
Balance at December 31, 2001			35,802,491		35,802		301,955			263,853			(60,906	)		540,704
	Net income									16,853						16,853
	Unrealized loss on securities available for sale and retained interest in securitized assets, net of tax (1)												(2,263	)		(2,263	)
	Unrealized hedge losses on cash flow hedges, net of tax (3)												(3,559	)		(3,559	)
	Reclassification adjustment for losses on cash flow hedges included in income (4)												14,438			14,438
	Comprehensive income															25,469
	Issuance of subsidiary common stock						(2,250	)								(2,250	)
	Issuance of common stock		3,311,127		3,311		48,378									51,689
	Cash dividends									(3,938	)					(3,938	)
Balance at March 31, 2002			39,113,618	$	39,113	$	348,083		$	276,768		$	(52,290	)	$	611,674

(1)	The pre-tax amount in unrealized gains and losses on securities available for sale and retained interest in securitized assets was $3.8 million for the three months ended March 31, 2002 compared with $20.9 million for the period ended December 31, 2001.
(2)	There was no pre-tax amount of unrealized gains or losses on securities available for sale reclassified into earnings for the three months ended March 31, 2002 compared with an unrealized loss of $1.8 million for the year ended December 31, 2001.
(3)	The pre-tax amount of unrealized losses on cash flow hedges was $6.0 million for the three months ended March 31, 2002 compared with $127 million for the year ended December 31, 2001.
(4)	The pre-tax amount of unrealized losses on cash flow hedges reclassified into earnings was $24.5 million for the three months ended March 31, 2002 compared with $26.4 million for the year ended December 31, 2001.

See accompanying notes to unaudited consolidated financial statements.

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WESTCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Three Months Ended
		March 31,
		2002			2001
		(Dollars in thousands)
OPERATING ACTIVITIES
Net income		$	16,853		$	17,716
Adjustments to reconcile net income to net cash provided by Operating activities:
	Provision for credit losses		65,698			26,982
	Depreciation and amortization		40,555			19,593
	Amortization of retained interest in securitized assets		14,378			14,366
Loans held for sale:
	Proceeds from sale of mortgage loans		455			620
(Increase) decrease in other assets			(1,150	)		2,821
(Decrease) increase in other liabilities			(2,920	)		2,010
Other, net			2,597			2,666
NET CASH PROVIDED BY OPERATING ACTIVITIES			136,466			86,774
INVESTING ACTIVITIES
Loans receivable:
	Origination of loans		(1,336,596	)		(1,248,308	)
	Participation paid to dealers		(29,603	)		(29,295	)
	Loan payments and payoffs		852,444			452,335
Investment securities available for sale:
	Purchases		(802	)		(232	)
	Proceeds from sale		485
	Proceeds from maturities		135
Mortgage-backed securities:
	Purchases		(354,620	)		(209,238	)
	Payments received		251,818			134,333
Decrease in amounts due from trusts			8,280			66,865
Purchase of premises and equipment			(10,871	)		(4,547	)
Proceeds from sale of premises and equipment			5,806
NET CASH USED IN INVESTING ACTIVITIES			(613,524	)		(838,087	)
FINANCING ACTIVITIES
Decrease in deposits			(63,426	)		(231,277	)
Decrease in securities sold under agreements to repurchase			(18,321	)		(6,028	)
Proceeds from notes payable on automobile secured financing			2,570,822			998,037
Payments on notes payable on automobile secured financing			(1,236,111	)		(269,903	)
Decrease in short-term borrowings			(16,368	)		(1,109	)
Decrease in amounts held on behalf of trustee			(18,282	)		(27,535	)
(Decrease) increase in FHLB advances			(540,535	)		222,261
Decrease in subordinated debentures			(32	)		(800	)
Proceeds from issuance of common stock			51,688			422
Proceeds from issuance of subsidiary common stock			10,300			1,558
Cash dividends			(3,938	)		(3,193	)
Payments on cash flow hedges			(8,460	)		(9,459	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			727,337			672,974
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			250,279			(78,339	)
Cash and cash equivalents at beginning of period			104,327			128,762
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	354,606		$	50,423

See accompanying notes to unaudited consolidated financial statements.

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WESTCORP AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements include our accounts and the accounts of our wholly owned subsidiary, Western Financial Bank, also known as the Bank, and its majority owned subsidiary, WFS Financial Inc, also known as WFS. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the current year’s presentation.

The unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto for the year ended December 31, 2001 included in the Westcorp Form 10-K.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Accounting for Business Combinations, also known as SFAS No. 141, and Statement of Financial Accounting Standards No. 142, Accounting for Goodwill and Intangible Assets, also known as SFAS No. 142. Under SFAS No. 141 and SFAS No. 142, companies may no longer use the pooling-of-interest accounting method for business combinations or account for mergers on their financial statements under the traditional purchase method, which required companies to amortize goodwill assets over a specific time period. Instead purchased goodwill will remain on the balance sheet as an asset subject to impairment reviews. We adopted SFAS No. 141 and SFAS No. 142 on January 1, 2002, and they did not have a material effect on our earnings or financial position.

In July 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, also known as SFAS No. 143, in which retirement obligations would be recorded as a liability using the present value of the estimated cash flows and a corresponding amount would be capitalized as part of the asset’s carrying amount. The capitalized asset retirement cost would be amortized to expense over the asset’s useful life using a systematic and rational allocation method. The estimate of the asset retirement obligation will change and have to be revised over time. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. If applicable, an accounting change to adopt the standard would be made as of the beginning of the company’s fiscal year. We do not expect SFAS No. 143 to have a material effect on our earnings or financial position.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, also known as SFAS No. 144, to supercede Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, also known as SFAS No. 121. The basic recognition and measurement model for assets held for use and held for sale under SFAS No. 121 has been retained, however SFAS No. 144 removes goodwill from the scope as goodwill is now subject to the provisions of SFAS No. 141 and SFAS No. 142. SFAS No. 144 provides guidance on differentiating between assets held and used, held for sale, and held for disposal other than by sale. Assets held for sale/disposal must be stated at the lower of the assets’ carrying amounts or fair values and depreciation would no longer be recognized. Assets to be disposed of by sale would be classified as held for sale when management, having the authority to approve the action, commits to a plan to

7

sell the assets meeting several strict criteria. The three-step approach for recognizing and measuring impairment of assets to be held and used under SFAS No. 121 remains applicable. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and for interim periods within those fiscal years. We adopted SFAS 144 on January 1, 2002, and it did not have a material effect on our earnings or financial position.

Note 2 — Mortgage-Backed Securities Available for Sale

Mortgage-backed securities available for sale consisted of the following:

	March 31, 2002
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
	(Dollars in thousands)
GNMA certificates	$	2,137,787	$	13,548	$	20,796	$	2,130,539
FNMA participation certificates		47,148		574				47,722
FHLMC participation certificates		1,627		14				1,641
Other		2,203						2,203
	$	2,188,765	$	14,136	$	20,796	$	2,182,105

	December 31, 2001
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gain		Loss		Value
	(Dollars in thousands)
GNMA certificates	$	2,040,110	$	12,527	$	16,268	$	2,036,369
FNMA participation certificates		51,353		541				51,894
FHLMC participation certificates		1,679		13				1,692
Other		2,270						2,270
	$	2,095,412	$	13,081	$	16,268	$	2,092,225

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Note 3 — Net Loans Receivable

Net loans receivable consisted of the following:

		March 31,			December 31,
		2002			2001
		(Dollars in thousands)
Consumer:
	Automobile contracts	$	7,506,590		$	7,045,578
	Dealer participation, net of deferred contract fees		134,185			128,148
	Other		7,812			8,826
	Unearned discounts		(106,517	)		(108,169	)
			7,542,070			7,074,383
Real Estate:
	Mortgage		343,731			361,115
	Construction		12,943			15,638
			356,674			376,753
Undisbursed loan proceeds			(2,564	)		(3,298	)
			354,110			373,455
Commercial			79,972			85,312
			7,976,152			7,533,150
Allowance for credit losses			(188,263	)		(171,432	)
		$	7,787,889		$	7,361,718

Loans managed by us totaled $8.9 billion as of March 31, 2002 compared with $8.6 billion at December 31, 2001. Of the $8.9 billion, $7.9 billion were owned by us and $1.0 billion were owned by securitization trusts. Of the $8.6 billion, $7.4 billion were owned by us and $1.2 billion were owned by securitization trusts.

There were no impaired loans at March 31, 2002 and December 31, 2001.

Note 4 — Retained Interest in Securitized Assets

The following table presents the activity of the RISA:

	Three Months Ended
	March 31,
	2002			2001
	(Dollars in thousands)
Beginning balance	$	37,392		$	111,558
Amortization		(14,377	)		(14,366	)
Change in unrealized gain/loss on RISA (1)		(479	)		975
Balance at end of period (2)	$	22,536		$	98,167

(1)

The change in unrealized gain/loss on RISA represents temporary changes in valuation including changes in the discount rate based on the current interest rate environment. Such amounts will not be realized unless the RISA is sold. Changes in prepayment and credit loss assumptions for the RISA are other than temporary in nature and impact the value of the RISA. Such other than temporary differences are immediately recognized in income as a component of retained interest income.

(2)

There are no restrictions on the RISA.

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The following table presents the estimated future undiscounted retained interest earnings to be received from securitizations:

	March 31,			December 31,
	2002			2001
	(Dollars in thousands)
Estimated net undiscounted RISA earnings	$	67,893		$	87,358
Off balance sheet allowance for credit losses		(43,483	)		(47,235	)
Discount to present value		(1,874	)		(2,731	)
Retained interest in securitized assets	$	22,536		$	37,392
Outstanding balance of automobile contracts sold through securitizations	$	1,005,549		$	1,215,058
Off balance sheet allowance for losses as a percent of automobile contracts sold through securitizations		4.32	%		3.89	%

The decline in the off balance sheet allowance for credit losses on a dollar basis is the result of our securitization transactions no longer being treated as sales since the first quarter of 2000. We expect the RISA to be fully amortized or otherwise eliminated by the end of 2002. Older transactions treated as sales have lower losses each month after securitization as estimated future credit losses are realized. We believe that the off balance sheet allowance for credit losses is adequate to absorb probable losses in the sold portfolio that can be reasonably estimated.

Note 5 — Notes Payable on Automobile Secured Financing

For the three months ended March 31, 2002, we issued $2.6 billion of notes secured by automobile contracts, of which $1.8 billion was through a public transaction and $775 million was through a private placement. The private placement was through a conduit facility established in January 2002. There were $7.2 billion of notes payable on automobile secured financing outstanding at March 31, 2002 compared with $5.9 billion at December 31, 2001. Of these amounts, we had $775 million outstanding on a conduit facility at March 31, 2002, compared to $650 million at December 31, 2001. In March 2002, we redeemed our $650 million conduit facility.

Interest payments on the public transactions are due quarterly, in arrears, based on the respective note’s interest rate. Interest payments on the conduit facilities are due monthly, in arrears, based on the respective note’s interest rate. Interest expense on all notes payable on automobile secured financing, including interest payments under interest rate swap agreements, totaled $92.0 million and $73.0 million for the three months ended March 31, 2002 and 2001, respectively.

Note 6 — Dividends

On February 20, 2002, we paid an $0.11 per share cash dividend to shareholders of record as of February 6, 2002. On February 8, 2002, we declared a cash dividend of $0.12 per share for shareholders of record as of May 6, 2002 with a payable date of May 20, 2002.

Note 7 — Rights Offerings

We completed a rights offering in March 2002 in which we raised a total of $51.3 million through the issuance of 3.3 million additional common shares at a price of $15.75 per share. With the completion of this offering, our total number of common shares issued and outstanding increased 9.1% to 39.1 million shares at March 31, 2002.

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WFS completed a rights offering in March 2002 which raised a total of $110 million through the issuance of 6.1 million additional common shares at a price of $18.00 per share. Of the 6.1 million additional common shares, we purchased 5.2 million shares in the amount of approximately $94 million.

Note 8 — Subsequent Events

On May 3, 2002, the Bank raised $300 million through a subordinated capital debenture offering that closed on May 3, 2002. The debentures have a coupon of 9.625% and a yield to maturity of 9.70%. The all-in cost of these debentures, including issue costs, is 10.0%. The debentures mature on May 15, 2012.

In order to utilize the proceeds from the debentures to fund our growth, WFS entered into a promissory note with the Bank for the sum of $300 million on May 3, 2002. Interest payments are due semi-annually in arrears at a fixed rate per annum of 10.25%. The promissory note is due on or before May 15, 2012.

On May 2, 2002, we declared a cash dividend of $0.12 per share for shareholders of record as of August 6, 2002 with a payable date of August 20, 2002.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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.

Our primary sources of revenue are net interest income and noninterest income. Net interest income is the difference between the income earned on interest earning assets and the interest paid on interest bearing liabilities. We generate interest income from our loan portfolio, which consists of consumer, mortgage and commercial loans, and from investments in mortgage-backed securities and other short-term investments. We fund our loan portfolio and investments with deposits, advances from the Federal Home Loan Bank, securities sold under agreements to repurchase, securitizations, other borrowings, and equity.

Noninterest income is primarily made up of revenues generated from the sale and servicing of automobile contracts and mortgage loans. The primary components of noninterest income include retained interest income on automobile contracts sold, contractually specified servicing fees for the servicing of loans, late charges, gain on sale of automobile contracts and mortgage loans, and other miscellaneous servicing fee income. Since March 2000, we have structured our securitizations as secured financings and no longer record non-cash gain on sale or subsequent contractual servicing and retained interest income. Instead, 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. Other components of noninterest income include gains and losses from the sale of investment securities and mortgage-backed securities, insurance income, fees related to the sales of investment products such as mutual funds and annuities, and fee income from depository accounts. The primary components of noninterest expense are salaries, credit and collection expenses, and data processing costs.

Critical Accounting Policies

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

Retained Interest in Securitized Assets

Retained interest in securitized assets, also known as RISA, is capitalized upon the sale of automobile contracts to securitization trusts for transactions treated as sales for accounting purposes. RISA represents the present value of the estimated future cash flows to be received by us from the excess spread created in securitization transactions. Future cash flows are calculated by taking the coupon rate of the automobile contracts securitized less the interest rate paid to the investors less contractually specified servicing fees and guarantor fees, after giving effect to estimated credit losses and prepayments.

RISA is classified in a manner similar to available for sale securities and as such is marked to market each quarter. Market value changes are calculated by discounting the estimated cash flows using a current market discount rate. Any changes in the market value of the RISA are reported as a separate component of shareholders’ equity on our Consolidated Statements of Financial Condition as accumulated other comprehensive income (loss), net of applicable taxes. On a quarterly basis, we evaluate the carrying value of the RISA in light of the actual performance of the underlying automobile contracts and make adjustments to reduce the carrying value, if appropriate.

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Allowance for Credit Losses

Management determines the amount of the allowance for credit losses based on a review of various quantitative and qualitative analyses. Quantitative analyses include the review of chargeoff trends by loan program and loan type on an owned and managed basis; evaluation of cumulative loss curves on both a managed and sold basis; evaluation of credit loss experience by credit tier and geographic location. Other quantitative analyses include the evaluation of the size of any particular asset group; the concentration of any credit tier; the level of non-performance and the percentage of delinquency.

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

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

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

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

The allowance for credit losses is reduced by net chargeoffs as well as decreases in required allowances due to sales of loans and by lowering the level of required reserves based upon improved loan performance. The allowance for credit losses is increased by recording amounts to the provision for credit losses.

Hedging Activities

Deposits and Securities Sold Under Agreements to Repurchase

We enter into cash flow hedges that will protect against potential changes in interest rates affecting interest payments on future deposits gathered by us and future securities sold under agreements to repurchase. The fair value of the interest rate swap agreements is included in deposits and securities sold under agreements to repurchase, respectively, and any change in the fair value is reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. Related interest income or

13

expense is settled on a quarterly basis and is recorded in accumulated other comprehensive income (loss) and reclassified into earnings in the period during which cash flows on the hedged items affect income.

Notes Payable on Automobile Secured Financing

The contracts originated and held by us are fixed rate and, accordingly, we have exposure to changes in interest rates. To protect against potential changes in interest rates affecting interest payments on future securitization transactions, we enter into various hedge agreements. We enter into Euro-dollar swap agreements and forward agreements in order to hedge our future interest payments on our notes payable on automobile secured financing. The market value of these hedge agreements responds inversely to changes in interest rates. Because of this inverse relationship, we can effectively lock in a gross interest rate spread at the time of entering into the hedge transaction. Gains and losses on these agreements are recorded in accumulated other comprehensive income (loss). Any ineffective portion is recognized in interest expense during that period if the hedge is greater than 100% effective. Upon completion of the securitization transaction, the gains or losses are recognized in full as an adjustment to the gain or loss on the sale of the contracts if the securitization transaction is treated as a sale or amortized on a level yield basis over the duration of the notes issued if the transaction is treated as a secured financing. These hedge instruments are settled daily, and therefore, there are no related financial instruments recorded on the Consolidated Statements of Financial Condition. Credit risk related to these hedge instruments is minimal.

As we issued certain variable rate notes payable, we also enter into interest rate swap agreements in order to hedge our variable interest rate exposure on future interest payments. The fair value of the interest rate swap agreements is included in notes payable on automobile secured financing, and any change in the fair value is reported as accumulated other comprehensive income (loss), net of tax, on our Consolidated Statements of Financial Condition. Any ineffective portion is recorded in interest expense during that period if the hedge is greater than 100% effective. Related interest income or expense is settled on a quarterly basis and recognized as an adjustment to interest expense in our Consolidated Statements of Income.

Results of Operations

Net Interest Income

Net interest income is affected by the difference between the rate earned on our interest earning assets and the rate paid on our interest bearing liabilities (interest rate spread) and the relative amounts of our interest earning assets and interest bearing liabilities. Net interest income totaled $142 million and $93.2 million for the three months ended March 31, 2002 and 2001, respectively. The increase in net interest income is the result of us holding more automobile contracts on the balance sheet as we utilize our own liquidity sources and completed a $1.8 billion public securitization and a $775 million conduit financing accounted for as secured financings.

14

Interest rates for interest earning assets and interest bearing liabilities for the three months ended March 31, 2002 and 2001 were as follows:

					Three Months Ended
					March 31,
					2002			2001
					Yield/			Yield/
					Rate			Rate
Interest earning assets:
		Total investments:
			Mortgage-backed securities			5.30	%		6.62	%
			Other investments			3.39			5.81
				Total investments		5.17			6.55
		Total loans:
			Consumer loans			12.75			13.84
			Mortgage loans (1)			6.53			8.41
			Commercial loans			6.84			8.58
				Total loans		12.38			13.21
				Total interest earning assets		10.73			11.09
Interest bearing liabilities:
	Deposits					3.64			5.69
	Notes payable on automobile secured financing					5.92			7.22
	Securities sold under agreements to repurchase					2.84			5.63
	FHLB advances and other borrowings					2.15			6.03
	Subordinated debentures					9.47			8.92
				Total interest bearing liabilities		5.16			6.65
Interest rate spread						5.57	%		4.44	%
Net yield on average interest earning assets						5.86	%		5.48	%

(1) For the purposes of these computations, non-accruing loans are included in the average loan amounts outstanding.

Provision for Credit Losses

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

The provision for credit losses totaled $65.7 million for the three months ended March 31, 2002 compared with $27.0 million for the same period a year earlier. Net chargeoffs were $47.5 million and $19.9 million for the same respective periods. The increase in the provision for credit losses was a result of our loans held on balance sheet increasing by approximately $443 million or 5.9% from March 31, 2001 as well as an increase in chargeoffs due to the slowdown in the economy. We recorded $18.2 million in provisions for credit losses in excess of chargeoffs this quarter as a result of the transitional effects related to the elimination of off balance sheet accounting for securitizations. The allowance for credit losses as a percentage of owned loans outstanding was 2.4% at March 31, 2002 compared with 2.3% at December 31, 2001.

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Noninterest Income

Automobile Lending

We regularly securitize automobile contracts in the public asset-backed securities market and retain the servicing rights. For accounting purposes, these transactions are treated as either secured financings or sales to a securitization trust. Since the first quarter of 2000, we have not completed a securitization that has been accounted for as a sale. For transactions treated as sales prior to April 2000, we recorded non-cash gain equal to the present value of the estimated future cash flows from the portfolio of automobile contracts sold less the write-off of dealer participation balances and the effect of hedging activities. For these securitizations, net interest earned on the automobile contracts sold and fees earned for servicing the contract portfolios are recognized over the life of the transactions as contractual servicing income, retained interest income and other fee income.

The components of automobile lending income were as follows:

		Three Months Ended
		March 31,
		2002			2001
		(Dollars in thousands)
Retained interest (expense) income, net of RISA amortization		$	(11,649	)	$	2,836
Contractual servicing income			3,539			7,365
Other fee income			19,784			16,733
	Total automobile lending income	$	11,674		$	26,934

Contract securitizations totaled $2.6 billion and $1.0 billion for the three months ended March 31, 2002 and 2001, respectively. All transactions have been treated as secured financings.

Retained interest expense totaled $11.6 million for the three months ended March 31, 2002, compared with retained interest income of $2.8 million for the same period a year earlier. For accounting purposes, this income is only recognized on contracts sold through securitizations treated as sales. Retained interest income is dependent upon the average excess spread on the contracts sold, credit losses and the size of the sold portfolio. The retained interest expense recognized in 2002 is the result of higher chargeoffs on our sold portfolio as well as revised estimates of future charge-offs due to the slowdown in the economy.

According to the terms of each securitization transaction, contractual servicing income is generally earned at rates ranging from 1.0% to 1.25% per annum on the outstanding balance of contracts securitized. For accounting purposes, this income is only recognized on contracts sold through securitizations treated as sales. For the three months ended March 31, 2002 and 2001, contractual servicing income totaled $3.5 million and $7.4 million, respectively. The decline was the result of the decrease in the average balance of the sold portfolio over those periods.

Other fee income consists primarily of documentation fees, late charges and deferment fees on our managed portfolio, including loans securitized in transactions accounted for as sales and secured financings, as well as automobile contracts not securitized. The increase in other fee income is due to the growth in our average managed automobile contract portfolio to $8.3 billion from $7.0 billion for the three months ended March 31, 2002 and 2001, respectively.

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Noninterest Expense

For the three months ended March 31, 2002 and 2001, noninterest expense totaled $60.9 million and $61.3 million, respectively. Noninterest expense as a percent of total revenues improved to 38% for the three months ended March 31, 2002 compared to 50% for the same period a year ago as a result of improved operating efficiencies.

Income Taxes

We file federal and certain state tax returns on a consolidated basis. Other state tax returns are filed for each subsidiary separately. Our effective tax rate was 40% for each of the three months ended March 31, 2002 and 2001.

Pro Forma Statements of Income

During the first quarter of 2000, we changed the structure of our securitizations so that they would no longer be accounted for as sales but rather be recorded as secured financings. This decision is consistent with our business strategy to record high quality earnings and to maintain a conservative, well-capitalized balance sheet. If treated as secured financings, no gain on sale or subsequent contractual servicing and retained interest income is recognized. Instead, 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 RISA is recorded on the balance sheet, which 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.

Over time, our securitizations that were recorded as sales will mature and an increasing percentage of securitized automobile contracts will be represented by securitizations that are accounted for as secured financings. In the interim, we will present pro forma portfolio basis statement of income that present our results under the assumption that all our outstanding securitizations are treated as secured financings rather than as sales. These statements provide a method by which to gauge our year to year performance while we make this transition.

We believe that such a presentation is an important performance measure of our operations during this transitory period. Differences between portfolio basis earnings and reported earnings represent the transitional effect of treating securitizations as secured financings rather than sales. Ultimately, our reported earnings will approach our portfolio basis earnings as we continue to treat future securitizations as secured financings. We refer to these pro forma results as “portfolio basis” statements of income since all automobile contracts would have remained in our on balance sheet contract portfolio if we accounted for the transactions as secured financings.

The growth in our portfolio basis earnings reflects the growth in our managed automobile contract portfolio to $8.4 billion at March 31, 2002 compared with $7.2 billion at March 31, 2001. We monitor the periodic portfolio basis earnings of our managed contract portfolio and believe these portfolio basis statements assist in better understanding our business.

17

The following tables present the portfolio basis statements of income and reconciliation to net income as reflected in our Consolidated Statements of Income presented under Generally Accepted Accounting Principles, also known as GAAP:

PORTFOLIO BASIS STATEMENTS OF INCOME
(Unaudited)

		Three Months Ended
		March 31,
		2002		2001
		(Dollars in thousands,
		except per share amounts)
Interest income		$	296,076	$	284,780
Interest expense			141,307		162,303
	Net interest income		154,769		122,477
Net chargeoffs (1)			57,230		32,667
Provision for growth (2)			1,023		5,607
	Provision for credit losses		58,253		38,274
	Net interest income after provision for credit losses		96,516		84,203
Noninterest income			25,269		20,267
Noninterest expense			60,897		61,345
	Income before income tax		60,888		43,125
Income tax (3)			24,119		17,460
	Income before minority interest		36,769		25,665
Minority interest in earnings			4,784		4,167
	Income before extraordinary item		31,985		21,498
Extraordinary gain from early extinguishment of debt					8
Portfolio basis net income		$	31,985	$	21,506
Portfolio basis net income per common share — diluted		$	0.86	$	0.67
GAAP basis net income per common share — diluted		$	0.46	$	0.55

(1)	Represents actual chargeoffs incurred during the period, net of recoveries.
(2)	Represents additional allowance for credit losses we would set aside due to an increase in the managed contract portfolio.
(3)	Such tax effect is based upon our tax rate for the respective period.

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RECONCILIATION OF GAAP BASIS NET INCOME
TO PORTFOLIO BASIS NET INCOME
(Unaudited)

			Three Months Ended
			March 31,
			2002			2001
			(Dollars in thousands)
GAAP basis net income			$	16,853		$	17,716
Portfolio basis adjustments:
	Retained interest expense (income)			11,649			(2,836	)
	Contractual servicing income			(3,539	)		(7,365	)
	Net interest income			12,643			29,268
	Provision for credit losses			7,445			(11,292	)
	Operating expenses			(38	)		(51	)
	Minority interest			(1,873	)		(807	)
		Total portfolio basis adjustments		26,287			6,917
Net tax effect (1)				11,155			3,127
Portfolio basis net income			$	31,985		$	21,506

(1) Such tax is based on our tax rate for the respective period.

Financial Condition

Overview

Total assets increased $740 million or 7.3% to $10.8 billion at March 31, 2002 from $10.1 billion at December 31, 2001. The increase was primarily a result of $1.3 billion of automobile contracts originated during the quarter.

Loan Portfolio

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

			March 31, 2002					December 31, 2001
			Amount		%			Amount		%
			(Dollars in thousands)
Consumer loans:
	Automobile contract		$	7,640,775		95.8	%	$	7,173,726		95.2	%
	Other			7,812		0.1			8,826		0.1
				7,648,587		95.9			7,182,552		95.3
Less: unearned interest				106,517		1.3			108,169		1.4
		Total consumer loans		7,542,070		94.6			7,074,383		93.9
Mortgage loans:
	Existing properties			343,731		4.3			361,115		4.8
	Construction			12,943		0.1			15,638		0.2
				356,674		4.4			376,753		5.0
Less: undisbursed loan proceeds				2,564					3,298
		Total mortgage loans		354,110		4.4			373,455		5.0
Commercial loans				79,972		1.0			85,312		1.1
		Total loans	$	7,976,152		100.0	%	$	7,533,150		100.0	%

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Mortgage Loan Portfolio

Our total mortgage loan portfolio consisted of the following:

			March 31, 2002					December 31, 2001
			Amount		%			Amount		%
			(Dollars in thousands)
Single family residential loans:
	First trust deeds		$	132,782		37.5	%	$	146,895		39.3	%
	Second trust deeds			4,231		1.2			4,645		1.3
				137,013		38.7			151,540		40.6
Multifamily residential loans				171,559		48.4			180,850		48.4
Construction loans				12,943		3.7			15,638		4.2
Other				35,159		9.9			28,725		7.7
				356,674		100.7			376,753		100.9
Less: undisbursed loan proceeds				2,564		0.7			3,298		0.9
		Total mortgage loans	$	354,110		100.0	%	$	373,455		100.0	%

Commercial Loan Portfolio

We had outstanding loan commitments of $137 million at March 31, 2002 compared with $141 million at December 31, 2001. For the three months ended March 31, 2002 and 2001, we originated $61.6 million and $51.8 million of commercial loans, respectively. Amounts outstanding at March 31, 2002 and December 31, 2001 were $80.0 million and $85.3 million, respectively. Though we continue to focus on expanding our commercial banking operation, it has not been a significant source of revenue.

Asset Quality

Overview

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

Automobile Contract Quality

We provide financing in a market where there is a risk of default by borrowers. Chargeoffs directly impact our earnings and cash flows. To minimize the amount of credit losses we incur, we monitor delinquent accounts, promptly repossess and remarket vehicles, and seek to collect on deficiency balances.

At March 31, 2002, the percentage of managed accounts delinquent 30 days or greater was 2.51% compared with 3.72% at December 31, 2001. We calculate delinquency based on the contractual due date. For the three months ended March 31, 2002 and 2001, net chargeoffs on average automobile contracts managed were 2.76% and 1.86%, respectively. The increase in credit loss experience is primarily a result of the current recession. Delinquencies improved over the prior quarter as the economic slowdown abates.

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

		March 31, 2002					December 31, 2001
		Amount		Percentage			Amount		Percentage
		(Dollars in thousands)
Automobile contracts managed		$	8,405,634				$	8,152,882
Period of delinquency
	30-59 days	$	149,217		1.78	%	$	217,873		2.67	%
	60 days or more		62,026		0.73			85,290		1.05
Total automobile contracts delinquent and delinquencies as a percentage of automobile contracts managed		$	211,243		2.51	%	$	303,163		3.72	%

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

	March 31, 2002						December 31, 2001
	Number of						Number of
	Contracts			Amount			Contracts			Amount
	(Dollars in thousands)
Automobile contracts managed		704,438		$	8,405,634			690,401		$	8,152,882
Repossessed vehicles		979		$	6,141			1,168		$	7,553
Repossessed vehicles as a percentage of number and amount of automobile contracts managed		0.14	%		0.07	%		0.17	%		0.09	%

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

	Three Months Ended
	March 31,
	2002			2001
	(Dollars in thousands)
Average automobile contracts managed during period	$	8,273,297		$	6,998,682
Gross chargeoffs	$	79,792		$	48,226
Recoveries		22,633			15,746
Net chargeoffs	$	57,159		$	32,480
Net chargeoffs as a percentage of average automobile contracts managed during period		2.76	%		1.86	%

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

CUMULATIVE STATIC POOL LOSS CURVES
AT MARCH 31, 2002
(Unaudited)

Period (1)	1998-A			1998-B			1998-C			1999-A			1999-B			1999-C			2000-A			2000-B			2000-C			2000-D			2001-A			2001-B			2001-C			2002-1
1		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
2		0.04	%		0.02	%		0.04	%		0.04	%		0.04	%		0.02	%		0.03	%		0.02	%		0.04	%		0.04	%		0.03	%		0.03	%		0.04	%
3		0.11	%		0.08	%		0.11	%		0.11	%		0.11	%		0.10	%		0.10	%		0.09	%		0.13	%		0.11	%		0.09	%		0.10	%		0.09	%
4		0.25	%		0.18	%		0.23	%		0.20	%		0.26	%		0.25	%		0.20	%		0.24	%		0.27	%		0.24	%		0.20	%		0.21	%		0.20	%
5		0.44	%		0.38	%		0.39	%		0.33	%		0.47	%		0.40	%		0.36	%		0.39	%		0.46	%		0.39	%		0.33	%		0.33	%		0.35	%
6		0.66	%		0.59	%		0.50	%		0.46	%		0.66	%		0.56	%		0.55	%		0.59	%		0.65	%		0.54	%		0.50	%		0.50	%		0.49	%
7		0.95	%		0.83	%		0.61	%		0.62	%		0.87	%		0.71	%		0.71	%		0.78	%		0.81	%		0.74	%		0.70	%		0.69	%		0.65	%
8		1.23	%		1.03	%		0.75	%		0.76	%		1.00	%		0.86	%		0.91	%		0.99	%		0.93	%		0.93	%		0.84	%		0.87	%		0.81	%
9		1.50	%		1.21	%		0.86	%		0.92	%		1.13	%		1.01	%		1.10	%		1.17	%		1.07	%		1.13	%		1.04	%		1.05	%
10		1.79	%		1.40	%		1.00	%		1.11	%		1.24	%		1.14	%		1.27	%		1.33	%		1.24	%		1.34	%		1.24	%		1.22	%
11		2.03	%		1.53	%		1.17	%		1.30	%		1.35	%		1.34	%		1.45	%		1.44	%		1.41	%		1.50	%		1.45	%		1.36	%
12		2.21	%		1.62	%		1.32	%		1.47	%		1.44	%		1.52	%		1.58	%		1.57	%		1.62	%		1.74	%		1.67	%
13		2.39	%		1.74	%		1.48	%		1.61	%		1.58	%		1.74	%		1.73	%		1.72	%		1.86	%		1.95	%		1.90	%
14		2.49	%		1.84	%		1.66	%		1.73	%		1.74	%		1.94	%		1.85	%		1.86	%		2.04	%		2.21	%		2.09	%
15		2.60	%		1.96	%		1.79	%		1.81	%		1.85	%		2.09	%		2.00	%		2.04	%		2.25	%		2.48	%
16		2.72	%		2.10	%		1.91	%		1.89	%		2.03	%		2.27	%		2.15	%		2.24	%		2.45	%		2.71	%
17		2.85	%		2.22	%		2.01	%		2.00	%		2.16	%		2.39	%		2.37	%		2.39	%		2.68	%		2.89	%
18		2.98	%		2.40	%		2.07	%		2.10	%		2.30	%		2.53	%		2.52	%		2.55	%		2.88	%
19		3.11	%		2.55	%		2.11	%		2.24	%		2.42	%		2.67	%		2.67	%		2.73	%		3.08	%
20		3.25	%		2.69	%		2.17	%		2.35	%		2.50	%		2.81	%		2.83	%		2.93	%		3.23	%
21		3.35	%		2.79	%		2.24	%		2.46	%		2.58	%		2.92	%		2.99	%		3.12	%
22		3.48	%		2.85	%		2.34	%		2.55	%		2.67	%		3.10	%		3.16	%		3.27	%
23		3.62	%		2.89	%		2.43	%		2.63	%		2.77	%		3.28	%		3.34	%		3.38	%
24		3.70	%		2.92	%		2.52	%		2.71	%		2.87	%		3.38	%		3.49	%
25		3.75	%		2.97	%		2.62	%		2.77	%		3.01	%		3.55	%		3.63	%
26		3.80	%		3.04	%		2.71	%		2.82	%		3.14	%		3.68	%
27		3.87	%		3.13	%		2.80	%		2.89	%		3.16	%		3.84	%
28		3.92	%		3.18	%		2.87	%		2.96	%		3.29	%		3.98	%
29		3.98	%		3.24	%		2.90	%		3.02	%		3.40	%		4.14	%
30		4.06	%		3.32	%		2.95	%		3.09	%		3.50	%		4.19	%
31		4.11	%		3.38	%		3.00	%		3.17	%		3.61	%
32		4.17	%		3.43	%		3.02	%		3.20	%		3.68	%
33		4.22	%		3.47	%		3.08	%		3.27	%		3.74	%
34		4.27	%		3.48	%		3.14	%		3.35	%
35		4.32	%		3.52	%		3.15	%		3.41	%
36		4.34	%		3.54	%		3.21	%		3.47	%
37		4.35	%		3.58	%		3.25	%		3.52	%
38		4.38	%		3.63	%		3.30	%		3.55	%
39		4.39	%		3.66	%		3.35	%
40		4.43	%		3.65	%		3.39	%
41		4.45	%		3.69	%		3.39	%
42		4.50	%		3.73	%
43		4.47	%		3.75	%
44		4.50	%		3.79	%
45		4.52	%		3.81	%
46		4.55	%		3.81	%
47		4.56	%
48		4.56	%
49		4.56	%
Prime Mix (2)		57	%		67	%		70	%		70	%		70	%		67	%		68	%		69	%		68	%		68	%		71	%		71	%		76	%		70	%

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

22

Real Estate Loan Quality

Our only category of mortgage delinquencies over 60 days was single family mortgages. We had $6.0 million mortgage loans, or 3.38% of total mortgage loans, past due over 60 days at March 31, 2002 compared with $7.0 million, or 3.79% of total mortgage loans, at December 31, 2001.

Nonperforming Assets

Nonperforming assets, also known as NPAs, consist of nonperforming loans, also known as NPLs, Chapter 13 bankruptcy accounts greater than 120 days delinquent, repossessed automobiles, and real estate owned, also known as REO. For those accounts that are in Chapter 13 bankruptcy and are contractually past due greater than 120 days, all accrued interest is reversed and income is recognized on a cash basis. REO is carried at lower of cost or fair value. NPLs are defined as all nonaccrual loans. This includes mortgage loans 90 days or more past due and impaired loans where full collection of principal and interest is not reasonably assured. NPAs increased $0.8 million to $29.1 million at March 31, 2002 compared with $28.3 million at December 31, 2001. NPAs represented 0.3% of total assets at both March 31, 2002 and December 31, 2001. There were no impaired loans at March 31, 2002 and December 31, 2001.

When a loan is designated as nonaccrual, all previously accrued but unpaid interest is reversed. For the three months ended March 31, 2002 and 2001, nonperforming loans excluded from interest income was $0.6 million and $0.4 million, respectively.

Allowance for Credit Losses

Our allowance for credit losses was $188 million at March 31, 2002 compared to $171 million at December 31, 2001. For the three months ended March 31, 2002 and 2001, the provision for credit losses was $65.7 million and $27.0 million. For the three months ended March 31, 2002 and 2001, net chargeoffs totaled $47.5 million and $19.9 million, respectively. The increase in the allowance for credit losses was the result of a higher level of automobile contracts held on balance sheet as well as higher chargeoffs related to a slowing economy. The allowance for credit losses as a percentage of owned loans outstanding was 2.4% at March 31, 2002 compared to 2.3% at December 31, 2001.

We believe that the allowance for credit losses is currently adequate to cover probable losses in our owned portfolio that can be reasonably estimated. No single loan, borrower or series of such loans comprises a significant portion of the total portfolio. The provision and allowance for credit losses are indicative of loan volumes, loss trends and management’s analysis of market conditions.

23

The following table sets forth the activity in the allowance for credit losses:

		Three Months Ended
		March 31,
		2002			2001
		(Dollars in thousands)
Balance at beginning of period		$	171,432		$	104,006
Chargeoffs:
	Mortgage loans		(68	)		(161	)
	Consumer loans		(64,600	)		(28,303	)
			(64,668	)		(28,464	)
Recoveries:
	Mortgage loans					1
	Consumer loans		17,161			8,567
			17,161			8,568
Net chargeoffs			(47,507	)		(19,896	)
Write-down on nonperforming assets			(1,360	)		(1,032	)
Provision for credit losses			65,698			26,982
Balance at end of period		$	188,263		$	110,060
Ratio of net chargeoffs during the period (annualized) to average loans owned during the period			2.49	%		1.52	%

The following table presents summarized data relative to the allowance for credit and real estate losses at the dates indicated:

		March 31,			December 31,
		2002			2001
		(Dollars in thousands)
Total loans (1)		$	7,976,152		$	7,533,150
Allowance for credit losses			188,263			171,432
Allowance for real estate owned losses			250			250
Loans past due 60 days or more			56,573			74,851
Nonperforming loans (2)			5,166			6,772
Nonperforming assets (3)			29,103			28,341
Allowance for credit losses as a percent of:
	Total loans (1)		2.4	%		2.3	%
	Loans past due 60 days or more		332.8	%		229.0	%
	Nonperforming loans		3,644.3	%		2,531.5	%
Total allowance for credit losses and REO losses as a percent of nonperforming assets			647.7	%		605.8	%
Nonperforming loans as a percent of total loans			0.1	%		0.1	%
Nonperforming assets as a percent of total assets			0.3	%		0.3	%

(1)	Loans net of unearned interest and undisbursed loan proceeds.
(2)	All nonperforming loans are on nonaccrual.
(3)	Nonperforming loans, Chapter 13 bankruptcy accounts greater than 120 days delinquent, repossessed automobiles and real estate owned.

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Capital Resources and Liquidity

Overview

We require substantial capital resources and cash to support our business. Our ability to maintain positive cash flows from operations is the result of consistent managed growth, favorable loss experience and efficient operations.

In addition to our indirect statement of cash flows as presented GAAP, we also analyze the key cash flows from our automobile lending operations on a direct basis excluding certain items such as the purchase or sale of loans. The following table shows our operating cash flows from our automobile lending operations:

	Three Months Ended
	March 31,
	2002		2001
	(Dollars in thousands)
Cash flows from owned loans	$	102,539	$	75,635
Cash flows from trusts		2,729		16,395
Contractual servicing income		3,539		7,365
Other fee income		21,588		18,002
Less:
Dealer participation		29,603		29,295
Operating costs		51,540		52,297
Operating cash flows	$	49,252	$	35,805

Operating cash flows improved for the three months ended March 31, 2002 compared with the three months ended March 31, 2001 as a result of an increase in the managed portfolio and improved operating efficiencies over the prior year.

Principal Sources of Cash

• Collections of Principal and Interest from Automobile Contracts —For the three months ended March 31, 2002, principal and interest collections totaled $1.8 billion compared with $1.5 billion for the same period in 2001.

• Deposits— Deposits were $2.3 billion at March 31, 2002 and December 31, 2001.

• Automobile Contract Securitizations —Securitizations totaled $2.6 billion for the three months ended March 31, 2002, of which approximately $1.8 billion was through a public transaction and $775 million was a private placement through a conduit facility. Securitizations totaled $1.0 billion for the same period in the prior year.

• Other Borrowings —Other borrowings, which include securities sold under agreements to repurchase and FHLB advances, decreased to $139 million at March 31, 2002 from $699 million at December 31, 2001.

Principal Uses of Cash

• Acquisition of Loans and Investment Securities —For the three months ended March 31, 2002, loan originations totaled $1.3 billion compared with $1.2 billion for the same period in 2001. We purchased $355 million of MBS and other investment securities during the three months ended March 31, 2002 compared with $209 million during the same respective period in 2001.

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• Payments of Principal and Interest on Securitizations — Payments of principal and interest to noteholders and certificateholders totaled $1.6 billion, including the redemption of our $650 million conduit facility, for the three months ended March 31, 2002 compared with $778 million for the same period in the prior year.

• Amounts Paid to Dealers — For the three months ended March 31, 2002, participation paid by us to dealers was $29.6 million compared with $29.3 for the same period in 2001.

• Advances to Spread Accounts —The amounts due from trusts, including initial advances not yet returned, was $128 million at March 31, 2002 compared with $136 million at December 31, 2001.

• Operating Our Business —For the three months ended March 31, 2002, operating expenses totaled $60.9 million compared with $61.3 million for the same respective period in 2001.

Capital Requirements

The Bank is a federally chartered savings bank. As such, it is subject to certain minimum capital requirements imposed by the Financial Institutions Reform, Recovery and Enforcement Act, also known as FIRREA and the Federal Deposit Insurance Corporation Improvement Act, also known as FDICIA. FDICIA separates all financial institutions into one of five capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” In order to be considered “well capitalized,” an institution must have a total risk-based capital ratio of 10.0% or greater, a Tier 1 or core risk-based capital ratio of 6.0% or greater, a leverage ratio of 5.0% or greater and not be subject to any OTS order. The Bank currently meets all of the requirements of a “well capitalized” institution.

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The following table summarizes the Bank’s actual capital and required capital as of March 31, 2002 and December 31, 2001:

								Tier 1
		Tangible			Core			Risk-Based			Risk-Based
		Capital			Capital			Capital			Capital
		(Dollars in thousands)
March 31, 2002
Actual Capital:
	Amount	$	658,151		$	658,151		$	658,151		$	903,409
	Capital ratio		7.18	%		7.18	%		8.64	%		11.87	%
FIRREA minimum required capital:
	Amount	$	137,565		$	275,130			N/A		$	609,067
	Capital ratio		1.50	%		3.00	%		N/A			8.00	%
	Excess	$	520,586		$	383,021			N/A		$	294,342
FDICIA well capitalized required capital:
	Amount		N/A		$	458,550		$	456,800		$	761,333
	Capital ratio		N/A			5.00	%	��	6.00	%		10.00	%
	Excess		N/A		$	199,601		$	201,351		$	142,076
December 31, 2001
Actual Capital:
	Amount	$	602,491		$	602,491		$	602,491		$	841,144
	Capital ratio		7.29	%		7.29	%		8.49	%		11.86	%
FIRREA minimum required capital:
	Amount	$	123,957		$	247,915			N/A		$	567,523
	Capital ratio		1.50	%		3.00	%		N/A			8.00	%
	Excess	$	478,534		$	354,576			N/A		$	273,621
FDICIA well capitalized required capital:
	Amount		N/A		$	413,192		$	425,642		$	709,404
	Capital ratio		N/A			5.00	%		6.00	%		10.00	%
	Excess		N/A		$	189,299		$	176,849		$	131,740

The following table reconciles the Bank’s capital in accordance with GAAP to the Bank’s tangible, core and risk-based capital:

		March 31,			December 31,
		2002			2001
		(Dollars in thousands)
Bank’s shareholder’s equity — GAAP basis		$	515,597		$	472,132
Adjustments for tangible and core capital:
	Unrealized losses under SFAS 115 and SFAS 133		47,273			52,214
	Non-permissible activities		(142	)		(116	)
	Minority interest in equity of subsidiaries		95,423			78,261
Total tangible and core capital			658,151			602,491
Adjustments for risk-based capital:
	Subordinated debentures (1)		149,579			149,554
	General loan valuation allowance (2)		95,679			89,099
Risk-based capital		$	903,409		$	841,144

(1)	Excludes capitalized discounts and issue costs.
(2)	Limited to 1.25% of risk-weighted assets.

27

Forward-Looking Statements

This Form 10-Q 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;

• 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 prove incorrect, our actual results may vary materially from those expected, estimated or projected.

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

Available Information

The company provides access to all filings with the Securities and Exchange Commission on its Web site at http:\\www.westcorpinc.com free of charge on the same day as these reports are electronically filed with the Commission. The information contained in our Web site does not constitute part of this filing.

28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Credit and Pricing Committee is responsible for setting credit and pricing policies and for monitoring credit quality. Our Asset/Liability Committee is responsible for the management of interest rate and prepayment risks. Asset/liability management is the process of measuring and controlling interest rate risk through matching the maturity and repricing characteristics of interest earning assets with those of interest bearing liabilities.

The Asset/Liability Committee closely monitors interest rate and prepayment risks and recommends policies for managing such risks. The primary measurement tool for evaluating this risk is the use of interest rate shock analysis. This analysis simulates the effects of an instantaneous and sustained change in interest rates (in increments of 100 basis points) on our assets and liabilities and measures the resulting increase or decrease to our net portfolio value, also known as NPV. NPV is the discounted value of the future cash flows (or ‘paths’ of cash flows in the presence of options based on volatility assumptions and an arbitrage free Monte Carlo simulation method to achieve the current market price) of all assets minus all liabilities whose value is affected by interest rate changes plus the book value of non-interest rate sensitive assets minus the book value of non-interest rate sensitive liabilities. The NPV ratio is the ratio of the NPV to the market value of our assets as calculated above. In general, an increase in interest rates would more adversely affect our NPV than would a decrease in interest rates.

Another important measurement of our interest rate risk is ‘GAP’ analysis. GAP is defined as the difference between the amount of interest sensitive assets that reprice versus the amount of interest sensitive liabilities that also reprice within a defined period of time. We have more interest sensitive liabilities rather than assets repricing in shorter term maturity buckets and more interest sensitive assets rather than liabilities repricing in longer term maturity buckets.

29

The following table summarizes our maturity GAP position:

				Interest Rate Sensitivity Analysis at March 31, 2002
													3 Years
				Within			3 Months			1 Year to			to			After 5
				3 Months			to 1 Year			3 Years			5 Years			Years			Total
				(Dollars in thousands)
Interest earning assets:
	Investment securities			$	9,662											$	1,020		$	10,682
	Other investments				300,133		$	510												300,643
	Mortgage-backed securities				378,226			765,441		$	670,623		$	237,916			129,899			2,182,105
			Total investments		688,021			765,951			670,623			237,916			130,919			2,493,430
	Consumer loans (1)				549,404			1,946,562			3,590,512			1,418,350			37,241			7,542,069
	Mortgage loans:
		Adjustable rate (2)			279,418			44,379												323,797
		Fixed rate (2)			2,293			5,086			7,305			2,918			2,333			19,935
	Construction loans (2)				10,379															10,379
	Commercial loans (2)				72,832			4,168			1,389			445			1,138			79,972
			Total interest earning assets		1,602,347			2,766,146			4,269,829			1,659,629			171,631			10,469,582
Interest bearing liabilities:																				��
	Deposits:
		Passbook accounts (3)			2,029			5,447			3,150									10,626
		Demand deposit and money market accounts (3)			110,920			225,294			444,619									780,833
		Certificate accounts (4)			281,519			861,685			187,919			3,669						1,334,792
	FHLB advances (4)																2,881			2,881
	Securities sold under agreements to repurchase (4)				136,365															136,365
	Subordinated debentures (4)																147,850			147,850
	Notes payable on automobile secured financing (4)				3,838,611			1,718,221			1,510,992			144,086						7,211,910
	Other borrowings (4)				8,700															8,700
			Total interest bearing liabilities		4,378,144			2,810,647			2,146,680			147,755			150,731			9,633,957
Excess interest earning/bearing assets (liabilities)					(2,775,797	)		(44,501	)		2,123,149			1,511,874			20,900			835,625
Effect of hedging activities (5)					4,162,875			(1,164,165	)		(2,159,278	)		(364,932	)		(474,500	)
Hedged excess (deficit)				$	1,387,078		$	(1,208,666	)	$	(36,129	)	$	1,146,942		$	(453,600	)	$	835,625
Cumulative excess				$	1,387,078		$	178,412		$	142,283		$	1,289,225		$	835,625		$	835,625
Cumulative excess as a percentage of total interest earning assets					13.25	%		1.70	%		1.36	%		12.31	%		7.98	%		7.98	%

(1)	Based on contractual maturities adjusted by our historical prepayment rate.
(2)	Based on interest rate repricing adjusted for projected prepayments.
(3)	Based on assumptions established by the OTS.
(4)	Based on contractual maturity.
(5)	Includes effect of interest rate swaps designated against deposits and securities sold under agreements to repurchase.

30

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We or our subsidiaries are involved as parties to certain legal proceedings incidental to our businesses. We are vigorously defending these actions and do not believe that the outcome of these proceedings will have a material effect upon our financial condition, results of operations and cash flows.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

On May 2, 2002, we held our annual shareholders’ meeting. There were 39,096,116 shares of common stock outstanding entitled to vote, and a total of 38,225,964 (98.08%) were represented at the meeting in person or by proxy. The following summarizes vote results of proposals submitted to our shareholders:

1. Proposal to elect one Class I Director for term expiring 2003 and three Class II Directors for terms expiring in 2004

NAME	FOR		WITHHELD
Thomas A. Wolfe, Class I		36,746,491		1,509,473
Ernest S. Rady, Class II		36,756,028		1,499,936
James R. Dowlan, Class II		38,045,656		210,308
Judith M. Bardwick, Class II		38,188,776		67,188

2. Proposal to ratify the appointment of Ernst & Young LLP as independent auditors for the fiscal year ending December 31, 2002

FOR	AGAINST		ABSTAIN
37,940,176		292,052		23,736

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits
	None
(b)	Reports on Form 8-K
	We filed a report on Form 8-K on February 11, 2002 to present the consolidated financial statements as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001.

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Westcorp

(Registrant)

Date:	May 14, 2002	By:	/s/   Thomas A. Wolfe
			Thomas A. Wolfe President and Director

Date:	May 14, 2002	By:	/s/   Lee a. Whatcott
			Lee A. Whatcott Executive Vice President (Principal Financial and Accounting Officer), Chief Financial Officer and Chief Operating Officer

32