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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K/A




FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO. 000-27377

W HOLDING COMPANY, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

|                                               |  |                    
|---------------------------------------------- |  | -------------------
|COMMONWEALTH OF PUERTO RICO                    |  | 66-0573197         
|(State or Other Jurisdiction of                |  | (IRS Employer      
|Incorporation or Organization)                 |  | Identification No.)
|                                               |  |                    
|19 WEST MCKINLEY STREET, MAYAGUEZ, PUERTO RICO |  | 00680              
|(Address of Principal Executive Offices)       |  | (Zip Code)         

REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (787) 834-8000

SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:

COMMON STOCK ($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:

7.125% NONCUMULATIVE, CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 1998 SERIES A
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)

7.25% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 1999 SERIES B
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)

7.60% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 2001 SERIES C
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)



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7.40% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 2001 SERIES D
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)

6.875% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 2002 SERIES E
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]

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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X     No

Aggregate market value of the voting and non-voting common stock held by
nonaffiliates of the registrant as of June 28, 2002: $665,111,662 based on the
closing sales price of $16.13.

Number of shares of Common Stock outstanding as of February 28, 2003:
68,350,186

DOCUMENTS INCORPORATED BY REFERENCE




Portions of the definitive Proxy Statement for the Registrants Annual Meeting
of Shareholders to be held on May 15, 2003 are incorporated by reference into
Part III, Items 10, 11, 12 and 13 of this Form 10-K.




Items 1, 7, 8 and 12 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2002 are hereby
amended by deleting the Item in its entirety and replacing it with
the Item attached hereto and filed herewith.

Any items in the Companys Annual report on
Form 10-K not expressly changed hereby shall be as set forth in the
original filing.





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TABLE OF CONTENTS



|                                             |  |  |  |  |  |  |  | 
|-------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                      
|PART II                                     
|PART III                                    
|PART IV                                     
|SIGNATURES                                  
|CERTIFICATIONS                              
|EXHIBIT INDEX                               
|EX-23.1 INDEPENDENT AUDITORS' CONSENT       
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO



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FORWARD-LOOKING STATEMENTS




Some information contained or incorporated by reference in this Form 10-K/A
constitutes forward-looking statements. Such information can be identified
by the use of forward-looking terminology such as may, will,
should, expect, anticipate, estimate, intend,
continue,
or believe or the negatives or other variations of these terms or
comparable terminology. Forward-looking statements with respect to future
financial conditions, results of operations and businesses of the Company are
always subject to various risk and market factors out of managements control
which could cause future results to differ materially from current management
expectations or estimates and as such should be understood. Such factors
include particularly, but are not limited; to the possibility of prolonged
adverse economic conditions or that an adverse interest rate environment could
develop.







PART I

ITEM 1. BUSINESS

GENERAL




W Holding Company,
Inc. (the Company) is a financial holding company offering
a full range of financial services through its wholly owned subsidiaries,
Westernbank Puerto Rico (Westernbank) and Westernbank Insurance Corp. The
Company was organized under the laws of the Commonwealth of Puerto Rico in
February 1999 to become the bank holding company of Westernbank. Westernbank was
founded as a savings institution in 1958 operating in the western and
southwestern regions of Puerto Rico, focusing on retail banking and emphasizing
long-term, fixed-rate residential mortgage loans on one-to-four family
residential properties. In 1994, Westernbank changed its charter to become a
full-service commercial bank. Westernbank offers a full range of business and
consumer financial services, including banking, trust and brokerage services.
Westernbank Insurance Corp. is a general insurance agent offering property,
casualty, life and disability insurance. The assets, liabilities, revenues and
expenses of Westernbank Insurance Corp. at December 31, 2002 and 2001 and for
the years then ended were not significant.




In July 2000, the Company became a financial holding company under the
Bank Holding Company Act. As a financial holding company, the Company is
permitted to engage in financial related activities, including insurance and
securities activities, provided that the Company and its banking subsidiary
meet certain regulatory standards.

The Company is the third largest public bank holding company headquartered
in Puerto Rico, as measured by total assets as of December 31, 2002. As of
December 31, 2002, it had total assets of $8.21 billion, a loan portfolio-net
including mortgage loans held for sale of $3.76 billion, deposits of $4.30
billion and stockholders equity of $584.7 million. The Company has improved
its efficiency ratio from 49.31% in 1998 to 39.15% for the year ended December
31, 2002.

The Company continues to emphasize on growing Westernbanks commercial
loan portfolio through commercial real estate, asset-based, unsecured business
and construction lending, as well as its consumer loan and investment
securities portfolios. As a result, the Company has shifted its asset
composition from primarily traditional long-term fixed rate residential loans
to assets with shorter maturities and greater repricing flexibility. As of
December 31, 2002, commercial loans were $2.03 billion or 53.88% (78.79%
collateralized by real estate) and consumer loans were $744.0 million or
19.77% (60.23% collateralized by real estate) of the $3.76 billion loan
portfolio, including mortgage loans held for sale. Investment securities
totaled $4.18 billion at December 31, 2002. These loans and securities tend to
have shorter maturities and reprice more rapidly than traditional residential
mortgage loans. The Company also continues to diversify and grow Westernbanks
sources of revenue, while maintaining its status as a secured lender, with
approximately 82% of its loans collateralized by real estate as of December 31,
2002. As part of this strategy, Westernbank has selectively entered into
several new business lines, including asset-based and small unsecured consumer
lending as well as trust services. In June 2001, Westernbank acquired the
asset-based lending portfolio of the Puerto Rico branch of Congress Credit
Corporation for $163.8 million. In July 2002, Westernbank launched a new
banking division focused on offering consumer loans through 17 full-service
branches, called Expresso of Westernbank, denoting the branches emphasis
on small, unsecured consumer loans up to $15,000 and collateralized consumer
loans up to $75,000.




The Company is focused on the expansion of Westernbank in the San Juan
metropolitan area. We have opened 11 branches in the San Juan metropolitan area
since 1998, including seven Expresso of Westernbank branches in July 2002. In
the first quarter of 2002, Westernbank acquired Westernbank World Plaza
(formerly known as Hato Rey Tower); a 23-story office building that is the
tallest in Puerto Ricos main business district and now serves as the Companys
San Juan metropolitan area headquarters, its regional commercial lending office
and the headquarters for the Westernbank Business Credit and Expresso of
Westernbank divisions. In addition, the Company continues to build upon its
existing platform and further expand its fee-based businesses, including
insurance brokerage, trust services and securities brokerage.

Commercial lending, including commercial real estate and asset-based lending,
unsecured business lending and construction lending, generally carry a greater
credit risk than residential lending because such loans are typically larger in
size and more risk is concentrated in a single borrower. In addition, the
borrowers ability to repay a commercial loan or a construction loan depends, in
the case of a commercial loan, on the successful operation of the business or
the property securing the loan and, in the case of a construction loan, on the
successful completion and sale or operation of the project. Substantially all of
the Companys borrowers and properties and other collateral securing the
commercial, real estate mortgage and consumer loans are located in Puerto Rico.
These loans may be subject to a greater risk of default if the Puerto Rico
economy suffers adverse economic, political or business developments, or if
natural disasters affect Puerto Rico.




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The traditional banking operations of Westernbank Puerto Rico include retail
operations, such as branches, including the branches of the Expresso division,
together with consumer loans, mortgage loans, commercial loans (excluding the
asset-based lending operations) and deposits products. Consumer loans include
loans such as personal, collateralized personal loans, credit cards, and small
loans. Commercial products consist of commercial loans including commercial real
estate, unsecured commercial and construction loans.

Westernbank International operates as an International Banking Entity (IBE)
under Puerto Rico Act No. 52, of August 11, 1989, as amended, known as the
International Banking Regulatory Act. Under Puerto Rico tax law, an IBE can hold
non-Puerto Rico assets, and earn interest on these assets, as well as generate
fee income outside of Puerto Rico on a tax-exempt basis. Westernbank
Internationals business activities consist of commercial banking and related
services, and treasury and investment activities outside of Puerto Rico. As of
December 31, 2002, 2001, and 2000 and for the years then ended, substantially
all of Westernbank Internationals business activities have consisted of
investment in securities and purchasing of loans. Note 21 to the Audited
Consolidated Financial Statements present further information about the
Companys business segments.




Westernbank seeks to differentiate itself from other banks by focusing on
customer relationships and personalized service, offering customers direct
access to senior management. As part of this strategy, Westernbank strives to
make fast and effective decisions locally. Westernbanks branches offer modern
facilities with advanced technology and remain open to customers for longer
hours compared to many other local banks, with a number of branches offering
both Saturday and Sunday hours. In addition, Westernbank trains its employees
to promote an effective and customer-focused sales culture. Westernbank is one
of the fastest-growing commercial banks in Puerto Rico, increasing both total
assets and loans at an average annual growth rate of over 36% for the last five
years, while maintaining a ratio of non-performing loans to total loans of
below 1.00%.

Westernbank operates through a network of 50 bank branches, including 17
Expresso of Westernbank branches opened in July 2002, (19 branches at December
31, 2002) located throughout Puerto Rico, and a fully functional banking site
on the Internet at www.westernetbank.com. In addition to its services
Westernbank operates four divisions: Westernbank Business Credit, which
specializes in asset-based lending; Expresso of Westernbank, which specializes
in small, unsecured consumer loans up to $15,000 and collateralized consumer
loans up to $75,000; Westernbank Trust Division, which offers a full array of
trust services; and Westernbank International Division, which offers,
commercial banking and related services outside of Puerto Rico. In addition,
Westernbank offers a broad array of fee income products including credit cards,
merchant card services, letters of credit, and brokerage services, among
others.

Established in 2001, Westernbank Insurance Corp. is a general insurance
agent placing property, casualty, life and disability insurance on which it
earns commission income. Currently, most of the agencys volume is derived from
two areas  mortgage insurance on residential mortgage loans and credit life
insurance for borrowers of personal loans. The Company intends to expand
Westernbank Insurance Corp. in order to offer a broader line of insurance
products to meet the needs of its customers.

The Company and its wholly-owned subsidiaries executive offices are
located at 19 West McKinley Street, Mayagüez, Puerto Rico 00680, and our
telephone number is (787) 834-8000.

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LENDING ACTIVITIES

GENERAL. At December 31, 2002, the Banks net loans, including mortgage
loans held for sale, amounted to $3.76 billion or 45.85% of total assets.

The following table sets forth the composition of the Banks loan
portfolio, including mortgage loans held for sale, by type of loan at the dates
indicated.

|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |         |  |        |      |   |   |           |         |  |  |        |      |   |   |           |         |  |  |        |      | 
|---------------------------------------- | ----------------------- | - | ---------------------- | ------- | ------- |  | ------ | ---- | ------- | - | --------- | ------- | ------- |  | ------ | ---- | ------- | - | --------- | ------- | ------- |  | ------ | ---- | - | - | --------- | ------- |  |  | ------ | ---- | - | - | --------- | ------- |  |  | ------ | ---- | 
|                                         |                         |   | December 31,          
|                                         |                         |   |                       
|                                         |                         |   | 2002                   |         | 2001    |  | 2000   |      | 1999    |   | 1998     
|                                         |                         |   |                        |         |         |  |        |      |         |   |          
|                                         |                         |   | Amount                 |         | Percent |  | Amount |      | Percent |   | Amount    |         | Percent |  | Amount |      | Percent |   | Amount    |         | Percent
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |        
|                                         |                         |   | (Dollars in thousands)
|Residential real estate:                 |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |         |  |        |      |   |   |           |         |  |  |        |      |   |   |           |         |  |  |        |     
|                                         | Mortgage (1)            |   | $                      | 852,249 |         |  |        | 22.7 | %       |   | $         | 852,715 |         |  |        | 30.0 | %       |   | $         | 785,853 |         |  |        | 35.5 | % |   | $         | 706,792 |  |  |        | 37.8 | % |   | $         | 407,245 |  |  |        | 29.9 | 
|                                         | Construction            |   |                        | 181,266 |         |  |        | 4.8  |         |   |           | 117,957 |         |  |        | 4.2  |         |   |           | 80,905  |         |  |        | 3.7  |   |   |           | 101,979 |  |  |        | 5.5  |   |   |           | 69,215  |  |  |        | 5.1  | 
|Commercial, industrial
and agricultural: |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |         |  |        |      |   |   |           |         |  |  |        |      |   |   |           |         |  |  |        |     
|Real estate                              |                         |   | 1,461,606              |         |         |  | 38.9   |      |         |   | 1,115,700 |         |         |  | 39.2   |      |         |   | 887,084   |         |         |  | 40.2   |      |   |   | 677,924   |         |  |  | 36.2   |      |   |   | 518,893   |         |  |  | 38.1   |     
|                                         | Business and others (2) |   |                        | 570,196 |         |  |        | 15.2 |         |   |           | 378,696 |         |  |        | 13.3 |         |   |           | 99,483  |         |  |        | 4.5  |   |   |           | 79,343  |  |  |        | 4.3  |   |   |           | 72,235  |  |  |        | 5.3  | 
|                                         | Consumer and others (3) |   |                        | 743,600 |         |  |        | 19.8 |         |   |           | 416,953 |         |  |        | 14.7 |         |   |           | 383,903 |         |  |        | 17.4 |   |   |           | 329,682 |  |  |        | 17.6 |   |   |           | 309,509 |  |  |        | 22.7 | 
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |         |  |        |      |   |   |           |         |  |  |        |      |   |   |           |         |  |  |        |     
|Total loans                              |                         | $ | 3,808,917              |         |         |  | 101.4  |      |         | $ | 2,882,021 |         |         |  | 101.4  |      |         | $ | 2,237,228 |         |         |  | 101.3  |      |   | $ | 1,895,720 |         |  |  | 101.4  |      |   | $ | 1,377,097 |         |  |  | 101.1  |     
|Allowance for loan losses                |                         |   | (47,114                | )       |         |  | (1.4   | )    |         |   | (38,364   | )       |         |  | (1.4   | )    |         |   | (28,928   | )       |         |  | (1.3   | )    |   |   | (23,978   | )       |  |  | (1.4   | )    |   |   | (15,800   | )       |  |  | (1.1   | )   
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |         |  |        |      |   |   |           |         |  |  |        |      |   |   |           |         |  |  |        |     
|Loans  net                              |                         | $ | 3,761,803              |         |         |  | 100.0  | %    |         | $ | 2,843,657 |         |         |  | 100.00 | %    |         | $ | 2,208,300 |         |         |  | 100.00 | %    |   | $ | 1,871,742 |         |  |  | 100.00 | %    |   | $ | 1,361,297 |         |  |  | 100.00 |     
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |         |  |        |      |         |   |           |         |         |  |        |      |   |   |           |         |  |  |        |      |   |   |           |         |  |  |        |      | 



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|(1) |  | Includes mortgage loans held for sale amounting to $7.4 million, $5.3
million, $4.6 million, $2.1 million, and $7.3 million for each one of
the years presented, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $427.7 million and $255.8 million of Westernbank Business
Credit division outstanding loans. loan at December 31, 2002 and 2001,
respectively.                       
|   
|(3) |  | Includes $117.4 million of the Expresso of Westernbank division
outstanding loans at December 31, 2002.                                                                       

Residential real estate mortgage loans at December 31, 2002, are mainly
comprised of loans secured by first mortgages on one-to-four family residential
properties. At December 31, 2002, residential mortgage loans included $17.2
million of mortgages insured or guaranteed by government agencies of the United
States or Puerto Rico.

The Bank originated $481.2 million of commercial real estate loans during
the year ended December 31, 2002. At December 31, 2002, commercial real estate
loans totaled $1.46 billion. In general, commercial real estate loans are
considered by management to be of somewhat greater risk of uncollectibility
than other loans due to the dependency on income production and future
development of real estate. Commercial real estate loans are collateralized by
various types of property, including warehouse, retail and other business
properties.

The portfolio of Consumer and Other loans at December 31, 2002, consisted
of consumer loans of $743.6 million, of which $447.9 million are secured by
real estate, $295.7 million are unsecured consumer loans (including $117.4
million of the Expresso of Westernbank division loans portfolio), credit card
loans of $56.7 million and loans secured by deposits in the Bank totaling $32.8
million.

During 2002, the Bank securitized $18.6 million and $26.5 million of
residential mortgage loans into Government National Mortgage Association and
Fannie Mae participation certificates, respectively. The Bank continues to
service outstanding loans which are securitized.

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The following table summarizes the contractual maturities of the Banks
total loans, excluding mortgage loans held for sale, for the periods indicated
as of December 31, 2002. Contractual maturities do not necessarily reflect the
actual term of a loan, including prepayments.

|                                         |                     |   |                   |           |             |   |                              |         |                  |   |          |         |          |   |         |         |       |   |          |         |  |   |           |         | 
|---------------------------------------- | ------------------- | - | ----------------- | --------- | ----------- | - | ---------------------------- | ------- | ---------------- | - | -------- | ------- | -------- | - | ------- | ------- | ----- | - | -------- | ------- |  | - | --------- | ------- | 
|                                         |                     |   |                   |           |             |   | Maturities                  
|                                         |                     |   |                   |           |             |   |                             
|                                         |                     |   |                   |           |             |   | After one year to five years |         | After five years
|                                         |                     |   |                   |           |             |   |                             
|                                         |                     |   |                   |           |             |   | (In thousands)               |         |                  |   |         
|                                         |                     |   | Balance           |           |             |   |                              |         |                  |   |          |         |          |   |         |         | Fixed |   | Variable
|                                         |                     |   | outstanding at    |           | One year or |   | Fixed interest               |         | Variable         |   | interest |         | interest
|                                         |                     |   | December 31, 2002 |           | less        |   | rates                        |         | interest rates   |   | rates    |         | rates   
|                                         |                     |   |                   |           |             |   |                              |         |                  |   |          |         |         
|Residential real estate:                 |                     |   |                   |           |             |   |                              |         |                  |   |          |         |          |   |         |         |       |   |          |         |  |   |           |        
|                                         | Mortgage            |   | $                 | 852,249   |             |   | $                            | 2,348   |                  |   | $        | 9,968   |          |   | $       | 154     |       |   | $        | 304,682 |  |   | $         | 535,099 | 
|                                         | Construction        |   |                   | 181,266   |             |   |                              | 93,729  |                  |   |          |        |          |   |         | 87,535  |       |   |          |        |  |   |           |        | 
|Commercial, industrial
and agricultural: |                     |   |                   |           |             |   |                              |         |                  |   |          |         |          |   |         |         |       |   |          |         |  |   |           |        
|                                         | Real estate         |   |                   | 1,461,606 |             |   |                              | 334,820 |                  |   |          | 138,173 |          |   |         | 103,290 |       |   |          | 50,502  |  |   |           | 834,819 | 
|                                         | Business and others |   |                   | 570,196   |             |   |                              | 519,342 |                  |   |          | 15,993  |          |   |         | 12,932  |       |   |          | 2,810   |  |   |           | 19,121  | 
|Consumer and others                      |                     |   | 743,600           |           |             |   | 107,136                      |         |                  |   | 186,786  |         |          |   |        |         |       |   | 449,678  |         |  |   |          |        
|                                         |                     |   |                   |           |             |   |                              |         |                  |   |          |         |          |   |         |         |       |   |          |         |  |   |           |        
|Total                                    |                     | $ | 3,808,917         |           |             | $ | 1,057,375                    |         |                  | $ | 350,920  |         |          | $ | 203,911 |         |       | $ | 807,672  |         |  | $ | 1,389,039 |        
|                                         |                     |   |                   |           |             |   |                              |         |                  |   |          |         |          |   |         |         |       |   |          |         |  |   |           |        



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|(1) |  | Includes foreign loans amounting to $2.7 million, secured by real estate
collateral and unlimited guaranty of a Puerto Rico resident.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

ORIGINATION, PURCHASE AND SALE OF LOANS. The Banks loan originations come
from a number of sources. The primary sources for residential loan originations
are depositors and walk-in customers. Commercial loan originations come from
existing customers as well as through direct solicitation and referrals.

The Bank originates loans in accordance with written, non-discriminatory
underwriting standards and loan origination procedures prescribed in Board of
Director approved loan policies. Detailed loan applications are obtained to
determine the borrowers repayment ability. Applications are verified through
the use of credit reports, financial statements and other confirmations
procedures. Property valuations by Board of Director approved independent
appraisers are required for mortgage loans. The Banks Credit Committee
approval is required for all residential and commercial real estate loans and
all other commercial loans over $1.0 million. Loans in excess of $1.0 million
are also reviewed by the full Board of Directors, including those loans
approved by the Credit Committee.

It is the Banks policy to require borrowers to provide title insurance
policies certifying or ensuring that the Bank has a valid first lien on the
mortgaged real estate. Borrowers must also obtain hazard insurance policies
prior to closing and, when required by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest
to a mortgage escrow account from which the Bank makes disbursements for items
such as real estate taxes, hazard insurance premiums and private mortgage
insurance premiums as they fall due.

Westernbank originates most of its residential real estate loans as
conforming loans, eligible for sale in the secondary market. The loan-to-value
ratio at the time of origination on residential mortgages is generally 75%,
except that the Bank may lend up to 90% of the lower of the purchase price or
appraised value of residential properties if private mortgage insurance is
obtained by the borrower for amounts in excess of 80%.

The Bank originates fixed and adjustable rate residential mortgage loans
secured by a first mortgage on the borrowers real property, payable in monthly
installments for terms ranging from ten to forty-five years. Adjustable rates are
indexed to specified prime or LIBOR rate. All 30 year conforming mortgages are
originated with the intent to sell.

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In addition to its residential loan originations, the Bank also purchases
residential first mortgage loans from other mortgage originators in Puerto
Rico. In 2002 and 2001, Westernbank purchased $208.4 million and $256.7
million, of such loans, respectively.

The Bank originates primarily variable and adjustable rate commercial
business and real estate loans. The Bank also makes real estate construction
loans subject to firm permanent financing commitments. On June 15, 2001, the
Bank acquired the entire loan portfolio of the Puerto Rico branch of Congress
Credit Corporation, a subsidiary of First Union National Bank, N. A., for
$163.8 million. This new line of business is managed by Westernbank Business
Credit Division, which specializes in commercial loans secured principally by
accounts receivables, inventory and equipment.

The Bank offers different types of consumer loans in order to provide a
full range of financial services to its customers. Within the different types
of consumer loans offered by the bank there are various types of secured and
unsecured consumer loans with varying amortization schedules. In addition, the
Bank makes fixed-rate residential second mortgage loans.

The Bank offers the service of VISA and Master Card. At December 31, 2002,
there were approximately 26,947 outstanding accounts, with an aggregate
outstanding balance of $56.7 million and unused credit card lines available of
$77.8 million.

In connection with all consumer and second mortgage loans originated, the
Banks underwriting standards include a determination of the applicants
payment history on other debts and an assessment of the ability to meet
existing obligations and payments on the proposed loan. As of December 31,
2002, only $4.7 million or .59% of the consumer loan portfolio consisted of
loans more than 60 days delinquent in payment.

Commercial loans have increased from $1.49 billion as of December 31,
2001, to $2.03 billion as of December 31, 2002. As of December 31, 2002, only
$6.7 million or .33% of the commercial loan portfolio consisted of loans more
than 60 days delinquent in payment.

INCOME FROM LENDING ACTIVITIES. The Bank realizes interest income and fee
income from its lending activities. For the most part, interest rates charged
by the Bank on loans depend upon the general interest rate environment, the
demand for loans and the availability of funds. The Bank also receives fees for
originating and committing to originate or purchase loans and also charges
service fees for the assumption of loans, late payments, inspection of
properties, appraisals and other miscellaneous services.

Loan origination and commitment fees vary with the volume and type of
loans and commitments made and sold and with competitive conditions in the
residential and commercial mortgage markets. The Bank accounts for loan
origination and commitment fees based on the provisions of Financial Accounting
Standards Board Statement No. 91. Loan origination fees and related direct loan
origination costs are deferred and amortized over the life of the related loans
as a yield adjustment. Commitment fees are also deferred and amortized over the
life of the related loans as a yield adjustment. If the commitment expires
unexercised, the fee is taken into income.

In accordance with
requirements of Statement Financial Accounting Standards Board
Statement (SFAS) No. 140, Accounting for Mortgage Servicing Rights, an Amendment of
FASB Statement No. 65 (SFAS 140), the Bank recognizes as separate assets the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. SFAS 140 also requires that the entities assess the
capitalized mortgage servicing rights for impairment based on the fair value of
those rights.

NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE. When a borrower fails to
make a required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower. In most cases, deficiencies are cured promptly. If the
delinquency exceeds 90 days and is not cured through the Banks normal
collection procedures, the Bank will generally institute measures to remedy the
default. If a foreclosure action is instituted and the loan is not cured, paid
in full or refinanced, the property is sold at a judicial sale at which the
Bank may acquire the property. Thereafter, if the Bank acquires the property,
such acquired property is appraised and included in the Banks foreclosed real
estate held for sale account at the lower of cost or fair value at the date of
acquisition. Then, this asset is carried at the lower of fair value less
estimated costs to sell or cost until the property is sold. In the event that
the property is sold at a price insufficient to cover the balance of the loan,
the debtor remains liable for the deficiency.

The accrual of interest on loans is discontinued when, in managements
opinion, the borrower may be unable to meet payments as they become due, but in
no event is it recognized after 90 days in arrears on payments of principal or
interest. When interest accrual is discontinued, all unpaid interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.

6



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##### Table of Contents



The following table sets forth information regarding non-performing loans
and foreclosed real estate held for sale by the Bank at the dates indicated:

|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |       | 
|------------------------------------------------------------------------------------------------------ | -------------------------- | - | ---------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ----- |  | - | ----- | ----- |  | - | ------ | ----- | 
|                                                                                                       |                            |   | December 31,          
|                                                                                                       |                            |   |                       
|                                                                                                       |                            |   | 2002                   |        | 2001 |   | 2000   |        | 1999 |   | 1998  
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |       
|                                                                                                       |                            |   | (Dollars in thousands)
|Residential real estate mortgage and construction loans                                                |                            | $ | 2,026                  |        |      | $ | 2,735  |        |      | $ | 1,817  |       |  | $ | 1,719 |       |  | $ | 1,183  |      
|Commercial, industrial and agricultural loans                                                          |                            |   | 13,567                 |        |      |   | 7,947  |        |      |   | 6,140  |       |  |   | 4,366 |       |  |   | 5,427  |      
|Consumer loans                                                                                         |                            |   | 3,812                  |        |      |   | 3,431  |        |      |   | 1,733  |       |  |   | 870   |       |  |   | 1,172  |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|                                                                                                       | Total non-performing loans |   |                        | 19,405 |      |   |        | 14,113 |      |   |        | 9,690 |  |   |       | 6,955 |  |   |        | 7,782 | 
|Foreclosed real estate held for sale                                                                   |                            |   | 3,679                  |        |      |   | 3,013  |        |      |   | 2,454  |       |  |   | 2,232 |       |  |   | 3,271  |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Total non-performing loans and foreclosed real
estate held for sale                                    |                            | $ | 23,084                 |        |      | $ | 17,126 |        |      | $ | 12,144 |       |  | $ | 9,187 |       |  | $ | 11,053 |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Interest that would have been recorded if the
loans had not been classified as
non-performing          |                            | $ | 1,102                  |        |      | $ | 1,123  |        |      | $ | 979    |       |  | $ | 514   |       |  | $ | 1,027  |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Interest recorded on non-performing loans                                                              |                            | $ | 775                    |        |      | $ | 1,716  |        |      | $ | 780    |       |  | $ | 1,470 |       |  | $ | 242    |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Total non-performing loans as a percentage
of loans receivable, including
mortgage loans held for sale |                            |   | 0.51                   | %      |      |   | 0.49   | %      |      |   | 0.43   | %     |  |   | 0.37  | %     |  |   | 0.57   | %    
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Total non-performing loans and foreclosed real estate
held for sale as a percentage of total assets    |                            |   | 0.28                   | %      |      |   | 0.29   | %      |      |   | 0.28   | %     |  |   | 0.27  | %     |  |   | 0.45   | %    
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      

The increase from 2001 to 2002 is mostly attributed to four commercial
loans with principal balances of $2.4 million, $1.6 million, $1.3 million and
$589,000, respectively, all of which are collateralized by real estate
properties. At December 31, 2002, two of these loans with outstanding balances
of $2.4 million and $1.6 million, required a specific valuation allowance of
$355,000 and $770,000, respectively. At December 31, 2002, the allowance for
possible loan losses was 242.80% of total non-performing loans (reserve
coverage).

ALLOWANCE FOR LOAN LOSSES. The Bank maintains an allowance for loan losses
to absorb losses inherent in the loan portfolio. The allowance is based on
ongoing, quarterly assessments of the probable estimated losses inherent in the
loan portfolio. The Company follows a systematic methodology to establish and
evaluate the adequacy of the allowance for loan losses. This methodology
consists of several key elements, which include:

The Formula Allowance. The formula allowance is calculated by applying
loss factors to outstanding loans not otherwise covered by specific allowances.
Loss factors are based on historical loss experience and may be adjusted for
significant factors that, in managements judgment, affect the collectibility
of the portfolio as of the evaluation date. Loss factors are described as
follows:



| |  |  | Loan loss factors for commercial loans, including construction and land
acquisition loans, are based on historical loss trends for three years,
as adjusted for managements expected increase in the loss factors given
the significant increase in such loan portfolios over the last few years.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Pooled loan loss factors are also based on historical loss trends for
one to three years. Pooled loans are loans that are
homogeneous in nature, such as consumer installment and residential
mortgage loans.                                                                                     

Specific Allowances for Identified Problem Loans and Portfolio Segments.
Specific allowances are established and maintained where management has
identified significant adverse conditions or circumstances related to a credit
or portfolio segment that management believes indicate the probability that a
loss has been incurred in excess of the amount determined by the application of
the formula allowance. Larger commercial and construction loans that exhibit
potential or observed credit weaknesses are subject to individual review. Where
appropriate, allowances are allocated to individual loans based on managements
estimate of the borrowers ability to repay the loan given the availability of
collateral, other sources of cash flow and legal options available to the Bank.

In addition, the specific allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended. This accounting standard prescribes the
measurement methods, income recognition and disclosures concerning impaired
loans.

7



---



##### Table of Contents



The Unallocated Allowance. An unallocated allowance is established
recognizing the estimation risk associated with the formula and specific
allowances. It is based upon managements evaluation of various conditions, the
effects of which are not directly measured in determining the formula and
specific allowances. These conditions include then-existing general economic
and business conditions affecting our key lending areas; credit quality trends,
including trends in nonperforming loans expected to result from existing
conditions, collateral values, loan volumes and concentrations, seasoning of
the loans portfolio, recent loss experience in particular segments of the
portfolio, regulatory examination results, and findings of our internal credit
examiners. The evaluation of the inherent loss regarding these conditions
involves a higher degree of uncertainty because they are not identified with
specific problem credits or portfolio segments.

Management assesses these conditions quarterly. If any of these conditions
is evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, managements estimate of the effect of this
condition may be reflected as a specific allowance applicable to this credit or
portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, managements evaluation of the probable loss concerning this
condition is reflected in the unallocated allowance.

The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. Historical loss factors for commercial and consumer loans
may be adjusted for significant factors that, in managements judgment, reflect
the impact of any current condition on loss recognition. Factors which
management considers in the analysis include the effect of the national and
local economies, trends in the nature and volume of loans (delinquencies,
charge-offs, non-accrual and problem loans), changes in the internal lending
policies and credit standards, collection practices, and examination results
from bank regulatory agencies and the Banks internal credit examiners. Loan
loss factors are adjusted quarterly based upon the level of net charge-offs
expected by management in the next twelve months, after taking into account
historical loss ratios adjusted for current trends. By assessing the probable
estimated losses inherent in the loan portfolio on a quarterly basis, we are
able to adjust specific and inherent loss estimates based upon any more recent
information that has become available.

At December 31, 2002, the Banks allowance for loan losses was $47.1
million, consisting of $36.1 million formula allowance, $8.0 million of
specific allowances and $3.0 million of unallocated allowance. As of December
31, 2002, the allowance for loan losses equals 1.24% of total loans, including
mortgage loans held for sale, and 242.80% of total non-performing loans,
compared with an allowance for loan losses at December 31, 2001, of $38.4
million, or 1.33% of total loans, and 271.83% of total non-performing loans.

As of December 31, 2002, there have been no significant changes in
estimation methods or assumptions that affected our methodology for assessing
the appropriateness of the allowance for loan losses.

8



---



##### Table of Contents



The table below presents a reconciliation of changes in the allowance for loan
losses for the periods indicated:

|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   | 
|------------------------------------------------ | ----------------------------------------------------------- | ------------------ | ------ | ----------------------- | - | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | 
|                                                 |                                                             |                    |        | YEAR ENDED DECEMBER 31,
|                                                 |                                                             |                    |        |                        
|                                                 |                                                             |                    |        | 2002                    |   | 2001 |        | 2000   |   | 1999 |        | 1998  
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |       
|                                                 |                                                             |                    |        | (Dollars in thousands) 
|Balance, beginning of year                       |                                                             | $                  | 38,364 |                         |   | $    | 28,928 |        |   | $    | 23,978 |        |   | $ | 15,800 |        |   | $ | 13,201 |       
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Loans charged-off:                               |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                                 | Consumer loans                                              |                    |        | 4,576                   |   |      |        | 3,840  |   |      |        | 4,760  |   |   |        | 5,154  |   |   |        | 4,090  |  
|                                                 | Commercial, industrial and agricultural loans               |                    |        | 3,389                   |   |      |        | 2,970  |   |      |        | 372    |   |   |        | 1,913  |   |   |        | 134    |  
|                                                 | Real estate-mortgage and
construction loans                 |                    |        |                        |   |      |        | 228    |   |      |        | 231    |   |   |        | 291    |   |   |        |       |  
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Total loans charged-off                          |                                                             |                    | 7,965  |                         |   |      | 7,038  |        |   |      | 5,363  |        |   |   | 7,358  |        |   |   | 4,224  |       
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Recoveries of loans previously charged-off:      |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                                 | Consumer loans                                              |                    |        | 858                     |   |      |        | 996    |   |      |        | 795    |   |   |        | 1,003  |   |   |        | 601    |  
|                                                 | Commercial, industrial and agricultural loans               |                    |        | 584                     |   |      |        | 133    |   |      |        | 594    |   |   |        | 335    |   |   |        | 42     |  
|                                                 | Real estate-mortgage and                                    |                    |        | 190                     |   |      |        | 175    |   |      |        | 224    |   |   |        | 198    |   |   |        | 180    |  
|                                                 |                                                             | construction loans |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   | 
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Total recoveries of loans previously charged-off |                                                             |                    | 1,632  |                         |   |      | 1,304  |        |   |      | 1,613  |        |   |   | 1,536  |        |   |   | 823    |       
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Net loans charged-off                            |                                                             |                    | 6,333  |                         |   |      | 5,734  |        |   |      | 3,750  |        |   |   | 5,822  |        |   |   | 3,401  |       
|Provision for loan losses                        |                                                             |                    | 15,083 |                         |   |      | 12,278 |        |   |      | 8,700  |        |   |   | 14,000 |        |   |   | 6,000  |       
|Allowance acquired on loans purchased            |                                                             |                    |       |                         |   |      | 2,892  |        |   |      |       |        |   |   |       |        |   |   |       |       
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Balance, end of period                           |                                                             | $                  | 47,114 |                         |   | $    | 38,364 |        |   | $    | 28,928 |        |   | $ | 23,978 |        |   | $ | 15,800 |       
|                                                 |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|Ratios:                                          |                                                             |                    |        |                         |   |      |        |        |   |      |        |        |   |   |        |        |   |   |        |       
|                                                 | Allowance for loan losses to total end of year loans        |                    |        | 1.24                    | % |      |        | 1.33   | % |      |        | 1.29   | % |   |        | 1.26   | % |   |        | 1.15   | %
|                                                 | Provision for loan losses to net loans
charged-off          |                    |        | 238.17                  | % |      |        | 214.13 | % |      |        | 232.00 | % |   |        | 240.47 | % |   |        | 176.42 | %
|                                                 | Recoveries of loans to loans charged-off in
previous period |                    |        | 23.19                   | % |      |        | 24.31  | % |      |        | 21.92  | % |   |        | 36.36  | % |   |        | 31.64  | %
|                                                 | Net loans charged-off to average loans                      |                    |        | 0.19                    | % |      |        | 0.23   | % |      |        | 0.19   | % |   |        | 0.35   | % |   |        | 0.32   | %
|                                                 | Allowance for loans losses to
non-performing loans          |                    |        | 242.80                  | % |      |        | 271.83 | % |      |        | 298.53 | % |   |        | 344.76 | % |   |        | 203.03 | %

The following table presents the allocation of the allowance for credit
losses and the percentage of loans in each category to total loans, as set
forth in the Loans table on page 5.

|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |        | 
|------------------------------------------------------- |  | ---------------------- | ------ | ------- |  | ------ | ----- | ------- |  | ------ | ------ | ------- |  | ------ | ----- | ------- |  | ------ | ------ | ------- |  |  | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ------ | 
|                                                        |  | DECEMBER 31,          
|                                                        |  |                       
|                                                        |  | 2002                   |        |         |  | 2001   |       |         |  | 2000   |        |         |  | 1999   |       |         |  | 1998  
|                                                        |  | Amount                 |        | Percent |  | Amount |       | Percent |  | Amount |        | Percent |  | Amount |       | Percent |  | Amount |        | Percent
|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |        
|                                                        |  | (Dollars in thousands)
|Commercial, industrial and
agricultural loans (1)       |  | $                      | 31,671 |         |  |        | 53.3  | %       |  | $      | 24,397 |         |  |        | 51.8  | %       |  | $      | 16,273 |         |  |  | 44.1  | % |  | $ | 11,772 |  |  |  | 39.9  | % |  | $ | 7,747  |  |  |  | 42.9   | 
|Consumer loans (2)                                      |  |                        | 12,004 |         |  |        | 19.5  |         |  |        | 8,203  |         |  |        | 14.5  |         |  |        | 7,194  |         |  |  | 17.2  |   |  |   | 5,718  |  |  |  | 17.4  |   |  |   | 5,044  |  |  |  | 22.5   | 
|Residential real estate mortgage
and construction loans |  |                        | 443    |         |  |        | 27.2  |         |  |        | 494    |         |  |        | 33.7  |         |  |        | 526    |         |  |  | 38.7  |   |  |   | 1,743  |  |  |  | 42.7  |   |  |   | 1,043  |  |  |  | 34.6   | 
|Unallocated allowance                                   |  |                        | 2,996  |         |  |        |      |         |  |        | 5,270  |         |  |        |      |         |  |        | 4,935  |         |  |  |      |   |  |   | 4,745  |  |  |  |      |   |  |   | 1,966  |  |  |  |       | 
|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |        | 
|Total allowance for loan losses                         |  | $                      | 47,114 |         |  |        | 100.0 | %       |  | $      | 38,364 |         |  |        | 100.0 | %       |  | $      | 28,928 |         |  |  | 100.0 | % |  | $ | 23,978 |  |  |  | 100.0 | % |  | $ | 15,800 |  |  |  | 100.00 | 
|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |        | 



---

|(1) |  | Includes $4.5 million and $3.1 million of Westernbank Business Credit loans
portfolio at December 31, 2002 and 2001, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $1.5 million of Expresso of Westernbank loans portfolio at December
31, 2002.                                            

Loans are classified as impaired or not impaired in accordance with SFAS
114. A loan is impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due, according to the contractual terms of the
agreement.

9



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##### Table of Contents



The Bank measures the impairment of a loan based on the present value of
expected future cash flows discounted at the loans effective interest rate, or
as a practical expedient, at the observable market price of the loan or the
fair value of the collateral, if the loan is collateral dependent. Significant
loans (those exceeding $500,000) are individually evaluated for impairment.
Large groups of small balance, homogeneous loans are collectively evaluated for
impairment; loans that are recorded at fair value or at the lower of cost or
market are not evaluated for impairment. The portfolios of mortgage and
consumer loans are considered homogeneous and are evaluated collectively for
impairment.

Impaired loans for which the discounted cash flows, collateral value or
market price exceeds its carrying value do not require an allowance. The
allowance for impaired loans is part of the Companys overall allowance for
loan losses.

The following table sets forth information regarding the investment in impaired
loans:

|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                      |  | 2002           |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                      |  |                |        |      |  |      |        |      |  |     
|                                      |  | (In thousands)
|Investment on impaired loans:         |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Covered by a valuation allowance      |  | $              | 26,074 |      |  | $    | 21,996 |      |  | $    | 8,040  |  |  | $ | 8,136  |  |  | $ | 5,499 | 
|Do not require a valuation allowance  |  |                | 24,515 |      |  |      | 20,482 |      |  |      | 4,834  |  |  |   | 4,947  |  |  |   | 4,309 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Total                                 |  | $              | 50,589 |      |  | $    | 42,478 |      |  | $    | 12,874 |  |  | $ | 13,083 |  |  | $ | 9,808 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Valuation allowance in impaired loans |  | $              | 4,752  |      |  | $    | 4,181  |      |  | $    | 1,157  |  |  | $ | 1,268  |  |  | $ | 1,120 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Average investment in impaired loans  |  | $              | 46,147 |      |  | $    | 20,293 |      |  | $    | 11,873 |  |  | $ | 14,919 |  |  | $ | 6,561 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Interest collected in impaired loans  |  | $              | 4,041  |      |  | $    | 1,716  |      |  | $    | 780    |  |  | $ | 1,470  |  |  | $ | 242   | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 

At December 31, 2002, the Banks investment in impaired loans increased
$8.1 million or 19.09%, from $42.5 million as of December 31, 2001, to $50.6
million as of December 31, 2002. This increase is principally attributed to
four newly classified loans with an aggregate outstanding principal balance of
approximately $13.0 million as of December 31, 2002. All loans are
collateralized by real estate and required a combined valuation allowance of
$823,000.

INVESTMENT ACTIVITIES

The Banks investments are managed by the Investment Department. Purchases
and sales are required to be reported monthly to both the Investment Committee
composed of members of the Board of Directors, as well as the President and
Chief Executive Officer and the Chief Financial Officer.

The Investment Department is authorized to purchase and sell federal
funds, interest bearing deposits in banks, bankers acceptances of commercial
banks insured by the FDIC, mortgage and other assets-backed securities, Puerto
Rico and U.S. Government and agency obligations, municipal securities rated A
or better by any of the nationally recognized rating agencies and commercial
paper rated P-1 by Moodys Investors Service, Inc. or A-1 by Standard and
Poors, a Division of the McGraw-Hill Companies, Inc. In addition, the
Investment Department is responsible for the pricing and sale of deposits and
reverse repurchase agreements. See Sources of Funds-Deposits and Borrowings
and Equity Risk Investments.

The Banks investment strategy is affected by both the rates and terms
available on competing investments and tax and other legal considerations.

10



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The following table presents the carrying value of investments as of year
end for each of the years indicated:

|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |           |        |           |        | 
|----------------------------------------------------- | --------------------------------------------- | ------------------------------------ | --------- | --------- | ------- | -------------- | --------- | --------- | ------- | --------- | --------- | --------- | ------ | --------- | ------ | 
|                                                      |                                               |                                      |           |           |         | 2002           |           | 2001      |         | 2000     
|                                                      |                                               |                                      |           |           |         |                |           |           |         |          
|                                                      |                                               |                                      |           |           |         | (In thousands)
|Held to maturity:                                     |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|                                                      | US Government and agency obligations          |                                      | $         | 2,671,344 |         |                | $         | 1,788,000 |         |           | $         | 1,367,417 |       
|                                                      | Puerto Rico Government and agency obligations |                                      |           | 19,695    |         |                |           | 22,607    |         |           |           | 13,769    |       
|                                                      | Commercial paper                              |                                      |           | 74,997    |         |                |           | 59,992    |         |           |           | 34,994    |       
|                                                      | Corporate notes                               |                                      |           | 66,697    |         |                |           | 66,460    |         |           |           | 51,420    |       
|                                                      | Mortgage and other asset-backed securities    |                                      |           | 668,324   |         |                |           | 432,716   |         |           |           | 189,087   |       
|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|                                                      |                                               |                                      | Total     |           |         | 3,501,057      |           |           |         | 2,369,775 |           |           |        | 1,656,687 |       
|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|Available for sale:                                   |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|                                                      |                                               | US Government and agency obligations |           |           |        |                |           |           | 196,446 |           |           |           |       |          
|                                                      |                                               | Corporate notes                      |           |           | 10,381  |                |           |           | 56,080  |           |           |           |       |          
|                                                      |                                               | Mortgage-backed securities           |           |           | 145,276 |                |           |           | 29,156  |           |           |           | 27,806 |          
|                                                      |                                               | Other investments                    |           |           | 5,230   |                |           |           |        |           |           |           |       |          
|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|                                                      |                                               |                                      |           | Total     |         |                | 160,887   |           |         |           | 281,682   |           |        |           | 27,806 | 
|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|Trading securities- mainly mortgage-backed
securities |                                               |                                      |          |           |         |                | 4,609     |           |         |           | 2,161     |          
|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |          
|Total investments                                     |                                               | $                                    | 3,661,944 |           |         | $              | 2,656,066 |           |         | $         | 1,686,654 |          
|                                                      |                                               |                                      |           |           |         |                |           |           |         |           |           |           |       

At December 31, 2002, no investment of a single issuer (in aggregate
balance) exceeded 10% of the consolidated stockholders equity.

The carrying amount of investment securities at December 31, 2002, by
contractual maturity (excluding mortgage and others asset-backed securities),
are shown below:

|                                                 |                                        |   |                        |           |                        |  |      |      |  
|------------------------------------------------ | -------------------------------------- | - | ---------------------- | --------- | ---------------------- |  | ---- | ---- | -
|                                                 |                                        |   | Carrying amount        |           | Weighted average yield
|                                                 |                                        |   |                        |           |                       
|                                                 |                                        |   | (Dollars in thousands)
|US Government and agencies obligations:          |                                        |   |                        |           |                        |  |      |     
|                                                 | Due within one year or less            |   | $                      | 30,181    |                        |  |      | 4.23 | %
|                                                 | Due after one year through five years  |   |                        | 2,551,163 |                        |  |      | 3.97 |  
|                                                 | Due after five years through ten years |   |                        | 90,000    |                        |  |      | 4.22 |  
|                                                 | Due after ten years                    |   |                        |          |                        |  |      |     |  
|                                                 |                                        |   |                        |           |                        |  |      |     
|                                                 |                                        |   | 2,671,344              |           |                        |  | 4.04 |     
|                                                 |                                        |   |                        |           |                        |  |      |     
|Puerto Rico Government and agencies obligations: |                                        |   |                        |           |                        |  |      |     
|                                                 | Due within one year                    |   |                        |          |                        |  |      |     |  
|                                                 | Due after one year through five years  |   |                        | 13,700    |                        |  |      | 6.28 |  
|                                                 | Due after five years through ten years |   |                        | 4,000     |                        |  |      | 5.05 |  
|                                                 | Due after ten years                    |   |                        | 1,995     |                        |  |      | 6.15 |  
|                                                 |                                        |   |                        |           |                        |  |      |     
|                                                 |                                        |   | 19,695                 |           |                        |  | 6.02 |     
|                                                 |                                        |   |                        |           |                        |  |      |     
|Other:                                           |                                        |   |                        |           |                        |  |      |     
|                                                 | Due within one year                    |   |                        | 90,388    |                        |  |      | 2.05 |  
|                                                 | Due after one year through five years  |   |                        | 29,983    |                        |  |      | 3.23 |  
|                                                 | Due after five years through ten years |   |                        |          |                        |  |      |     |  
|                                                 | Due after ten years                    |   |                        | 36,934    |                        |  |      | 6.54 |  
|                                                 |                                        |   |                        |           |                        |  |      |     
|                                                 |                                        |   | 157,305                |           |                        |  | 3.33 |     
|                                                 |                                        |   |                        |           |                        |  |      |     
|Total                                            |                                        |   | 2,848,344              |           |                        |  | 4.01 |     
|Mortgage and other asset-backed securities       |                                        |   | 813,600                |           |                        |  | 5.46 |     
|                                                 |                                        |   |                        |           |                        |  |      |     
|Total                                            |                                        | $ | 3,661,944              |           |                        |  | 4.33 | %   
|                                                 |                                        |   |                        |           |                        |  |      |     

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Mortgage and other asset-backed securities at December 31, 2002, consists
of:

|                                                                           |                                                              |                        |         |                |         | 
|-------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------- | ------- | -------------- | ------- | 
|                                                                           |                                                              |                        |         | (In Thousands)
|Available
for sale  Collateralized Mortgage Obligation (CMO) certificates |                                                              | $                      | 145,276 |               
|                                                                           |                                                              |                        |         |               
|Held to maturity:                                                          |                                                              |                        |         |               
|                                                                           | Federal
Home Loan Mortgage Corporation (FHLMC) certificates  |                        |         | 10,435         |        
|                                                                           | Government
National Mortgage Association (GNMA) certificates |                        |         | 13,657         |        
|                                                                           | Fannie Mae (FNMA) certificates                               |                        |         | 6,906          |        
|                                                                           | CMO certificates                                             |                        |         | 565,068        |        
|                                                                           | Other                                                        |                        |         | 72,258         |        
|                                                                           |                                                              |                        |         |               
|                                                                           |                                                              | Total held to maturity |         |                | 668,324 | 
|                                                                           |                                                              |                        |         |               
|Total mortgage and other asset-backed
securities                           |                                                              | $                      | 813,600 |               
|                                                                           |                                                              |                        |         |               




As of December 31, 2002 and 2001, management concluded that there was no other
than temporary impairment on its investment securities portfolio.




SOURCES OF FUNDS

GENERAL. Deposits, reverse repurchase agreements, Federal Home Loan Bank
(FHLB) advances and term notes are the primary sources of the Banks funds
for use in lending and for other general business purposes. In addition, the
Bank obtains funds in the form of loan repayments and income from operations
and the maturities and repayments of securities. Loan repayments are a
relatively stable source of funds, while net increases in deposits and reverse
repurchase agreements are significantly influenced by general interest rates
and money market conditions. Short-term borrowings from the FHLB of New York
are used to compensate for reductions in normal sources of funds such as
savings inflows at less than projected levels.

DEPOSITS. The Bank offers a diversified choice of deposit accounts.
Savings deposits increased from $465.3 million as of December 31, 2001, to
$560.5 million as of December 31, 2002, an increase of $95.3 million or 20.48%.
Also, other deposits (excluding accrued interest payable) represented mainly
by time deposits, brokered deposits and Individual Retirement Account deposits
(IRAs), increased from $2.74 billion as of December 31, 2001, to $3.71 billion
as of December 31, 2002, an increase of $971.2 million or 35.40%. Other
deposits include brokered deposits amounting to $2.55 billion and $1.57 billion
as of December 31, 2002 and 2001, respectively. These accounts have
historically been a stable source of funds.

At December 31, 2002, the Bank had total deposits of $4.3 billion
(excluding accrued interest payable), of which $560.5 million or 13.1%
consisted of savings deposits, $178.6 million or 4.18% consisted of interest
bearing demand deposits, $156.1 million or 3.65% consisted of noninterest
bearing deposits, and $3.38 billion or 79.06% consisted of time deposits. The
Bank also offers negotiable order of withdrawal (NOW) accounts, Super Now
accounts, special checking accounts and commercial demand accounts. At December
31, 2002, the scheduled maturities of time certificates of deposit in amounts
of $100,000 or more are as follows:

|                                |       |   |                |           | 
|------------------------------- | ----- | - | -------------- | --------- | 
|                                |       |   | (In thousands)
|3 months or less                |       | $ | 735,812        |          
|over 3 months through 6 months  |       |   | 800,396        |          
|over 6 months through 12 months |       |   | 616,962        |          
|over 12 months                  |       |   | 719,071        |          
|                                |       |   |                |          
|                                | Total |   | $              | 2,872,241 | 
|                                |       |   |                |          

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The following table sets forth the average amount and the average rate
paid on the following deposit categories for the years ended December 31:

|                                    |  |                        |           |         |  |         |      |         |  |         |           |         |  |  |      |   |  |   |           |  |  |  |      |   |  |  |  | 
|----------------------------------- |  | ---------------------- | --------- | ------- |  | ------- | ---- | ------- |  | ------- | --------- | ------- |  |  | ---- | - |  | - | --------- |  |  |  | ---- | - |  |  |  | 
|                                    |  | 2002                   |           | 2001    |  | 2000   
|                                    |  |                        |           |         |  |        
|                                    |  | Average                |           | Average |  | Average |      | Average |  | Average |           | Average
|                                    |  | amount                 |           | rate    |  | amount  |      | rate    |  | amount  |           | rate    |  |  |      |  
|                                    |  |                        |           |         |  |         |      |         |  |         |           |         |  |  |      |  
|                                    |  | (Dollars in thousands)
|Time deposits                       |  | $                      | 2,889,649 |         |  |         | 3.40 | %       |  | $       | 2,177,399 |         |  |  | 5.21 | % |  | $ | 1,765,493 |  |  |  | 6.34 | %
|Savings deposits                    |  |                        | 509,114   |         |  |         | 2.46 | %       |  |         | 432,626   |         |  |  | 2.96 | % |  |   | 407,636   |  |  |  | 3.06 | %
|Interest bearing demand deposits    |  |                        | 124,127   |         |  |         | 2.90 | %       |  |         | 100,960   |         |  |  | 3.45 | % |  |   | 97,168    |  |  |  | 3.28 | %
|Noninterest bearing demand deposits |  |                        | 167,352   |         |  |         |     |         |  |         | 136,251   |         |  |  |     |   |  |   | 118,632   |  |  |  |     |  
|                                    |  |                        |           |         |  |         |      |         |  |         |           |         |  |  |      |   |  |   |           |  |  |  |      |  
|Total                               |  | $                      | 3,690,242 |         |  |         | 3.10 | %       |  | $       | 2,847,236 |         |  |  | 4.55 | % |  | $ | 2,388,929 |  |  |  | 5.34 | %
|                                    |  |                        |           |         |  |         |      |         |  |         |           |         |  |  |      |   |  |   |           |  |  |  |      |  

The increase in deposits during the last three years is mainly the result
of the increase in the volume of business.

BORROWINGS. The following table sets forth the borrowings of the Bank at
the dates indicated:

|                                               |  |                |           |      |  |      |           |  |  |   |           | 
|---------------------------------------------- |  | -------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                               |  | 2002           |           | 2001 |  | 2000
|                                               |  |                |           |      |  |     
|                                               |  | (In thousands)
|Securities sold under agreements to repurchase |  | $              | 3,097,341 |      |  | $    | 2,059,646 |  |  | $ | 1,179,073 | 
|Advances from FHLB                             |  |                | 120,000   |      |  |      | 120,000   |  |  |   | 120,000   | 
|Term notes                                     |  |                |          |      |  |      | 43,000    |  |  |   | 48,000    | 
|Mortgage note payable                          |  |                | 37,822    |      |  |      |          |  |  |   |          | 
|                                               |  |                |           |      |  |      |           |  |  |   |           | 
|Total                                          |  | $              | 3,255,163 |      |  | $    | 2,222,646 |  |  | $ | 1,347,073 | 
|                                               |  |                |           |      |  |      |           |  |  |   |           | 

The Bank has made use of institutional securities sold under agreements to
repurchase in order to obtain funding, primarily through investment banks and
brokerage firms. Such agreements are collateralized with investment securities.
The Bank had $3.1 billion in total securities sold under agreements to
repurchase outstanding at December 31, 2002, at a weighted average rate of
3.03%. Securities sold under agreements to repurchase outstanding as of
December 31, 2002, mature as follows: $1.02 billion within 30 days; $12.7
million in 2003; $315.8 million in 2004; $663.6 million in 2005, $47.5 million
in 2006; and $1.04 billion thereafter.

Westernbank also obtains advances from FHLB of New York. As of December
31, 2002, Westernbank had $120.0 million in outstanding FHLB advances at a
weighted average rate of 5.10%. Advances from FHLB mature as follows: $14.0
million in 2003; $14.0 million in 2005; $50.0 million in 2006; and $42.0
million thereafter.

At December 31, 2002,
Westernbank World Plaza, Inc., a wholly-owned
subsidiary of Westernbank Puerto Rico, had outstanding $37.8 million of a
mortgage note, at an interest rate of 8.05% per year up to September 11, 2009.
Thereafter, the mortgage note will bear interest on the
then outstanding principal balance (1) at a rate per year equal to the greatest
of 13.05% or the Treasury Rate plus five percentage points or (2) at the rate
of 10.05% per year depending on certain conditions on the repricing date.
Westernbank World Plaza has a prepayment option on the repricing date, without
penalty. The mortgage note is collateralized by a 23-story office building,
including its related parking facility, located in Hato Rey, Puerto Rico.

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The following table presents certain information regarding the Banks
short-term borrowings for the periods indicated.

|                                             |              |   |                        |      |      |   |         |      |   |   |         |      |  
|-------------------------------------------- | ------------ | - | ---------------------- | ---- | ---- | - | ------- | ---- | - | - | ------- | ---- | -
|                                             |              |   | 2002                   |      | 2001 |   | 2000   
|                                             |              |   |                        |      |      |   |        
|                                             |              |   | (Dollars in thousands)
|Amount outstanding at period end             |              | $ | 1,043,493              |      |      | $ | 806,548 |      |   | $ | 170,225 |     
|Monthly average outstanding balance          |              |   | 1,378,074              |      |      |   | 353,003 |      |   |   | 274,669 |     
|Maximum outstanding balance at any month end |              |   | 2,104,599              |      |      |   | 806,548 |      |   |   | 472,916 |     
|Weighted average interest rate:              |              |   |                        |      |      |   |         |      |   |   |         |     
|                                             | For the year |   |                        | 1.51 | %    |   |         | 3.73 | % |   |         | 6.29 | %
|                                             | At year end  |   |                        | 1.96 | %    |   |         | 2.18 | % |   |         | 6.65 | %

FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS. As part of the Companys
asset/liability management, the Bank uses interest-rate contracts, which
include interest-rate exchange agreements (swaps), to hedge various exposures
or to modify interest rate characteristics of various statement of financial
condition accounts.

Effective January 1, 2001, the Company adopted
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activitiesand SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. These Statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The statements require that all derivative instruments be
recognized as assets and liabilities at fair value. If certain conditions are
met, the derivative may qualify for hedge accounting treatment and be
designated as one of the following types of hedges: (a) hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge); (b) a hedge of the exposure
to variability of cash flows of a recognized asset, liability or forecasted
transaction (cash flow hedge) or (c) a hedge of foreign currency exposure
(foreign currency hedge).

In the case of a qualifying fair value hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in
current period earnings along with the change in value of the designated hedge
item. In the case of a qualifying cash flow hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in other
comprehensive income, until such time those earnings are affected by the
variability of the cash flows of the underlying hedged item. In either a fair
value hedge or a cash flow hedge, net earnings may be impacted to the extent
the changes in the value of the derivative instruments do not perfectly offset
changes in the value of the hedge items. If the derivative is not designated as
a hedging instrument, the changes in fair value of the derivative are recorded
in earnings. The Company does not currently have any foreign currency hedges.

Certain contracts contain embedded derivatives. When the embedded
derivative possesses economic characteristics that are not clearly and closely
related to the economic characteristics of the host contract, it should be
carried at fair value and designated as a trading or non-hedging derivative
instrument.

The effect of implementing these Statements on the Companys financial
condition at January 1, 2001, was a decrease in deposits; an increase in other
liabilities and an increase in accumulated other comprehensive income (net of
tax of $45,000) by $2,607,000, $2,472,000, $135,000, respectively. There was no
effect on results of operations from the implementation of these Statements.

In the case of interest-rate exchange agreements that qualify for hedging
accounting treatment, net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payment is
recorded on a current basis as an adjustment to interest income or expense on
the corresponding hedged assets and liabilities.

The Company utilizes various derivative instruments for hedging purposes
and other than hedging purposes such as asset/liability management. These
transactions involve both credit and market risk. The notional amounts are
amounts in which calculations and payments are based. Notional amounts do not
represent direct credit exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received and paid, if any. The
actual risk of loss is the cost of replacing, at market, these contracts in the
event of default by the counterparties. The Company controls the credit risk of
its derivative financial instruments agreements through credit approvals,
limits and monitoring procedures. The Company enters into interest-rate swap
contracts in managing its interest rate exposure. Interest-rate swap contracts
generally involve the exchange of fixed and floating-rate interest payment
obligations without the exchange of the underlying principal amounts. Entering
into interest-rate swap contracts involves not

14



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only the risk of dealing with counterparties and their ability to meet the
terms of the contracts, but also the interest rate risk associated with
unmatched positions. Interest rate swaps are the most common type of derivative
contract that the Company utilizes. Situations in which the Company utilizes
interest rate swaps are: a) to convert its fixed-rate certificates of deposit
(liabilities) to a variable rate, and b) to convert its variable rate -term
notes and FHLB advances (liabilities) to a fixed rate. By entering into the
swap, the principal amount of the hedged item would remain unchanged but the
interest payment streams would change.

Interest-rate swap contracts used to convert its fixed-rate certificates
of deposit (liabilities) to a variable rate, mature between ten to twenty years
with a right by the counterparty to call after the first anniversary. The
Company has an identical right to call the certificates of deposit.

In addition, the Company offers its customers certificates of deposit
which contain an embedded derivative tied to the performance of Standard
& Poors 500 Composite Stock Index that must be bifurcated from the host deposit
and recognized in the statement of financial condition in accordance with SFAS
No. 133. At the end of five years, the depositor will receive a specified percent of
the average increase of the month-end value of the stock index. If such index
decrease, the depositor receives the principal without any interest. The
Company uses interest rate swap and option agreements with major broker dealer
companies to manage its exposure to the stock market. Under the terms of the
swap agreements, the Company will receive the average increase in the month 
end value of the index in exchange for a quarterly fixed interest cost. Under
the option agreements, the Company also will receive the average increase in
the month-end value of the index but in exchange for the payment of a premium
when the contract is initiated. Since the embedded derivative instrument of the
certificates of deposit and the interest rate swap and option agreements do not
qualify for hedge accounting, these derivative instruments are marked to market
through earnings.

Interest rate options, which include caps, are contracts that transfer,
modify, or reduce interest rate risk in exchange for the payment of a premium
when the contract is initiated. The Company pays a premium for the right, but
not the obligation, to buy or sell a financial instrument at predetermined
terms in the future. The credit risk inherent in options is the risk that the
exchange party may default.

Derivative instruments are generally negotiated over-the-counter (OTC)
contracts. Negotiated OTC derivatives are generally entered into between two
counterparties that negotiate specific agreement terms, including the
underlying instrument, amount, exercise price and maturity.

See Note 18 to the consolidated financial statements for a detail of
derivative transactions.









YIELDS EARNED AND RATES PAID

The net income of the Bank depends primarily upon the difference or spread
between the interest income received on its interest-earning assets and the
interest paid on its interest-bearing liabilities. Net interest income for the
year ended December 31, 2002, was $166.3 million, an increase of $41.3 million,
or 32.99%, from $125.1 million for the same period of last year. The increase
in 2002 was the result of increases in most of the components of interest
income, but principally from interest income from loans, investment securities
and mortgage and asset backed securities, which was partially offset by
increases in interest expense, primarily on deposits and securities sold under
agreements to repurchase. For the year ended December 31, 2001,
non interest income reached $125.1
million, compared to $98.5 million reported in 2000, an increase of $26.6
million or 27.04%. The increase in 2001 was the result of increases in all
components of interest income, but principally from interest income from loans,
investment securities and mortgage and other asset-backed securities, which was
partially offset by increases in interest expense, principally on deposits and
reverse repurchase agreements.

15



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##### Table of Contents



The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, as well as in a normal and
tax equivalent basis. Average balances are daily average balances. The yield on
the securities portfolio is based on average historical cost balances and does
not give effect to changes in fair value that are reflected as a component of
consolidated stockholders equity.

|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|------------------------------------------------------------- |  | ----------------------- | ------- | ---------- |  | ---------- | --------- | -------- |  | ---------- | ---- | ---------- |  | -------- | ------- | ---------- |  | ---------- | --------- | - |  |  | ---- | - |  | - | ------- |  |  | - | --------- | - |  |  | ---- | -
|                                                              |  | YEAR ENDED DECEMBER 31,
|                                                              |  |                        
|                                                              |  | 2002                    |         | 2001       |  | 2000      
|                                                              |  |                        
|                                                              |  |                         |         | Average    |  | Average    |           |          |  | Average    |      | Average    |  |          |         | Average    |  | Average   
|                                                              |  | Interest                |         | balance(1) |  | Yield/Rate |           | Interest |  | balance(1) |      | Yield/Rate |  | Interest |         | balance(1) |  | Yield/Rate
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |           
|                                                              |  | (Dollars in Thousands) 
|Normal Spread:                                                |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Interest-earning assets:                                      |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Loans, including loan fees (2)                                |  | $                       | 220,676 |            |  | $          | 3,315,514 |          |  |            | 6.66 | %          |  | $        | 207,385 |            |  | $          | 2,534,486 |   |  |  | 8.18 | % |  | $ | 183,497 |  |  | $ | 2,023,169 |   |  |  | 9.07 | %
|Mortgage and asset-backed securities (3)                      |  |                         | 44,848  |            |  |            | 859,991   |          |  |            | 5.21 | %          |  |          | 28,273  |            |  |            | 411,922   |   |  |  | 6.86 | % |  |   | 12,387  |  |  |   | 142,911   |   |  |  | 8.67 | %
|Investment securities (4)                                     |  |                         | 112,759 |            |  |            | 2,600,210 |          |  |            | 4.34 | %          |  |          | 98,946  |            |  |            | 1,606,744 |   |  |  | 6.16 | % |  |   | 84,532  |  |  |   | 1,253,011 |   |  |  | 6.75 | %
|Money market instruments                                      |  |                         | 7,451   |            |  |            | 314,633   |          |  |            | 2.37 | %          |  |          | 8,731   |            |  |            | 203,081   |   |  |  | 4.30 | % |  |   | 10,171  |  |  |   | 160,224   |   |  |  | 6.35 | %
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Total                                                         |  |                         | 385,734 |            |  |            | 7,090,348 |          |  |            | 5.44 | %          |  |          | 343,335 |            |  |            | 4,756,233 |   |  |  | 7.22 | % |  |   | 290,587 |  |  |   | 3,579,315 |   |  |  | 8.12 | %
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Interest-bearing liabilities:                                 |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Deposits                                                      |  |                         | 114,374 |            |  |            | 3,690,242 |          |  |            | 3.10 | %          |  |          | 129,676 |            |  |            | 2,847,236 |   |  |  | 4.55 | % |  |   | 127,640 |  |  |   | 2,388,929 |   |  |  | 5.34 | %
|Securities sold under
agreements to repurchase                |  |                         | 98,233  |            |  |            | 2,815,608 |          |  |            | 3.49 | %          |  |          | 79,882  |            |  |            | 1,484,639 |   |  |  | 5.38 | % |  |   | 53,968  |  |  |   | 847,028   |   |  |  | 6.37 | %
|Term notes                                                    |  |                         | 604     |            |  |            | 15,469    |          |  |            | 3.90 | %          |  |          | 2,114   |            |  |            | 47,798    |   |  |  | 4.42 | % |  |   | 3,609   |  |  |   | 74,863    |   |  |  | 4.82 | %
|Advances from FHLB                                            |  |                         | 6,202   |            |  |            | 120,008   |          |  |            | 5.17 | %          |  |          | 6,597   |            |  |            | 120,000   |   |  |  | 5.50 | % |  |   | 6,920   |  |  |   | 106,715   |   |  |  | 6.48 | %
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Total                                                         |  |                         | 219,413 |            |  |            | 6,641,327 |          |  |            | 3.30 | %          |  |          | 218,269 |            |  |            | 4,499,673 |   |  |  | 4.85 | % |  |   | 192,137 |  |  |   | 3,417,535 |   |  |  | 5.62 | %
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Net interest income                                           |  | $                       | 166,321 |            |  |            |           |          |  |            |      |            |  | $        | 125,066 |            |  |            |           |   |  |  |      |   |  | $ | 98,450  |  |  |   |           |   |  |  |      |  
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Interest rate spread                                          |  |                         |         |            |  |            |           |          |  |            | 2.14 | %          |  |          |         |            |  |            |           |   |  |  | 2.37 | % |  |   |         |  |  |   |           |   |  |  | 2.50 | %
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Net interest-earning assets                                   |  |                         |         |            |  | $          | 449,021   |          |  |            |      |            |  |          |         |            |  | $          | 256,560   |   |  |  |      |   |  |   |         |  |  | $ | 161,780   |   |  |  |      |  
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Net yield on interest-earning
assets (5)                      |  |                         |         |            |  |            |           |          |  |            | 2.35 | %          |  |          |         |            |  |            |           |   |  |  | 2.63 | % |  |   |         |  |  |   |           |   |  |  | 2.75 | %
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  
|Interest-earning assets to
interest-bearing liabilities
ratio |  |                         |         |            |  |            | 106.76    | %        |  |            |      |            |  |          |         |            |  |            | 105.70    | % |  |  |      |   |  |   |         |  |  |   | 104.73    | % |  |  |      |  
|                                                              |  |                         |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |   |  |  |      |   |  |   |         |  |  |   |           |   |  |  |      |  

|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|---------------------------------------- |  | ---------------------- | ------- | ---------- |  | ---------- | --------- | -------- |  | ---------- | ---- | ---------- |  | -------- | ------- | ---------- |  | ---------- | --------- |  |  |  | ---- | - |  | - | ------- |  |  | - | --------- |  |  |  | ---- | -
|                                         |  | 2002                   |         | 2001       |  | 2000      
|                                         |  |                       
|                                         |  |                        |         | Average    |  | Average    |           |          |  | Average    |      | Average    |  |          |         | Average    |  | Average   
|                                         |  | Interest               |         | balance(1) |  | Yield/Rate |           | Interest |  | balance(1) |      | Yield/Rate |  | Interest |         | balance(1) |  | Yield/Rate
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |           
|                                         |  | (Dollars in Thousands)
|Tax
Equivalent Spread:                   |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|Interest-earning assets                  |  | $                      | 385,734 |            |  | $          | 7,090,348 |          |  |            | 5.44 | %          |  | $        | 343,335 |            |  | $          | 4,756,233 |  |  |  | 7.22 | % |  | $ | 290,587 |  |  | $ | 3,579,315 |  |  |  | 8.12 | %
|Tax equivalent adjustment                |  |                        | 23,704  |            |  |            |          |          |  |            | 0.33 | %          |  |          | 19,053  |            |  |            |          |  |  |  | 0.40 | % |  |   | 13,843  |  |  |   |          |  |  |  | 0.39 | %
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|Interest-earning assets  tax equivalent |  |                        | 409,438 |            |  |            | 7,090,348 |          |  |            | 5.77 | %          |  |          | 362,388 |            |  |            | 4,756,233 |  |  |  | 7.62 | % |  |   | 304,430 |  |  |   | 3,579,315 |  |  |  | 8.51 | %
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|Interest-bearing liabilities             |  |                        | 219,413 |            |  | $          | 6,641,327 |          |  |            | 3.30 | %          |  |          | 218,269 |            |  | $          | 4,499,673 |  |  |  | 4.85 | % |  |   | 192,137 |  |  | $ | 3,417,535 |  |  |  | 5.62 | %
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|Net interest income                      |  | $                      | 190,025 |            |  |            |           |          |  |            |      |            |  | $        | 144,119 |            |  |            |           |  |  |  |      |   |  | $ | 112,293 |  |  |   |           |  |  |  |      |  
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|Interest rate spread                     |  |                        |         |            |  |            |           |          |  |            | 2.47 | %          |  |          |         |            |  |            |           |  |  |  | 2.77 | % |  |   |         |  |  |   |           |  |  |  | 2.89 | %
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  
|Net yield on interest-earning
assets (5) |  |                        |         |            |  |            |           |          |  |            | 2.68 | %          |  |          |         |            |  |            |           |  |  |  | 3.03 | % |  |   |         |  |  |   |           |  |  |  | 3.14 | %
|                                         |  |                        |         |            |  |            |           |          |  |            |      |            |  |          |         |            |  |            |           |  |  |  |      |   |  |   |         |  |  |   |           |  |  |  |      |  



---

|(1) |  | Average balance on interest-earning assets and interest-bearing liabilities is
computed using daily monthly average balances during the periods.                                                                                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes loans held for sale. Average loans exclude non-performing loans. Loans fees
amounted to $5.6 million; $4.6 million and $3.5 million as of December 31, 2002, 2001 and 2000, respectively. (3) Includes mortgage-backed securities held
to maturity, available for sale and for trading purposes.
|   
|(4) |  | Includes trading account securities and investments available for sale.                                                                                                                                                                                                                                  
|   
|(5) |  | Net interest income divided by average interest-earning assets.                                                                                                                                                                                                                                          

16



---



##### Table of Contents



The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to higher outstanding balances and the volatility of
interest rates.

|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |        |  
|--------------------------------------------- | ---------------------------------------------- | - | ----------------------- | ------- | ------------- | - | -------- | -------- | ------ | - | ------ | ------- | ----- | - | ------ | ------ | - | - | ------- | ------- | - | - | ------ | ------ | -
|                                              |                                                |   | Year ended December 31,
|                                              |                                                |   |                        
|                                              |                                                |   | 2002 vs. 2001           |         | 2001 vs. 2000
|                                              |                                                |   |                         |         |              
|                                              |                                                |   | Volume                  |         | Rate          |   | Total    |          | Volume |   | Rate   |         | Total
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |      
|                                              |                                                |   | (In thousands)         
|Interest income:                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|                                              | Loans (1)                                      |   | $                       | 33,687  |               |   | $        | (20,397  | )      |   | $      | 13,290  |       |   | $      | 38,974 |   |   | $       | (15,086 | ) |   | $      | 23,888 |  
|                                              | Mortgage and asset-backed
securities (2)       |   |                         | 21,273  |               |   |          | (4,698   | )      |   |        | 16,575  |       |   |        | 17,861 |   |   |         | (1,975  | ) |   |        | 15,886 |  
|                                              | Investment securities (3)                      |   |                         | 26,483  |               |   |          | (12,670  | )      |   |        | 13,813  |       |   |        | 20,854 |   |   |         | (6,440  | ) |   |        | 14,414 |  
|                                              | Money market instruments                       |   |                         | 3,611   |               |   |          | (4,891   | )      |   |        | (1,280  | )     |   |        | 2,323  |   |   |         | (3,763  | ) |   |        | (1,440 | )
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Total increase (decrease)
in interest income  |                                                |   | 85,054                  |         |               |   | (42,656  | )        |        |   | 42,398 |         |       |   | 80,012 |        |   |   | (27,264 | )       |   |   | 52,748 |       
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Interest expense:                             |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|                                              | Deposits                                       |   |                         | 193,545 |               |   |          | (208,847 | )      |   |        | (15,302 | )     |   |        | 8,824  |   |   |         | (6,788  | ) |   |        | 2,036  |  
|                                              | Securities sold under
agreements to repurchase |   |                         | 30,191  |               |   |          | (11,840  | )      |   |        | 18,351  |       |   |        | 32,662 |   |   |         | (6,748  | ) |   |        | 25,914 |  
|                                              | Term notes                                     |   |                         | (1,227  | )             |   |          | (283     | )      |   |        | (1,510  | )     |   |        | (1,165 | ) |   |         | (330    | ) |   |        | (1,495 | )
|                                              | Advances from FHLB                             |   |                         |        |               |   |          | (395     | )      |   |        | (395    | )     |   |        | 1,450  |   |   |         | (1,773  | ) |   |        | (323   | )
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Total increase (decrease) in
interest expense |                                                |   | 222,509                 |         |               |   | (221,365 | )        |        |   | 1,144  |         |       |   | 41,771 |        |   |   | (15,639 | )       |   |   | 26,132 |       
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Increase (decrease) in
net interest income    |                                                | $ | (137,455                | )       |               | $ | 178,709  |          |        | $ | 41,254 |         |       | $ | 38,241 |        |   | $ | (11,625 | )       |   | $ | 26,616 |       
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       



---

|(1) |  | Includes mortgage loans held for sale.                                        
|--- |  | ------------------------------------------------------------------------------
|   
|(2) |  | Includes mortgage-backed securities available for sale and trading securities.
|   
|(3) |  | Includes investments available for sale.                                      

The following table sets forth, for the periods indicated, certain ratios
reflecting the productivity and profitability of the Company:

|                                                 |  |                             |       |      |  |      |       |   |  |  |       |  
|------------------------------------------------ |  | --------------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                 |  | YEAR ENDED DECEMBER 31, (1)
|                                                 |  |                            
|                                                 |  | 2002                        |       | 2001 |  | 2000
|                                                 |  |                             |       |      |  |     
|Return on total assets (2)                       |  |                             | 1.22  | %    |  |      | 1.22  | % |  |  | 1.17  | %
|Return on common stockholders equity (3)        |  |                             | 25.39 |      |  |      | 27.49 |   |  |  | 24.75 |  
|Dividend payout ratio to common stockholders (4) |  |                             | 19.46 |      |  |      | 19.99 |   |  |  | 21.42 |  
|Equity-to-asset ratio (5)                        |  |                             | 7.13  |      |  |      | 6.29  |   |  |  | 6.21  |  



---

|(1) |  | Averages computed by using beginning and end of year balances.                                   
|--- |  | -------------------------------------------------------------------------------------------------
|   
|(2) |  | Net income divided by average total assets.                                                      
|   
|(3) |  | Net income attributable to common stockholders divided by average common
stockholders equity.   
|   
|(4) |  | Common stockholders dividend declared divided by net income attributable
to common stockholders.
|   
|(5) |  | Average net worth divided by average total assets.                                               

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##### Table of Contents



MARKET AREA AND COMPETITION

The Company operates through 50 full service branch offices throughout
Puerto Rico, primarily in the western and southwestern regions of the island.
In recent years, the Company has expanded into the San Juan metropolitan area,
where it now has 11 branches. In addition, the Company has five branches in
northeastern Puerto Rico. As of December 31, 2002, the Company was the third
largest locally controlled banking company headquartered in Puerto Rico, based
on total assets.

The Company competes mainly with other commercial banks in attracting and
retaining deposits and in making real estate and commercial loans. At year end
2002, there were approximately 11 other banks, including affiliates of banks
headquartered in the United States, Canada and Spain, operating branches in
Puerto Rico.

The banking business is highly competitive, and the profitability of the
Company will depend principally upon the Companys ability to compete in its
market area as well as to a significant extent upon general economic conditions
in the island of Puerto Rico. The Company competes with other commercial and
non-commercial banks, finance companies, mutual funds, insurance companies,
brokerage and investment banking firms, asset-based non-bank lenders and
certain other non-financial institutions, including certain governmental
organizations which may offer subsidized financing at lower rates than those
offered by the Company. The Company has been able to compete effectively with
other financial institutions by emphasizing technology and customer service,
including local office decision-making on loans, establishing long-term
customer relationships and building customer loyalty, and by providing products
and services designed to address the specific needs of its customers.

EMPLOYEES

At December 31, 2002, the Company had 1,031 full-time employees, including
its executive officers; and seven (7) part time employees. The Company
considers its employees relations to be excellent.

REGULATION

The Company is a financial holding company subject to the regulation,
supervision, and examination of the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the BHC Act). The Company is
required to file periodic reports and other information with the Federal
Reserve Board and the Federal Reserve Board may conduct examinations of the
Company. The Bank is subject to the regulation, supervision and examination of
the FDIC and the Puerto Rico Commissioner of Financial Institutions (the
Puerto Rico Commissioner) and, as to certain matters, the Federal Reserve
Board. Westernbank Insurance Corp. is subject to the regulation, supervision,
and examination of the Office of the Commissioner of Insurance of
Puerto Rico.

FEDERAL REGULATION. The Company is subject to capital adequacy guidelines
of the Federal Reserve Board. The guidelines apply on a consolidated basis and
require bank holding companies to maintain a ratio of Tier 1 capital to total
average assets of 4.0% to 5.0%. There is a minimum ratio of 3.0% established
for the most highly rated bank holding companies. The Federal Reserve Boards
capital adequacy guidelines also require bank holding companies to maintain and
a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0% and a minimum
ratio of qualifying total capital to risk-weighted assets of 8.0%. As of
December 31, 2002, the Companys ratio of Tier 1 capital to total average
assets was 7.21%, its ratio of Tier 1 capital to risk-weighted assets was
12.93%, and its ratio of qualifying total capital to risk-weighted assets was
13.83%.

Under the guidelines for qualifying total capital, at least half of the
total capital is to be comprised of common equity, retained earnings, minority
interest in unconsolidated subsidiaries, non-cumulative perpetual preferred
stock and the disallowed portion of deferred tax assets (Tier 1 Capital). The
remainder may consist of a limited amount of subordinated debt, other preferred
stock and a limited amount of loan and lease loss reserves (Tier 2 Capital).
With respect to risk-based and leverage capital ratios, most intangibles,
including core deposit intangibles, are deducted from Tier 1 Capital. The
regulations, however, permit the inclusion of a limited amount of intangibles
related to originated and purchased mortgage servicing rights and purchased
credit card relationships and include a grandfathered provision permitting
inclusion of certain existing intangibles.

Under the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), the federal banking regulators must take prompt corrective action
in respect of depository institutions that do not meet minimum capital
requirements. The FDICIA and the regulations issued thereunder established five
capital tiers: (i) well capitalized, if a depository institution has a total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more, and
is not subject to any written capital order or directive; (ii) adequately
capitalized, if it has a total risk-based capital ratio of 8.0% or more, a
Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital
ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of well capitalized, (iii) undercapitalized, if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based ratio that
is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0%
(3.0% under

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##### Table of Contents



certain circumstances), (iv) significantly undercapitalized, if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%, and (v) critically undercapitalized, if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. A
depository institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives a less
than satisfactory examination rating in any of the first four categories. As of
March 31, 2002, the company and the Bank are deemed to be well-capitalized
institutions.

The FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fees to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institutions
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institutions assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institutions capital. Significantly undercapitalized depository institutions
may be subject to a number of requirements and restrictions, including orders
to sell sufficient voting stock to become adequately capitalized, requirements
to reduce total assets, and cessation of receipt of deposits from corresponding
banks. Critically undercapitalized depository institutions are subject to the
appointment of a receiver or conservator.

Failure to meet the capital guidelines could subject an institution to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC, and to certain restrictions on its business. At December 31, 2002,
the Company and Westernbank were in compliance with all capital requirements.
For more information, refer to Capital Requirementson page 27 in the
Managements Discussion and Analysis of Financial Condition and Results of
Operations(MD&A) of the Company Annual Report to Stockholders for the year
ended December 31, 2002, which are included herein by reference.

DIVIDEND RESTRICTIONS. The principal source of funds of the Company is
dividends from the Bank. The ability of the Bank to pay dividends on its common
stock is restricted by the Puerto Rico Banking Act, the Federal Deposit
Insurance Act (FDIA) and FDIC regulations. In general terms, the Puerto Rico
Banking Act provides that when the expenditures of a bank are greater than
receipts, the excess of expenditures over receipts shall be charged against the
undistributed profits of the bank and the balance, if any, shall be charged
against the required reserve fund of the bank. If there is no sufficient
reserve fund to cover such balance in whole or in part, the outstanding amount
shall be charged against the banks capital account. The Puerto Rico Banking
Act provides that until said capital has been restored to its original amount
and the reserve fund to 20% of the original capital, the bank may not declare
any dividends. In general terms, the FDIA and the FDIC regulations restrict the
payment of dividends when a bank is undercapitalized, when a bank has failed to
pay insurance assessments, or when there are safety and soundness concerns
regarding a bank.

The payment of dividends by the Bank may also be affected by other
regulatory requirements and policies, such as maintenance of adequate capital.
If, in the opinion of the regulatory authority, a depository institution under
its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound
practice (that, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such depository institution cease and
desist from such practice. The Federal Reserve Board has issued a policy
statement that provides that insured banks and bank holding companies should
generally pay dividends only out of operating earnings for the current and
preceding two years. In addition, all insured depository institutions are
subject to the capital-based limitations required by FDICIA.

ACQUISITIONS AND CHANGE OF CONTROL. Federal Reserve Board approval is
required if the Company seeks to acquire direct or indirect ownership or
control of any voting shares of a bank if, after such acquisition, the Company
would own or control directly or indirectly more than 5% of the voting stock of
the bank. Federal Reserve Board approval also must be obtained if the Company
seeks to acquire all or substantially all of the assets of a bank or merges or
consolidates with another bank holding company.

The Company is required to give the Federal Reserve Board prior written
notice of any purchase or redemption of its outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, will be equal to 10% or more of the Companys consolidated
net worth. The Federal Reserve Board may disapprove any purchase or redemption
if it determines that the proposal would constitute an unsafe and unsound
practice, or would violate any law, regulation, order or directive of the
Federal Reserve Board, or any condition imposed by, or written agreement with,
the Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as well capitalized under applicable
regulations of the Federal Reserve Board, that has received a composite 1 or
2 rating at its most recent bank holding company inspection by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory
issues. Notwithstanding the foregoing, any redemption of the Companys
preferred stocks will require the prior approval of the Federal Reserve Board.

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PUERTO RICO BANKING LAW. Westernbank is a bank chartered under the Puerto
Rico Banking Act. Westernbank must file reports with the Puerto Rico
Commissioner and the FDIC concerning its activities and financial condition,
and it must obtain regulatory approval prior to entering into certain
transactions, such as mergers with, or acquisitions of, other depository
institutions and opening or acquiring branch offices. The Puerto Rico
Commissioner and the FDIC conduct periodic examinations to assess Westernbanks
compliance with various regulatory requirements. This regulation and
supervision is intended primarily for the protection of the deposit insurance
funds and depositors. The regulatory authorities have extensive discretion in
connection with the exercise of their supervisory and enforcement activities,
including the setting of policies with respect to the classification of assets
and the establishment of adequate loan loss reserves for regulatory purposes.

Westernbank derives its lending, investment and other powers primarily
from the applicable provisions of the Puerto Rico Banking Act and the
regulations adopted thereunder. That law governs the responsibilities of
directors, officers and stockholders, and the corporate powers, savings,
lending, capital and investment requirements and other activities of
Westernbank. The Puerto Rico Commissioner has extensive rulemaking power and
administrative discretion under the Puerto Rico Banking Act, and generally
examines Westernbank on an annual basis.

The Puerto Rico Banking Act requires that at least 10% of the yearly net
income of Westernbank be credited annually to a reserve fund. This must be done
every year until the reserve fund is equal to the total paid-in capital for
common stock and preferred stock. At December 31, 2002, Westernbank had an
adequate reserve fund established. The Puerto Rico Banking Act also provides
that when the expenditures of a bank are greater than the receipts, the excess
is charged against the undistributed profits of the bank, and the balance, if
any, is charged against and reduces the reserve fund. If there is no reserve
fund sufficient to cover the entire amount, the excess amount is charged
against the capital account and no dividend can be declared until the capital
has been restored to its original amount and the reserve fund to 20% of the
original capital.

Under the Puerto Rico Banking Act, Westernbank must maintain a legal
reserve in an amount equal to at least 20% of Westernbanks demand liabilities,
except certain government deposits. At December 31, 2002, Westernbank had a
legal reserve of 188.46%.

The Puerto Rico Regulatory Financial Board (the Financial Board) which
is part of the Office of the Puerto Rico Commissioner has the authority to
regulate the maximum interest rates and finance charges that may be charged on
loans to individuals and unincorporated businesses in the Commonwealth of
Puerto Rico. In February 1992 and again in November 1997, the Financial Board
approved regulations which provide that the applicable interest rate on loans
to individuals and an unincorporated business is to be determined by free
competition. The Financial Board also has authority to regulate the maximum
finance charges on retail installment sales contracts, including credit card
purchases, which are currently set at 21%. There is no maximum rate set for
installment sales contracts involving motor vehicles, commercial, agricultural
and industrial equipment, commercial electric appliances, and insurance
premiums.

Under Puerto Rico law, no person or company may acquire direct or indirect
control of a holding company without first obtaining the prior approval of the
Puerto Rico Commissioner. Control is defined to mean the power, directly or
indirectly, to direct or decisively influence the management or the operations
of the holding company. Control is presumed to exist if a person or entity, or
group acting in concert, would become the owner, directly or indirectly, of
more than 5% of the voting stock of the holding company as a result of the
transfer of voting stock, and such person, entity or group did not own more
than 5% of the voting stock prior to the transfer.

DEPOSIT INSURANCE. Westernbank is subject to FDIC deposit insurance
assessments. Pursuant to FDICIA, the FDIC has adopted a risk-based assessment
system, under which the assessment rate for an insured depository institution
varies according to the level of risk incurred in its activities. An
institutions risk category is based partly upon whether the institution is
well capitalized, adequately capitalized or less than adequately capitalized.
Each insured institution is also assigned to one of three supervisory
subgroups. Group A institutions are financially sound institutions with only
a few minor weaknesses; Group B institutions are institutions that
demonstrate weaknesses that, if not corrected, could result in significant
deterioration; and Group C institutions are institutions with respect to
which there is a substantial probability that the FDIC will suffer a loss in
connection with the institution unless effective action is taken to correct the
areas of weakness.

FDIC insurance on deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition to continue operations as an insured bank, or has violated any
applicable law, regulation, rule or order of or condition imposed by or written
agreement entered into with the FDIC.

Westernbank is also subject to quarterly payments on semiannual insurance
premium assessments for its FDIC deposit insurance. Westernbank is subject to
separate assessments to repay bonds (FICO bonds) issued in the late 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The
assessment for the payments on the FICO bonds for the quarter beginning on

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January 1, 2003 is 1.68 basis points for BIF-assessable and
SAIF-assessable deposits. Most of Westernbanks deposits are presently insured
by SAIF.

BROKERED DEPOSITS. FDIC regulations govern the receipt of brokered
deposits. Under these regulations, a bank cannot accept, roll over or renew
brokered deposits (which term is defined also to include any deposit with an
interest rate more than 75 basis points above prevailing rates) unless (i) it
is well capitalized or (ii) it is adequately capitalized and receives a waiver
from the FDIC. However, a bank that is adequately capitalized may not pay an
interest rate more than 75 basis points over prevailing rates under any
circumstances. The Company does not believe the brokered deposits regulation
has had or will have a material effect on the funding or liquidity of
Westernbank.

SAFETY AND SOUNDNESS STANDARDS. Section 39 of the FDIA requires each
federal banking agency to prescribe for all insured depository institutions
that it regulates standards relating to internal control, information systems
and internal audit system, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. In
addition, each federal banking agency also is required to adopt standards that
specify (i) a maximum ratio of classified assets to capital, (ii) minimum
earnings sufficient to absorb losses without impairing capital, (iii) to the
extent feasible, a minimum ratio of market value to book value for
publicly-traded shares of the institution or holding company, and (iv) such
other standards relating to asset quality, earnings and valuation as the agency
deems appropriate. Finally, each federal banking agency is required to
prescribe standards for the employment contracts and other compensation
arrangements of executive officers, employees, directors and principal
stockholders of insured depository institutions that would prohibit
compensation, benefits and other arrangements that are excessive or that could
lead to a material financial loss for the institution. If an insured depository
institution or its holding company fails to meet any of the standards described
above, it will be required to submit to the appropriate federal banking agency
a plan specifying the steps that will be taken to cure the deficiency. If an
institution or holding company fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or holding company to correct the deficiency and, until it is
corrected, may impose other restrictions on the institution or holding company,
including any of the restrictions applicable under the prompt corrective action
provisions of FDICIA.

ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. State banks are limited
in their investments and activities engaged in as principal to those
permissible under applicable state law and that are permissible for national
banks and their subsidiaries, unless such investments and activities are
specifically permitted by the FDIA or the FDIC determines that such activity or
investment would pose no significant risk to the SAIF and BIF. The FDIC has by
regulation determined that certain real estate investment activities do not
present a significant risk to the SAIF and BIF, provided they are conducted in
accordance with the regulations. Provisions of the Gramm-Leach-Bliley Act of
1999 (GLB Act), permit national banks to establish financial subsidiaries
that may engage in the activities permissible for financial holding companies,
other than insurance underwriting, merchant banking and real estate development
and investment activities. In order to exercise this authority, a bank and its
depository institution affiliates must be well- capitalized, well-managed and
have CRA ratings of at least satisfactory. For a state bank, such activities
also must be permissible under relevant state law.

TRANSACTIONS WITH AFFILIATES AND INSIDERS OF WESTERNBANK. Transactions
between Westernbank and any of its affiliates, including the Company, are
governed by sections 23A and 23B of the Federal Reserve Act. An affiliate of a
bank is any company or entity that controls, is controlled by or is under
common control with the bank. Generally, sections 23A and 23B (1) limit the
extent to which a bank or its subsidiaries may engage in covered transactions
with any one affiliate to an amount equal to 10% of the banks capital stock
and surplus, and limit such transactions with all affiliates to an amount equal
to 20% of such capital stock and surplus, and (2) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. The term covered transactions includes the making of loans,
purchase of or investment in securities issued by the affiliate, purchase of
assets, issuance of guarantees and other similar types of transactions. Most
loans by a bank to any of its affiliates must be secured by collateral in
amounts ranging from 100 to 130 percent of the loan amount, depending on the
nature of the collateral. In addition, any covered transaction by a bank with
an affiliate and any sale of assets or provision of services to an affiliate
must be on terms that are substantially the same, or at least as favorable, to
the bank as those prevailing at the time for comparable transactions with
nonaffiliated companies.

On October 31, 2002, the Federal Reserve Bank Board adopted a new
regulation, Regulation W, effective March 1, 2003, that comprehensively
implements sections 23A and 23B. The regulation unifies and updates staff
interpretations issued over the years, incorporates several new interpretative
proposals (such as to clarify when transactions with an unrelated third party
will be attributed to an affiliate), and addresses new issues arising as a
result of the expanded scope of nonbanking activities engaged in by banks and
bank holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach Bliley Act (GLB Act).

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Sections 22(g) and (h) of the Federal Reserve Act place restrictions on
loans by a bank to executive officers, directors, and principal stockholders.
Under Section 22(h), loans to a director, an executive officer and to a greater
than 10% stockholder of a bank and certain of their related interests
(insiders) and insiders of affiliates, may not exceed, together with all
other outstanding loans to such person and related interests, the banks
loans-to-one-borrower limit (generally equal to 15% of the institutions
unimpaired capital and surplus). Section 22(h) also requires that loans to
insiders and to insiders of affiliates be made on terms substantially the same
as offered in comparable transactions to other persons, unless the loans are
made pursuant to a benefit or compensation program that (i) is widely available
to employees of the bank and (ii) does not give preference to insiders over
other employees of the bank. Section 22(h) also requires prior board of
directors approval for certain loans, and the aggregate amount of extensions
of credit by a bank to all insiders cannot exceed the institutions unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers.

COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (CRA), as
implemented by federal regulations, a financial institution has a continuing
and affirmative obligation, consistent with its safe and sound operation, to
help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institutions
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires federal examiners, in connection with the examination of a financial
institution, to assess the institutions record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to
make public disclosure of their CRA ratings. The Company has a Compliance
Committee, which oversees the planning of products, and services offered to the
community, especially those aimed to serve low and moderate income communities.
The FDIC rated the Company as having a satisfactory record of meeting
community credit needs under the CRA at its most recent examination for CRA
performance.

FEDERAL HOME LOAN BANK SYSTEM. Westernbank is a member of the Federal
Home Loan Bank System. The System consists of 12 regional Federal Home Loan
Banks (FHLBs), with each subject to supervision and regulation by the Federal
Housing Finance Board. The FHLB provides a central credit facility primarily
for member institutions. Westernbank, as a member of the FHLB of New York, is
required to acquire and hold shares of capital stock in that FHLB in an amount
equal to the greater of: 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year; 5% of its FHLB advances outstanding; or 0.3% of
total its assets. At December 31, 2002, the Bank held $43.3 million in capital
stock of the FHLB of New York.

Advances from a FHLB are secured by a members shares of stock in the
institution, certain type of mortgages and other assets, including investment
securities. Interest rates charged for advances vary depending upon maturity
and the cost of funds to the FHLB. As of December 31, 2002, Westernbank had
$120.0 million in outstanding advances and $692.5 million in securities sold
under agreements to repurchase from the FHLB of New York.

INTERNATIONAL BANKING ENTITY ACT. The business and operations of
Westernbank International Banking Entity are subject to supervision and
regulation by the Puerto Rico Commissioner. Under the International Banking
Entity Act (IBE Act), no sale, encumbrance, assignment, merger, exchange or
transfer of shares, interest or participation in the capital of an
international banking entity (an IBE) may be initiated without the prior
approval of the Puerto Rico Commissioner, if by such transaction a person would
acquire, directly or indirectly, control of 10% or more of any class of stock,
interest or participation in the capital of the IBE. The IBE Act and the
regulations issued thereunder by the Puerto Rico Commissioner (the IBE
Regulations) limit the business activities that may be carried out by an IBE.
Such activities are limited in part to persons and assets located outside of
Puerto Rico. The IBE Act provides further that every IBE must have not less
than $300,000 of unencumbered assets or acceptable financial securities.

Pursuant to the IBE Act and the IBE Regulations, the Westernbank IBE must
maintain books and records of all its transactions in the ordinary course of
business. The Westernbank IBE also is required thereunder to submit to the
Puerto Rico Commissioner quarterly and annual reports of its financial
condition and results of operations, including annual audited financial
statements.

The IBE Act empowers the Puerto Rico Commissioner to revoke or suspend,
after notice and hearing, a license issued thereunder if, among other things,
the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of
its license, or if the Puerto Rico Commissioner finds that the business or
affairs of the IBE are conducted in a manner that is not consistent with the
public interest.

PRIVACY. Under the GLB Act, all financial institutions, including the
Company, the Bank, Westernbank Insurance Corp., are required to adopt privacy
policies, restrict the sharing of nonpublic customer data with nonaffiliated
parties at the customers request, and establish procedures and practices to
protect customer data from unauthorized access. The Company and its
subsidiaries have

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developed such policies and procedures, and the Company believes these
policies and procedures are in compliance with all privacy provisions of the
GLB Act.

ANTI-MONEY LAUNDERING. On October 26, 2001, the President signed into law
comprehensive anti-terrorism legislation known as the USA Patriot Act. Title
III of the USA Patriot Act requires financial institutions to help prevent,
detect and prosecute international money laundering and the financing of
terrorism. The effectiveness of a financial institution in combating money
laundering activities is a factor to be considered in any application submitted
by the financial institution under the Bank Merger Act, which applies to the
Bank, or the BHC Act, which applies to the Company. The Company and its
subsidiaries, including the Bank, have adopted systems and procedures to comply
with the USA Patriot Act and regulations adopted thereunder by the Secretary of
the Treasury.

CORPORATE GOVERNANCE. The Sarbanes-Oxley Act, signed into law July 30,
2002 (SOA), addresses, among other issues, director and officer
responsibilities for proper corporate governance of publicly traded companies,
including the establishment of audit committees, certification of financial
statements, auditor independence and accounting standards, executive
compensation, insider loans, whistleblower protection, and enhanced and timely
disclosure of corporate information. In general, SOA is intended to allow
stockholders to monitor more effectively the performance of publicly traded
companies and their management. Provisions of SOA become effective from within
30 days to one year from enactment. Effective August 29, 2002, the chief
executive officer and the chief financial officer of the Company are required
to certify that the Companys quarterly and annual reports do not contain any
untrue statement of a material fact. The Securities and Exchange Commission has
been delegated responsibility to enact rules to implement this and other
provisions of SOA.

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CAPITAL, DIVIDENDS, STOCK SPLIT AND OPTION PLANS

Total stockholders equity as a measure of capital increased by
approximately $196.8 million in 2002 and 137.3 million in 2001.

In June 1998, Westernbank issued 1,219,000 shares of 7.125%
Non-cumulative, Convertible Monthly Income Preferred Stock, Series A, with a
liquidation preference of $25.00 per share. Proceeds from the issuance of
preferred stock amounted to $29.1 million, net of $1.3 million of issuance
costs. Each share is convertible, at the holders option, at any time on or
after the 90th date following the issue date, into .995 shares of the Companys
common stock, subject to adjustment upon certain events. The per share
conversion ratio equates to a price of $25.125 per share of common stock.

In April and June 1999, Westernbank issued 2,001,000 shares of 7.25%
Non-cumulative, Non-convertible Monthly Income Series B Preferred Stock, with a
liquidation preference of $25 per share. Proceeds from the issuance of
preferred stock amounted to $48.3 million, net of $1.8 million of issuance
costs.

In March and April 2001, the Company issued 2,208,000 shares of its 7.60%
Non-cumulative, Non-convertible Monthly Income Preferred Stock, Series C, with
a liquidation preference of $25 per share. Proceeds from issuance of preferred
stock amounted to $53.1 million, net of $2.1 million of issuance cost.

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In August 2001, the Company issued 1,791,999 shares of its 7.40%
Non-cumulative, Non-convertible Monthly Income Preferred Stock Series D, with a
liquidation preference of $25 per share. Proceeds from issuance of preferred
stock amounted to $43.2 million, net of $1.6 million of issuance cost.

On June 17, 2002, the Company declared a three-for-two split, for all
stockholders of record as of June 28, 2002, distributed on
July 10, 2002. The effect of the stock split was a decrease to retained
earnings and an increase in common stock of $20.8 million.

During 2002 the Company issued 6,095,000 and 1,725,000 shares of the
Companys Common Stock and Series E Preferred Stock, respectively, providing a
net capital infusion of $98.0 million and $41.5 million, respectively.

The Company may redeem, in whole or in part, at any time at the following
redemption prices, if redeemed during the twelve month period beginning July 1
for 1998 Series A, May 28 for 1999 Series B, March 30 for the 2001 Series C,
August 1 for the 2001 Series D and October 31 for 2002 Series E of the years
indicated below, plus accrued and unpaid dividends, if any, for the current
period to the date of redemption:

|                    |  |                            |       |          |  |          |       |          |  |          |       |  |  |   |       |  |  |   |       | 
|------------------- |  | -------------------------- | ----- | -------- |  | -------- | ----- | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |  | Redemption Price per Share
|                    |  |                           
|Year                |  | Series A                   |       | Series B |  | Series C |       | Series D |  | Series E
|                    |  |                            |       |          |  |          |       |          |  |         
|2003                |  |                            | 25.75 |          |  |          |      |          |  |          |      |  |  |   |      |  |  |   |       | 
|2004                |  |                            | 25.50 |          |  | $        | 26.00 |          |  |          |      |  |  |   |      |  |  |   |       | 
|2005                |  |                            | 25.25 |          |  |          | 25.50 |          |  |          |      |  |  |   |      |  |  |   |       | 
|2006                |  |                            | 25.00 |          |  |          | 25.00 |          |  | $        | 25.50 |  |  | $ | 25.50 |  |  |   |       | 
|2007                |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.25 |  |  |   | 25.25 |  |  | $ | 25.50 | 
|2008                |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |  |  |   | 25.00 |  |  |   | 25.25 | 
|2009 and thereafter |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |  |  |   | 25.00 |  |  |   | 25.00 | 

Series A, B, C, D and E Preferred Stocks rank senior to the Companys
common stock as to dividends and liquidation rights. Dividends declared on
preferred stock for the years ended December 31, 2002 and 2001 amounted to
$14.0 million and $10.3 million, respectively.

During 2002, 2001 and 2000, the Company acquired and retired shares of
common stock as follows: $41,000 (1,678 shares) in 2002; $28,000 (1,700 shares)
in 2001; and $4,781,000 (498,300 shares) in 2000.

Total common stock
dividends declared in 2002 amounted to $14.0 million
compared to $10.4 million in 2001.

On January 31, 2003,
the Board of Directors approved an increase of its
annual dividend payments to stockholders in 2003 to $0.27 per share. This
represents an increase of 22.73% over the dividends paid the previous year
of $0.22 per share (as adjusted).

On March 7, 2000, the Companys Board of Directors adopted the policy of
paying dividends on a monthly basis. Initial dividend payment under this
policy, were applied retroactively for dividends corresponding to the first
three-month period ending March 31, 2000. Thereafter, dividends on common stock
and preferred stock are being paid on the 15th day of each month for
stockholders of record as of the last day of the previous month.

In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the 1999 Qualified Option Plan) and the 1999 Nonqualified Stock
Option Plan (the 1999 Nonqualified Option Plan), for the benefit of employees
of the Company and its subsidiaries. These plans offer to key officers,
directors and employees an opportunity to purchase shares of the Companys
common stock. Under the 1999 Qualified Option Plan, options for up to
6,300,000 (as adjusted) shares of common stock can be granted. Also, options
for up to 6,300,000 (as adjusted) shares of common stock, reduced by any share
issued under the 1999 Qualified Option Plan can be granted under the 1999
Nonqualified Option Plan. The option price for both plans is determined at the
grant date. Both plans will remain in effect for a term of 10 years. The
Board of Directors has sole authority and absolute discretion as to the number
of stock options to be granted, their vesting rights, and the options exercise
price. The Plans provide for a proportionate adjustment in the exercise price
and the number of shares that can be purchased in the event of a stock split,
reclassification of stock and a merger or reorganization. At December 31, 2002
and 2001, the Company had outstanding 3,678,000 and 3,555,000 options (as
adjusted), respectively, under the 1999 Qualified Stock Option Plan. These
options were granted to various executive officers and employees, which will
become fully exercisable after five years following the grant date. During
2002, 2001 and 2000, the Company granted

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123,000, 113,000 and 3,442,000 options (as adjusted), respectively, to
various executive officers. None of these options were exercised or forfeited
in 2002, 2001 and 2000.

For more information, please refer to Note 17 to the Companys
Consolidated Financial Statements, as incorporated herein by reference.

COMMONWEALTH TAXATION

GENERAL. Under the
Puerto Rico Internal Revenue Code (the Code), all companies are
treated as separate taxable entities and are not entitled to file consolidated
tax returns. The Company, Westernbank and Westernbank Insurance, Corp. (the
Companies) report their income and expenses based on the accrual basis of
accounting and file their Puerto Rico tax returns on a calendar year basis.

INCOME TAXES. The Companies are subject to Puerto Rico regular income tax
on income earned from all sources up to a maximum rate of 39%.

The Puerto Rico income tax act disallows any interest deduction which is
allocable to income earned from tax exempt obligations acquired after December
31, 1987. For purposes of the above determination, each company is required to
allocate interest expense to exempt interest income based on the ratio that the
average exempt obligations bear to the total average assets of each company.

The Companies are also subject to an alternative minimum tax (AMT) equal
to 22% of the alternative minimum taxable income. The alternative minimum
taxable income is equal to each companys taxable income adjusted for certain
items. The principal adjustments for determining each companys alternative
minimum taxable income are the following: (i) no deduction may be claimed with
respect to the companys interest expense allocable to interest income derived
from tax exempt obligations acquired before January 1, 1988, other than
mortgages guaranteed by the government of Puerto Rico, its agencies,
instrumentalities and political subdivisions, issued before September 1, 1987;
and (ii) the alternative minimum taxable income is increased by 50% of the
amount by which the corporations book income (adjusted for certain items)
exceeds its alternative minimum taxable income without regard to this
adjustment.

The AMT is payable if it exceeds regular income tax. The excess of AMT
over regular income tax paid in any one year may be used to offset regular
income tax in future years, subject to certain limitations. The Companies
income taxes were based on regular income tax rates.

The Puerto Rico Internal Revenue Code provides a dividend received
deduction of 100% on dividends received from wholly owned subsidiaries subject
to income taxation in Puerto Rico, like Westernbank and Westernbank Insurance
Corp.

Westernbank World Plaza, Inc., a wholly-owned subsidiary of Westernbank,
elected to be treated as a special partnership under the Code; accordingly, its
net income is taxed by Westernbank.

For the year ended December 31, 2002, the Company had approximately $35.9
million of regular taxable income, on which it was required to pay current
income tax of $18.6 million. The income on certain investments is exempt for
income tax purposes. Also, activities relating to the Westernbank International
division are exempt for income tax purposes. As a result of the above, the
Companys effective tax rate is substantially below the statutory rate.

Any change in these
tax laws or other regulations, whether by applicable regulators or as
a result of legislation subsequently enacted by the Congress of the
United States or the applicable local legislatures, may have an
impact on the Company's effective tax rate.

AVAILABLE INFORMATION

We make available free of charge, through our investor relations section
at our website, http://www.wholding.com, our annual reports on Form 10-K, quarterly
reports Form 10-Q and current reports on Form 8-K and all amendments to those
reports as soon as reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange Commission.

The public may read and copy any materials the Company files with the SEC
at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at its web site (http://www.sec.gov).

26



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##### Table of Contents






PART II

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

Managements Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Companys consolidated financial
statements and should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto and other detailed information
appearing elsewhere in this Annual Report.

FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

OVERVIEW

Total assets at December 31, 2002, 2001 and 2000, were $8.21 billion,
$5.89 billion, and $4.26 billion, respectively. This growth was driven by strong
increases in the Companys loan and investment portfolios. The investment
portfolios increased $1.30 billion, from $2.88 billion in 2001 to $4.18 billion
in 2002. The investment portfolio was $1.90 billion at December 31, 2000. Loans
receivable net, including mortgage loans held for sale, grew by $918.1 million
for the year ended December 31, 2002, when compared to the previous year,
resulting from the Companys continued strategy of growing its loan portfolio
through commercial real estate, asset-based, unsecured business and construction
lending, as well as its consumer loan portfolios. Loans receivable net,
including mortgage loans held for sale, were $2.21 billion at December 31, 2000.
Total deposits (excluding accrued interest payable) reached $4.27 billion at
December 31, 2002, from $3.21 billion at December 31, 2001, and $2.61 billion at
year end 2000.

Net income was $86.0 million, $62.2 million and $44.6 million and earnings
per basic common share was $1.12 ($1.11 on a diluted basis), $.83 (split
adjusted), and $.62 (split adjusted) for the years 2002, 2001 and 2000,
respectively. This increase in net income was primarily the result of strong
loan and investments securities growth, maintaining strong asset quality and
expense control and resulting in returns on average assets (ROA) of 1.22%,
1.22% and 1.17% and returns on average common stockholders equity (ROCE) of
25.39%, 27.49%, and 24.75% for the years ended 2002, 2001 and 2000,
respectively.

RESULTS OF OPERATIONS

NET INTEREST INCOME

The Companys principal source of earnings is its net interest income.
This is the difference between interest income on loans and invested assets
(interest-earning assets) and its interest expense on deposits and borrowings,
including reverse repurchase agreements, term notes and advances from the FHLB
(interest-bearing liabilities). Loan origination and commitments fees, net of
related costs, are deferred and amortized over the life of the related loans as
a yield adjustment. Gains or losses on the sale of loans and investments,
service charges, fees and other income, also affect income. In addition, the
Companys net income is affected by the level of its non-interest expenses, such
as compensation, employees benefits, occupancy costs, other operating expenses
and income taxes.

The main objective of the Companys asset-liability management program is
to invest funds judiciously and reduce interest rate risks while optimizing net
income and maintaining adequate liquidity levels. The Company uses several tools
to manage the risks associated with the composition and repricing of assets and
liabilities. Therefore, management has followed a conservative practice inclined
towards the preservation of capital with adequate returns. The Companys
Investment Committee, which includes the entire Board of Directors and senior
management, is responsible for the asset-liability management oversight. The
Investment Department is responsible for implementing the policies established
by the Investment Committee.

2002 VERSUS 2001. Net interest income for the year ended December 31,
2002, was $166.3 million, an increase of $41.3 million, or 32.99%, from $125.1
million for the same period of last year. The increase in 2002 was the result of
increases in most of the components of interest income, but principally from
interest income from loans, investments securities and mortgage and asset backed
securities, which was partially offset by increases in interest expense,
primarily on deposits and securities sold under agreements to repurchase.

Average interest-earning assets for the year ended 2002 increased by $2.33
billion, compared with the same period in previous year, primarily driven by a
rise in the average loan portfolio of $781.0 million, particularly a very
diversified growth from all lines of loans and an increase of $1.55 billion in
the average investment portfolio, mainly

27



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##### Table of Contents



U.S. Government and agencies obligations and mortgage-backed securities.
Notwithstanding, average yields decreased from 7.22% in year 2001 to 5.44% for
the year-ended 2002. The decrease on average yields was primarily due to a
drop in market interest rates affecting our loan repricing, primarily our
commercial loans portfolio with floating rates and reinvestment rates on
matured, called and purchased securities.

The impact of the strong growth in average interest-earning assets was in
part offset by an increase in the average interest-bearing liabilities of $2.14
billion or 47.60% for the year 2002 when compared to 2001. In order to offset
such increase, the Company managed its liability costs carefully, decreasing the
overall cost of rates paid from 4.85% in 2001 to 3.30% in 2002, while continuing
to offer competitive rates. Interest-bearing deposits grew in average by $843.0
million during the year 2002, when compared to the previous year, while other
borrowings in average (mainly securities sold under agreements to repurchase)
increased by $1.30 billion for the same period.

The Companys net yield on interest-earning assets decreased 28 basis
points in 2002 to 2.35%, due to the industry wide interest margin compression
pressures.

2001 VERSUS 2000. Net interest income for the year ended December 31,
2001, reached $125.1 million, compared to $98.5 million reported in 2000, an
increase of $26.6 million or 27.04%. The increase in 2001 was the result of
increases in all components of interest income, but principally from interest
income from loans, investment securities and mortgage and other asset-backed
securities, which was partially offset by increases in interest expense,
principally on deposits and reverse repurchase agreements.

Average interest-earning assets increased $1.18 billion or 32.88% from
2000 to 2001. Such increase was primarily due to an increase of $695.7 million
in the average investment and mortgage-backed securities, followed by an
increase of $511.3 million in the average loan portfolio, which is the higher
yielding category of interest-earning assets.

The increase in average interest-earning assets was partially offset by an
increase in average interest-bearing liabilities of $1.08 billion or 31.66%
experienced in 2001, when compared to December 31, 2000. The increase in average
interest-bearing liabilities is mainly related to a significant increase of
$637.6 million in securities sold under agreements to repurchase followed by an
increase of $458.3 million in average deposits.

The Companys net yield on interest-earning assets decreased slightly 12
basis points in 2001 to 2.63%.

28



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##### Table of Contents



The following table presents, for the periods indicated, the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, as well as in a normal and tax equivalent
basis. Average balances are daily average balances. The yield on the securities
portfolio is based on average historical cost balances and does not give effect
to changes in fair value that are reflected as a component of consolidated
stockholders equity.

|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |      |  
|------------------------------------------------------------- | ---------------------------------------------- | - | ----------------------- | ------- | ----------- | - | ---------- | --------- | -------- |  | ----------- | ---- | ---------- | - | -------- | ------- | ----------- | - | ---------- | --------- |  |  | ------- | ---- | ------- | - | ------- | ------- |  | - | --------- | --------- |  |  | ---- | ---- | -
|                                                              |                                                |   | YEAR ENDED DECEMBER 31,
|                                                              |                                                |   |                        
|                                                              |                                                |   | 2002                    |         | 2001        |   | 2000      
|                                                              |                                                |   |                         |         |             |   |           
|                                                              |                                                |   |                         |         |             |   | AVERAGE    |           | AVERAGE  |  |             |      |            |   | AVERAGE  |         | AVERAGE     |   |            |           |  |  | AVERAGE |      | AVERAGE
|                                                              |                                                |   | INTEREST                |         | BALANCE (1) |   | YIELD/RATE |           | INTEREST |  | BALANCE (1) |      | YIELD/RATE |   | INTEREST |         | BALANCE (1) |   | YIELD/RATE
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |           
|                                                              |                                                |   | (DOLLARS IN THOUSANDS) 
|Normal Spread:                                                |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Interest-earning
assets:                                      |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|                                                              | Loans, including
loan fees (2)                 |   | $                       | 220,676 |             |   | $          | 3,315,514 |          |  |             | 6.66 | %          |   | $        | 207,385 |             |   | $          | 2,534,486 |  |  |         | 8.18 | %       |   | $       | 183,497 |  |   | $         | 2,023,169 |  |  |      | 9.07 | %
|                                                              | Mortgage and
asset-backed
securities (3)       |   |                         | 44,848  |             |   |            | 859,991   |          |  |             | 5.21 | %          |   |          | 28,273  |             |   |            | 411,922   |  |  |         | 6.86 | %       |   |         | 12,387  |  |   |           | 142,911   |  |  |      | 8.67 | %
|                                                              | Investment
securities (4)                      |   |                         | 112,759 |             |   |            | 2,600,210 |          |  |             | 4.34 | %          |   |          | 98,946  |             |   |            | 1,606,744 |  |  |         | 6.16 | %       |   |         | 84,532  |  |   |           | 1,253,011 |  |  |      | 6.75 | %
|                                                              | Money market
instruments                       |   |                         | 7,451   |             |   |            | 314,633   |          |  |             | 2.37 | %          |   |          | 8,731   |             |   |            | 203,081   |  |  |         | 4.30 | %       |   |         | 10,171  |  |   |           | 160,224   |  |  |      | 6.35 | %
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Total                                                         |                                                |   | 385,734                 |         |             |   | 7,090,348  |           |          |  | 5.44        | %    |            |   | 343,335  |         |             |   | 4,756,233  |           |  |  | 7.22    | %    |         |   | 290,587 |         |  |   | 3,579,315 |           |  |  | 8.12 | %   
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Interest-bearing
liabilities:                                 |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|                                                              | Deposits                                       |   |                         | 114,374 |             |   |            | 3,690,242 |          |  |             | 3.10 | %          |   |          | 129,676 |             |   |            | 2,847,236 |  |  |         | 4.55 | %       |   |         | 127,640 |  |   |           | 2,388,929 |  |  |      | 5.34 | %
|                                                              | Securities sold
under agreements
to repurchase |   |                         | 98,233  |             |   |            | 2,815,608 |          |  |             | 3.49 | %          |   |          | 79,882  |             |   |            | 1,484,639 |  |  |         | 5.38 | %       |   |         | 53,968  |  |   |           | 847,028   |  |  |      | 6.37 | %
|                                                              | Term notes                                     |   |                         | 604     |             |   |            | 15,469    |          |  |             | 3.90 | %          |   |          | 2,114   |             |   |            | 47,798    |  |  |         | 4.42 | %       |   |         | 3,609   |  |   |           | 74,863    |  |  |      | 4.82 | %
|                                                              | Advances from FHLB                             |   |                         | 6,202   |             |   |            | 120,008   |          |  |             | 5.17 | %          |   |          | 6,597   |             |   |            | 120,000   |  |  |         | 5.50 | %       |   |         | 6,920   |  |   |           | 106,715   |  |  |      | 6.48 | %
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Total                                                         |                                                |   | 219,413                 |         |             |   | 6,641,327  |           |          |  | 3.30        | %    |            |   | 218,269  |         |             |   | 4,499,673  |           |  |  | 4.85    | %    |         |   | 192,137 |         |  |   | 3,417,535 |           |  |  | 5.62 | %   
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Net interest income                                           |                                                | $ | 166,321                 |         |             |   |            |           |          |  |             |      |            | $ | 125,066  |         |             |   |            |           |  |  |         |      |         | $ | 98,450  |         |  |   |           |           |  |  |      |     
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Interest rate
spread                                          |                                                |   |                         |         |             |   |            |           |          |  | 2.14        | %    |            |   |          |         |             |   |            |           |  |  | 2.37    | %    |         |   |         |         |  |   |           |           |  |  | 2.50 | %   
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Net interest-earning
assets                                   |                                                |   |                         |         |             | $ | 449,021    |           |          |  |             |      |            |   |          |         |             | $ | 256,560    |           |  |  |         |      |         |   |         |         |  | $ | 161,780   |           |  |  |      |     
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Net yield on
interest-earning
assets (5)                      |                                                |   |                         |         |             |   |            |           |          |  | 2.35        | %    |            |   |          |         |             |   |            |           |  |  | 2.63    | %    |         |   |         |         |  |   |           |           |  |  | 2.75 | %   
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     
|Interest-earning
assets to
interest-bearing
liabilities ratio |                                                |   |                         |         |             |   | 106.76     | %         |          |  |             |      |            |   |          |         |             |   | 105.70     | %         |  |  |         |      |         |   |         |         |  |   | 104.73    | %         |  |  |      |     
|                                                              |                                                |   |                         |         |             |   |            |           |          |  |             |      |            |   |          |         |             |   |            |           |  |  |         |      |         |   |         |         |  |   |           |           |  |  |      |     

|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|---------------------------------------- |  | ----------------------- | ------- | ----------- |  | ---------- | --------- | -------- |  | ----------- | ---- | ---------- |  | -------- | ------- | ----------- |  | ---------- | --------- |  |  | ------- | ---- | ------- |  | - | ------- |  |  | - | --------- |  |  |  | ---- | -
|                                         |  | YEAR ENDED DECEMBER 31,
|                                         |  |                        
|                                         |  | 2002                    |         | 2001        |  | 2000      
|                                         |  |                         |         |             |  |           
|                                         |  |                         |         |             |  | AVERAGE    |           | AVERAGE  |  |             |      |            |  | AVERAGE  |         | AVERAGE     |  |            |           |  |  | AVERAGE |      | AVERAGE
|                                         |  | INTEREST                |         | BALANCE (1) |  | YIELD/RATE |           | INTEREST |  | BALANCE (1) |      | YIELD/RATE |  | INTEREST |         | BALANCE (1) |  | YIELD/RATE
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |           
|                                         |  | (DOLLARS IN THOUSANDS) 
|Tax Equivalent
Spread:                   |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|Interest-earning
assets                  |  | $                       | 385,734 |             |  | $          | 7,090,348 |          |  |             | 5.44 | %          |  | $        | 343,335 |             |  | $          | 4,756,233 |  |  |         | 7.22 | %       |  | $ | 290,584 |  |  | $ | 3,579,315 |  |  |  | 8.12 | %
|Tax equivalent
adjustment                |  |                         | 23,708  |             |  |            |          |          |  |             | 0.33 | %          |  |          | 19,053  |             |  |            |          |  |  |         | 0.40 | %       |  |   | 13,843  |  |  |   |          |  |  |  | 0.39 | %
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|Interest-earning
assets  tax
equivalent |  |                         | 409,438 |             |  |            | 7,090,348 |          |  |             | 5.77 | %          |  |          | 362,388 |             |  |            | 4,756,233 |  |  |         | 7.62 | %       |  |   | 304,430 |  |  |   | 3,579,315 |  |  |  | 8.51 | %
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|Interest-bearing
liabilities             |  |                         | 219,413 |             |  | $          | 6,641,327 |          |  |             | 3.30 | %          |  |          | 218,269 |             |  | $          | 4,499,673 |  |  |         | 4.85 | %       |  |   | 192,138 |  |  | $ | 3,417,535 |  |  |  | 5.62 | %
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|Net interest
income                      |  | $                       | 190,025 |             |  |            |           |          |  |             |      |            |  | $        | 144,119 |             |  |            |           |  |  |         |      |         |  | $ | 112,293 |  |  |   |           |  |  |  |      |  
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|Interest
rate spread                     |  |                         |         |             |  |            |           |          |  |             | 2.47 | %          |  |          |         |             |  |            |           |  |  |         | 2.77 | %       |  |   |         |  |  |   |           |  |  |  | 2.89 | %
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  
|Net yield on
interest-earning
assets (5) |  |                         |         |             |  |            |           |          |  |             | 2.68 | %          |  |          |         |             |  |            |           |  |  |         | 3.03 | %       |  |   |         |  |  |   |           |  |  |  | 3.14 | %
|                                         |  |                         |         |             |  |            |           |          |  |             |      |            |  |          |         |             |  |            |           |  |  |         |      |         |  |   |         |  |  |   |           |  |  |  |      |  



---

|(1) |  | Average balance on interest-earning assets and interest-bearing
liabilities is computed using daily monthly average balances during the
periods.                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes loans held for sale. Average loans exclude non-performing loans.
Loans fees amounted to $5.6 million; $4.6 million and $3.5 million as of
December 31, 2002, 2001 and 2000, respectively.
|   
|(3) |  | Includes mortgage-backed securities held to maturity, available for sale
and for trading purposes.                                                                                                
|   
|(4) |  | Includes trading account securities and investments available for sale.                                                                                                                           
|   
|(5) |  | Net interest income divided by average interest-earning assets.                                                                                                                                   

29



---



##### Table of Contents



The following table presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase
(decrease) related to higher outstanding balances and the volatility of interest
rates.

|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |        |  
|--------------------------------------------- | ---------------------------------------------- | - | ----------------------- | ------- | ------------- | - | -------- | -------- | ------ | - | ------ | ------- | ----- | - | ------ | ------ | - | - | ------- | ------- | - | - | ------ | ------ | -
|                                              |                                                |   | YEAR ENDED DECEMBER 31,
|                                              |                                                |   |                        
|                                              |                                                |   | 2002 VS. 2001           |         | 2001 VS. 2000
|                                              |                                                |   |                         |         |              
|                                              |                                                |   | VOLUME                  |         | RATE          |   | TOTAL    |          | VOLUME |   | RATE   |         | TOTAL
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |      
|                                              |                                                |   | (IN THOUSANDS)         
|Interest income:                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|                                              | Loans (1)                                      |   | $                       | 33,687  |               |   | $        | (20,397  | )      |   | $      | 13,290  |       |   | $      | 38,974 |   |   | $       | (15,086 | ) |   | $      | 23,888 |  
|                                              | Mortgage and asset-backed
securities (2)       |   |                         | 21,273  |               |   |          | (4,698   | )      |   |        | 16,575  |       |   |        | 17,861 |   |   |         | (1,975  | ) |   |        | 15,886 |  
|                                              | Investment securities (3)                      |   |                         | 26,483  |               |   |          | (12,670  | )      |   |        | 13,813  |       |   |        | 20,854 |   |   |         | (6,440  | ) |   |        | 14,414 |  
|                                              | Money market instruments                       |   |                         | 3,611   |               |   |          | (4,891   | )      |   |        | (1,280  | )     |   |        | 2,323  |   |   |         | (3,763  | ) |   |        | (1,440 | )
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Total increase (decrease)
in interest income  |                                                |   | 85,054                  |         |               |   | (42,656  | )        |        |   | 42,398 |         |       |   | 80,012 |        |   |   | (27,264 | )       |   |   | 52,748 |       
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Interest expense:                             |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|                                              | Deposits                                       |   |                         | 193,545 |               |   |          | (208,847 | )      |   |        | (15,302 | )     |   |        | 8,824  |   |   |         | (6,788  | ) |   |        | 2,036  |  
|                                              | Securities sold under
agreements to repurchase |   |                         | 30,191  |               |   |          | (11,840  | )      |   |        | 18,351  |       |   |        | 32,662 |   |   |         | (6,748  | ) |   |        | 25,914 |  
|                                              | Term notes                                     |   |                         | (1,227  | )             |   |          | (283     | )      |   |        | (1,510  | )     |   |        | (1,165 | ) |   |         | (330    | ) |   |        | (1,495 | )
|                                              | Advances from FHLB                             |   |                         |        |               |   |          | (395     | )      |   |        | (395    | )     |   |        | 1,450  |   |   |         | (1,773  | ) |   |        | (323   | )
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Total increase (decrease) in
interest expense |                                                |   | 222,509                 |         |               |   | (221,365 | )        |        |   | 1,144  |         |       |   | 41,771 |        |   |   | (15,639 | )       |   |   | 26,132 |       
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       
|Increase (decrease) in
net interest income    |                                                | $ | (137,455                | )       |               | $ | 178,709  |          |        | $ | 41,254 |         |       | $ | 38,241 |        |   | $ | (11,625 | )       |   | $ | 26,616 |       
|                                              |                                                |   |                         |         |               |   |          |          |        |   |        |         |       |   |        |        |   |   |         |         |   |   |        |       



---

|(1) |  | Includes mortgage loans held for sale.                                        
|--- |  | ------------------------------------------------------------------------------
|   
|(2) |  | Includes mortgage-backed securities available for sale and trading
securities.
|   
|(3) |  | Includes investments available for sale.                                      

PROVISION FOR LOAN LOSSES




The 2002 provision for loan losses was $15.1 million, an increase of
$2.8 million from 2001. Net charge-offs during 2002 amounted to $6.3 million,
which when subtracted from the provision for loan losses of $15.1 million
resulted in a net increase in the allowance for loan losses of $8.8 million. The
provision for the year ended 2001 was $12.3 million, an increase of $3.6 million
from the year ended December 31, 2000. Net charge-offs during 2001 amounted to
$5.7 million, which when subtracted from the provision for loan losses of $12.3
million plus the allowance of $2.9 million on loans purchased, resulted in a net
increase in the allowance for loan losses of $9.4 million. The allowance for
loan losses is maintained at a level which, in managements judgment, is
adequate to absorb credit losses inherent in the loan portfolio. The amount of
the allowance is based on managements evaluation of the collectibility of the
loan portfolio, including the nature and volume of the portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
and prevailing economic conditions. This evaluation is inherently subjective as
it requires estimates that are susceptible to significant revision as more
information becomes available. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. Although no assurance can be given, management believes that the present
allowance for loan losses is adequate considering loss experience, delinquency
trends and current economic conditions. Management regularly reviews the
Companys loan loss allowance as its loan portfolio grows and diversifies. See
 Financial Condition  Allowance for Loan Losses and see Item 1, Business
 Allowance for Loan Losses.

The increase in the provision for loan losses from 2001 to 2002 is
primarily attributed to managements policy of establishing reserves,
principally taking into consideration the overall strong growth in the Companys
loan portfolio and particularly those of Westernbanks newest Divisions:
Westernbank Business Credit, a division specializing in asset-based lending; and
the Expresso of Westernbank, which specializes in small, unsecured consumer
loans up to $15,000 and collateralized consumer loans up to $75,000 (see
 Financial Condition  Loans Including Mortgage Loans Held for Sale). The
provision for loan losses for the commercial and the consumer loan portfolios
grew by $2.0 million or 24.91% and $3.7 million or 95.15%, from 2001 to 2002,
respectively, reflecting primarily the increase in the loan portfolios of
Westernbank Business Credit and the Expresso of Westernbank in addition to the
strong growth of the Companys commercial real estate and other consumer loans
(principally collateralized by real estate) portfolios. The provision for
Westernbank Business Credit division accounted for $1.5 million or 15.00% of the
total provision for loan losses in the commercial loan portfolio for the year
ended December 31, 2002, while for year 2001 (its first year of operations), it
accounted for $208,000 or 2.58% of the total provision for loan losses for the
commercial loans portfolio. The Expresso of Westernbank division accounted for
$1.5 million or 20.00% of the total provision for loan losses for the consumer
loans portfolio for the year ended December 31, 2002, its first year of
operation.

At December 31, 2002, the allowance for loan losses was $47.1 million,
or 1.24% of total loans, and 242.80% of total non-performing loans, compared to
an allowance for loan losses at December 31, 2001 of $38.4 million, or 1.33% of
total loans, and 271.83% of total non-performing loans.

During
2002, net charge-offs remained relatively stable. Net
charge-offs were $6.3 million in 2002 and $5.7 million in
2001, which is an
increase of $599,000 or 10.44%. Net charge-offs to average loans improved
to .19% in 2002 compared to .23% in 2001. Accounts amounting to $7.9 million
were written-off against the allowance for loan losses in 2002, compared to $7.0
million in 2001, an increase of $927,000 or 13.17%. The increase in net
charge-offs was primarily attributed to the commercial and consumer loan
portfolios. The increase in net charge-offs in the commercial loans portfolio
was primarily due to a $505,000 loan charged-off by Westernbank Business Credit
Division. This loan was acquired in the purchased loan portfolio from Congress
Credit Corporation, a subsidiary of First Union Bank N. A., on June 15, 2001.
This loan was fully reserved at the acquisition date. The increase in net
charge-offs in the consumer loan portfolio was primarily due to loans
charged-off by the Expresso of Westernbank Division amounting to $62,000 for the
year ended December 31, 2002. The accounts written-off are submitted to the
Collections Department recovery unit for continued collection efforts.
Recoveries made from accounts previously written-off amounted to $1.6 million in
2002 and $1.3 million in 2001.




30



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##### Table of Contents



OTHER INCOME

Other operating income, excluding derivative transactions and gains
(losses) on sales and valuation of loans, securities and other assets, grew $3.6
million or 19.33%, during the year ended December 31, 2002, when compared to
$18.9 million in year 2001, which had increase from $14.4 million during 2000.
The increase for years ended December 31, 2002 and 2001 was primarily driven by
higher activity associated with service charges on deposit accounts and other
fees as a result of the Companys continued strategy to diversify and increase
its fee income. Other factors that contributed to such boost were increases in
fees associated to the trust division, insurance commissions earned by
Westernbank Insurance Corp., and fees generated by the asset-based lending
operation as well as increases in other areas resulting from the Companys
overall growing volume of business.

OPERATING EXPENSES

Total operating expenses increased $13.6 million or 22.56% and $7.1
million or 13.56% in 2002 and 2001, respectively.

Salaries and employees benefits accounted for the majority of such
increase, rising $5.1 million or 22.43% for the year 2002, as compared to the
corresponding period in 2001, which also increased $2.8 million or 13.74% from
$20.1 million in 2000. Such increases are attributed to the continued expansion
of the Company, including increases in personnel, normal salary increases and
related employees benefits. At December 31, 2002, the Company had 1,031
full-time employees, including its executive officers, an increase of 179
employees or 21.01%, when compared to the prior year. New personnel and
additional infrastructure were added to support the continued expansion of the
Company, mainly with the inception of Westernbanks new division, Expresso of
Westernbank, which accounted for 130 new employees at December 31, 2002. At
December 31, 2000, the Company had 749 full-time employees, including its
executive officers increasing to 817 employees by the end of year 2001.

Other operating expenses, as a group, excluding salaries and employees
benefits, increased $8.5 million or 22.64%, during the year ended December 31,
2002, when compared to $37.4 million in 2001, which had increased $4.3 million
or 13.08% from $33.1 million in 2000, resulting mostly from increases in
advertising, occupancy and equipment expenses, and other expenses, mostly
associated to the new Expresso Division, launched in July 2002, as well as the
inherent costs associated with the additional investment in technology and
general infrastructure to sustain and coordinate the Banks expansion in all of
its business areas during both periods.

The Company continued its strict cost control measures, maintaining
operating expenses at adequate levels, further evidenced by its outstanding and
world-class efficiency ratios of 39.15%, 41.97% and 47.14% for the years 2002,
2001 and 2000, respectively. The Company is committed to constantly improve and
maintain operating expenses at adequate levels, further improving its lean,
effective and highly productive operation.

PROVISION FOR INCOME TAXES

Under Puerto Rico income tax laws, the Company is required to pay the
higher of an alternative minimum tax of 22% or regular statutory rates raging
from 20% to 39%. The current provision for estimated Puerto Rico income taxes
for the year ended December 31, 2002, amounted to $16.1 million compared to $8.5
million in 2001 and $5.8 million in 2000. Deferred income taxes reflect the
impact of credit carryforwards and temporary differences between amounts of
assets and liabilities for financial reporting purposes and their respective tax
bases. The income on certain investments is exempt for income tax purposes.
Also, activities relating to the Westernbank International division are exempt
for income tax purposes. As a result, the Companys effective tax rate is
substantially below the statutory rate, being 16.00% for the year ended December
31, 2002, and 12.00% for each of the years ended December 2001 and 2000. The
increase in the effective tax rate for year 2002 its attributed to higher
levels of taxable income resulting from new lines of business commenced in 2001
and 2002.

NET INCOME

The Companys net income increased $23.8 million or 38.30% and $17.6
million or 39.40% in 2002 and 2001, respectively. The increase in both years
resulted from an increase in net interest income and other income, which was
partially offset by increases in total operating expenses and in the provisions
for loan losses and income taxes.

31



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##### Table of Contents



FINANCIAL CONDITION

LOANS, INCLUDING MORTGAGE LOANS HELD FOR SALE

Loans, including mortgage loans held for sale, were $3.76 billion or
45.85% of total assets at December 31, 2002, an increase of $918.1 million, or
32.29% from December 31, 2001. Loans, including mortgage loans held for sale,
were $2.84 billion or 48.29% of total assets at December 31, 2001, which
increased $635.4 million or 28.77% from $2.21 billion or 51.83% of total assets
at December 31, 2000.

The Company continues to focus on growing its commercial loan portfolio
through commercial real estate, asset-based, unsecured business and construction
lending, as well as its consumer loan portfolios. As a result, the portfolio of
real estate loans secured by first mortgages, including mortgage loans held for
sale, increased from $1.76 billion as of December 31, 2000 to $2.09 billion as
of December 31, 2001, and to $2.50 billion as of December 31, 2002. Commercial
real estate loans secured by first mortgages were $1.46 billion at December 31,
2002, an increase of $344.2 million, or 30.80% from December 31, 2001.
Commercial real estate loans secured by first mortgages were $1.12 billion at
December 31, 2001, an increase of $230.4 million or 25.97%, from $887.1 million
at December 31, 2000. The consumer loans portfolio (including credit cards),
commercial loans (not collateralized by real estate) and other loans increased
from $483.4 million as of December 31, 2000, to $795.6 million as of December
31, 2001, and to $1.31 billion as of December 31, 2002.

Westernbanks commercial real estate and other loans are primarily
variable and adjustable rate products. Commercial loan originations come from
existing customers as well as through direct solicitation and referrals.
Westernbank offers different types of consumer loans, including secured and
unsecured products, in order to provide a full range of financial services to
its retail customers. In addition, Westernbank offers VISA and Master Card
accounts to its customers.

During the past five years, loans, including mortgage loans held for sale,
have grown at an average annualized rate of 36.20%. As of December 31, 2002,
commercial loans were 53.88% (78.79% collateralized by real estate and consumer
loans were 19.77% (60.23% collateralized by real estate) of the $3.76 billion
loan portfolio. This has enabled Westernbank to shift its asset composition to
assets with shorter maturities and greater repricing flexibility. The Company
has also continued to diversify Westernbanks sources of revenue, while
maintaining its status as a secured lender, with approximately 82% of its loans
collateralized by real estate as of December 31, 2002. Westernbank has
selectively entered into several new business lines, including asset-based and
small unsecured consumer lending as well as trust services. As of December 31,
2002, Westernbank Business Credit (asset-based) and the Expresso of Westernbank
(unsecured consumer lending) divisions loan portfolios amounted to $427.7
million and $117.4 million, respectively. For the year ended December 31, 2002,
the average yield on Westernbank Business Credit division asset-based loan
portfolio was 5.56%. For the six-months period ended December 31, 2002, the
average yield on the Expresso of Westernbank division loan portfolio was 19.40%.
The Expresso of Westernbank, Westernbanks newest division, was created in July
2002.

32



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##### Table of Contents



The following table sets forth the composition of the Banks loans
portfolio, including mortgage loans held for sale, by type of loan at the dates
indicated.

|                                         |                         |   |                        |           |         |  |        |      |         |   |           |           |         |  |        |      |   |   |           |         |  |  |        |      |  
|---------------------------------------- | ----------------------- | - | ---------------------- | --------- | ------- |  | ------ | ---- | ------- | - | --------- | --------- | ------- |  | ------ | ---- | - | - | --------- | ------- |  |  | ------ | ---- | -
|                                         |                         |   | DECEMBER 31,          
|                                         |                         |   |                       
|                                         |                         |   | 2002                   |           | 2001    |  | 2000  
|                                         |                         |   |                        |           |         |  |       
|                                         |                         |   | AMOUNT                 |           | PERCENT |  | AMOUNT |      | PERCENT |   | AMOUNT    |           | PERCENT
|                                         |                         |   |                        |           |         |  |        |      |         |   |           |           |        
|                                         |                         |   | (DOLLARS IN THOUSANDS)
|Residential real estate:                 |                         |   |                        |           |         |  |        |      |         |   |           |           |         |  |        |      |   |   |           |         |  |  |        |     
|                                         | Mortgage (1)            |   | $                      | 852,249   |         |  |        | 22.7 | %       |   | $         | 852,715   |         |  |        | 30.0 | % |   | $         | 785,853 |  |  |        | 35.5 | %
|                                         | Construction            |   |                        | 181,266   |         |  |        | 4.8  |         |   |           | 117,957   |         |  |        | 4.2  |   |   |           | 80,905  |  |  |        | 3.7  |  
|Commercial, industrial
and agricultural: |                         |   |                        |           |         |  |        |      |         |   |           |           |         |  |        |      |   |   |           |         |  |  |        |     
|                                         | Real estate             |   |                        | 1,461,606 |         |  |        | 38.9 |         |   |           | 1,115,700 |         |  |        | 39.2 |   |   |           | 887,084 |  |  |        | 40.2 |  
|                                         | Business and others (2) |   |                        | 570,196   |         |  |        | 15.2 |         |   |           | 378,696   |         |  |        | 13.3 |   |   |           | 99,483  |  |  |        | 4.5  |  
|Consumer and others (3)                  |                         |   | 743,600                |           |         |  | 19.8   |      |         |   | 416,953   |           |         |  | 14.7   |      |   |   | 383,903   |         |  |  | 17.4   |     
|                                         |                         |   |                        |           |         |  |        |      |         |   |           |           |         |  |        |      |   |   |           |         |  |  |        |     
|Total loans                              |                         |   | 3,808,917              |           |         |  | 101.4  |      |         | $ | 2,882,021 |           |         |  | 101.4  |      |   | $ | 2,237,228 |         |  |  | 101.3  |     
|Allowance for loan losses                |                         |   | (47,114                | )         |         |  | (1.4   | )    |         |   | (38,364   | )         |         |  | (1.4   | )    |   |   | (28,928   | )       |  |  | (1.3   | )   
|                                         |                         |   |                        |           |         |  |        |      |         |   |           |           |         |  |        |      |   |   |           |         |  |  |        |     
|Loans  net                              |                         | $ | 3,761,803              |           |         |  | 100.0  | %    |         | $ | 2,843,657 |           |         |  | 100.00 | %    |   | $ | 2,208,300 |         |  |  | 100.00 | %   
|                                         |                         |   |                        |           |         |  |        |      |         |   |           |           |         |  |        |      |   |   |           |         |  |  |        |     

|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |  |  |        |      |  
|---------------------------------------- | ----------------------- | - | ---------------------- | ------- | ------- |  | ------ | ---- | ------- | - | --------- | ------- |  |  | ------ | ---- | -
|                                         |                         |   | DECEMBER 31,          
|                                         |                         |   |                       
|                                         |                         |   | 1999                   |         | 1998   
|                                         |                         |   |                        |         |        
|                                         |                         |   | AMOUNT                 |         | PERCENT |  | AMOUNT |      | PERCENT
|                                         |                         |   |                        |         |         |  |        |      |        
|                                         |                         |   | (DOLLARS IN THOUSANDS)
|Residential real estate:                 |                         |   |                        |         |         |  |        |      |         |   |           |         |  |  |        |     
|                                         | Mortgage (1)            |   | $                      | 706,792 |         |  |        | 37.8 | %       |   | $         | 407,245 |  |  |        | 29.9 | %
|                                         | Construction            |   |                        | 101,979 |         |  |        | 5.5  |         |   |           | 69,215  |  |  |        | 5.1  |  
|Commercial, industrial
and agricultural: |                         |   |                        |         |         |  |        |      |         |   |           |         |  |  |        |     
|                                         | Real estate             |   |                        | 677,924 |         |  |        | 36.2 |         |   |           | 518,893 |  |  |        | 38.1 |  
|                                         | Business and others (2) |   |                        | 79,343  |         |  |        | 4.3  |         |   |           | 72,235  |  |  |        | 5.3  |  
|Consumer and others (3)                  |                         |   | 329,682                |         |         |  | 17.6   |      |         |   | 309,509   |         |  |  | 22.7   |     
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |  |  |        |     
|Total loans                              |                         | $ | 1,895,720              |         |         |  | 101.4  |      |         | $ | 1,377,097 |         |  |  | 101.1  |     
|Allowance for loan losses                |                         |   | (23,978                | )       |         |  | (1.4   | )    |         |   | (15,800   | )       |  |  | (1.1   | )   
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |  |  |        |     
|Loan  net                               |                         | $ | 1,871,742              |         |         |  | 100.00 | %    |         | $ | 1,361,297 |         |  |  | 100.00 | %   
|                                         |                         |   |                        |         |         |  |        |      |         |   |           |         |  |  |        |     



---

|(1) |  | Includes mortgage loans held for sale amounting to $7.4 million, $5.3
million, $4.6 million, $2.1 million, and $7.3 million for each one of the
years presented, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $427.7 million and $255.8 million of Westernbank Business Credit
division outstanding loans at December 31, 2002 and 2001, respectively.                             
|   
|(3) |  | Includes $117.4 million of the Expresso of Westernbank division
outstanding loans at December 31, 2002.                                                                       

Residential real estate mortgage loans are mainly comprised of loans
secured by first mortgages on one-to-four family residential properties. At
December 31, 2002, residential mortgage loans included $17.2 million of
mortgages insured or guaranteed by government agencies of the United States or
Puerto Rico.

The Bank originated $481.2 million of commercial real estate loans during
the year ended December 31, 2002. At December 31, 2002, commercial real estate
loans totaled $1.46 billion. In general, commercial real estate loans are
considered by management to be of somewhat greater risk of uncollectibility than
other loans due to the dependency on income production and future development of
real estate. Commercial real estate loans are collateralized by various types of
property, including warehouse, retail and other business properties.

The portfolio of Consumer and Other loans at December 31, 2002, consisted
of consumer loans of $743.6 million, of which $447.9 million are secured by real
estate and $295.7 million are unsecured consumer loans (including $117.4 million
of the Expresso of Westernbank division loans portfolio, credit card loans of
$56.7 million and loans secured by deposits in the Bank totaling $32.8 million).

33



---



##### Table of Contents



The following table summarizes the contractual maturities of the Banks
total loans, excluding mortgage loans held for sale, for the periods indicated
at December 31, 2002. Contractual maturities do not necessarily reflect the
actual term of a loan, including prepayments.

|                                         |                     |   |                |           |          |   |            |         |          |   |                              |         |                  |   |          |         |  |   |         |         |  |   |           |         | 
|---------------------------------------- | ------------------- | - | -------------- | --------- | -------- | - | ---------- | ------- | -------- | - | ---------------------------- | ------- | ---------------- | - | -------- | ------- |  | - | ------- | ------- |  | - | --------- | ------- | 
|                                         |                     |   |                |           |          |   | MATURITIES
|                                         |                     |   |                |           |          |   |           
|                                         |                     |   |                |           |          |   |            |         |          |   | AFTER ONE YEAR TO FIVE YEARS |         | AFTER FIVE YEARS
|                                         |                     |   |                |           |          |   |            |         |          |   |                              |         |                 
|                                         |                     |   |                |           |          |   |            |         |          |   | (IN THOUSANDS)               |         |                  |   |          |         |  |   |        
|                                         |                     |   | BALANCE        |           |          |   |            |         |          |   |                              |         |                  |   |          |         |  |   |         |         |  |   |          
|                                         |                     |   | OUTSTANDING AT |           |          |   |            |         | FIXED    |   | VARIABLE                     |         | FIXED            |   | VARIABLE
|                                         |                     |   | DECEMBER 31,   |           | ONE YEAR |   | INTEREST   |         | INTEREST |   | INTEREST                     |         | INTEREST        
|                                         |                     |   | 2002           |           | OR LESS  |   | RATES      |         | RATES    |   | RATES                        |         | RATES           
|                                         |                     |   |                |           |          |   |            |         |          |   |                              |         |                 
|Residential real estate:                 |                     |   |                |           |          |   |            |         |          |   |                              |         |                  |   |          |         |  |   |         |         |  |   |           |        
|                                         | Mortgage            |   | $              | 852,249   |          |   | $          | 2,346   |          |   | $                            | 9,968   |                  |   | $        | 154     |  |   | $       | 304,682 |  |   | $         | 535,099 | 
|                                         | Construction        |   |                | 181,266   |          |   |            | 93,731  |          |   |                              |        |                  |   |          | 87,535  |  |   |         |        |  |   |           |        | 
|Commercial, industrial
and agricultural: |                     |   |                |           |          |   |            |         |          |   |                              |         |                  |   |          |         |  |   |         |         |  |   |           |        
|                                         | Real estate         |   |                | 1,461,606 |          |   |            | 334,822 |          |   |                              | 138,173 |                  |   |          | 103,290 |  |   |         | 50,502  |  |   |           | 834,819 | 
|                                         | Business and others |   |                | 570,196   |          |   |            | 519,340 |          |   |                              | 15,993  |                  |   |          | 12,932  |  |   |         | 2,810   |  |   |           | 19,121  | 
|Consumer and others                      |                     |   | 743,600        |           |          |   | 107,136    |         |          |   | 186,786                      |         |                  |   |         |         |  |   | 449,678 |         |  |   |          |        
|                                         |                     |   |                |           |          |   |            |         |          |   |                              |         |                  |   |          |         |  |   |         |         |  |   |           |        
|Total                                    |                     | $ | 3,808,917      |           |          | $ | 1,057,375  |         |          | $ | 350,920                      |         |                  | $ | 203,911  |         |  | $ | 807,672 |         |  | $ | 1,389,039 |        
|                                         |                     |   |                |           |          |   |            |         |          |   |                              |         |                  |   |          |         |  |   |         |         |  |   |           |        

The Banks loan originations come from a number of sources. The primary
sources for residential loan originations are depositors and walk-in customers.
Commercial loan originations come from existing customers as well as through
direct solicitation and referrals.

The Bank originates loans in accordance with written, non-discriminatory
underwriting standards and loan origination procedures prescribed in the Board
of Directors approved loan policies. Detailed loan applications are obtained to
determine the borrowers repayment ability. Applications are verified through
the use of credit reports, financial statements and other confirmation
procedures. Property valuations by Board of Directors approved independent
appraisers are required for mortgage loans. The Banks Credit Committee approval
is required for all residential and commercial real estate loans, and all other
commercial loans over $1.0 million. Loans in excess of $1.0 million are also
reviewed by the full Board of Directors, including those loans approved by the
Credit Committee.

It is the Banks policy to require borrowers to provide title insurance
policies certifying or ensuring that the Bank has a valid first lien on the
mortgaged real estate. Borrowers must also obtain hazard insurance policies
prior to closing and, when required by the Department of Housing and Urban
Development, flood insurance policies. Borrowers may be required to advance
funds on a monthly basis together with each payment of principal and interest to
a mortgage escrow account from which the Bank makes disbursements for items such
as real estate taxes, hazard insurance premiums and private mortgage insurance
premiums as they fall due.

Westernbank originates most of its residential real estate loans as
conforming loans, eligible for sale in the secondary market. The loan-to-value
ratio at the time of origination on residential mortgages is generally 75%,
except that the Bank may lend up to 90% of the lower of the purchase price or
appraised value of residential properties if private mortgage insurance is
obtained by the borrower for amounts in excess of 80%.

The Bank originates fixed and adjustable rate residential mortgage loans
secured by a first mortgage on the borrowers real property, payable in monthly
installments for terms ranging from ten up to forty years. Adjustable rates are
indexed to specified prime or LIBOR rate. All 30 year conforming mortgages are
originated with the intent to sell.

34



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##### Table of Contents



In addition to its residential loan originations, the Bank also purchases
residential first mortgage loans from other mortgage originators in Puerto Rico.
During the year ended December 31, 2002, Westernbank purchased $208.4 million of
such loans.

The Bank originates primarily variable and adjustable rate commercial
business and real estate loans. The Bank also makes real estate construction
loans subject to firm permanent financing commitments. As of December 31, 2002,
the Banks commercial loans portfolio had a total delinquency ratio, including
the categories of 60 days and over, of 0.33% (less than 1%).

The Bank offers different types of consumer loans in order to provide a
full range of financial services to its customers. Within the different types of
consumer loans offered by the bank, there are various types of secured and
unsecured consumer loans with varying amortization schedules. In addition, the
Bank makes fixed-rate residential second mortgage loans. In July 2002,
Westernbank launched a new banking division focused on offering consumer loans
through 17 full-service branches, called Expresso of Westernbank, denoting the
branches emphasis on small, unsecured consumer loans up to $15,000 and
collateralized consumer loans up to $75,000.

The Bank offers the service of VISA and Master Card. At December 31, 2002,
there were approximately 26,947 outstanding accounts, with an aggregate
outstanding balance of $56.7 million and unused credit card lines available of
$77.8 million.

In connection with all consumer and second mortgage loans originated, the
Banks underwriting standards include an evaluation of the applicants payment
history on other debts and an assessment of the ability to meet existing
obligations and payments on the proposed loan. As of December 31, 2002, the
Banks consumer loans portfolio had a total delinquency ratio, including the
categories of 60 days and over, of 0.59% (less than 1%).

NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE HELD FOR SALE

When a borrower fails to make a required payment on a loan, the Bank
attempts to cure the deficiency by contacting the borrower. In most cases,
deficiencies are cured promptly. If the delinquency exceeds 90 days and is not
cured through the Banks normal collection procedures, the Bank will generally
institute measures to remedy the default. If a foreclosure action is instituted
and the loan is not cured, paid in full or refinanced, the property is sold at a
judicial sale at which the Bank may acquire the property. Thereafter, if the
Bank acquires the property, such acquired property is appraised and included in
the Banks foreclosed real estate held for sale account at the lower of cost or
fair value at the date of acquisition. Then, this asset is carried at the lower
of fair value less estimated costs to sell or cost until the property is sold.
In the event that the property is sold at a price insufficient to cover the
balance of the loan, the debtor remains liable for the deficiency.

The accrual of interest on loans is discontinued when, in managements
opinion, the borrower may be unable to meet payments as they become due, but in
no event is it recognized after 90 days in arrears on payments of principal or
interest. When interest accrual is discontinued, all unpaid interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.

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The following table sets forth information regarding non-performing loans
and foreclosed real estate held for sale by the Bank at the dates indicated:

|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |       | 
|------------------------------------------------------------------------------------------------------ | -------------------------- | - | ---------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ----- |  | - | ----- | ----- |  | - | ------ | ----- | 
|                                                                                                       |                            |   | DECEMBER 31,          
|                                                                                                       |                            |   |                       
|                                                                                                       |                            |   | 2002                   |        | 2001 |   | 2000   |        | 1999 |   | 1998  
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |       
|                                                                                                       |                            |   | (DOLLARS IN THOUSANDS)
|Residential real estate mortgage and construction loans                                                |                            | $ | 2,026                  |        |      | $ | 2,735  |        |      | $ | 1,817  |       |  | $ | 1,719 |       |  | $ | 1,183  |      
|Commercial, industrial and agricultural loans                                                          |                            |   | 13,567                 |        |      |   | 7,947  |        |      |   | 6,140  |       |  |   | 4,366 |       |  |   | 5,427  |      
|Consumer loans                                                                                         |                            |   | 3,812                  |        |      |   | 3,431  |        |      |   | 1,733  |       |  |   | 870   |       |  |   | 1,172  |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|                                                                                                       | Total non-performing loans |   |                        | 19,405 |      |   |        | 14,113 |      |   |        | 9,690 |  |   |       | 6,955 |  |   |        | 7,782 | 
|Foreclosed real estate held for sale                                                                   |                            |   | 3,679                  |        |      |   | 3,013  |        |      |   | 2,454  |       |  |   | 2,232 |       |  |   | 3,271  |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Total non-performing loans and foreclosed real estate held for sale                                    |                            | $ | 23,084                 |        |      | $ | 17,126 |        |      | $ | 12,144 |       |  | $ | 9,187 |       |  | $ | 11,053 |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Interest that would have been recorded if the
loans had not been classified as
non-performing          |                            | $ | 1,102                  |        |      | $ | 1,123  |        |      | $ | 979    |       |  | $ | 514   |       |  | $ | 1,027  |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Interest recorded on non-performing loans                                                              |                            | $ | 775                    |        |      | $ | 1,716  |        |      | $ | 780    |       |  | $ | 1,470 |       |  | $ | 242    |      
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Total non-performing loans as a percentage
of loans receivable, including
mortgage loans held for sale |                            |   | 0.51                   | %      |      |   | 0.49   | %      |      |   | 0.43   | %     |  |   | 0.37  | %     |  |   | 0.57   | %    
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      
|Total non-performing loans and foreclosed real estate
held for sale as a percentage of total assets    |                            |   | 0.28                   | %      |      |   | 0.29   | %      |      |   | 0.28   | %     |  |   | 0.27  | %     |  |   | 0.45   | %    
|                                                                                                       |                            |   |                        |        |      |   |        |        |      |   |        |       |  |   |       |       |  |   |        |      

The increase from 2001 to 2002 is mostly attributed to four commercial
loans with principal balances of $2.4 million, $1.6 million, $1.3 million and
$589,000, respectively, all of which are collateralized by real estate
properties. At December 31, 2002, two of these loans with outstanding balances
of $2.4 million and $1.6 million, required a specific valuation allowance of
$355,000 and $770,000, respectively. At December 31, 2002, the allowance for
possible loan losses was 242.80% of total non-performing loans (reserve
coverage).

ALLOWANCE FOR LOAN LOSSES

The Bank maintains an allowance for loan losses to absorb losses inherent
in the loan portfolio. The allowance is based on ongoing, quarterly assessments
of the probable estimated losses inherent in the loan portfolio. The Company
follows a systematic methodology to establish and evaluate the adequacy of the
allowance for loan losses. This methodology consists of several key elements,
which include:

The Formula Allowance. The formula allowance is calculated by applying
loss factors to outstanding loans not otherwise covered by specific allowances.
Loss factors are based on historical loss experience and may be adjusted for
significant factors that, in managements judgment, affect the collectibility of
the portfolio as of the evaluation date. Loss factors are described as follows:



| |  |  | Loan loss factors for commercial loans, including construction and
land acquisition loans, are based on historical loss trends for
three years, as adjusted for managements expected increase in the
loss factors given the significant increase in such loan portfolios
over the last few years.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Pooled loan loss factors are also based on historical loss trends
for one to three years. Pooled loans are loans that are homogeneous
in nature, such as consumer installment and residential mortgage
loans.                                                                                     

Specific Allowances for Identified Problem Loans and Portfolio Segments.
Specific allowances are established and maintained where management has
identified significant adverse conditions or circumstances related to a credit
or portfolio segment that management believes indicate the probability that a
loss has been incurred in excess of the amount determined by the application of
the formula allowance. Larger commercial and construction loans that exhibit
potential or observed credit weaknesses are subject to individual review. Where
appropriate, allowances are allocated to individual loans based on managements
estimate of the borrowers ability to repay the loan given the availability of
collateral, other sources of cash flow and legal options available to the Bank.

36



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In addition, the specific allowance incorporates the results of measuring
impaired loans as provided in SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, as amended. This accounting standard prescribes the
measurement methods, income recognition and disclosures concerning impaired
loans.

The Unallocated Allowance. An unallocated allowance is established
recognizing the estimation risk associated with the formula and specific
allowances. It is based upon managements evaluation of various conditions, the
effects of which are not directly measured in determining the formula and
specific allowances. These conditions include then-existing general economic and
business conditions affecting our key lending areas; credit quality trends,
including trends in nonperforming loans expected to result from existing
conditions, collateral values, loan volumes and concentrations, seasoning of the
loans portfolio, recent loss experience in particular segments of the portfolio,
regulatory examination results, and findings of our internal credit examiners.
The evaluation of the inherent loss regarding these conditions involves a higher
degree of uncertainty because they are not identified with specific problem
credits or portfolio segments.

Management assesses these conditions quarterly. If any of these conditions
is evidenced by a specifically identifiable problem credit or portfolio segment
as of the evaluation date, managements estimate of the effect of this condition
may be reflected as a specific allowance applicable to this credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
managements evaluation of the probable loss concerning this condition is
reflected in the unallocated allowance.

The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. Historical loss factors for commercial and consumer loans may
be adjusted for significant factors that, in managements judgment, reflect the
impact of any current condition on loss recognition. Factors which management
considers in the analysis include the effect of the national and local
economies, trends in the nature and volume of loans (delinquencies, charge-offs,
non-accrual and problem loans), changes in the internal lending policies and
credit standards, collection practices, and examination results from bank
regulatory agencies and the Banks internal credit examiners. Loan loss factors
are adjusted quarterly based upon the level of net charge-offs expected by
management in the next twelve months, after taking into account historical loss
ratios adjusted for current trends. By assessing the probable estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon any more recent information that
has become available.

At December 31, 2002, the Banks allowance for loan losses was $47.1
million, consisting of $36.1 million formula allowance, $8.0 million of specific
allowances and $3.0 million of unallocated allowance. As of December 31, 2002,
the allowance for loan losses equals 1.24% of total loans, including mortgage
loans held for sale, and 242.80% of total non-performing loans, compared with an
allowance for loan losses at December 31, 2001, of $38.4 million, or 1.33% of
total loans, and 271.83% of total non-performing loans.

As of December 31, 2002, there have been no significant changes in
estimation methods or assumptions that affected our methodology for assessing
the appropriateness of the allowance for loan losses.

37



---



##### Table of Contents



The table below presents a reconciliation of changes in the allowance for
loan losses for the periods indicated:

|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |        |  
|------------------------------------------------ | ----------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                 |                                                             |   | YEAR ENDED DECEMBER 31,
|                                                 |                                                             |   |                        
|                                                 |                                                             |   | 2002                    |        | 2001 |   | 2000   |        | 1999 |   | 1998  
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |       
|                                                 |                                                             |   | (DOLLARS IN THOUSANDS) 
|Balance, beginning of year                       |                                                             | $ | 38,364                  |        |      | $ | 28,928 |        |      | $ | 23,978 |        |   | $ | 15,800 |        |   | $ | 13,201 |       
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Loans charged-off:                               |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|                                                 | Consumer loans                                              |   |                         | 4,576  |      |   |        | 3,840  |      |   |        | 4,760  |   |   |        | 5,154  |   |   |        | 4,090  |  
|                                                 | Commercial, industrial and agricultural loans               |   |                         | 3,389  |      |   |        | 2,970  |      |   |        | 372    |   |   |        | 1,913  |   |   |        | 134    |  
|                                                 | Real estate-mortgage and
construction loans                 |   |                         |       |      |   |        | 228    |      |   |        | 231    |   |   |        | 291    |   |   |        |       |  
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Total loans charged-off                          |                                                             |   | 7,965                   |        |      |   | 7,038  |        |      |   | 5,363  |        |   |   | 7,358  |        |   |   | 4,224  |       
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Recoveries of loans previously
charged-off:      |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|                                                 | Consumer loans                                              |   |                         | 858    |      |   |        | 996    |      |   |        | 795    |   |   |        | 1,003  |   |   |        | 601    |  
|                                                 | Commercial, industrial and agricultural loans               |   |                         | 584    |      |   |        | 133    |      |   |        | 594    |   |   |        | 335    |   |   |        | 42     |  
|                                                 | Real estate-mortgage and
construction loans                 |   |                         | 190    |      |   |        | 175    |      |   |        | 224    |   |   |        | 198    |   |   |        | 180    |  
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Total recoveries of loans previously charged-off |                                                             |   | 1,632                   |        |      |   | 1,304  |        |      |   | 1,613  |        |   |   | 1,536  |        |   |   | 823    |       
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Net loans charged-off                            |                                                             |   | 6,333                   |        |      |   | 5,734  |        |      |   | 3,750  |        |   |   | 5,822  |        |   |   | 3,401  |       
|Provision for loan losses                        |                                                             |   | 15,083                  |        |      |   | 12,278 |        |      |   | 8,700  |        |   |   | 14,000 |        |   |   | 6,000  |       
|Allowance acquired on loans purchased            |                                                             |   |                        |        |      |   | 2,892  |        |      |   |       |        |   |   |       |        |   |   |       |       
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Balance, end of period                           |                                                             | $ | 47,114                  |        |      | $ | 38,364 |        |      | $ | 28,928 |        |   | $ | 23,978 |        |   | $ | 15,800 |       
|                                                 |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|Ratios:                                          |                                                             |   |                         |        |      |   |        |        |      |   |        |        |   |   |        |        |   |   |        |       
|                                                 | Allowance for loan losses to total end of year loans        |   |                         | 1.24   | %    |   |        | 1.33   | %    |   |        | 1.29   | % |   |        | 1.26   | % |   |        | 1.15   | %
|                                                 | Provision for loan losses to net loans
charged-off          |   |                         | 238.17 | %    |   |        | 214.13 | %    |   |        | 232.00 | % |   |        | 240.47 | % |   |        | 176.42 | %
|                                                 | Recoveries of loans to loans charged-off in
previous period |   |                         | 23.19  | %    |   |        | 24.31  | %    |   |        | 21.92  | % |   |        | 36.36  | % |   |        | 31.64  | %
|                                                 | Net loans charged-off to average loans                      |   |                         | 0.19   | %    |   |        | 0.23   | %    |   |        | 0.19   | % |   |        | 0.35   | % |   |        | 0.32   | %
|                                                 | Allowance for loans losses to
non-performing loans          |   |                         | 242.80 | %    |   |        | 271.83 | %    |   |        | 298.53 | % |   |        | 344.76 | % |   |        | 203.03 | %

The following table presents the allocation of the allowance for credit
losses and the percentage of loans in each category to total loans, as set forth
in the Loans table on page 12.

|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |        | 
|------------------------------------------------------- |  | ---------------------- | ------ | ------- |  | ------ | ----- | ------- |  | ------ | ------ | ------- |  | ------ | ----- | ------- |  | ------ | ------ | ------- |  |  | ----- | - |  | - | ------ |  |  |  | ----- | - |  | - | ------ |  |  |  | ------ | 
|                                                        |  | DECEMBER 31,          
|                                                        |  |                       
|                                                        |  | 2002                   |        | 2001    |  | 2000   |       | 1999    |  | 1998  
|                                                        |  |                        |        |         |  |        |       |         |  |       
|                                                        |  | AMOUNT                 |        | PERCENT |  | AMOUNT |       | PERCENT |  | AMOUNT |        | PERCENT |  | AMOUNT |       | PERCENT |  | AMOUNT |        | PERCENT
|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |        
|                                                        |  | (DOLLARS IN THOUSANDS)
|Commercial, industrial and
agricultural loans (1)       |  | $                      | 31,671 |         |  |        | 53.3  | %       |  | $      | 24,397 |         |  |        | 51.8  | %       |  | $      | 16,273 |         |  |  | 44.1  | % |  | $ | 11,772 |  |  |  | 39.9  | % |  | $ | 7,747  |  |  |  | 42.9   | 
|Consumer loans (2)                                      |  |                        | 12,004 |         |  |        | 19.5  |         |  |        | 8,203  |         |  |        | 14.5  |         |  |        | 7,194  |         |  |  | 17.2  |   |  |   | 5,718  |  |  |  | 17.4  |   |  |   | 5,044  |  |  |  | 22.5   | 
|Residential real estate mortgage
and construction loans |  |                        | 443    |         |  |        | 27.2  |         |  |        | 494    |         |  |        | 33.7  |         |  |        | 526    |         |  |  | 38.7  |   |  |   | 1,743  |  |  |  | 42.7  |   |  |   | 1,043  |  |  |  | 34.6   | 
|Unallocated allowance                                   |  |                        | 2,996  |         |  |        |      |         |  |        | 5,270  |         |  |        |      |         |  |        | 4,935  |         |  |  |      |   |  |   | 4,745  |  |  |  |      |   |  |   | 1,966  |  |  |  |       | 
|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |        | 
|Total allowance for loan losses                         |  | $                      | 47,114 |         |  |        | 100.0 | %       |  | $      | 38,364 |         |  |        | 100.0 | %       |  | $      | 28,928 |         |  |  | 100.0 | % |  | $ | 23,978 |  |  |  | 100.0 | % |  | $ | 15,800 |  |  |  | 100.00 | 
|                                                        |  |                        |        |         |  |        |       |         |  |        |        |         |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |  |  |  |       |   |  |   |        |  |  |  |        | 



---

|(1) |  | Includes $4.5 million and $3.1 million of Westernbank Business Credit
loans portfolio at December 31, 2002 and 2001, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $1.5 million of Expresso of Westernbank loans portfolio at
December 31, 2002.                                            

Loans are classified as impaired or not impaired in accordance with SFAS
114. A loan is impaired when, based on current information and events, it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due, according to the contractual terms of the
agreement.

38



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##### Table of Contents



The Bank measures the impairment of a loan based on the present value of
expected future cash flows discounted at the loans effective interest rate, or
as a practical expedient, at the observable market price of the loan or the fair
value of the collateral, if the loan is collateral dependent. Significant loans
(those exceeding $500,000) are individually evaluated for impairment. Large
groups of small balance, homogeneous loans are collectively evaluated for
impairment; loans that are recorded at fair value or at the lower of cost or
market are not evaluated for impairment. The portfolios of mortgage and consumer
loans are considered homogeneous and are evaluated collectively for impairment.

Impaired loans for which the discounted cash flows, collateral value or
market price exceeds its carrying value do not require an allowance. The
allowance for impaired loans is part of the Companys overall allowance for loan
losses.

The following table sets forth information regarding the investment in impaired
loans:

|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                      |  | 2002           |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                      |  |                |        |      |  |      |        |      |  |     
|                                      |  | (IN THOUSANDS)
|Investment on impaired loans:         |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Covered by a valuation allowance      |  | $              | 26,074 |      |  | $    | 21,996 |      |  | $    | 8,040  |  |  | $ | 8,136  |  |  | $ | 5,499 | 
|Do not require a valuation allowance  |  |                | 24,515 |      |  |      | 20,482 |      |  |      | 4,834  |  |  |   | 4,947  |  |  |   | 4,309 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Total                                 |  | $              | 50,589 |      |  | $    | 42,478 |      |  | $    | 12,874 |  |  | $ | 13,083 |  |  | $ | 9,808 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Valuation allowance in impaired loans |  | $              | 4,752  |      |  | $    | 4,181  |      |  | $    | 1,157  |  |  | $ | 1,268  |  |  | $ | 1,120 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Average investment in impaired loans  |  | $              | 46,147 |      |  | $    | 20,293 |      |  | $    | 11,873 |  |  | $ | 14,919 |  |  | $ | 6,561 | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 
|Interest collected in impaired loans  |  | $              | 4,041  |      |  | $    | 1,716  |      |  | $    | 780    |  |  | $ | 1,470  |  |  | $ | 242   | 
|                                      |  |                |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |       | 

At December 31, 2002, the Banks investment in impaired loans increased
$8.1 million or 19.09%, from $42.5 million as of December 31, 2001, to $50.6
million as of December 31, 2002. This increase is principally attributed to four
newly classified loans with an aggregate outstanding principal balance of
approximately $13.0 million as of December 31, 2002. All loans are
collateralized by real estate and required a combined valuation allowance of
$823,000.

INVESTMENTS

At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity, trading or available for sale.
At each reporting date, the appropriateness of the classification is reassessed.
Investments in debt securities for which management has the positive intent and
ability to hold to maturity are classified as held to maturity and stated at
cost increased by accretion of discounts and reduced by amortization of
premiums, both computed by the interest method. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading and measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Securities not classified as
either held to maturity or trading are classified as available for sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, as a component of accumulated other comprehensive
income (loss) until realized. Gains and losses on sales of securities are
determined using the specific-identification method.

The Banks investments are managed by the Investment Department. Purchases
and sales are required to be reported monthly to both the Investment Committee
composed of members of the Board of Directors, as well as the President and
Chief Executive Officer and the Chief Financial Officer.

The Investment Department is authorized to purchase and sell federal
funds, interest bearing deposits in banks, bankers acceptances of commercial
banks insured by the FDIC, mortgage and assets-backed securities, Puerto Rico
and U.S. Government and agency obligations, municipal securities rated A or
better by any of the nationally recognized rating agencies and commercial paper
rated P-1 by Moodys Investors Service, Inc. or A-1 by Standard and Poors, a
Division of the McGraw-Hill Companies, Inc. In addition, the Investment
Department is responsible for the pricing and sale of deposits and securities
sold under agreements to repurchase.

The Banks investment strategy is affected by both the rates and terms
available on competing investments and tax and other legal considerations.

39



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The following table presents the carrying value of investments at December
31, 2002 and 2001:

|                                                |                                                 |   |                |           |      |   |           |           | 
|----------------------------------------------- | ----------------------------------------------- | - | -------------- | --------- | ---- | - | --------- | --------- | 
|                                                |                                                 |   | 2002           |           | 2001
|                                                |                                                 |   |                |           |     
|                                                |                                                 |   | (IN THOUSANDS)
|Held to maturity :                              |                                                 |   |                |           |      |   |           |          
|                                                | US Government and agencies obligations          |   | $              | 2,671,344 |      |   | $         | 1,788,000 | 
|                                                | Puerto Rico Government and agencies obligations |   |                | 19,695    |      |   |           | 22,607    | 
|                                                | Commercial paper                                |   |                | 74,997    |      |   |           | 59,992    | 
|                                                | Corporate notes                                 |   |                | 66,697    |      |   |           | 66,460    | 
|                                                | Mortgage and other asset-backed securities      |   |                | 668,324   |      |   |           | 432,716   | 
|                                                |                                                 |   |                |           |      |   |           |          
|Total                                           |                                                 |   | 3,501,057      |           |      |   | 2,369,775 |          
|                                                |                                                 |   |                |           |      |   |           |          
|Available for sale:                             |                                                 |   |                |           |      |   |           |          
|                                                | US Government and agencies obligations          |   |                |          |      |   |           | 196,446   | 
|                                                | Corporate notes                                 |   |                | 10,381    |      |   |           | 56,080    | 
|                                                | Mortgage-backed securities                      |   |                | 145,276   |      |   |           | 29,156    | 
|                                                | Other investments                               |   |                | 5,230     |      |   |           |          | 
|                                                |                                                 |   |                |           |      |   |           |          
|Total                                           |                                                 |   | 160,887        |           |      |   | 281,682   |          
|                                                |                                                 |   |                |           |      |   |           |          
|Trading securities  mortgage-backed securities |                                                 |   |               |           |      |   | 4,609     |          
|                                                |                                                 |   |                |           |      |   |           |          
|Total investments                               |                                                 | $ | 3,661,944      |           |      | $ | 2,656,066 |          
|                                                |                                                 |   |                |           |      |   |           |          

The carrying amount of investment securities at December 31, 2002, by
contractual maturity (excluding mortgage and others asset-backed securities),
are shown below:

|                                                 |                                        |   |                        |           |         |  |          |      |  
|------------------------------------------------ | -------------------------------------- | - | ---------------------- | --------- | ------- |  | -------- | ---- | -
|                                                 |                                        |   |                        |           |         |  | WEIGHTED
|                                                 |                                        |   | CARRYING               |           | AVERAGE
|                                                 |                                        |   | AMOUNT                 |           | YIELD  
|                                                 |                                        |   |                        |           |        
|                                                 |                                        |   | (DOLLARS IN THOUSANDS)
|US Government and agencies obligations:          |                                        |   |                        |           |         |  |          |     
|                                                 | Due within one year or less            |   | $                      | 30,181    |         |  |          | 4.23 | %
|                                                 | Due after one year through five years  |   |                        | 2,551,163 |         |  |          | 3.97 |  
|                                                 | Due after five years through ten years |   |                        | 90,000    |         |  |          | 4.22 |  
|                                                 | Due after ten years                    |   |                        |          |         |  |          |     |  
|                                                 |                                        |   |                        |           |         |  |          |     
|                                                 |                                        |   | 2,671,344              |           |         |  | 4.04     |     
|                                                 |                                        |   |                        |           |         |  |          |     
|Puerto Rico Government and agencies obligations: |                                        |   |                        |           |         |  |          |     
|                                                 | Due within one year                    |   |                        |          |         |  |          |     |  
|                                                 | Due after one year through five years  |   |                        | 13,700    |         |  |          | 6.28 |  
|                                                 | Due after five years through ten years |   |                        | 4,000     |         |  |          | 5.05 |  
|                                                 | Due after ten years                    |   |                        | 1,995     |         |  |          | 6.15 |  
|                                                 |                                        |   |                        |           |         |  |          |     
|                                                 |                                        |   | 19,695                 |           |         |  | 6.02     |     
|                                                 |                                        |   |                        |           |         |  |          |     
|Other:                                           |                                        |   |                        |           |         |  |          |     
|                                                 | Due within one year                    |   |                        | 90,388    |         |  |          | 2.05 |  
|                                                 | Due after one year through five years  |   |                        | 29,983    |         |  |          | 3.23 |  
|                                                 | Due after five years through ten years |   |                        |          |         |  |          |     |  
|                                                 | Due after ten years                    |   |                        | 36,934    |         |  |          | 6.54 |  
|                                                 |                                        |   |                        |           |         |  |          |     
|                                                 |                                        |   | 157,305                |           |         |  | 3.33     |     
|                                                 |                                        |   |                        |           |         |  |          |     
|Total                                            |                                        |   | 2,848,344              |           |         |  | 4.01     |     
|Mortgage and other asset-backed securities       |                                        |   | 813,600                |           |         |  | 5.46     |     
|                                                 |                                        |   |                        |           |         |  |          |     
|Total                                            |                                        | $ | 3,661,944              |           |         |  | 4.33     | %   
|                                                 |                                        |   |                        |           |         |  |          |     

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Mortgage and other asset-backed securities at December 31, 2002 and 2001,
consists of:

|                                                                            |                                                              |                        |         |                |         |      |         |         |         | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------- | ------- | -------------- | ------- | ---- | ------- | ------- | ------- | 
|                                                                            |                                                              |                        |         | 2002           |         | 2001
|                                                                            |                                                              |                        |         |                |         |     
|                                                                            |                                                              |                        |         | (IN THOUSANDS)
|Trading:                                                                    |                                                              |                        |         |                |         |      |         |        
|                                                                            | Government National Mortgage
Association (GNMA) certificates |                        | $       |               |         |      | $       | 2,579   |        
|                                                                            | Fannie Mae (FNMA) certificates                               |                        |         |               |         |      |         | 2,030   |        
|                                                                            |                                                              |                        |         |                |         |      |         |        
|Total trading                                                               |                                                              |                        |        |                |         |      | 4,609   |        
|                                                                            |                                                              |                        |         |                |         |      |         |        
|Available for sale  Collateralized
mortgage obligations (CMO) certificates |                                                              |                        | 145,276 |                |         |      | 29,156  |        
|                                                                            |                                                              |                        |         |                |         |      |         |        
|Held to maturity:                                                           |                                                              |                        |         |                |         |      |         |        
|                                                                            | Federal Home Loan Mortgage Corporation (FHLMC)
certificates  |                        |         | 10,435         |         |      |         | 13,475  |        
|                                                                            | GNMA certificates                                            |                        |         | 13,657         |         |      |         | 18,500  |        
|                                                                            | FNMA certificates                                            |                        |         | 6,906          |         |      |         | 10,011  |        
|                                                                            | CMO certificates                                             |                        |         | 565,068        |         |      |         | 319,386 |        
|                                                                            | Other                                                        |                        |         | 72,258         |         |      |         | 71,344  |        
|                                                                            |                                                              |                        |         |                |         |      |         |        
|                                                                            |                                                              | Total held to maturity |         |                | 668,324 |      |         |         | 432,716 | 
|                                                                            |                                                              |                        |         |                |         |      |         |        
|Total mortgage and other asset-backed
securities                            |                                                              | $                      | 813,600 |                |         | $    | 466,481 |        
|                                                                            |                                                              |                        |         |                |         |      |         |        

The Banks investment portfolio at December 31, 2002, had an average
contractual maturity of 50 months, when compared to an average contractual
maturity of 73 months at December 31, 2001. The Banks interest rate risk model
takes into consideration the callable features of certain investment securities.
Given the present interest rate scenario, and taking into consideration the
callable features of these securities, the Banks investment portfolio as of
December 31, 2002, had a remaining average maturity of 30 months. However, no
assurance can be given that such levels will be maintained in future periods.




As of
December 31, 2002, the Company had $17.8 million of below-investment
grade securities with unrealized losses of $1,850,000. These
securities have been in an unrealized loss position of
at least $435,000 for a period greater than one year but less than
two years and of at least $50,000 for a period greater than two years
but less than three. As of December 31, 2002, there were no
unrealized losses for a period greater than three years.




DEPOSITS

The Bank offers a diversified choice of deposit accounts. Savings deposits
increased from $465.3 million as of December 31, 2001, to $560.5 million as of
December 31, 2002, an increase of $95.3 million or 20.48%. Also, other deposits
(excluding accrued interest payable) represented mainly by time deposits,
brokered deposits and Individual Retirement Account deposits (IRAs), increased
from $2.74 billion as of December 31, 2001, to $3.71 billion as of December 31,
2002, an increase of $971.2 million or 35.40%. Other deposits include brokered
deposits amounting to $2.55 billion and $1.57 billion as of December 31, 2002
and 2001, respectively. These accounts have historically been a stable source of
funds.

At December 31, 2002, the Bank had total deposits of $4.3 billion
(excluding accrued interest payable), of which $560.5 million or 13.1% consisted
of savings deposits, $178.6 million or 4.18% consisted of interest bearing
demand deposits, $156.1 million or 3.65% consisted of noninterest bearing
deposits, and $3.38 billion or 79.06% consisted of time deposits. The Bank also
offers negotiable order of withdrawal (NOW) accounts, Super Now accounts,
special checking accounts and commercial demand accounts. At December 31, 2002,
the scheduled maturities of time certificates of deposit in amounts of $100,000
or more are as follows:

|                                |       |   |                |           | 
|------------------------------- | ----- | - | -------------- | --------- | 
|                                |       |   | (IN THOUSANDS)
|3 months or less                |       | $ | 735,812        |          
|over 3 months through 6 months  |       |   | 800,396        |          
|over 6 months through 12 months |       |   | 616,962        |          
|over 12 months                  |       |   | 719,071        |          
|                                |       |   |                |          
|                                | Total |   | $              | 2,872,241 | 
|                                |       |   |                |          

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The following table sets forth the average amount and the average rate
paid on the following deposit categories for the years ended December 31, 2002
and 2001, respectively:

|                                    |  |         |           |         |  |                        |      |         |  |   |           |  |  |  |      |  
|----------------------------------- |  | ------- | --------- | ------- |  | ---------------------- | ---- | ------- |  | - | --------- |  |  |  | ---- | -
|                                    |  | 2002    |           | 2001   
|                                    |  |         |           |        
|                                    |  | AVERAGE |           | AVERAGE |  | AVERAGE                |      | AVERAGE
|                                    |  | AMOUNT  |           | RATE    |  | AMOUNT                 |      | RATE   
|                                    |  |         |           |         |  |                        |      |        
|                                    |  |         |           |         |  | (DOLLARS IN THOUSANDS) |      |         |  |  
|Time deposits                       |  | $       | 2,889,649 |         |  |                        | 3.40 | %       |  | $ | 2,177,399 |  |  |  | 5.21 | %
|Savings deposits                    |  |         | 509,114   |         |  |                        | 2.46 | %       |  |   | 432,626   |  |  |  | 2.96 | %
|Interest bearing demand
deposits    |  |         | 124,127   |         |  |                        | 2.90 | %       |  |   | 100,960   |  |  |  | 3.45 | %
|Noninterest bearing demand
deposits |  |         | 167,352   |         |  |                        |     |         |  |   | 136,251   |  |  |  |     |  
|                                    |  |         |           |         |  |                        |      |         |  |   |           |  |  |  |      |  
|Total                               |  | $       | 3,690,242 |         |  |                        | 3.10 | %       |  | $ | 2,847,236 |  |  |  | 4.55 | %
|                                    |  |         |           |         |  |                        |      |         |  |   |           |  |  |  |      |  

BORROWINGS

The following table sets forth the borrowings of the Bank at December 31,
2002 and 2001, respectively:

|                                               |  |                |           |      |  |   |           | 
|---------------------------------------------- |  | -------------- | --------- | ---- |  | - | --------- | 
|                                               |  | 2002           |           | 2001
|                                               |  |                |           |     
|                                               |  | (IN THOUSANDS)
|Securities sold under agreements to repurchase |  | $              | 3,097,341 |      |  | $ | 2,059,646 | 
|Advances from FHLB                             |  |                | 120,000   |      |  |   | 120,000   | 
|Term notes                                     |  |                |          |      |  |   | 43,000    | 
|Mortgage note payable                          |  |                | 37,822    |      |  |   |          | 
|                                               |  |                |           |      |  |   |           | 
|Total                                          |  | $              | 3,255,163 |      |  | $ | 2,222,646 | 
|                                               |  |                |           |      |  |   |           | 

The Bank has made use of institutional securities sold under agreements to
repurchase in order to obtain funding, primarily through investment banks and
brokerage firms. Such agreements are collateralized with investment securities.
The Bank had $3.1 billion in total securities sold under agreements to
repurchase outstanding at December 31, 2002, at a weighted average rate of
3.03%. Securities sold under agreements to repurchase outstanding as of December
31, 2002, mature as follows: $1.02 billion within 30 days; $12.7 million in
2003; $315.8 million in 2004; $663.6 million in 2005, $47.5 million in 2006; and
$1.04 billion thereafter.

Westernbank also obtains advances from FHLB of New York. As of December
31, 2002, Westernbank had $120.0 million in outstanding FHLB advances at a
weighted average rate of 5.10%. Advances from FHLB mature as follows: $14.0
million in 2003; $14.0 million in 2005; $50.0 million in 2006; and $42.0 million
thereafter.

At December 31, 2002, Westernbank World Plaza, Inc., a wholly-owned
subsidiary of Westernbank Puerto Rico, had outstanding $37.8 million of a
mortgage note, at an interest rate of 8.05% per year up to September 11, 2009.
Thereafter, the mortgage note will bear interest on the then outstanding
principal balance (1) at a rate per year equal to the greatest of 13.05% or the
Treasury Rate plus five percentage points or (2) at the rate of 10.05% per year
depending on certain conditions on the repricing date. Westernbank World Plaza
has a prepayment option on the repricing date, without penalty. The mortgage
note is collateralized by a 23-story office building, including its related
parking facility, located in Hato Rey, Puerto Rico.

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The following table presents certain information regarding the Banks
short-term borrowings for the years ended December 31, 2002 and 2001,
respectively:

|                                             |              |   |                        |      |      |   |         |      |  
|-------------------------------------------- | ------------ | - | ---------------------- | ---- | ---- | - | ------- | ---- | -
|                                             |              |   | 2002                   |      | 2001
|                                             |              |   |                        |      |     
|                                             |              |   | (DOLLARS IN THOUSANDS)
|Amount outstanding at period end             |              | $ | 1,043,493              |      |      | $ | 806,548 |     
|Monthly average outstanding balance          |              |   | 1,378,074              |      |      |   | 353,003 |     
|Maximum outstanding balance at any month end |              |   | 2,104,599              |      |      |   | 806,548 |     
|Weighted average interest rate:              |              |   |                        |      |      |   |         |     
|                                             | For the year |   |                        | 1.51 | %    |   |         | 2.18 | %
|                                             | At year end  |   |                        | 1.96 |      |   |         | 3.73 |  




CRITICAL ACCOUNTING POLICIES

Other-than-temporary
impairments  The Company evaluates for impairment its investment securities
on a quarterly basis or earlier if other factors indicative of potential impairment
exist. An impairment charge in the consolidated statements of income is recognized when
the decline in the fair value of the securities below their cost basis is judged to
be other-than-temporary. The Company considers various factors in determining whether it should
recognize an impairment charge, including, but not limited to the length of time and extent to
which the fair value has been less than its cost basis, expectation
of recoverability of its
original investment, the employment of a systematic methodology that considers available
evidence in evaluating potential impairment, and the Companys intention and ability to hold
the securities for a period of time sufficient to allow for any anticipated recovery in fair value.

RECENT ACCOUNTING DEVELOPMENTS

In
November 2002, the FASB issued FASB Interpretation No. 45
(FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others, an interpretation of FASB Statements
No. 5, 57, and 107 and rescission of FASB interpretation
No. 34. This interpretation elaborates on the disclosures to be made by a
guarantor in the financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN 45
are applicable for guarantees issued or modified after
December 31, 2002. Adoption of the recognition and measurement
provisions is not expected to have a significant effect on the
Companys financial condition and results of operations. The
disclosure provisions of FIN 45 were effective for financial
statements of fiscal years ending after December 15, 2002 and
did not have a significant effect on the Companys financial statements.

In
January 2003, the FASB issued FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51. FIN 46
addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that
either (a) does not issue voting interests (or other interests
with similar rights) or (b) the total equity investment at risk
is not sufficient to permit the entity to finance its activities.
FIN No. 46 requires an enterprise to consolidate a variable
interest entity if that enterprise has a variable interest that will
absorb a majority of the entitys expected losses if they occur,
receive a majority of the entitys expected residual
returns if they occur, or both. Qualifying Special Purpose
Entities are exempt from the consolidation requirements.
The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements
apply to variable interest entities created before
February 1, 2003 in the fiscal year or interim period beginning
after June 15, 2003. The adoption of FIN 46 is not expected
to have a significant effect on the Companys
financial position or results of operations.




STOCKHOLDERS EQUITY

Stockholders equity increased to $584.7 million as of December 31, 2002,
compared to $387.9 million in 2001 and $250.6 million in 2000. The 2002 increase
resulted from the combination of the issuance of 6,095,000 and 1,725,000 shares
of the Companys Common Stock and Series E Preferred Stock, respectively,
providing a net capital infusion of $97.9 million and $41.5 million,
respectively, plus the net income of $86.0 million generated for the year,
partially offset by total dividends $27.8 million paid on common and preferred
stock. The increase in 2001 was primarily due to the issuance of 2001 Series C
and D preferred stock for $96.3 million (net of cost of issuance of $3.7
million), a net income of $62.2 million, offset by cash dividends paid on common
stock and preferred stock totaling $20.6 million.

On January 18, 2002, the Companys Board of Directors approved an increase
in its annual dividend payments to stockholders in 2002 to $0.32 per share
($0.22 as adjusted). This represents an increase of 28% over the dividends paid
in 2001. Subsequently, on June 17, 2002, the Company declared a three-for-two
stock split in the form of a stock dividend, for all stockholders of record as
of June 28, 2002, distributed on July 10, 2002. The effect of the stock split
was a decrease to retained earnings and an increase in common stock of $20.8
million.

On January 31, 2003, the Companys Board of Directors approved an increase
in its annual dividend payments to stockholders in 2003 to $0.27 per share.
This represents an increase of 22.73% over the dividends paid in 2002.

The average number of common shares outstanding increased from 62,250,000
(split adjusted) in 2001 to 65,298,153 in 2002.

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##### Table of Contents






ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




INDEPENDENT AUDITORS REPORT

To the Board of Directors of
W Holding Company, Inc.
Mayaguez, Puerto Rico

We have audited the accompanying consolidated statements of financial condition
of W Holding Company, Inc. and its subsidiaries (the Company) as of December
31, 2002 and 2001, and the related consolidated statements of income, changes in
stockholders equity and of comprehensive income, and cash flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of W Holding Company, Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments effective January 1,
2001.

/s/  Deloitte & Touche LLP
San Juan, Puerto Rico
February 21, 2003

Stamp No. 1857172
affixed to original.



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W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 2002 AND 2001

|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |           |         |           | 
|--------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | -------------------------- | --------- | ------- | --------- | --------- | --------- | ------- | --------- | 
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           | 2002    |           | 2001     
|ASSETS                                                                                                    |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|Cash and due from banks                                                                                   |                                                                                                                                                                                                | $                 | 76,080                     |           |         | $         | 62,414    |          
|Money market instruments:                                                                                 |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|Securities purchased under agreements to resell                                                           |                                                                                                                                                                                                |                   | 261,847                    |           |         |           | 136,096   |          
|Federal funds sold                                                                                        |                                                                                                                                                                                                |                   | 197,300                    |           |         |           | 20,037    |          
|Interest-bearing deposits in banks                                                                        |                                                                                                                                                                                                |                   | 17,459                     |           |         |           | 26,214    |          
|Trading securities, with an amortized cost of $4,624 in 2001                                              |                                                                                                                                                                                                |                   |                           |           |         |           | 4,609     |          
|Investment securities available for sale, with an amortized cost
of $161,958 in 2002 and $281,963 in 2001 |                                                                                                                                                                                                |                   | 160,887                    |           |         |           | 281,682   |          
|Investment securities held to maturity, with a fair value of
$3,503,379 in 2002 and $2,362,836 in 2001    |                                                                                                                                                                                                |                   | 3,501,057                  |           |         |           | 2,369,775 |          
|Federal Home Loan Bank stock, at cost                                                                     |                                                                                                                                                                                                |                   | 43,322                     |           |         |           | 38,450    |          
|Mortgage loans held for sale, at lower of cost or fair value                                              |                                                                                                                                                                                                |                   | 7,446                      |           |         |           | 5,253     |          
|Loans, net of allowance for loan losses of $47,114 in 2002 and
$38,364 in 2001                            |                                                                                                                                                                                                |                   | 3,754,357                  |           |         |           | 2,838,404 |          
|Accrued interest receivable                                                                               |                                                                                                                                                                                                |                   | 46,653                     |           |         |           | 32,820    |          
|Foreclosed real estate held for sale, net                                                                 |                                                                                                                                                                                                |                   | 3,679                      |           |         |           | 3,013     |          
|Premises and equipment, net                                                                               |                                                                                                                                                                                                |                   | 96,209                     |           |         |           | 40,673    |          
|Deferred income taxes, net                                                                                |                                                                                                                                                                                                |                   | 16,327                     |           |         |           | 13,862    |          
|Other assets                                                                                              |                                                                                                                                                                                                |                   | 22,454                     |           |         |           | 14,892    |          
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|TOTAL                                                                                                     |                                                                                                                                                                                                | $                 | 8,205,077                  |           |         | $         | 5,888,194 |          
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                      |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|LIABILITIES:                                                                                              |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|                                                                                                          | Deposits                                                                                                                                                                                       |                   | $                          | 4,298,744 |         |           | $         | 3,233,912 |        
|                                                                                                          | Securities sold under agreements to repurchase                                                                                                                                                 |                   |                            | 3,097,341 |         |           |           | 2,059,646 |        
|                                                                                                          | Advances from Federal Home Loan Bank                                                                                                                                                           |                   |                            | 120,000   |         |           |           | 120,000   |        
|                                                                                                          | Term notes                                                                                                                                                                                     |                   |                            |          |         |           |           | 43,000    |        
|                                                                                                          | Mortgage note payable                                                                                                                                                                          |                   |                            | 37,822    |         |           |           |          |        
|                                                                                                          | Advances from borrowers for taxes and insurance                                                                                                                                                |                   |                            | 3,198     |         |           |           | 2,435     |        
|                                                                                                          | Other liabilities                                                                                                                                                                              |                   |                            | 63,224    |         |           |           | 41,292    |        
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|                                                                                                          |                                                                                                                                                                                                |                   | Total liabilities          |           |         | 7,620,329 |           |           |         | 5,500,285 | 
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|COMMITMENTS AND CONTINGENCIES                                                                             |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|STOCKHOLDERS EQUITY:                                                                                     |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|                                                                                                          | Preferred stock  $1.00 par value per share (liquidation preference $25 per share);
20,000,000 shares authorized; issued and outstanding 8,942,999 shares in 2002
and 7,219,999 shares in 2001 |                   |                            | 8,943     |         |           |           | 7,220     |        
|                                                                                                          | Common stock  $1.00 par value per share; authorized 300,000,000 shares;
issued and outstanding 68,346,306 shares in 2002 and 41,500,000 shares in 2001                                        |                   |                            | 68,346    |         |           |           | 41,500    |        
|                                                                                                          | Paid-in capital                                                                                                                                                                                |                   |                            | 319,106   |         |           |           | 187,628   |        
|                                                                                                          | Retained earnings:                                                                                                                                                                             |                   |                            |           |         |           |           |           |        
|                                                                                                          |                                                                                                                                                                                                | Reserve fund      |                            |           | 32,011  |           |           |           | 23,476  |          
|                                                                                                          |                                                                                                                                                                                                | Undivided profits |                            |           | 157,442 |           |           |           | 128,583 |          
|                                                                                                          | Accumulated other comprehensive loss                                                                                                                                                           |                   |                            | (1,100    | )       |           |           | (498      | )      
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|                                                                                                          |                                                                                                                                                                                                |                   | Total stockholders equity |           |         | 584,748   |           |           |         | 387,909   | 
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          
|TOTAL                                                                                                     |                                                                                                                                                                                                | $                 | 8,205,077                  |           |         | $         | 5,888,194 |          
|                                                                                                          |                                                                                                                                                                                                |                   |                            |           |         |           |           |          

See notes to consolidated financial statements.

45



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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                    |                                                                               |                          |         | 2002    |         | 2001 |         | 2000   
|                                                    |                                                                               |                          |         |         |         |      |         |        
|INTEREST INCOME:                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    | Loans, including loan fees                                                    |                          | $       | 220,676 |         |      | $       | 207,385 |         |   | $       | 183,497 |        
|                                                    | Investment securities                                                         |                          |         | 112,759 |         |      |         | 98,946  |         |   |         | 84,532  |        
|                                                    | Mortgage-backed securities                                                    |                          |         | 44,694  |         |      |         | 28,216  |         |   |         | 12,251  |        
|                                                    | Money market instruments                                                      |                          |         | 7,451   |         |      |         | 8,731   |         |   |         | 10,171  |        
|                                                    | Trading securities                                                            |                          |         | 154     |         |      |         | 57      |         |   |         | 136     |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    |                                                                               | Total interest income    |         |         | 385,734 |      |         |         | 343,335 |   |         |         | 290,587 | 
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|INTEREST EXPENSE:                                   |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    | Deposits                                                                      |                          |         | 114,374 |         |      |         | 129,676 |         |   |         | 127,640 |        
|                                                    | Securities sold under agreements to repurchase                                |                          |         | 98,233  |         |      |         | 79,882  |         |   |         | 53,968  |        
|                                                    | Advances from Federal Home Loan Bank                                          |                          |         | 6,202   |         |      |         | 6,597   |         |   |         | 6,920   |        
|                                                    | Term notes                                                                    |                          |         | 604     |         |      |         | 2,114   |         |   |         | 3,609   |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    |                                                                               | Total interest expense   |         |         | 219,413 |      |         |         | 218,269 |   |         |         | 192,137 | 
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|NET INTEREST INCOME                                 |                                                                               |                          | 166,321 |         |         |      | 125,066 |         |         |   | 98,450  |        
|PROVISION FOR LOAN LOSSES                           |                                                                               |                          | 15,083  |         |         |      | 12,278  |         |         |   | 8,700   |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES |                                                                               |                          | 151,238 |         |         |      | 112,788 |         |         |   | 89,750  |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|OTHER INCOME:                                       |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    | Service charges on deposit accounts and other fees                            |                          |         | 22,505  |         |      |         | 18,859  |         |   |         | 14,440  |        
|                                                    | Unrealized gain (loss) on derivative instruments                              |                          |         | 1,288   |         |      |         | (838    | )       |   |         | 11      |        
|                                                    | Net gain (loss) on sales and valuation of loans,
securities, and other assets |                          |         | 950     |         |      |         | 160     |         |   |         | (583    | )      
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    |                                                                               | Total other income, net  |         |         | 24,743  |      |         |         | 18,181  |   |         |         | 13,868  | 
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|TOTAL NET INTEREST INCOME AND OTHER INCOME          |                                                                               |                          | 175,981 |         |         |      | 130,969 |         |         |   | 103,618 |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|OPERATING EXPENSES:                                 |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    | Salaries and employees benefits                                              |                          |         | 28,017  |         |      |         | 22,884  |         |   |         | 20,120  |        
|                                                    | Equipment                                                                     |                          |         | 9,519   |         |      |         | 8,850   |         |   |         | 8,695   |        
|                                                    | Occupancy                                                                     |                          |         | 5,861   |         |      |         | 5,031   |         |   |         | 4,997   |        
|                                                    | Advertising                                                                   |                          |         | 6,865   |         |      |         | 4,392   |         |   |         | 3,348   |        
|                                                    | Printing, postage, stationery, and supplies                                   |                          |         | 2,836   |         |      |         | 2,262   |         |   |         | 2,029   |        
|                                                    | Telephone                                                                     |                          |         | 2,042   |         |      |         | 1,864   |         |   |         | 1,620   |        
|                                                    | Net gain from operations of foreclosed real estate
held for sale              |                          |         | (88     | )       |      |         | (173    | )       |   |         | (236    | )      
|                                                    | Other                                                                         |                          |         | 18,865  |         |      |         | 15,200  |         |   |         | 12,643  |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|                                                    |                                                                               | Total operating expenses |         |         | 73,917  |      |         |         | 60,310  |   |         |         | 53,216  | 
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|INCOME BEFORE PROVISION FOR INCOME TAXES            |                                                                               |                          | 102,064 |         |         |      | 70,659  |         |         |   | 50,402  |        
|PROVISION FOR INCOME TAXES                          |                                                                               |                          | 16,101  |         |         |      | 8,504   |         |         |   | 5,814   |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|NET INCOME                                          |                                                                               | $                        | 85,963  |         |         | $    | 62,155  |         |         | $ | 44,588  |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS         |                                                                               | $                        | 72,189  |         |         | $    | 51,891  |         |         | $ | 38,789  |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|BASIC EARNINGS PER COMMON SHARE                     |                                                                               | $                        | 1.12    |         |         | $    | 0.83    |         |         | $ | 0.62    |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        
|DILUTED EARNINGS PER COMMON SHARE                   |                                                                               | $                        | 1.11    |         |         | $    | 0.83    |         |         | $ | 0.62    |        
|                                                    |                                                                               |                          |         |         |         |      |         |         |         |   |         |        

See notes to consolidated financial statements.

46



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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND OF COMPREHENSIVE INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |        |        |  
|-------------------------------- | ------------------------------------------------------------------ | -------------------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ------ | ------ | -
|                                 |                                                                    |                                                                      |         | 2002   |         | 2001 |         | 2000  
|CHANGES IN STOCKHOLDERS EQUITY: |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Preferred stock:                                                   |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Balance at beginning of year                                         |         | $      | 7,220   |      |         | $      | 3,220   |   |         | $      | 3,220  |  
|                                 |                                                                    | Issuance of preferred stock                                          |         |        | 1,725   |      |         |        | 4,000   |   |         |        |       |  
|                                 |                                                                    | Conversion of preferred stock                                        |         |        | (2      | )    |         |        |        |   |         |        |       |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    | Balance at end of year                                               |         |        | 8,943   |      |         |        | 7,220   |   |         |        | 3,220  |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Common stock:                                                      |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Balance at beginning of year                                         |         |        | 41,500  |      |         |        | 41,502  |   |         |        | 42,000 |  
|                                 |                                                                    | Stock split effected in form of a stock dividend                     |         |        | 20,750  |      |         |        |        |   |         |        |       |  
|                                 |                                                                    | Purchase and retirement of common stock                              |         |        | (2      | )    |         |        | (2      | ) |         |        | (498   | )
|                                 |                                                                    | Issuance of common stock                                             |         |        | 6,098   |      |         |        |        |   |         |        |       |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    | Balance at end of year                                               |         |        | 68,346  |      |         |        | 41,500  |   |         |        | 41,502 |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Paid-in capital:                                                   |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Balance at beginning of year                                         |         |        | 187,628 |      |         |        | 95,313  |   |         |        | 99,596 |  
|                                 |                                                                    | Purchase and retirement of common stock                              |         |        | (40     | )    |         |        | (26     | ) |         |        | (4,283 | )
|                                 |                                                                    | Issuance of common stock                                             |         |        | 91,780  |      |         |        |        |   |         |        |       |  
|                                 |                                                                    | Issuance of preferred stock                                          |         |        | 39,738  |      |         |        | 92,341  |   |         |        |       |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    | Balance at end of year                                               |         |        | 319,106 |      |         |        | 187,628 |   |         |        | 95,313 |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Reserve fund:                                                      |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Balance at beginning of year                                         |         |        | 23,476  |      |         |        | 17,302  |   |         |        | 12,843 |  
|                                 |                                                                    | Transfer from undivided profits                                      |         |        | 8,535   |      |         |        | 6,174   |   |         |        | 4,459  |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    | Balance at end of year                                               |         |        | 32,011  |      |         |        | 23,476  |   |         |        | 17,302 |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Undivided profits:                                                 |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Balance at beginning of year                                         |         |        | 128,583 |      |         |        | 93,241  |   |         |        | 67,218 |  
|                                 |                                                                    | Net income                                                           |         |        | 85,963  |      |         |        | 62,155  |   |         |        | 44,588 |  
|                                 |                                                                    | Cash dividends declared on common stock                              |         |        | (14,045 | )    |         |        | (10,375 | ) |         |        | (8,307 | )
|                                 |                                                                    | Cash dividends declared on preferred stock                           |         |        | (13,774 | )    |         |        | (10,264 | ) |         |        | (5,799 | )
|                                 |                                                                    | Transfer to reserve fund                                             |         |        | (8,535  | )    |         |        | (6,174  | ) |         |        | (4,459 | )
|                                 |                                                                    | Stock split effected in form of a stock dividend                     |         |        | (20,750 | )    |         |        |        |   |         |        |       |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    | Balance at end of year                                               |         |        | 157,442 |      |         |        | 128,583 |   |         |        | 93,241 |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Accumulated other comprehensive income (loss):                     |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Balance at beginning of year                                         |         |        | (498    | )    |         |        | 40      |   |         |        | (1,058 | )
|                                 |                                                                    | Cumulative effect of change in accounting
for derivative instruments |         |        |        |      |         |        | 135     |   |         |        |       |  
|                                 |                                                                    | Other comprehensive income (loss) for the year                       |         |        | (602    | )    |         |        | (673    | ) |         |        | 1,098  |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    | Balance at end of year                                               |         |        | (1,100  | )    |         |        | (498    | ) |         |        | 40     |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|TOTAL STOCKHOLDERS EQUITY       |                                                                    | $                                                                    | 584,748 |        |         | $    | 387,909 |        |         | $ | 250,618 |       
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|COMPREHENSIVE INCOME:            |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Net income                                                         |                                                                      | $       | 85,963 |         |      | $       | 62,155 |         |   | $       | 44,588 |       
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Other comprehensive income (loss), net of income tax:              |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 | Unrealized net gains (losses) on securities available for sale:    |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Arising during the period                                            |         |        | 718     |      |         |        | (1      | ) |         |        | 804    |  
|                                 |                                                                    | Reclassification adjustment included in net income                   |         |        | (1,508  | )    |         |        | (351    | ) |         |        | 422    |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    |                                                                      | (790    | )      |         |      | (352    | )      |         |   | 1,226   |       
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Cash flow hedges:                                                  |                                                                      |         |        |         |      |         |        |         |   |         |        |       
|                                 |                                                                    | Adoption of SFAS 133, net of income tax                              |         |        |        |      |         |        | 135     |   |         |        |       |  
|                                 |                                                                    | Unrealized net derivative loss arising during the period             |         |        | 356     |      |         |        | (536    | ) |         |        |       |  
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 |                                                                    |                                                                      | 356     |        |         |      | (401    | )      |         |   |        |       
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Income tax effect                                                  |                                                                      |         | (168   | )       |      |         | 215    |         |   |         | (128   | )     
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|                                 | Net change in other comprehensive income (loss), net of income tax |                                                                      |         | (602   | )       |      |         | (538   | )       |   |         | 1,098  |       
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       
|TOTAL COMPREHENSIVE INCOME       |                                                                    | $                                                                    | 85,361  |        |         | $    | 61,617  |        |         | $ | 45,686  |       
|                                 |                                                                    |                                                                      |         |        |         |      |         |        |         |   |         |       

See notes to consolidated financial statements.

47



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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |          |            |        |          |  
|------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------- | --------------------------------- | --------------------------------------------------- | ----------- | -------- | ---------- | ---------- | ----------- | -------- | ---------- | -------- | ---------- | ------ | -------- | -
|                                      |                                                                                   |                                        |                                   |                                                     |             | 2002     |            | 2001       |             | 2000    
|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |         
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         
|                                      | Net income                                                                        |                                        | $                                 | 85,963                                              |             |          | $          | 62,155     |             |          | $          | 44,588   |           
|                                      | Adjustments to reconcile net income to net cash provided
by operating activities: |                                        |                                   |                                                     |             |          |            |            |             |          |            |          |           
|                                      |                                                                                   |                                        |                                   | Provision for:                                      |             |          |            |            |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Loan losses                                         |             |          | 15,083     |            |             |          | 12,278     |          |            |        | 8,700    |  
|                                      |                                                                                   |                                        |                                   | Foreclosed real estate held for sale                |             |          | 126        |            |             |          | 20         |          |            |        | 20       |  
|                                      |                                                                                   |                                        |                                   | Depreciation and amortization on:                   |             |          |            |            |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Premises and equipment                              |             |          | 6,856      |            |             |          | 5,931      |          |            |        | 6,440    |  
|                                      |                                                                                   |                                        |                                   | Foreclosed real estate held for sale                |             |          | 60         |            |             |          | 61         |          |            |        | 57       |  
|                                      |                                                                                   |                                        |                                   | Mortgage servicing rights                           |             |          | 772        |            |             |          | 477        |          |            |        | 347      |  
|                                      |                                                                                   |                                        |                                   | Deferred income tax credit                          |             |          | (2,518     | )          |             |          | (3,246     | )        |            |        | (1,920   | )
|                                      |                                                                                   |                                        |                                   | Amortization of premium (discount) on:              |             |          |            |            |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Investment securities available for sale            |             |          | (647       | )          |             |          | (160       | )        |            |        | 9        |  
|                                      |                                                                                   |                                        |                                   | Investment securities held to maturity              |             |          | (9,062     | )          |             |          | (14,068    | )        |            |        | (12,021  | )
|                                      |                                                                                   |                                        |                                   | Mortgage-backed securities held to maturity         |             |          | (555       | )          |             |          | (1,634     | )        |            |        | (63      | )
|                                      |                                                                                   |                                        |                                   | Loans                                               |             |          | 1,651      |            |             |          | 1,166      |          |            |        | 476      |  
|                                      |                                                                                   |                                        |                                   | Amortization of discount on deposits                |             |          | 1,930      |            |             |          | 780        |          |            |        |         |  
|                                      |                                                                                   |                                        |                                   | Amortization of deferred loan origination fees, net |             |          | (5,634     | )          |             |          | (4,710     | )        |            |        | (3,905   | )
|                                      |                                                                                   |                                        |                                   | Net loss (gain) on sale and valuation of:           |             |          |            |            |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Investment securities available for sale            |             |          | (1,508     | )          |             |          | (351       | )        |            |        | 422      |  
|                                      |                                                                                   |                                        |                                   | Mortgage loans held for sale                        |             |          | (306       | )          |             |          | 26         |          |            |        | (43      | )
|                                      |                                                                                   |                                        |                                   | Derivative instruments                              |             |          | (1,288     | )          |             |          | 838        |          |            |        |         |  
|                                      |                                                                                   |                                        |                                   | Foreclosed real estate held for sale                |             |          | (119       | )          |             |          | (89        | )        |            |        | (57      | )
|                                      |                                                                                   |                                        |                                   | Capitalization of servicing rights                  |             |          | (607       | )          |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Originations of mortgage loans held for sale        |             |          | (52,317    | )          |             |          | (47,446    | )        |            |        | (44,389  | )
|                                      |                                                                                   |                                        |                                   | Proceeds from sales of mortgage loans held for sale |             |          | 8,690      |            |             |          | 2,148      |          |            |        | 3,123    |  
|                                      |                                                                                   |                                        |                                   | Decrease (increase) in:                             |             |          |            |            |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Trading securities                                  |             |          | 87,397     |            |             |          | 41,728     |          |            |        | 37,417   |  
|                                      |                                                                                   |                                        |                                   | Accrued interest receivable                         |             |          | (13,833    | )          |             |          | 14,131     |          |            |        | (13,640  | )
|                                      |                                                                                   |                                        |                                   | Other assets                                        |             |          | (6,994     | )          |             |          | (5,793     | )        |            |        | (528     | )
|                                      |                                                                                   |                                        |                                   | Increase (decrease) in:                             |             |          |            |            |             |          |            |          |            |        |          |  
|                                      |                                                                                   |                                        |                                   | Accrued interest on deposits and borrowings         |             |          | (376       | )          |             |          | (8,496     | )        |            |        | 20,425   |  
|                                      |                                                                                   |                                        |                                   | Other liabilities                                   |             |          | 21,211     |            |             |          | 3,824      |          |            |        | (490     | )
|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         
|                                      |                                                                                   |                                        |                                   | Net cash provided by operating activities           |             |          | 133,975    |            |             |          | 59,570     |          |            |        | 44,968   |  
|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         
|                                      | Net decrease (increase) in interest-bearing deposits in banks                     |                                        |                                   | 8,755                                               |             |          |            | (14,909    | )           |          |            | (2,034   | )         
|                                      | Net decrease (increase) in federal funds sold                                     |                                        |                                   | (177,263                                            | )           |          |            | 23,463     |             |          |            | (27,100  | )         
|                                      | Net increase in securities purchased under agreements to resell                   |                                        |                                   | (125,751                                            | )           |          |            | (10,287    | )           |          |            | (5,154   | )         
|                                      | Investment securities available for sale:                                         |                                        |                                   |                                                     |             |          |            |            |             |          |            |          |           
|                                      |                                                                                   |                                        | Purchases                         |                                                     |             | (771,152 | )          |            |             | (449,227 | )          |          |            | (9,889 | )       
|                                      |                                                                                   |                                        | Proceeds from sales               |                                                     |             | 661,090  |            |            |             | 162,556  |            |          |            | 3,552  |         
|                                      |                                                                                   |                                        | Proceeds from principal repayment |                                                     |             | 191,175  |            |            |             | 32,954   |            |          |            | 1,511  |         
|                                      | Investment securities held to maturity:                                           |                                        |                                   |                                                     |             |          |            |            |             |          |            |          |           
|                                      |                                                                                   | Purchases                              |                                   |                                                     | (15,600,485 | )        |            |            | (11,453,430 | )        |            |          | (2,426,084 | )     
|                                      |                                                                                   | Proceeds from redemption and repayment |                                   |                                                     | 14,713,873  |          |            |            | 10,998,040  |          |            |          | 2,033,788  |       
|                                      | Mortgage-backed securities held to maturity:                                      |                                        |                                   |                                                     |             |          |            |            |             |          |            |          |           
|                                      |                                                                                   | Purchases                              |                                   |                                                     | (638,079    | )        |            |            | (420,790    | )        |            |          | (96,454    | )     
|                                      |                                                                                   | Proceeds from principal repayment      |                                   |                                                     | 403,026     |          |            |            | 178,795     |          |            |          | 18,680     |       
|                                      | Loans receivable:                                                                 |                                        |                                   |                                                     |             |          |            |            |             |          |            |          |           
|                                      |                                                                                   | Purchases                              |                                   |                                                     | (213,418    | )        |            |            | (420,459    | )        |            |          | (261,829   | )     
|                                      |                                                                                   | Other increase                         |                                   |                                                     | (714,924    | )        |            |            | (224,004    | )        |            |          | (77,817    | )     
|                                      | Purchases of options                                                              |                                        |                                   | (4,968                                              | )           |          |            | (331       | )           |          |            |         |           
|                                      | Cash paid on terminated swaps                                                     |                                        |                                   | (208                                                | )           |          |            |            |             |          |            |          |           
|                                      | Proceeds from sales of foreclosed real estate held for sale                       |                                        |                                   | 462                                                 |             |          |            | 434        |             |          |            | 142      |           
|                                      | Additions to premises and equipment                                               |                                        |                                   | (12,520                                             | )           |          |            | (4,671     | )           |          |            | (10,342  | )         
|                                      | Purchase of Federal Home Loan Bank stock                                          |                                        |                                   | (4,872                                              | )           |          |            | (8,650     | )           |          |            | (17,000  | )         
|                                      | Purchase of companies, net of cash acquired                                       |                                        |                                   | (11,496                                             | )           |          |            | (1,070     | )           |          |            |         |           
|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         
|                                      |                                                                                   |                                        |                                   | Net cash used in investing activities               |             |          | (2,296,755 | )          |             |          | (1,611,586 | )        |            |        | (876,030 | )
|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         
|                                      | Forward                                                                           |                                        | $                                 | (2,162,780                                          | )           |          | $          | (1,552,016 | )           |          | $          | (831,062 | )         
|                                      |                                                                                   |                                        |                                   |                                                     |             |          |            |            |             |          |            |         

(continued)

48



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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |         |         |            |         | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------- | ---------------------------------------- | ----------------------------------------- | ------- | --------- | ---------- | ------- | ------- | -------- | --------- | ------- | ------- | ---------- | ------- | 
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         | 2002      |            | 2001    |         | 2000    
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |         
|Forward                                            |                                                                                            | $                                                                                     | (2,162,780                               | )                                         |         | $         | (1,552,016 | )       |         | $        | (831,062  | )      
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|                                                   | Net increase in deposits                                                                   |                                                                                       |                                          | 1,069,000                                 |         |           |            | 616,097 |         |          |           | 374,693 |        
|                                                   | Net increase in securities sold under agreements to repurchase                             |                                                                                       |                                          | 451,195                                   |         |           |            | 365,447 |         |          |           | 16,293  |        
|                                                   | Securities sold under agreements to repurchase with original
maturities over three months: |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |         |        
|                                                   |                                                                                            |                                                                                       | Proceeds                                 |                                           |         | 1,475,773 |            |         |         | 792,500  |           |         |         | 1,508,886  |        
|                                                   |                                                                                            |                                                                                       | Payments                                 |                                           |         | (889,273  | )          |         |         | (277,374 | )         |         |         | (1,076,074 | )      
|                                                   | Term notes payments                                                                        |                                                                                       |                                          | (43,000                                   | )       |           |            | (5,000  | )       |          |           | (31,000 | )      
|                                                   | Advances from Federal Home Loan Bank:                                                      |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |         |        
|                                                   |                                                                                            |                                                                                       | Proceeds                                 |                                           |         |          |            |         |         | 64,000   |           |         |         | 50,000     |        
|                                                   |                                                                                            |                                                                                       | Payments                                 |                                           |         |          |            |         |         | (64,000  | )         |         |         |           |        
|                                                   | Net increase in advances from borrowers for taxes
and insurance                            |                                                                                       |                                          | 763                                       |         |           |            | 659     |         |          |           | 82      |        
|                                                   | Repurchase of common stock for retirement                                                  |                                                                                       |                                          | (42                                       | )       |           |            | (28     | )       |          |           | (4,781  | )      
|                                                   | Issuance of common stock                                                                   |                                                                                       |                                          | 97,875                                    |         |           |            |        |         |          |           |        |        
|                                                   | Issuance of preferred stock                                                                |                                                                                       |                                          | 41,463                                    |         |           |            | 96,341  |         |          |           |        |        
|                                                   | Dividends paid                                                                             |                                                                                       |                                          | (27,308                                   | )       |           |            | (20,148 | )       |          |           | (16,773 | )      
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|                                                   |                                                                                            |                                                                                       |                                          | Net cash provided by financing activities |         |           | 2,176,446  |         |         |          | 1,568,494 |         |         |            | 821,326 | 
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|NET CHANGE IN CASH AND DUE FROM BANKS              |                                                                                            |                                                                                       | 13,666                                   |                                           |         |           | 16,478     |         |         |          | (9,736    | )      
|CASH AND DUE FROM BANKS, BEGINNING OF YEAR         |                                                                                            |                                                                                       | 62,414                                   |                                           |         |           | 45,936     |         |         |          | 55,672    |        
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|CASH AND DUE FROM BANKS, END OF YEAR               |                                                                                            | $                                                                                     | 76,080                                   |                                           |         | $         | 62,414     |         |         | $        | 45,936    |        
|                                                   |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION: |                                                                                            |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |        
|                                                   | Cash paid during the year for:                                                             |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |         |        
|                                                   |                                                                                            | Interest on deposits and other borrowings                                             |                                          | $                                         | 225,146 |           |            | $       | 226,765 |          |           | $       | 171,712 |           
|                                                   |                                                                                            | Income tax                                                                            |                                          |                                           | 11,235  |           |            |         | 8,200   |          |           |         | 11,104  |           
|                                                   | Noncash activities:                                                                        |                                                                                       |                                          |                                           |         |           |            |         |         |          |           |         |        
|                                                   |                                                                                            | Building acquired on purchase of partnership                                          |                                          |                                           | 49,852  |           |            |         |        |          |           |         |        |           
|                                                   |                                                                                            | Other assets acquired on purchase of partnership                                      |                                          |                                           | 249     |           |            |         |        |          |           |         |        |           
|                                                   |                                                                                            | Mortgage note assumed on purchase of partnership                                      |                                          |                                           | 37,822  |           |            |         |        |          |           |         |        |           
|                                                   |                                                                                            | Accrued dividends payable                                                             |                                          |                                           | 1,931   |           |            |         | 1,419   |          |           |         | 935     |           
|                                                   |                                                                                            | Net decrease (increase) in other comprehensive loss                                   |                                          |                                           | (602    | )         |            |         | (538    | )        |           |         | 1,098   |           
|                                                   |                                                                                            | Mortgage loans securitized and transferred to
trading securities                      |                                          |                                           | 41,740  |           |            |         | 44,176  |          |           |         | 38,289  |           
|                                                   |                                                                                            | Transfers from loans to foreclosed real estate held for sale                          |                                          |                                           | 2,075   |           |            |         | 1,017   |          |           |         | 569     |           
|                                                   |                                                                                            | Available for sale securities transferred to trading                                  |                                          |                                           | 41,048  |           |            |         |         |          |           |         |         |           
|                                                   |                                                                                            | Mortgage loans originated to finance the sale of foreclosed
real estate held for sale |                                          |                                           | 786     |           |            |         | 32      |          |           |         | 185     |           
|                                                   |                                                                                            | Capitalized mortgage servicing rights                                                 |                                          |                                           | 607     |           |            |         | 483     |          |           |         | 454     |           
|                                                   |                                                                                            | Unpaid additions to premises and equipment                                            |                                          |                                           | 20      |           |            |         | 19      |          |           |         | 80      |           
|                                                   |                                                                                            | Transfer from undivided profits to reserve fund                                       |                                          |                                           | 8,535   |           |            |         | 6,174   |          |           |         | 4,459   |           
|                                                   |                                                                                            | Effect in valuation of derivatives and their hedged items:                            |                                          |                                           |         |           |            |         |         |          |           |         |         |           
|                                                   |                                                                                            |                                                                                       | (Decrease) increase in other assets      |                                           |         | (3,796    | )          |         |         | 8        |           |         |         |           |        
|                                                   |                                                                                            |                                                                                       | Decrease in deposits                     |                                           |         | 4,438     |            |         |         | 13,666   |           |         |         |           |        
|                                                   |                                                                                            |                                                                                       | (Decrease) increase in other liabilities |                                           |         | (646      | )          |         |         | 14,965   |           |         |         |           |        
|                                                   |                                                                                            | Conversion of preferred stock into common stock:                                      |                                          |                                           |         |           |            |         |         |          |           |         |         |           
|                                                   |                                                                                            |                                                                                       | Preferred stock                          |                                           |         | (2        | )          |         |         |         |           |         |         |           |        
|                                                   |                                                                                            |                                                                                       | Paid in capital                          |                                           |         | (1        | )          |         |         |         |           |         |         |           |        
|                                                   |                                                                                            |                                                                                       | Common Stock                             |                                           |         | 3         |            |         |         |         |           |         |         |           |        

|                                               |  |            
|---------------------------------------------- |  | -----------
|See notes to consolidated financial statements |  | (concluded)

49



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##### Table of Contents



Audited Financial Statements

W HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000



|1. |  | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|  
|   |  | W Holding Company, Inc. (the Company) is a financial holding company
offering a full range of financial services through its wholly owned
subsidiaries, Westernbank Puerto Rico (Westernbank) and Westernbank
Insurance Corp. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999 to become the bank holding
company of Westernbank. Westernbank was founded as a savings institution
in 1958 operating in the western and southwestern regions of Puerto Rico,
focusing on retail banking and emphasizing long-term, fixed-rate
residential mortgage loans on one-to-four family residential properties.
In 1994, Westernbank changed its charter to become a full-service
commercial bank. Westernbank offers a full range of business and consumer
financial services, including banking, trust and brokerage services.
Westernbank Insurance Corp. is a general insurance agent offering
property, casualty, life and disability insurance. The assets,
liabilities, revenues and expenses of Westernbank Insurance Corp. at
December 31, 2002 and 2001 and for the years then ended were not
significant.                                                                          
|  
|  
|   |  | In July 2000, the Company became a financial holding company under the
Bank Holding Company Act. As a financial holding company, the Company is
permitted to engage in financial related activities, including insurance
and securities activities, provided that the Company and its banking
subsidiary meet certain regulatory standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Westernbank operates through 50 full service branch offices located
throughout Puerto Rico, primarily in the western and southwestern regions
of the island, and a fully functional banking site on the Internet. In
addition, it operates four divisions: Westernbank International Division,
which offers commercial banking and related services outside of Puerto
Rico; Westernbank Business Credit, which specializes in commercial
business loans secured principally by accounts receivable, inventory and
equipment; Westernbank Trust Division, which offers a full array of trust
services; and Expresso of Westernbank, a new division created in July
2002, which specializes in small, unsecured consumer loans up to $15,000
and collateralized consumer loans up to $75,000 through 19 full-service
branches (including 13 new branches and six re-designated branches).
Westernbank owns 100% of the voting shares of SRG Net, Inc., a Puerto Rico
corporation that operates an electronic funds transfer network. The
assets, liabilities, revenues and expenses of SRG Net, Inc. at December
31, 2002 and 2001 and for each of the three years in the period ended
December 31, 2002, are not significant.         
|  
|   |  | On March 18, 2002, Westernbank through Westernbank World Plaza, Inc.
(WWPI), a newly created wholly-owned subsidiary of Westernbank Puerto
Rico, and its wholly-owned subsidiary Westernbank One Percent, Inc.
(WOPI), acquired 99% (as Limited Partner) and 1% (as General Partner),
respectively, of the partnership interest of Apollo Hato Rey, L.P., a
Delaware Limited Partnership (the Partnership). WWPI and WOPI were
created for the purpose of owning, developing, managing and operating
Westernbank World Plaza (formerly known as Hato Rey Tower) a 23-story
office building, including its related parking facility, located in Hato
Rey, Puerto Rico, the main Puerto Rican business district. On March 23,
2002, the Partnership was dissolved and its net assets distributed to WWPI
and WOPI. Immediately thereafter, WOPI was also dissolved by WWPI. Upon
dissolution of WOPI, WWPI became the 100% owner of the net assets of the
dissolved partnership. Westernbank World Plaza now serves as the Companys
San Juan metropolitan area headquarters for Westernbanks regional
commercial lending office and the headquarters for the Westernbank
Business Credit and Expresso of Westernbank divisions.

50



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##### Table of Contents





| |  | On July 1, 2001, the Company acquired 100% of the voting shares of a
general insurance agency headquartered in Mayaguez, Puerto Rico. The new
corporation is a wholly-owned subsidiary of the Company, and operates as a
general agent by placing property and casualty insurance, as well as life
and disability insurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The accounting and reporting policies of W Holding Company, Inc. conform
to accounting principles generally accepted in the United States of
America and banking industry practices. Following is a summary of the
Companys most significant accounting policies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | PRINCIPLES OF CONSOLIDATION  The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Westernbank Puerto Rico and Westernbank Insurance Corp. All significant
inter-company transactions and balances have been eliminated in
consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | USE OF ESTIMATES  The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK  Most of the Companys
business activities are with customers located within Puerto Rico. Notes 2
and 3 discuss the types of securities that the Company invests in. Note 4
discusses the types of lending that the Company engages in. The Company
does not have any significant concentration in any one industry or
customer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | CASH AND CASH EQUIVALENTS  For purpose of presentation in the
consolidated statements of cash flows, cash and cash equivalents are those
amounts included in the statements of financial condition as cash and due
from banks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | INTEREST-BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD  Interest-
bearing deposits in banks and federal funds sold are recorded at
cost and matures the next business day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | TRADING SECURITIES  Securities held principally for resale in the near
term are classified as trading securities and recorded at fair value.
Gains and losses on sales and changes in fair value of these securities
are included in current operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | INVESTMENT SECURITIES HELD TO MATURITY  Investment securities for which
the Company has the positive intent and ability to hold to maturity are
carried at cost, adjusted for premium amortization and discount accretion
under the interest method over the period to maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | INVESTMENT SECURITIES AVAILABLE FOR SALE  Investment securities available
for sale consist of securities not classified as trading securities nor as
held to maturity securities. These securities are reported at fair value
with unrealized holding gains and losses, net of tax, reported as a net
amount in other comprehensive income (loss). Realized gains and losses on
these securities are determined using the specific identification method.
Premium amortization and discount accretion are recognized in interest
income using the interest method over the period to maturity.                                                                                                                                                                                                                                                                                                                                                         
|
|
| |  | OTHER-THAN-TEMPORARY IMPAIRMENTS  The Company evaluates for impairment
its investment securities on a quarterly basis or earlier if other factors
indicative of potential impairment exists. An impairment charge in the
consolidated statements of income is recognized when the decline in the
fair value of the securities below their cost basis is judged to be
other-than-temporary. The Company considers various factors in determining
whether it should recognize an impairment charge, including, but not
limited to the length of time and extent to which the fair value has been
less than its cost basis, expectation of recoverability of its original
investment, the employment of a systematic methodology that considers
available evidence in evaluating potential impairment, and the Companys
intention and ability to hold the securities for a period of time
sufficient to allow for any anticipated recovery in fair value.
|
| |  | The impairment analysis on the mortgage and other asset-backed securities
is done placing special emphasis on the analysis of the trustee and
collateral manager monthly reports, as well as on sensitivity and cash
flows analysis made by major brokerage houses. The Company also considers
its intent and ability to hold these securities. If management believes,
based on the analysis, that the principal and interest obligations on any
other asset-backed security will not be received on a timely manner, the
security is written down to managements estimate of fair value.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The equity securities impairment analyses are performed and reviewed
quarterly based on the latest financial information and any supporting
research report made by a major brokerage house. These analyses are very
subjective and based, among other things, on relevant financial data such
as capitalization, cash flow, liquidity, systematic risk, and debt
outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Management also considers the industry trends, the historical performance
of the stock, as well as the Companys intent to hold the security for an
extended period. If Management believes there is a low probability of
achieving book value in a reasonable time frame, then impairment will be
recorded by writing the security down to fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
|
| |  | MORTGAGE LOANS HELD FOR SALE  Mortgage loans originated and intended for
sale in the secondary market are carried at the lower of cost or estimated
fair value in the aggregate. Net unrealized losses are recognized through
a valuation allowance by charges to income. Realized gains or losses on
these loans are determined using the specific identification method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |  | LOANS  Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred
and recognized as an adjustment of the related loan yield using the
interest method. Discounts and premiums on purchased loans are amortized
to income over the expected lives of the loans using methods that
approximate the interest method.                                                                                                                                                                                                                                                                                                           
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The accrual of interest on loans is discontinued when, in managements
opinion, the borrower may be unable to meet payments as they become due,
but in no event is it recognized after 90 days in arrears on payments of
principal or interest. When interest accrual is discontinued, all unpaid
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | ALLOWANCE FOR LOAN LOSSES  The allowance for loan losses is a current
estimate of the losses inherent in the present portfolio based on
managements ongoing quarterly evaluations of the loan portfolio.
Estimates of losses inherent in the loan portfolio involve the exercise of
judgment and the use of assumptions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. The allowance is increased
by a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, managements
estimate of credit losses in the loan portfolio and the related allowance
may change in the near term.                                                                                
|
| |  | The Company follows a systematic methodology to establish and evaluate the
adequacy of the allowance for loan losses. This methodology consists of
several key elements. Larger commercial and construction loans that
exhibit potential or observed credit weaknesses are subject to individual
review. Where appropriate, allowances are allocated to individual loans
based on managements estimate of the borrowers ability to repay the loan
given the availability of collateral, other sources of cash flow and legal
options available to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Included in the review of individual loans are those that are impaired as
provided in Statement of Financial Accounting Standards (SFAS) No. 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. Any allowances for
impaired loans are measured based on the present value of expected future
cash flows discounted at the loans effective interest rate or fair value
of the underlying collateral. Commercial business, commercial real estate
and construction loans exceeding $500,000 are individually evaluated for
impairment. Other loans are evaluated in homogeneous groups and
collectively evaluated for impairment. Loans that are recorded at fair
value or at the lower of cost or fair value are not evaluated for
impairment. Impaired loans for which the discounted cash flows or
collateral value exceeds its carrying value do not require an allowance.
The Company evaluates the collectibility of both principal and interest
when assessing the need for loss accrual.
|
| |  | Historical loss rates are applied to other commercial loans not subject to
specific allowance. The loss rates are generally derived from historical
loss trends for three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Homogeneous loans, such as consumer installments, residential mortgage
loans, and credit cards are not individually risk graded. Allowances are
established for each pool of loans based on the expected net charge-offs
for one year. Loss rates are based on the average net charge-off history
for one to three years by loan category.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | An unallocated allowance is maintained to recognize the imprecision in
estimating and measuring loss when evaluating allowances for individual
loans or pools of loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |  | Historical loss rates for commercial and consumer loans may be adjusted
for significant factors that, in managements judgment, reflect the
impact of any current condition on loss recognition. Factors which
management considers in the analysis include the effect of the national
and local economies, trends in the nature and volume of loans
(delinquencies, charge-offs, non-accrual and problem loans), changes in
the internal lending policies and credit standards, collection practices,
and examination results from bank regulatory agencies and the Companys
internal credit examiners.                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Allowances on individual loans and historical loss rates are reviewed
quarterly and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | FORECLOSED REAL ESTATE HELD FOR SALE  Foreclosed real estate held for
sale are carried at the lower of fair value minus estimated costs to sell
or cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | PREMISES AND EQUIPMENT  Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed under
the straight-line method over the estimated useful lives of the assets,
which range from two to 40 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Leasehold improvements are amortized over the terms of the respective
leases or the estimated useful lives of the improvements, whichever is
shorter. Costs of maintenance and repairs that do not improve or extend
the lives of the respective assets are charged to expense as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | IMPAIRMENT OF LONG-LIVED ASSETS  The Company periodically reviews
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. No indications of impairment are evident as a result of such
review.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | TRANSFER OF FINANCIAL ASSETS  Transfer of financial assets are accounted
for as a sale, when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets
have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets through an
agreement to repurchase them before maturity.                                                                                                                                                                                                                                 
|
| |  | MORTGAGE SERVICING RIGHTS  The Company recognizes as separate assets the
rights to service mortgage loans for others, regardless of how those
servicing rights are acquired and assesses the capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Fair value is determined using
prices for similar assets with similar characteristics. Impairment is
recognized through a valuation allowance for an individual servicing
right, to the extent that fair value is less than the carrying amount for
that right.                                                                                                                            
|
| |  | The total cost of mortgage loans to be sold with servicing rights retained
is allocated to the mortgage servicing rights and the loans (without the
mortgage servicing rights), based on their relative fair values. Mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated servicing income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | STOCK OPTION PLANS  As further discussed in Note 17 to the consolidated
financial statements, the Company has two stock option plans. Up to
December 31, 2002 the Company has accounted for those plans following the
intrinsic value-based method of accounting prescribed by APB Opinion No.
25, Accounting for Stocks Issued to Employees, and Related
Interpretations. Compensation expense under this method is generally
recognized for any excess of the quoted market price of the Companys
stock at the measurement date over the amount an employee must pay to
acquire the stock. Since all options granted under those plans has an
exercise price equal to the market value of the underlying common stock at
the grant date, no compensation expense was recognized at the measurement
date.
|
| |  | Effective January 1, 2003, the Company will adopt the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Under the modified prospective method which will
be selected by the Company under the provisions of FASB Statement No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure,
compensation cost to be recognized in future years is the same that which
would have been recognized had the recognition provisions of FASB No. 123
been applied from its original effective date. Results prior to 2003 will
not be restated. The following table illustrates the effect on net income
and earnings per share if the fair value based method had been applied to
all outstanding options in each period:                      

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|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                                                             |  | Year ended December 31,
|                                                                                                                                             |  |                        
|                                                                                                                                             |  | 2002                    |        | 2001 |  | 2000
|                                                                                                                                             |  |                         |        |      |  |     
|                                                                                                                                             |  | (Dollars in thousands) 
|Net income as reported                                                                                                                       |  | $                       | 85,963 |      |  | $    | 62,155 |   |  | $ | 44,588 |  
|Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all options,
net of related tax effects |  |                         | (648   | )    |  |      | (782   | ) |  |   | (751   | )
|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|Pro forma net income                                                                                                                         |  | $                       | 85,315 |      |  | $    | 61,373 |   |  | $ | 43,837 |  
|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|Earnings per share:                                                                                                                          |  |                         |        |      |  |      |        |   |  |   |        |  
|Basic  as reported                                                                                                                          |  | $                       | 1.12   |      |  | $    | 0.83   |   |  | $ | 0.93   |  
|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|Basic  pro forma                                                                                                                            |  | $                       | 1.11   |      |  | $    | 0.82   |   |  | $ | 0.91   |  
|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|Diluted  as reported                                                                                                                        |  | $                       | 1.11   |      |  | $    | 0.83   |   |  | $ | 0.93   |  
|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  
|Diluted  pro forma                                                                                                                          |  | $                       | 1.10   |      |  | $    | 0.82   |   |  | $ | 0.91   |  
|                                                                                                                                             |  |                         |        |      |  |      |        |   |  |   |        |  



| |  | The fair value of the options granted in years 2002 and 2001 was $3.20 and
$3.25 per option as adjusted for the stock split, respectively. The fair
value was estimated on the grant date using the Black-Scholes option
pricing model with the following weighted average assumptions: (1) the
dividend yield was 1.39% (2.14% in 2001, adjusted for stock split); (2)
the expected life was 7 years; (3) the expected volatility was 33.42%
(41.95% in 2001); and, (4) the risk-free interest rate was 4.43% (5.40% in
2001). The weighted average market price of the stock at the grant date
was $15.85 ($7.79 in 2001).                                                                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | INCOME TAXES  Deferred income taxes are accounted for using the asset and
liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and liabilities
and the respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
|
| |  | FINANCIAL INSTRUMENTS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



| |  |  | DERIVATIVE FINANCIAL INSTRUMENTS  As part of the Companys
asset/liability management, the Company uses interest-rate
contracts, which include interest-rate exchange agreements (swaps
and options agreements), to hedge various exposures or to modify
interest rate characteristics of various statement of financial
condition items.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |   |  | Effective January 1, 2001, the Company adopted SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES and
SFAS 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN
HEDGING ACTIVITIES. These Statements establish accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The statements require that all derivative instruments
be recognized as assets and liabilities at fair value. If certain
conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges:
(a) hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment
(fair value hedge); (b) a hedge of the exposure to variability of
cash flows of a recognized asset, liability or forecasted
transaction (cash flow hedge) or (c) a hedge of foreign currency
exposure (foreign currency hedge).
|
| |   |  | In the case of a qualifying fair value hedge, changes in the value
of the derivative instruments that have been highly effective are
recognized in current period earnings along with the change in value
of the designated hedged item. In the case of a qualifying cash flow
hedge, changes in the value of the derivative instruments that have
been highly effective are recognized in other comprehensive income,
until such time those earnings are affected by the variability of
the cash flows of the underlying hedged item. In either a fair value
hedge or a cash flow hedge, net earnings may be impacted to the
extent the changes in the value of the derivative instruments do not
perfectly offset changes in the value of the hedged items. If the
derivative is not designated as a hedging instrument, the changes in
fair value of the derivative are recorded in earnings. The Company
does not currently have any foreign currency hedges.                                                                                     
|
| |   |  | Certain contracts contain embedded derivatives. When the embedded
derivative possesses economic characteristics that are not clearly
and closely related to the economic characteristics of the host
contract, it is bifurcated and carried at fair value and designated
as a trading or non-hedging derivative instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |   |  | The effect of implementing these statements on the Companys financial
condition at January 1, 2001 was a decrease in deposits, an increase in
other liabilities and an increase in accumulated other comprehensive
income (net of tax of $45,000) of $2,607,000, $2,472,000 and $135,000,
respectively. There was no effect on results of operations from the
implementation of these Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |  |  | In the case of interest-rate exchange agreements that qualify for hedging
accounting treatment, net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payments
is recorded on a current basis as an adjustment to interest income or
expense on the corresponding hedged assets and liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | OTHER OFF-BALANCE SHEET INSTRUMENTS  In the ordinary course of business,
the Company enters into off-balance sheet instruments consisting of
commitments to extend credit, commitments under credit card arrangements
and stand-by letters of credit. Such financial instruments are recorded in
the financial statements when they are funded or related fees are incurred
or received. The Company periodically evaluates the credit risks inherent
in these commitments and letters of credit, and establishes loss
allowances for such risks if and when these are deemed necessary. For the
years ended December 31, 2002 and 2001, the Bank did not record any loss
allowances in connection with risks involved in other off-balance sheet
instruments. At December 31, 2002 and 2001, there were no additional
off-balance sheet instruments other than those mentioned above.



| |  | FAIR VALUE OF FINANCIAL INSTRUMENTS  The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed in these financial statements:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CASH AND DUE FROM BANKS  The carrying amounts of cash and due from banks
approximate their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | MONEY MARKET INSTRUMENTS  Money market instruments have been valued at
their carrying amount given the relatively short period of time between
origination of the instruments and their expected realization.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | TRADING SECURITIES  For securities held for trading purposes, fair values
are based on quoted market prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY  The fair
values of investment securities available for sale and held to maturity
are estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers. If a quoted market price is
not available, fair value is estimated using quoted market prices for
similar securities.                                                                                                                                                                                                                                                                          
|
| |  |  | FEDERAL HOME LOAN BANK (FHLB) STOCK  FHLB stock is valued at its
redemption value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | LOANS  Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
residential mortgage, commercial, consumer, credit cards and other loans.
Each loan category is further segmented into fixed and adjustable interest
rate terms and by performing, nonperforming and loans with payments in
arrears.                                                                                                                                                                                                                                                                                             
|
| |   |  | The fair value of performing loans, except residential mortgages and
credit card loans is calculated by discounting scheduled cash flows
through the estimated maturity dates using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. For
performing residential mortgage loans, fair value is computed using an
estimated market rate based on secondary market sources adjusted to
reflect differences in servicing and credit costs. For credit card loans,
cash flows and maturities are estimated based on contractual interest
rates and historical experience and are discounted using estimated market
rates.
|
| |   |  | Fair value for significant nonperforming loans and certain loans with
payments in arrears is based on recent external appraisals of collateral.
If appraisals are not available, estimated cash flows are discounted using
a rate that is commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount
rates are judgmentally determined using available market information and
specific borrower information.                                                                                                                                                                                      

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| |  |  | MORTGAGE SERVICING RIGHTS  The carrying amount of mortgage servicing
rights, which is evaluated periodically for impairment, approximates the
fair value (fair value is estimated considering prices for similar
assets).                                                                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | DEPOSITS  The fair value of deposits with no stated maturity, such as
passbook accounts, money market and checking accounts is equal to the
amount payable on demand. The fair value of fixed maturity certificates of
deposit is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits
of similar remaining maturities.  
|
| |  |  | SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, ADVANCES FROM FHLB, TERM
NOTES AND MORTGAGE NOTE PAYABLE  The fair value of securities sold under
agreements to repurchase, advances from FHLB, term notes and mortgage note
payable and is based on the discounted value using rates currently
available to the Company for debt with similar terms and remaining
maturities.                             
|
| |  |  | ACCRUED INTEREST  The carrying amounts of accrued interest approximate
their fair values.                                                                                                                                                                                                                                                                                                                  
|
| |  |  | INTEREST RATE SWAP AND INTEREST RATE OPTION CONTRACTS  The fair value of
interest rate swap and interest rate option contracts was obtained from
dealer quotes. This value represents the estimated amount the Company
would receive or pay to terminate the contracts, at the reporting date,
taking into account current interest rates and the current
creditworthiness of the contracts counterparties.
|
| |  |  | COMMITMENTS TO EXTEND CREDIT AND COMMERCIAL LETTERS OF CREDIT  The fair
value of commitments to extend credit and commercial letters of credit are
based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the counterparties
credit standings.                                                                                   



| |  | The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Because no
market exists for a portion of the Companys financial instruments (loans and
financial liabilities), fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.                                                                                                                                                                                                                                                                                                    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In addition, the fair value estimates are based on existing on and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not
considered financial instruments such as premises and equipment and goodwill. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | EARNINGS PER SHARE  Basic earnings per share represents income attributable to
common stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Company relate to the outstanding convertible preferred stock, which are
determined using the if-converted method, and the outstanding stock options,
which are determined using the treasury stock method. The effect of convertible
preferred stock (1,210,915 shares in 2002, and 1,212,905 shares in 2001 and
2000) was antidilutive in 2002, 2001 and 2000. The effect of stock options was
dilutive in 2002 and 2001, and antidilutive 2000.

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| |  | Basic and diluted earnings per share were computed as follows:
| |  | --------------------------------------------------------------

|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |            |    
|-------------------------------------------- | ----------------------------------------------------------------- | - | ----------------------------------------- | ---------- | ---- | - | ---------- | ---------- | --- | - | ---------- | ---------- | ---
|                                             |                                                                   |   | 2002                                      |            | 2001 |   | 2000      
|                                             |                                                                   |   |                                           |            |      |   |           
|                                             |                                                                   |   | (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
|Basic and diluted earnings per common share: |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           
|                                             | Net income                                                        |   | $                                         | 85,963     |      |   | $          | 62,155     |     |   | $          | 44,588     |    
|                                             | Less preferred stock dividends                                    |   |                                           | (13,774    | )    |   |            | (10,264    | )   |   |            | (5,799     | )  
|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           
|                                             | Income attributable to common stockholders                        |   | $                                         | 72,189     |      |   | $          | 51,891     |     |   | $          | 38,789     |    
|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           
|                                             | Weighted average number of common
shares outstanding for the year |   |                                           | 64,382,211 |      |   |            | 62,252,543 | (1) |   |            | 62,445,389 | (1)
|                                             | Dilutive potential common shares  options                        |   |                                           | 759,964    |      |   |            | 175,803    |     |   |            |           |    
|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           
|Total                                        |                                                                   |   | 65,142,175                                |            |      |   | 62,428,346 |            |     |   | 62,445,389 |           
|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           
|Basic earnings per common share              |                                                                   | $ | 1.12                                      |            |      | $ | 0.83       | (1)        |     | $ | 0.62       | (1)       
|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           
|Diluted earnings per common share            |                                                                   | $ | 1.11                                      |            |      | $ | 0.83       | (1)        |     | $ | 0.62       | (1)       
|                                             |                                                                   |   |                                           |            |      |   |            |            |     |   |            |           



---

|(1) |  | Adjusted to reflect the three-for-two split in the form of a stock
dividend on our common stock declared on June 17, 2002, and distributed on
July 10, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | COMPREHENSIVE INCOME  Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. Accounting principles generally accepted in the United
States of America require that recognized revenue, expenses, gains and losses be
included in net income. Although certain changes in assets and liabilities, such
as unrealized gains and losses on available for sale securities, are reported as
a separate component of the stockholders equity section of the statement of
financial condition, such items, along with net income, are components of
comprehensive income.                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | RECENT ACCOUNTING DEVELOPMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Effective January 1, 2002, the Company adopted SFAS No. 141, BUSINESS
COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Those
statements changed the accounting for business combinations and goodwill in two
significant ways. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations. Use of the pooling-of-interest method is
prohibited. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, ceased upon
adoption of this statement. Adoption of SFAS No. 141 and No. 142 did not have a
significant effect on the Companys consolidated financial statements.                    
|
| |  | In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No. 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. SFAS No. 143 becomes effective January 1, 2003, and is not expected to
have a significant effect on the Companys consolidated financial condition or
results of operations.                                                                                                                                                                                                                                                                                                           
|
| |  | Effective January 1, 2002, the Company adopted SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the
accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS
OF OPERATIONS  REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS,
AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS,
FOR THE DISPOSAL OF A SEGMENT OF A BUSINESS Implementation of SFAS No. 144 did
not have a significant effect on the Companys consolidated financial
statements.

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| |  | In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44 AND 64, AMENDMENT OF SFAS NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145
rescinds SFAS No. 4, REPORTING GAINS AND LOSSES FROM EXTINGUISHMENT OF DEBT-AN
AMENDMENT OF APB OPINION NO. 30, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion No. 30 will now be used to classify those gains and losses. SFAS No.
145 also amends SFAS No. 13, ACCOUNTING FOR LEASES, to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS No. 145 did not have a significant effect on the Companys consolidated
financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. This Statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The provisions of this
Statement are effective for exit or disposal activities that are initiated after
December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In October 2002, the FASB issued SFAS No. 147, ACQUISITIONS OF CERTAIN FINANCIAL
INSTITUTIONS, AN AMENDMENT OF FASB STATEMENTS NO. 72 AND 144 AND FASB
INTERPRETATION NO. 9. Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141, BUSINESS
COMBINATIONS and SFAS No. 142, Goodwill and Other Intangible Assets. In
addition, SFAS No. 147 amends SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor-and-borrower-relationship intangible assets and credit cardholders
intangible assets. SFAS No. 147 is effective for acquisitions or impairment
measurement of such intangibles effective on or after October 1, 2002. SFAS No.
147 did not have a significant effect on the Companys financial condition or
results of operations.                                                                                                                                                                                                                                                                                
|
| |  | In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION  TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO.
123. This Statement amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financials statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Effective
January 1, 2003, the Company changed the method of accounting for employee stock
options from the intrinsic value method to the fair value method. Under the fair
value method, the Company will recognize stock-based compensation as an expense
through the statement of operations for only the current and future years in an
amount equal to the amount that would have been recognized had SFAS 123 been
adopted as of its effective date. The effect of implementing this Statement on
the Companys financial condition and results of operations is expected to be
immaterial.                                                                                                  
|
|
| |  | In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
GUARANTORS ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB
STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in the
financial statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable for guarantees issued or
modified after December 31, 2002. Adoption of the recognition and measurement
provisions is not expected to have a significant effect on the Companys
financial condition and results of operations. The disclosure provisions of FIN
45 were effective for financial statements of fiscal years ending after December
15, 2002 and did not have a significant effect on the Companys financial
statements.                                                                                                                                                                                             
|
| |  | In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51.
FIN 46 addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
issue voting interests (or other interests with similar rights) or (b) the total
equity investment at risk is not sufficient to permit the entity to finance its
activities. FIN No. 46 requires an enterprise to consolidate a variable interest
entity if that enterprise has a variable interest that will absorb a majority of
the entitys expected losses if they occur, receive a majority of the entitys
expected residual returns if they occur, or both. Qualifying Special Purpose
Entities are exempt from the consolidation requirements. The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to variable
interest entities created before February 1, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. The adoption of FIN 46 is not expected to have a
significant effect on the Companys financial position or results of operations.
|

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|2. |  | SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company enters into purchases of securities under agreements to resell
the same securities. These agreements are classified as secured loans and
are reflected as assets in the consolidated statements of financial
condition.
|  
|   |  | At December 31, 2002 and 2001, securities purchased under agreements to
resell (classified by counterparty) were as follows:                                                                                                       

|                                            |  |                |         |      |  |   |         | 
|------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                            |  | 2002           |         | 2001
|                                            |  |                |         |     
|                                            |  | (In Thousands)
|Credit Suisse First Boston                  |  | $              | 75,000  |      |  | $ |        | 
|Doral Securities, Inc.                      |  |                | 71,809  |      |  |   | 65,059  | 
|UBS PaineWebber Incorporated of Puerto Rico |  |                | 70,029  |      |  |   | 45,034  | 
|Popular Securities, Inc.                    |  |                | 45,009  |      |  |   | 26,003  | 
|                                            |  |                |         |      |  |   |         | 
|Total                                       |  | $              | 261,847 |      |  | $ | 136,096 | 
|                                            |  |                |         |      |  |   |         | 



| |  | A comparative summary of securities purchased under agreements to resell as of
December 31, were as follows:
| |  | ------------------------------------------------------------------------------------------------------------

|                                                                               |                                                 |                                   |         |                |         |            |         |            |         |            |         |        |        |          |         |        |        | 
|------------------------------------------------------------------------------ | ----------------------------------------------- | --------------------------------- | ------- | -------------- | ------- | ---------- | ------- | ---------- | ------- | ---------- | ------- | ------ | ------ | -------- | ------- | ------ | ------ | 
|                                                                               |                                                 |                                   |         | 2002           |         | 2001      
|                                                                               |                                                 |                                   |         |                |         |           
|                                                                               |                                                 |                                   |         | (In Thousands)
|                                                                               |                                                 |                                   |         |                |         |            |         | FAIR       |         |            |         |        |        | FAIR    
|                                                                               |                                                 |                                   |         |                |         |            |         | VALUE OF   |         |            |         |        |        | VALUE OF
|                                                                               |                                                 |                                   |         | RECEIVABLE     |         | UNDERLYING |         | RECEIVABLE |         | UNDERLYING
|UNDERLYING COLLATERAL                                                          |                                                 | BALANCE                           |         | COLLATERAL     |         | BALANCE    |         | COLLATERAL
|                                                                               |                                                 |                                   |         |                |         |            |         |           
|Investment securities:                                                         |                                                 |                                   |         |                |         |            |         |            |         |            |         |        |        |          |         |       
|                                                                               | U.S. Government and
agencies obligations        |                                   | $       | 70,029         |         |            | $       | 71,294     |         |            | $       | 48,114 |        |          | $       | 48,838 |       
|                                                                               | Puerto Rico Government and
agencies obligations |                                   |         | 45,555         |         |            |         | 46,964     |         |            |         | 18,059 |        |          |         | 18,390 |       
|                                                                               | Commercial paper                                |                                   |         | 7,910          |         |            |         | 8,074      |         |            |         |       |        |          |         |       |       
|                                                                               | Mortgage and asset-backed
securities:           |                                   |         |                |         |            |         |            |         |            |         |        |        |          |         |        |       
|                                                                               |                                                 | Guaranteed by Government
agencies |         |                | 134,983 |            |         |            | 139,544 |            |         |        | 69,923 |          |         |        | 71,877 | 
|                                                                               |                                                 | Other                             |         |                | 3,370   |            |         |            | 3,435   |            |         |        |       |          |         |        |       | 
|                                                                               |                                                 |                                   |         |                |         |            |         |            |         |            |         |        |        |          |         |       
|Total  excluding accrued
interest receivable                                  |                                                 | $                                 | 261,847 |                |         | $          | 269,311 |            |         | $          | 136,096 |        |        | $        | 139,105 |       
|                                                                               |                                                 |                                   |         |                |         |            |         |            |         |            |         |        |        |          |         |       
|Accrued interest receivable
on securities purchased
under agreements to resell |                                                 | $                                 | 560     |                |         |            |         |            |         | $          | 11      |        |        |          |         |       
|                                                                               |                                                 |                                   |         |                |         |            |         |            |         |            |         |        |        |          |         |       

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| |  | The Company monitors the fair value of the underlying securities as compared to
the related receivable, including accrued interest, and requests additional
collateral when the fair value of the underlying collateral falls to less than
the collateral requirement. The collateral requirement is equal to 102 percent
of the related receivable, including interest. At December 31, 2002, repurchase
agreements amounting to $161,847,000 mature the next business day and
$100,000,000 mature in November 2007, on which the counterparty has the option
to terminate the agreement quarterly, at each interest payment date. Securities
purchased under agreements to resell are held in safekeeping, in the name of the
Company, by Citibank N.A., the Companys custodian, or are held by the
counterparty. At December 31, 2002, all collateral was held by the counterparty.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Average outstanding balances and maximum month-end outstanding balances during
the years ended December 31, 2002 and 2001, and weighted average interest rates
for the year and at year end are indicated below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                             |              |   |                        |      |      |   |         |      |  
|-------------------------------------------- | ------------ | - | ---------------------- | ---- | ---- | - | ------- | ---- | -
|                                             |              |   | 2002                   |      | 2001
|                                             |              |   |                        |      |     
|                                             |              |   | (DOLLARS IN THOUSANDS)
|Monthly average outstanding balance          |              | $ | 185,684                |      |      | $ | 126,355 |     
|Maximum outstanding balance at any month-end |              |   | 272,019                |      |      |   | 145,747 |     
|Weighted average interest rate:              |              |   |                        |      |      |   |         |     
|                                             | For the year |   |                        | 2.26 | %    |   |         | 4.36 | %
|                                             | At year end  |   |                        | 2.44 |      |   |         | 1.78 |  

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|3. |  | INVESTMENT SECURITIES:                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The amortized cost, gross unrealized gains and losses, and fair value of
investment securities at December 31, were as follows:

|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |           |         | 
|------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------ | --------- | -------------- | ------- | ---------- | ------ | ---------- | --- | ----- | ------ | ----- | ----- | - | --------- | --------- | ------- | 
|                    |                                                                        |                                                              |           |                |         |            |        | GROSS      |     | GROSS |        |       |       |  
|                    |                                                                        |                                                              |           | AMORTIZED      |         | UNREALIZED |        | UNREALIZED |     | FAIR 
|DECEMBER 31, 2002   |                                                                        | COST                                                         |           | GAINS          |         | LOSSES     |        | VALUE     
|                    |                                                                        |                                                              |           |                |         |            |        |           
|                    |                                                                        |                                                              |           | (In Thousands)
|AVAILABLE FOR SALE: |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|                    | Mortgage-backed securities -
Collateralized mortgage obligations (CMO) |                                                              | $         | 144,378        |         |            | $      | 898        |     |       | $      |      |       |   | $         | 145,276   |        
|                    | Corporate notes                                                        |                                                              |           | 12,580         |         |            |        |           |     |       |        | 2,199 |       |   |           | 10,381    |        
|                    | Other investments                                                      |                                                              |           | 5,000          |         |            |        | 230        |     |       |        |      |       |   |           | 5,230     |        
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|Total               |                                                                        | $                                                            | 161,958   |                |         | $          | 1,128  |            |     | $     | 2,199  |       |       | $ | 160,887   |          
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|HELD TO MATURITY:   |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|                    | U.S. Government and agencies obligations                               |                                                              | $         | 2,671,344      |         |            | $      | 7,783      |     |       | $      | 376   |       |   | $         | 2,678,751 |        
|                    | Puerto Rico Government and
agencies obligations                        |                                                              |           | 19,695         |         |            |        | 245        |     |       |        | 30    |       |   |           | 19,910    |        
|                    | Commercial paper                                                       |                                                              |           | 74,997         |         |            |        |           |     |       |        |      |       |   |           | 74,997    |        
|                    | Corporate notes                                                        |                                                              |           | 66,697         |         |            |        | 3,173      |     |       |        |      |       |   |           | 69,870    |        
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|Total               |                                                                        |                                                              | 2,832,733 |                |         |            | 11,201 |            |     |       | 406    |       |       |   | 2,843,528 |          
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|                    | Mortgage and other asset-backed
securities:                            |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |           |        
|                    |                                                                        | Federal Home Loan Mortgage
Corporation (FHLMC) certificates  |           |                | 10,435  |            |        |            | 636 |       |        |       |      |   |           |           | 11,071  | 
|                    |                                                                        | Government National Mortgage
Association (GNMA) certificates |           |                | 13,657  |            |        |            | 686 |       |        |       |      |   |           |           | 14,343  | 
|                    |                                                                        | Fannie Mae (FNMA) certificates                               |           |                | 6,906   |            |        |            | 447 |       |        |       |      |   |           |           | 7,353   | 
|                    |                                                                        | CMO certificates                                             |           |                | 565,068 |            |        |            | 986 |       |        |       | 3,366 |   |           |           | 562,688 | 
|                    |                                                                        | Other                                                        |           |                | 72,258  |            |        |            | 250 |       |        |       | 8,112 |   |           |           | 64,396  | 
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|Total               |                                                                        |                                                              | 668,324   |                |         |            | 3,005  |            |     |       | 11,478 |       |       |   | 659,851   |          
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          
|Total               |                                                                        | $                                                            | 3,501,057 |                |         | $          | 14,206 |            |     | $     | 11,884 |       |       | $ | 3,503,379 |          
|                    |                                                                        |                                                              |           |                |         |            |        |            |     |       |        |       |       |   |           |          

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|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |           |         | 
|------------------- | ----------------------------------------------- | ------------------ | --------- | -------------- | ------- | ---------- | ----- | ---------- | --- | ----- | ------ | ----- | ----- | - | --------- | --------- | ------- | 
|                    |                                                 |                    |           |                |         |            |       | GROSS      |     | GROSS |        |       |       |  
|                    |                                                 |                    |           | AMORTIZED      |         | UNREALIZED |       | UNREALIZED |     | FAIR 
|DECEMBER 31, 2001   |                                                 | COST               |           | GAINS          |         | LOSSES     |       | VALUE     
|                    |                                                 |                    |           |                |         |            |       |           
|                    |                                                 |                    |           | (IN THOUSANDS)
|TRADING SECURITIES: |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|                    | Mortgage-backed securities:                     |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |           |        
|                    |                                                 | GNMA certificates  |           | $              | 2,554   |            |       | $          | 25  |       |        | $     |      |   |           | $         | 2,579   | 
|                    |                                                 | FNMA certificates  |           |                | 2,070   |            |       |            |    |       |        |       | 40    |   |           |           | 2,030   | 
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|Total               |                                                 | $                  | 4,624     |                |         | $          | 25    |            |     | $     | 40     |       |       | $ | 4,609     |          
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|AVAILABLE FOR SALE: |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|                    | U.S. Government and agencies obligations        |                    | $         | 196,600        |         |            | $     |           |     |       | $      | 154   |       |   | $         | 196,446   |        
|                    | Corporate notes                                 |                    |           | 56,301         |         |            |       | 22         |     |       |        | 243   |       |   |           | 56,080    |        
|                    | Mortgage-backed securities -
CMO certificates   |                    |           | 29,062         |         |            |       | 94         |     |       |        |      |       |   |           | 29,156    |        
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|Total               |                                                 | $                  | 281,963   |                |         | $          | 116   |            |     | $     | 397    |       |       | $ | 281,682   |          
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|HELD TO MATURITY:   |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|                    | U.S. Government and agencies obligations        |                    | $         | 1,788,000      |         |            | $     | 2,721      |     |       | $      | 6,360 |       |   | $         | 1,784,361 |        
|                    | Puerto Rico Government and
agencies obligations |                    |           | 22,607         |         |            |       | 249        |     |       |        | 15    |       |   |           | 22,841    |        
|                    | Commercial paper                                |                    |           | 59,992         |         |            |       |           |     |       |        |      |       |   |           | 59,992    |        
|                    | Corporate notes                                 |                    |           | 66,460         |         |            |       | 1,064      |     |       |        | 1,269 |       |   |           | 66,255    |        
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|Total               |                                                 |                    | 1,937,059 |                |         |            | 4,034 |            |     |       | 7,644  |       |       |   | 1,933,449 |          
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|                    | Mortgage and other asset-backed
securities:     |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |           |        
|                    |                                                 | FHLMC certificates |           |                | 13,475  |            |       |            | 455 |       |        |       |      |   |           |           | 13,930  | 
|                    |                                                 | GNMA certificates  |           |                | 18,500  |            |       |            | 594 |       |        |       |      |   |           |           | 19,094  | 
|                    |                                                 | FNMA certificates  |           |                | 10,011  |            |       |            | 332 |       |        |       |      |   |           |           | 10,343  | 
|                    |                                                 | CMO certificates   |           |                | 319,386 |            |       |            | 369 |       |        |       | 1,799 |   |           |           | 317,956 | 
|                    |                                                 | Other              |           |                | 71,344  |            |       |            |    |       |        |       | 3,280 |   |           |           | 68,064  | 
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|Total               |                                                 |                    | 432,716   |                |         |            | 1,750 |            |     |       | 5,079  |       |       |   | 429,387   |          
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          
|Total               |                                                 | $                  | 2,369,775 |                |         | $          | 5,784 |            |     | $     | 12,723 |       |       | $ | 2,362,836 |          
|                    |                                                 |                    |           |                |         |            |       |            |     |       |        |       |       |   |           |          



| |  | The amortized cost and fair value of investment securities available for sale
and held to maturity at December 31, 2002, by contractual maturity (excluding
mortgage-backed securities), are shown below.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |  |                    |         |                  |  |           |         |       |  |   |           |  |  |   |           | 
|------------------------------------------ |  | ------------------ | ------- | ---------------- |  | --------- | ------- | ----- |  | - | --------- |  |  | - | --------- | 
|                                           |  | AVAILABLE FOR SALE |         | HELD TO MATURITY
|                                           |  |                    |         |                 
|                                           |  | AMORTIZED          |         | FAIR             |  | AMORTIZED |         | FAIR 
|                                           |  | COST               |         | VALUE            |  | COST      |         | VALUE
|                                           |  |                    |         |                  |  |           |         |      
|                                           |  | (IN THOUSANDS)    
|Due within one year                        |  | $                  |        |                  |  | $         |        |       |  | $ | 120,569   |  |  | $ | 120,947   | 
|Due after one year through five years      |  |                    |        |                  |  |           |        |       |  |   | 2,594,846 |  |  |   | 2,603,506 | 
|Due after five years through ten years     |  |                    |        |                  |  |           |        |       |  |   | 94,000    |  |  |   | 93,679    | 
|Due after ten years                        |  |                    | 17,580  |                  |  |           | 15,611  |       |  |   | 23,318    |  |  |   | 25,396    | 
|                                           |  |                    |         |                  |  |           |         |       |  |   |           |  |  |   |           | 
|Total                                      |  |                    | 17,580  |                  |  |           | 15,611  |       |  |   | 2,832,733 |  |  |   | 2,843,528 | 
|Mortgage and other asset-backed securities |  |                    | 144,378 |                  |  |           | 145,276 |       |  |   | 668,324   |  |  |   | 659,851   | 
|                                           |  |                    |         |                  |  |           |         |       |  |   |           |  |  |   |           | 
|Total                                      |  | $                  | 161,958 |                  |  | $         | 160,887 |       |  | $ | 3,501,057 |  |  | $ | 3,503,379 | 
|                                           |  |                    |         |                  |  |           |         |       |  |   |           |  |  |   |           | 

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Audited Financial Statements
Note 3

Proceeds from sales of investment securities available for sale and the
respective gross realized gains and losses for the years ended December 31,
2002, 2001 and 2000, were as follows:

|                      |  |                |         |      |  |      |         |  |  |   |       | 
|--------------------- |  | -------------- | ------- | ---- |  | ---- | ------- |  |  | - | ----- | 
|                      |  | 2002           |         | 2001 |  | 2000
|                      |  |                |         |      |  |     
|                      |  | (IN THOUSANDS)
|Proceeds from sales   |  | $              | 661,090 |      |  | $    | 162,556 |  |  | $ | 3,552 | 
|Gross realized gains  |  |                | 3,250   |      |  |      | 426     |  |  |   |      | 
|Gross realized losses |  |                | 1,742   |      |  |      | 75      |  |  |   | 422   | 

Unencumbered investment securities held to maturity at December 31, 2002,
amounted to $252,140,000 after taking into account the investment securities
pledged (Notes 7, 10 and 18), those sold under agreements to repurchase (Note
8), those pledged to the Federal Reserve Bank of $4,994,000, and those pledged
to the Puerto Rico Treasury Department (for the Westernbank International
Division) of $500,000.

Nontaxable interest income on investments for the years ended December 31, 2002,
2001 and 2000, amounted to $163,387,000, $131,112,000, and $93,122,000,
respectively. Nontaxable interest income relates mostly to interest earned on
government obligations of the United States and Puerto Rico, certain
mortgage-backed securities, and loans of the Westernbank International division.




As of December 31, 2002 and 2001, management concluded that there was no other
than temporary impairment on its investment securities portfolio.




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|4. |  | LOANS:                                                        
|-- |  | --------------------------------------------------------------
|  
|   |  | The loan portfolio at December 31, consisted of the following:

|                                              |                                                                                            |                         |                               |                                                |           |                |           |           |           |         |        |  
|--------------------------------------------- | ------------------------------------------------------------------------------------------ | ----------------------- | ----------------------------- | ---------------------------------------------- | --------- | -------------- | --------- | --------- | --------- | ------- | ------ | -
|                                              |                                                                                            |                         |                               |                                                |           | 2002           |           | 2001     
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            |                         |                               |                                                |           | (IN THOUSANDS)
|REAL ESTATE LOANS SECURED BY FIRST MORTGAGES: |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              | Commercial real estate                                                                     |                         | $                             | 1,461,606                                      |           |                | $         | 1,117,451 |          
|                                              | Conventional:                                                                              |                         |                               |                                                |           |                |           |           |          
|                                              |                                                                                            |                         | One-to-four-family residences |                                                |           | 827,902        |           |           |           | 827,110 |       
|                                              |                                                                                            |                         | Other properties              |                                                |           | 2,447          |           |           |           | 2,734   |       
|                                              | Construction and land acquisition                                                          |                         |                               | 186,208                                        |           |                |           | 125,047   |          
|                                              | Insured or guaranteed  Federal Housing Administration,
Veterans Administration and others |                         |                               | 17,201                                         |           |                |           | 16,896    |          
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            | Total                   |                               |                                                | 2,495,364 |                |           |           | 2,089,238 |        
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            | Plus (less):            |                               |                                                |           |                |           |           |           |        
|                                              |                                                                                            |                         |                               | Undisbursed portion of loans in process        |           |                | (4,942    | )         |           |         | (5,624 | )
|                                              |                                                                                            |                         |                               | Premium on loans purchased                     |           |                | 1,485     |           |           |         | 2,036  |  
|                                              |                                                                                            |                         |                               | Deferred loan fees  net                       |           |                | (4,230    | )         |           |         | (4,531 | )
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            | Total                   |                               |                                                | (7,687    | )              |           |           | (8,119    | )      
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            | Real estate loans  net |                               |                                                | 2,487,677 |                |           |           | 2,081,119 |        
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|OTHER LOANS:                                  |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            | Commercial loans        |                               |                                                | 569,804   |                |           |           | 376,408   |        
|                                              |                                                                                            | Loans on deposits       |                               |                                                | 32,803    |                |           |           | 35,140    |        
|                                              |                                                                                            | Credit cards            |                               |                                                | 56,658    |                |           |           | 63,108    |        
|                                              |                                                                                            | Consumer loans          |                               |                                                | 655,713   |                |           |           | 318,509   |        
|                                              |                                                                                            | Plus (less):            |                               |                                                |           |                |           |           |           |        
|                                              |                                                                                            |                         |                               | Premium on loans purchased                     |           |                | 3,225     |           |           |         | 4,169  |  
|                                              |                                                                                            |                         |                               | Deferred loan fees  net and unearned interest |           |                | (4,409    | )         |           |         | (1,685 | )
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|                                              |                                                                                            |                         | Other loans  net             |                                                |           | 1,313,794      |           |           |           | 795,649 |       
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|TOTAL LOANS                                   |                                                                                            |                         | 3,801,471                     |                                                |           |                | 2,876,768 |          
|ALLOWANCE FOR LOAN LOSSES                     |                                                                                            |                         | (47,114                       | )                                              |           |                | (38,364   | )        
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          
|LOANS  NET                                   |                                                                                            | $                       | 3,754,357                     |                                                |           | $              | 2,838,404 |          
|                                              |                                                                                            |                         |                               |                                                |           |                |           |          

The Company originated commercial real estate loans during 2002 amounting to
$481,197,000, totaling $1,461,606,000 at December 31, 2002. In general,
commercial real estate loans are considered by management to be of somewhat
greater risk of uncollectibility due to the dependency on income production or
future development of the real estate. The commercial real estate loans are
principally collateralized by property dedicated to wholesale, retail and rental
business activities. Foreign loans amounted to $2,701,000 and $3,850,000 at
December 31, 2002 and 2001, respectively.

The Company originates mortgage loans for portfolio investment or sale in the
secondary market. During the period of origination, mortgage loans are
designated as held for either sale or investment purposes. Mortgage loans held
for sale are carried at the lower of cost or fair value. At December 31, 2002
and 2001, mortgage loans with a cost of $7,456,000 and $5,352,000, respectively,
were designated as held for sale.

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The following table reflects the outstanding principal balance of non-accrual
loans and the corresponding effect on earnings:

|                                                                                                              |  |                |        |      |  |      |        |  |  |   |       | 
|------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|                                                                                                              |  | 2002           |        | 2001 |  | 2000
|                                                                                                              |  |                |        |      |  |     
|                                                                                                              |  | (IN THOUSANDS)
|Outstanding principal balance
at end of year                                                                  |  | $              | 19,405 |      |  | $    | 14,113 |  |  | $ | 9,690 | 
|                                                                                                              |  |                |        |      |  |      |        |  |  |   |       | 
|Interest that would have been recorded
if the loans had been performing and not
been classified as nonaccrual |  | $              | 1,102  |      |  | $    | 1,123  |  |  | $ | 979   | 
|                                                                                                              |  |                |        |      |  |      |        |  |  |   |       | 

Loans serviced for others are not included in the consolidated statements of
financial condition. At December 31, 2002 and 2001, the unpaid principal balance
of these loans amounted to $311,058,000 and $307,867,000, respectively.
Servicing loans for others generally consists of collecting payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees. In
connection with the loans serviced for others, the Company held borrowers
escrow balances of $960,000 and $852,000 at December 31, 2002 and 2001,
respectively.

Mortgage servicing rights, included as other assets, amounted to $1,926,000,
$2,091,000 and $2,085,000 at December 31, 2002, 2001 and 2000, respectively. In
2002, 2001 and 2000, the Company capitalized mortgage servicing rights amounting
to $607,000, $483,000 and $454,000, respectively. Amortization of mortgage
servicing rights was $772,000, $477,000, and $347,000 in 2002, 2001, and 2000,
respectively. At December 31, 2002, 2001 and 2000, the carrying value of
mortgage servicing rights approximates fair value.

In the normal course of business, the Company engages in business transactions
with its directors, executive officers, principal shareholders and organizations
associated with them. Loans to related parties, mainly mortgage loans for
purchase of the principal residence, are substantially on the same terms as
loans to nonrelated parties. The aggregate amount of loans outstanding to
related parties at December 31, 2002 and 2001 totaled $571,000 and $708,000,
respectively.

Changes in the allowance for loan losses are summarized below:

|                                    |  |                |        |      |  |      |        |   |  |   |        |  
|----------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                    |  | 2002           |        | 2001 |  | 2000
|                                    |  |                |        |      |  |     
|                                    |  | (IN THOUSANDS)
|Balance  at January 1              |  | $              | 38,364 |      |  | $    | 28,928 |   |  | $ | 23,978 |  
|Provision charged to income         |  |                | 15,083 |      |  |      | 12,278 |   |  |   | 8,700  |  
|Allowance acquired                  |  |                |       |      |  |      | 2,892  |   |  |   |       |  
|Recoveries                          |  |                | 1,632  |      |  |      | 1,304  |   |  |   | 1,613  |  
|Write-off of uncollectible accounts |  |                | (7,965 | )    |  |      | (7,038 | ) |  |   | (5,363 | )
|                                    |  |                |        |      |  |      |        |   |  |   |        |  
|Balance  at December 31            |  | $              | 47,114 |      |  | $    | 38,364 |   |  | $ | 28,928 |  
|                                    |  |                |        |      |  |      |        |   |  |   |        |  

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ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA



|   |  | The total investment in impaired commercial and construction loans at
December 31, 2002 and 2001 was $50,589,000 and $42,478,000, respectively.
All impaired commercial and construction loans were measured based on the
fair value of collateral at December 31, 2002 and 2001. Impaired
commercial and construction loans amounting to $26,074,000 and $21,996,000
at December 31, 2002 and 2001, respectively, were covered by a valuation
allowance of $4,752,000 and $4,181,000, respectively. Impaired commercial
and construction loans amounting to $24,515,000 and $20,482,000 at
December 31, 2002 and 2001, respectively, did not require a valuation
allowance in accordance with SFAS 114. The average investment in impaired
commercial and construction loans during the years ended December 31,
2002, 2001 and 2000, amounted to $46,147,000, $20,293,000 and $11,873,000,
respectively. The Companys policy is to recognize interest income related
to impaired loans on a cash basis when these are over 90 days in arrears
on payments of principal or interest. Interest on impaired commercial and
construction loans collected and recognized as income during the years
ended December 31, 2002, 2001 and 2000, amounted to $4,041,000, $1,716,000
and $780,000, respectively.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | FORECLOSED REAL ESTATE HELD FOR SALE:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Foreclosed real estate held for sale at December 31, consisted of the
following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                               |                           |   |                |       |      |   |       |       |  |   |       |       | 
|---------------------------------------------- | ------------------------- | - | -------------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                               |                           |   | 2002           |       | 2001 |   | 2000 
|                                               |                           |   |                |       |      |   |      
|                                               |                           |   | (IN THOUSANDS)
|Balance, foreclosed real estate held
for sale: |                           |   |                |       |      |   |       |       |  |   |       |      
|                                               | Residential (1 - 4 units) |   | $              | 701   |      |   | $     | 934   |  |   | $     | 90    | 
|                                               | Commercial                |   |                | 3,029 |      |   |       | 2,397 |  |   |       | 2,662 | 
|                                               |                           |   |                |       |      |   |       |       |  |   |       |      
|Total                                          |                           |   | 3,730          |       |      |   | 3,331 |       |  |   | 2,752 |      
|Less valuation allowance                       |                           |   | 51             |       |      |   | 318   |       |  |   | 298   |      
|                                               |                           |   |                |       |      |   |       |       |  |   |       |      
|Foreclosed real estate held for
sale  net     |                           | $ | 3,679          |       |      | $ | 3,013 |       |  | $ | 2,454 |      
|                                               |                           |   |                |       |      |   |       |       |  |   |       |      



|6. |  | PREMISES AND EQUIPMENT:                                           
|-- |  | ------------------------------------------------------------------
|  
|   |  | Premises and equipment at December 31, consisted of the following:

|                                               |  |                 |         |      |  |   |        | 
|---------------------------------------------- |  | --------------- | ------- | ---- |  | - | ------ | 
|                                               |  | 2002            |         | 2001
|                                               |  |                 |         |     
|                                               |  | (IN THOUSANDS)}
|                                               |  |                
|Land                                           |  | $               | 25,580  |      |  | $ | 13,153 | 
|Buildings and improvements                     |  |                 | 51,027  |      |  |   | 7,747  | 
|Furniture and equipment                        |  |                 | 24,894  |      |  |   | 23,190 | 
|Leasehold improvements                         |  |                 | 12,312  |      |  |   | 11,542 | 
|Construction in progress                       |  |                 | 3,758   |      |  |   | 2,951  | 
|                                               |  |                 |         |      |  |   |        | 
|Total                                          |  |                 | 117,571 |      |  |   | 58,583 | 
|Less accumulated depreciation and
amortization |  |                 | 21,362  |      |  |   | 17,910 | 
|                                               |  |                 |         |      |  |   |        | 
|Total                                          |  | $               | 96,209  |      |  | $ | 40,673 | 
|                                               |  |                 |         |      |  |   |        | 

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|7. |  | DEPOSITS AND INTEREST EXPENSE:                      
|-- |  | ----------------------------------------------------
|  
|   |  | Deposits at December 31, consisted of the following:

|                              |  |                |           |      |  |   |           | 
|----------------------------- |  | -------------- | --------- | ---- |  | - | --------- | 
|                              |  | 2002           |           | 2001
|                              |  |                |           |     
|                              |  | (IN THOUSANDS)
|Noninterest bearings accounts |  | $              | 156,143   |      |  | $ | 123,932   | 
|Passbook accounts             |  |                | 560,549   |      |  |   | 465,267   | 
|NOW accounts                  |  |                | 138,434   |      |  |   | 115,977   | 
|Super NOW accounts            |  |                | 24,868    |      |  |   | 18,609    | 
|Money market accounts         |  |                | 15,303    |      |  |   | 6,806     | 
|Certificates of deposit       |  |                | 3,379,628 |      |  |   | 2,477,842 | 
|                              |  |                |           |      |  |   |           | 
|Total                         |  |                | 4,274,925 |      |  |   | 3,208,433 | 
|Accrued interest payable      |  |                | 23,819    |      |  |   | 25,479    | 
|                              |  |                |           |      |  |   |           | 
|Total                         |  | $              | 4,298,744 |      |  | $ | 3,233,912 | 
|                              |  |                |           |      |  |   |           | 



| |  | The weighted average interest rate of all deposits at December 31, 2002
and 2001, was approximately 2.88% and 4.02%, respectively. At December 31,
2002, the aggregate amount of deposits in denominations of $100,000 or
more was $619,280,000 ($583,979,000 at December 31, 2001). Deposits
include brokered deposits of $2,546,000,000 and $1,572,000,000 at December
31, 2002 and 2001, respectively. Deposits of directors, executive
officers, principal shareholders and organizations associated with them
amounted to $8,287,000 and $7,273,000 at December 31, 2002 and 2001,
respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002, the scheduled maturities of certificates of deposit
are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

YEAR ENDING
DECEMBER 31,

|           |  |                |           | 
|---------- |  | -------------- | --------- | 
|           |  | AMOUNT        
|           |  |               
|           |  | (IN THOUSANDS)
|2003       |  | $              | 2,405,338 | 
|2004       |  |                | 346,727   | 
|2005       |  |                | 156,099   | 
|2006       |  |                | 50,727    | 
|2007       |  |                | 54,043    | 
|Thereafter |  |                | 366,694   | 
|           |  |                |           | 
|Total      |  | $              | 3,379,628 | 
|           |  |                |           | 



| |  | At December 31, 2002, the Company had pledged investment securities held
to maturity with a carrying value of $13,063,000 and mortgage-backed
securities held to maturity with a carrying value of $33,545,000 to secure
public funds, and mortgage-backed securities held to maturity with a
carrying value of $483,000 as bond requirement for individual retirement
accounts.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | A summary of interest expense on deposits for the years ended December 31,
follows:
| |  | -----------------------------------------------------------------------------------

|      |  |                          |  |   |        |      |         |      |         |                |         |   |         |   |         | 
|----- |  | ------------------------ |  | - | ------ | ---- | ------- | ---- | ------- | -------------- | ------- | - | ------- | - | ------- | 
|      |  |                          |  |   |        | 2002 |         | 2001 |         | 2000          
|      |  |                          |  |   |        |      |         |      |         |               
|      |  |                          |  |   |        |      |         |      |         | (IN THOUSANDS) |         |   |         |  
|      |  | Passbook                 |  | $ | 12,520 |      |         | $    | 12,800  |                |         | $ | 12,491  |  
|      |  | NOW, Super NOW and Money |  |   |        |      |         |      |         |                |         |   |         |  
|      |  | Market accounts          |  |   | 3,598  |      |         |      | 3,479   |                |         |   | 3,185   |  
|      |  | Certificates of deposit  |  |   | 98,256 |      |         |      | 113,397 |                |         |   | 111,964 |  
|      |  |                          |  |   |        |      |         |      |         |                |         |   |         |   |         | 
|Total |  |                          |  |   |        | $    | 114,374 |      |         | $              | 129,676 |   |         | $ | 127,640 | 
|      |  |                          |  |   |        |      |         |      |         |                |         |   |         |   |         | 



|8. |  | SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Reverse repurchase agreements are
classified as secured borrowings and are reflected as a liability in the
consolidated statements of financial condition. During the years ended
December 31, 2002 and 2001, all of the Companys transactions were
fixed-coupon reverse repurchase agreements. Reverse repurchase agreements
at December 31, 2002, include $433,198,000 of long-term agreements with
fixed rate step-up schedule. During the period of such agreements, the
securities were delivered to the counterparties. The dealers may have
sold, loaned, or otherwise disposed of such securities to other parties in
the normal course of their operations, and have agreed to resell to the
Company the same securities at the maturities of the agreements. The
Company may be required to provide additional collateral based on the fair
value of the underlying securities.
|  
|   |  | Reverse repurchase agreements at December 31, 2002, mature as follows:
within 30 days $1,016,763,000; in 2003 12,730,000; in 2004 $315,750,000;
in 2005 $663,650,000; in 2006 $47,500,000 and $1,040,948,000 thereafter.
At December 31, 2002, with respect to reverse repurchase agreements
amounting to $1,476,898,000, excluding FHLB reverse repurchase agreements
(Note 10), the counterparties have the option to terminate the agreements
at the first anniversary date and each interest payment date thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |  | At December 31, 2002 and 2001, securities sold under agreements to
repurchase (classified by counterparty) were as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------

|                                                        |  |           |           |               |  |                |           |               |  |   |           |            |  |   |           | 
|------------------------------------------------------- |  | --------- | --------- | ------------- |  | -------------- | --------- | ------------- |  | - | --------- | ---------- |  | - | --------- | 
|                                                        |  | 2002      |           | 2001         
|                                                        |  |           |           |              
|                                                        |  |           |           |               |  | FAIR VALUE     |           |               |  |   |           | FAIR VALUE
|                                                        |  | BORROWING |           | OF UNDERLYING |  | BORROWING      |           | OF UNDERLYING
|                                                        |  | BALANCE   |           | COLLATERAL    |  | BALANCE        |           | COLLATERAL   
|                                                        |  |           |           |               |  |                |           |              
|                                                        |  |           |           |               |  | (IN THOUSANDS) |           |               |  |  
|UBS PaineWebber Incorporated
of Puerto Rico             |  | $         | 1,038,538 |               |  | $              | 1,070,657 |               |  | $ | 255,730   |            |  | $ | 262,177   | 
|Federal Home Loan Bank of New York                      |  |           | 692,470   |               |  |                | 700,612   |               |  |   | 649,000   |            |  |   | 702,801   | 
|Lehman Brothers Inc. and affiliates                     |  |           | 524,148   |               |  |                | 637,285   |               |  |   | 733,950   |            |  |   | 754,046   | 
|Merrill Lynch Government
Securities Inc. and affiliates |  |           | 334,900   |               |  |                | 344,561   |               |  |   | 95,483    |            |  |   | 101,175   | 
|Bear, Stearns and Company, Inc.                         |  |           | 146,441   |               |  |                | 163,073   |               |  |   | 13,283    |            |  |   | 14,230    | 
|Credit Suisse First Boston                              |  |           | 104,285   |               |  |                | 107,412   |               |  |   |          |            |  |   |          | 
|Salomon Smith Barney Inc. and affiliates                |  |           | 100,000   |               |  |                | 105,569   |               |  |   | 50,000    |            |  |   | 55,575    | 
|Prudential Securities                                   |  |           | 81,559    |               |  |                | 82,854    |               |  |   |          |            |  |   |          | 
|Morgan Stanley Dean Witter                              |  |           | 75,000    |               |  |                | 76,817    |               |  |   | 148,500   |            |  |   | 150,812   | 
|Keefe, Bruyette and Woods, Inc.                         |  |           |          |               |  |                |          |               |  |   | 113,700   |            |  |   | 118,346   | 
|                                                        |  |           |           |               |  |                |           |               |  |   |           |            |  |   |           | 
|Total                                                   |  | $         | 3,097,341 |               |  | $              | 3,288,840 |               |  | $ | 2,059,646 |            |  | $ | 2,159,162 | 
|                                                        |  |           |           |               |  |                |           |               |  |   |           |            |  |   |           | 



| |  | Borrowings under reverse repurchase agreements at December 31, were
collateralized as follows:
| |  | ----------------------------------------------------------------------------------------------

|                                                                              |  |            |           |            |  |                |           |            |  |   |           |  |  |   |           | 
|----------------------------------------------------------------------------- |  | ---------- | --------- | ---------- |  | -------------- | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                                                                              |  | 2002       |           | 2001      
|                                                                              |  |            |           |           
|                                                                              |  | CARRYING   |           | FAIR       |  | CARRYING       |           | FAIR      
|SECURITIES UNDERLYING                                                         |  | VALUE OF   |           | VALUE OF   |  | VALUE OF       |           | VALUE OF  
|REVERSE REPURCHASE                                                            |  | UNDERLYING |           | UNDERLYING |  | UNDERLYING     |           | UNDERLYING
|AGREEMENTS                                                                    |  | COLLATERAL |           | COLLATERAL |  | COLLATERAL     |           | COLLATERAL
|                                                                              |  |            |           |            |  |                |           |           
|                                                                              |  |            |           |            |  | (IN THOUSANDS) |           |            |  |  
|U.S. Government and agencies
obligations  held to maturity                   |  | $          | 2,556,076 |            |  | $              | 2,563,199 |            |  | $ | 1,657,001 |  |  | $ | 1,654,518 | 
|U.S. Government and agencies
obligations  available for sale                 |  |            |          |            |  |                |          |            |  |   | 196,600   |  |  |   | 195,447   | 
|U.S. Government and agencies
obligations purchased under
agreements to resell |  |            | 100,000   |            |  |                | 100,000   |            |  |   |          |  |  |   |          | 
|Mortgage-backed securities  held
to maturity                                 |  |            | 621,680   |            |  |                | 620,228   |            |  |   | 280,443   |  |  |   | 280,042   | 
|Mortgage-backed securities -
available for sale                               |  |            |          |            |  |                |          |            |  |   | 29,062    |  |  |   | 29,155    | 
|Other investments  held to maturity                                          |  |            | 4,983     |            |  |                | 5,413     |            |  |   |          |  |  |   |          | 
|                                                                              |  |            |           |            |  |                |           |            |  |   |           |  |  |   |           | 
|Total                                                                         |  |            | 3,282,739 |            |  | $              | 3,288,840 |            |  |   | 2,163,106 |  |  | $ | 2,159,162 | 
|                                                                              |  |            |           |            |  |                |           |            |  |   |           |  |  |   |           | 
|Accrued interest receivable
of underlying securities                          |  |            | 20,198    |            |  |                |           |            |  |   | 10,211    |  |  |   |           | 
|                                                                              |  |            |           |            |  |                |           |            |  |   |           |  |  |   |           | 
|Total                                                                         |  | $          | 3,302,937 |            |  |                |           |            |  | $ | 2,173,317 |  |  |   |           | 
|                                                                              |  |            |           |            |  |                |           |            |  |   |           |  |  |   |           | 

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| |  | Average outstanding balances and maximum month-end outstanding balances
during the years ended December 31, 2002 and 2001, and weighted average
interest rates for the year and at year-end are indicated below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |              |   |                        |      |      |   |           |      |  
|-------------------------------------------- | ------------ | - | ---------------------- | ---- | ---- | - | --------- | ---- | -
|                                             |              |   | 2002                   |      | 2001
|                                             |              |   |                        |      |     
|                                             |              |   | (DOLLARS IN THOUSANDS)
|Monthly average outstanding balance          |              | $ | 2,822,658              |      |      | $ | 1,521,005 |     
|Maximum outstanding balance at any month-end |              |   | 3,561,167              |      |      |   | 2,059,646 |     
|Weighted average interest rate:              |              |   |                        |      |      |   |           |     
|                                             | For the year |   |                        | 3.48 | %    |   |           | 5.38 | %
|                                             | At year end  |   |                        | 3.03 |      |   |           | 4.19 |  



|9.  |  | LINES OF CREDIT:                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As of December 31, 2002 and 2001, Westernbank had line of credit
agreements with three commercial banks permitting Westernbank to borrow a
maximum aggregate amount of $75,000,000. The agreements provide for
unsecured advances to be used by Westernbank on an overnight basis.
Interest rate is negotiated at the time of the transaction. The credit
agreements are renewable annually.
|   
|10. |  | ADVANCES FROM FEDERAL HOME LOAN BANK, TERM NOTES AND MORTGAGE NOTE
PAYABLE:                                                                                                                                                                                                                                                                                                                 
|   
|    |  | Advances from Federal Home Loan Bank (FHLB), term notes and mortgage
note payable at December 31, consisted of the following:                                                                                                                                                                                                                                                             

|                                                                        |                                                  |  |                        |         |      |  |          |      |      |   |        |         |          |  |      |      |  
|----------------------------------------------------------------------- | ------------------------------------------------ |  | ---------------------- | ------- | ---- |  | -------- | ---- | ---- | - | ------ | ------- | -------- |  | ---- | ---- | -
|                                                                        |                                                  |  | 2002                   |         | 2001
|                                                                        |                                                  |  |                        |         |     
|                                                                        |                                                  |  |                        |         |      |  | WEIGHTED |      |      |   |        |         | WEIGHTED
|                                                                        |                                                  |  |                        |         |      |  | INTEREST |      |      |   |        |         | INTEREST
|                                                                        |                                                  |  | AMOUNT                 |         | RATE |  | AMOUNT   |      | RATE
|                                                                        |                                                  |  |                        |         |      |  |          |      |     
|                                                                        |                                                  |  | (DOLLARS IN THOUSANDS) |         |      |  |         
|ADVANCES FROM FHLB:                                                     |                                                  |  |                        |         |      |  |          |      |      |   |        |         |          |  |      |     
|                                                                        | Fixed rate convertible
advances
(4.10% to 6.66%) |  | $                      | 120,000 |      |  |          | 5.10 | %    |   | $      | 120,000 |          |  |      | 5.10 | %
|                                                                        |                                                  |  |                        |         |      |  |          |      |      |   |        |         |          |  |      |     
|TERM NOTES -
Variable rate notes
(83% to 89% of three
month LIBID rate) |                                                  |  |                       |         |      |  |         |      |      | $ | 43,000 |         |          |  | 1.66 | %   
|                                                                        |                                                  |  |                        |         |      |  |          |      |      |   |        |         |          |  |      |     
|MORTGAGE NOTE:                                                          |                                                  |  |                        |         |      |  |          |      |      |   |        |         |          |  |      |     
|                                                                        | Fixed rate mortgage note                         |  | $                      | 37,822  |      |  |          | 8.05 | %    |   |        |        |          |  |      |     |  
|                                                                        |                                                  |  |                        |         |      |  |          |      |      |   |        |         |          |  |      |     

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| |  | Advances and reverse repurchase agreements (Note 8) are received from the
FHLB under an agreement whereby the Company is required to maintain a
minimum amount of qualifying collateral with a fair value of at least 110%
and 105% of the outstanding advances and reverse repurchase agreements,
respectively. At December 31, 2002, convertible advances were secured by
investment securities held to maturity amounting to $2,004,000 and
mortgage loans amounting to $337,135,000. At the advances and reverse
repurchase agreements first anniversary date and each quarter thereafter,
the FHLB has the option to convert them into replacement funding for the
same or a lesser principal amount based on any funding then offered by
FHLB at the then current market rates, unless the interest rate has been
predetermined between FHLB and the Company. If the Company chooses not to
replace the funding, it will repay the convertible advance and reverse
repurchase agreements, including any accrued interest, on such optional
conversion date.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Term notes amounting to $40,000,000 at December 31, 2001, were secured by
irrevocable stand-by letters of credit issued by a commercial bank (the
issuer) with credit values amounting to $40,900,000. Under the letters
of credit securities pledge agreements, the Company delivered to the
issuer specific investment securities having a fair value, determined
monthly, of at least 105% of the face amount of the letters of credit.
Term note amounting to $25,000,000 was repaid on April 3, 2002, and a term
note amounting to $15,000,000 was repaid on May 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Term note amounting to $3,000,000 at December 31, 2001, was secured by a
pledge of certain collateral pursuant to pledge agreements. Under the
pledge agreements, the Company delivered to the note holders investments
and mortgage-backed securities having a fair value determined every two
weeks of at least 105% of the aggregate principal amount of the notes
outstanding. This term note was repaid on December 15, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | At December 31, 2002, Westernbank World Plaza, Inc., a wholly-owned
subsidiary of Westernbank Puerto Rico, had outstanding $37.8 million of a
mortgage note, at an interest rate of 8.05% per annum up to September 11,
2009. Thereafter, the mortgage note will bear interest on the then
outstanding principal balance (1) at a rate per annum equal to the greater
of 13.05% or the Treasury Rate plus five percentage points or (2) at the
rate of 10.05% per annum depending on certain conditions on the repricing
date. Westernbank World Plaza has a prepayment option on the repricing
date, without penalty. The mortgage note is collateralized by a 23-story
office building, including its related parking facility, located in Hato
Rey, Puerto Rico.                                                                                                                                                                                                                                                                                                
|
| |  | Advances from FHLB and the mortgage note payable by contractual maturities
at December 31, 2002, were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|             |  |                |         |              |  |   |        | 
|------------ |  | -------------- | ------- | ------------ |  | - | ------ | 
|YEAR ENDING  |  | ADVANCES       |         | MORTGAGE    
|DECEMBER 31, |  | FROM FHLB      |         | NOTE PAYABLE
|             |  |                |         |             
|             |  | (IN THOUSANDS)
|2003         |  | $              | 14,000  |              |  | $ | 356    | 
|2004         |  |                |        |              |  |   | 378    | 
|2005         |  |                | 14,000  |              |  |   | 418    | 
|2006         |  |                | 50,000  |              |  |   | 454    | 
|2007         |  |                |        |              |  |   | 492    | 
|Thereafter   |  |                | 42,000  |              |  |   | 35,724 | 
|             |  |                |         |              |  |   |        | 
|Total        |  | $              | 120,000 |              |  | $ | 37,822 | 
|             |  |                |         |              |  |   |        | 

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11. INCOME TAXES:



| |  | Under the Puerto Rico Internal Revenue Code (the Code), all companies
are treated as separate taxable entities and are not entitled to file
consolidated tax returns. The Company, Westernbank and Westernbank
Insurance Corp. are subject to Puerto Rico regular income tax or
alternative minimum tax (AMT) on income earned from all sources. The AMT
is payable if it exceeds regular income tax. The excess of AMT over
regular income tax paid in any one year may be used to offset regular
income tax in future years, subject to certain limitations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Westernbank World Plaza, Inc., a wholly-owned subsidiary of Westernbank,
elected to be treated as a special partnership under the Code;
accordingly, its net income is taxed by Westernbank.                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The Code provides a dividend received deduction of 100%, on dividends
received from wholly-owned subsidiaries subject to income taxation in
Puerto Rico. The income on certain investments is exempt for income tax
purposes. Also, activities relating to the Westernbank International
division are exempt from income tax. As a result of the above, the
Companys effective tax rate is substantially below the statutory rate.                                                                                                                               
|
| |  | The provision for income taxes for the years ended December 31, consisted
of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|         |  |      |        |      |  |                |        |   |  |   |        |  
|-------- |  | ---- | ------ | ---- |  | -------------- | ------ | - |  | - | ------ | -
|         |  | 2002 |        | 2001 |  | 2000          
|         |  |      |        |      |  |               
|         |  |      |        |      |  | (IN THOUSANDS) |        |   |  |  
|Current  |  | $    | 18,619 |      |  | $              | 11,750 |   |  | $ | 7,734  |  
|Deferred |  |      | (2,518 | )    |  |                | (3,246 | ) |  |   | (1,920 | )
|         |  |      |        |      |  |                |        |   |  |   |        |  
|Total    |  | $    | 16,101 |      |  | $              | 8,504  |   |  | $ | 5,814  |  
|         |  |      |        |      |  |                |        |   |  |   |        |  



| |  | A reconciliation of the provision for income taxes computed by applying
the Puerto Rico income tax statutory rate to the tax provision as reported
for the years ended December 31, is as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       |                             |   |                |         |      |   |        |         |   |   |        |         |  
|-------------------------------------- | --------------------------- | - | -------------- | ------- | ---- | - | ------ | ------- | - | - | ------ | ------- | -
|                                       |                             |   | 2002           |         | 2001 |   | 2000  
|                                       |                             |   |                |         |      |   |       
|                                       |                             |   | (IN THOUSANDS)
|Computed at Puerto Rico
statutory rate |                             | $ | 39,805         |         |      | $ | 27,557 |         |   | $ | 19,657 |        
|Effect on provision of:                |                             |   |                |         |      |   |        |         |   |   |        |        
|                                       | Exempt interest income, net |   |                | (25,700 | )    |   |        | (20,791 | ) |   |        | (13,864 | )
|                                       | Net nondeductible expenses  |   |                | 12      |      |   |        | 26      |   |   |        | 105     |  
|                                       | Other                       |   |                | 1,984   |      |   |        | 1,712   |   |   |        | (84     | )
|                                       |                             |   |                |         |      |   |        |         |   |   |        |        
|Provision for income taxes as
reported |                             | $ | 16,101         |         |      | $ | 8,504  |         |   | $ | 5,814  |        
|                                       |                             |   |                |         |      |   |        |         |   |   |        |        
|Statutory tax rates                    |                             |   | 39             | %       |      |   | 39     | %       |   |   | 39     | %      
|                                       |                             |   |                |         |      |   |        |         |   |   |        |        
|Effective tax rates                    |                             |   | 16             | %       |      |   | 12     | %       |   |   | 12     | %      
|                                       |                             |   |                |         |      |   |        |         |   |   |        |        

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| |  | Deferred income tax assets (liabilities) as of December 31, 2002 and 2001,
consisted of the following:
| |  | ------------------------------------------------------------------------------------------------------

|                                                    |  |                |        |      |  |   |        |  
|--------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                    |  | 2002           |        | 2001
|                                                    |  |                |        |     
|                                                    |  | (IN THOUSANDS)
|Allowance for loan losses                           |  | $              | 17,247 |      |  | $ | 13,834 |  
|Unrealized losses (gains) on derivative instruments |  |                | (137   | )    |  |   | 891    |  
|Mortgage servicing rights                           |  |                | (751   | )    |  |   | (816   | )
|Allowance for foreclosed real estate held for sale  |  |                | 6      |      |  |   | 39     |  
|Other temporary differences                         |  |                | (32    | )    |  |   | (47    | )
|                                                    |  |                |        |      |  |   |        |  
|Total                                               |  |                | 16,333 |      |  |   | 13,901 |  
|Less valuation allowance                            |  |                | 6      |      |  |   | 39     |  
|                                                    |  |                |        |      |  |   |        |  
|Deferred income taxes, net                          |  | $              | 16,327 |      |  | $ | 13,862 |  
|                                                    |  |                |        |      |  |   |        |  



| |  | Changes in the valuation allowance for deferred income tax assets were as
follows:
| |  | ----------------------------------------------------------------------------------

|                                |  |                |     |      |  |      |    |  |  |   |      |  
|------------------------------- |  | -------------- | --- | ---- |  | ---- | -- |  |  | - | ---- | -
|                                |  | 2002           |     | 2001 |  | 2000
|                                |  |                |     |      |  |     
|                                |  | (IN THOUSANDS)
|Balance  at January 1          |  | $              | 39  |      |  | $    | 39 |  |  | $ | 635  |  
|Decrease in valuation allowance |  |                | (33 | )    |  |      |   |  |  |   | (596 | )
|                                |  |                |     |      |  |      |    |  |  |   |      |  
|Balance  at December 31        |  | $              | 6   |      |  | $    | 39 |  |  | $ | 39   |  
|                                |  |                |     |      |  |      |    |  |  |   |      |  



| |  | Realization of deferred tax assets is dependent on generating sufficient
future taxable income. The amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future
taxable income are not met.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|12. |  | NET GAIN (LOSS) ON SALES AND VALUATION OF LOANS, SECURITIES AND OTHER
ASSETS:                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Net gain (loss) on sales and valuation of loans, securities and other
assets for the years ended December 31, 2002, 2001 and 2000, consisted of
the following:

|                                                                |  |                |       |      |  |      |      |   |  |   |      |  
|--------------------------------------------------------------- |  | -------------- | ----- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                |  | 2002           |       | 2001 |  | 2000
|                                                                |  |                |       |      |  |     
|                                                                |  | (IN THOUSANDS)
|Trading account securities, mainly related
to loans securitized |  | $              | (866  | )    |  | $    | (192 | ) |  | $ | (204 | )
|Investment securities available for sale                        |  |                | 1,508 |      |  |      | 351  |   |  |   | (422 | )
|Mortgage loans held for sale                                    |  |                | 306   |      |  |      | (26  | ) |  |   | 43   |  
|Other                                                           |  |                | 2     |      |  |      | 27   |   |  |   |     |  
|                                                                |  |                |       |      |  |      |      |   |  |   |      |  
|Total                                                           |  | $              | 950   |      |  | $    | 160  |   |  | $ | (583 | )
|                                                                |  |                |       |      |  |      |      |   |  |   |      |  



|13. |  | COMMITMENTS AND CONTINGENCIES:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company
is a defendant in certain claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected
to have a material adverse effect on the Companys financial condition.                                                                                                                                                                                                     
|   
|    |  | The Company, as a Puerto Rico chartered financial holding company, and its
subsidiaries are each subject to extensive federal and local governmental
supervision and regulation relating to its banking and insurance business.
There are laws and regulations that restrict transactions between The
Company and its subsidiaries. In addition, The Company benefits from
favorable tax treatment of activities relating to the Westernbank
International Division. Any change in such regulations, whether by
applicable regulators or as a result of legislation subsequently enacted
by the Congress of the United States or the applicable local legislatures,
could have a substantial impact on Westernbanks operations.
|   
|    |  | At December 31, 2002, the Company is obligated under noncancelable
operating leases for banking premises. Certain leases contain escalation
clauses providing for increased rental. Rent expense amounted to
$2,435,000, $1,943,000, and $1,834,000 for the years ended December 31,
2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                         

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| |  | The projected minimum rental payments under the leases with initial or
remaining terms of more than one year, without considering renewal
options, and expiring through 2025 are as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             |  |                |        | 
|------------ |  | -------------- | ------ | 
|YEAR ENDING  |  | MINIMUM       
|DECEMBER 31, |  | RENT          
|             |  |               
|             |  | (IN THOUSANDS)
|2003         |  | $              | 2,026  | 
|2004         |  |                | 2,103  | 
|2005         |  |                | 2,142  | 
|2006         |  |                | 2,030  | 
|2007         |  |                | 1,765  | 
|Thereafter   |  |                | 16,045 | 
|             |  |                |        | 
|Total        |  | $              | 26,111 | 
|             |  |                |        | 



|14. |  | RETIREMENT BENEFIT PLANS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | PENSION PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Bank established a retirement plan for directors who were not also
executive officers and who elected to retire after January 1, 1988. The
Plan generally provided pension benefits ranging from 80% to 100% of the
Directors average remuneration based on consecutive years of service
(vesting started after six years) and average earnings during the last
five years (three years if the Director has served longer than 25 years).
On February 24, 1989, the Plan was substantially amended to limit the
pension benefits to only those directors who were founders of the Company,
had attained the age of 50 years and had served for 25 consecutive years
on the Board. The amended plan provided for pension benefits equal to the
Directors average remuneration during the last three years of service.
The other Directors (non-founders) by approving this amendment waived and
renounced their pension benefits under the Plan. The Plan was unfunded as
of December 31, 2002 and 2001. The accumulated benefit obligation under
this Plan is $159,000 and $186,000 as of December 31, 2002 and 2001,
respectively.
|   
|    |  | PROFIT-SHARING AND DEFINED CONTRIBUTIONS PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | The Company has a non-contributory deferred profit-sharing plan, covering
substantially all of its employees, which provides for retirement and
disability benefits. The Companys contribution to the profit-sharing plan
is discretionary and is generally based on a formula related to net
income. The Companys contributions for the years ended December 31, 2002,
2001 and 2000 were $250,000 for each year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The Company has a defined contribution plan under Section 1165(e) of the
Puerto Rico Treasury Department Internal Revenue Code, covering all
full-time employees of the Company who have one year of service and are
twenty-one years or older. Under the provisions of this Plan, participants
may contribute each year from 2% to 10% of their compensation after
deducting social security, up to a specified maximum. The Company
contributes 50 percent of the first 6 percent of base compensation that a
participant contributes to the Plan. Participants are immediately vested
in their contributions plus actual earnings thereon. The Companys
contributions plus actual earnings thereon are 100 percent vested after
three years of credited service. In case of death or disability, a
participant will be 100 percent vested regardless of the number of years
of credited service. The Companys contributions for the years ended
December 31, 2002, 2001 and 2000, amounted to $305,000, $286,000 and
$236,000, respectively.                                                                                        

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|15. |  | MINIMUM REGULATORY CAPITAL REQUIREMENTS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company is subject to examination, regulation and periodic reporting
under the Bank Holding Company Act of 1956, as amended, which is
administered by the Board of Governors of the Federal Reserve System.
Westernbank is regulated by the Federal Deposit Insurance Corporation
(FDIC) and by the Office of the Commissioner of Financial Institutions
of Puerto Rico. Westernbanks deposits are insured by the Savings
Association Insurance Fund and by the Bank Insurance Fund, which are
administered by the FDIC, up to $100,000 per depositor.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The Company (on a consolidated basis) and Westernbank (the Companies)
are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on
the Companies financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Companies must
meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
|   
|    |  | Quantitative measures established by regulation to ensure capital adequacy
require the Companies to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 2002 and 2001, that the Companies met all capital adequacy
requirements to which they are subject.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | As of March 31, 2002, Westernbank qualified as a well capitalized
institution under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, an institution must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as
set forth in the following table. At December 31, 2002, there are no
conditions or events that management believes have changed Westernbanks
category.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |  | The Companies actual capital amounts and ratios as of December 31, 2002
and 2001, are also presented in the table below:
| |  | -------------------------------------------------------------------------------------------------------------------------

|                                        |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |     |  
|--------------------------------------- | ------------ |  | ---------------------- | ------- | ----------- |  | ----------------- | ----- | ----- |  | ------- | ------- | ---------------------- |  |  | - | - |  | - | ------- |  |  |  | --- | -
|                                        |              |  |                        |         |             |  |                   |       |       |  | MINIMUM |         | WELL CAPITALIZED UNDER
|                                        |              |  |                        |         |             |  |                   |       |       |  | CAPITAL |         | PROMPT CORRECTIVE     
|                                        |              |  | ACTUAL                 |         | REQUIREMENT |  | ACTION PROVISIONS
|                                        |              |  |                        |         |             |  |                  
|                                        |              |  | AMOUNT                 |         | RATIO       |  | AMOUNT            |       | RATIO |  | AMOUNT  |         | RATIO                 
|                                        |              |  |                        |         |             |  |                   |       |       |  |         |         |                       
|                                        |              |  | (DOLLARS IN THOUSANDS)
|AS OF DECEMBER 31, 2002:                |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|Total Capital to Risk
Weighted Assets:  |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |  | $                      | 631,037 |             |  |                   | 13.83 | %     |  | $       | 365,016 |                        |  |  | 8 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |  |                        | 613,574 |             |  |                   | 13.46 |       |  |         | 364,606 |                        |  |  | 8 |   |  | $ | 455,757 |  |  |  | 10  | %
|Tier I Capital to Risk
Weighted Assets: |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |  | $                      | 583,923 |             |  |                   | 12.93 | %     |  | $       | 180,623 |                        |  |  | 4 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |  |                        | 566,460 |             |  |                   | 12.56 |       |  |         | 180,418 |                        |  |  | 4 |   |  | $ | 270,628 |  |  |  | 6   | %
|Tier I Capital to
Average Assets:       |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |  | $                      | 583,923 |             |  |                   | 7.21  | %     |  | $       | 242,942 |                        |  |  | 3 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |  |                        | 566,460 |             |  |                   | 7.02  |       |  |         | 241,921 |                        |  |  | 3 |   |  | $ | 403,202 |  |  |  | 5   | %
|AS OF DECEMBER 31, 2001:                |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|Total Capital to Risk
Weighted Assets:  |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |  | $                      | 424,680 |             |  |                   | 12.65 | %     |  | $       | 268,657 |                        |  |  | 8 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |  |                        | 407,793 |             |  |                   | 12.15 |       |  |         | 268,594 |                        |  |  | 8 |   |  | $ | 335,743 |  |  |  | 10  | %
|Tier I Capital to Risk
Weighted Assets: |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |  | $                      | 386,316 |             |  |                   | 11.64 | %     |  | $       | 132,794 |                        |  |  | 4 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |  |                        | 369,429 |             |  |                   | 11.13 |       |  |         | 132,763 |                        |  |  | 4 |   |  | $ | 199,144 |  |  |  | 6   | %
|Tier I Capital to
Average Assets:       |              |  |                        |         |             |  |                   |       |       |  |         |         |                        |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |  | $                      | 386,316 |             |  |                   | 7.17  | %     |  | $       | 161,675 |                        |  |  | 3 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |  |                        | 369,429 |             |  |                   | 6.86  |       |  |         | 161,626 |                        |  |  | 3 |   |  | $ | 269,377 |  |  |  | 5   | %



| |  | The Companys ability to pay dividends to its stockholders and other
activities can be restricted if its capital falls below levels established
by the Federal Reserve guidelines. In addition, any bank holding company
whose capital falls below levels specified in the guidelines can be
required to implement a plan to increase capital. Management believes that
the Company will continue to meet its cash obligations as they become due
and pay dividends as they are declared.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|16. |  | COMMON AND PREFERRED STOCK TRANSACTIONS:                                                                                                                                                                                                                                                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During 2002, 2001 and 2000, the Company acquired and retired shares of
common stock as follows: $42,000 (1,678 shares) in 2002; $28,000 (1,700
shares) in 2001; and $4,781,000 (498,300 shares) in 2000.                                                                                                               
|   
|    |  | On June 17, 2002, the Company declared a three-for-two split in a form of
a stock dividend, for all stockholders of record as of June 28, 2002,
distributed on July 10, 2002. The effect of the stock split resulted in a
decrease to retained earnings and an increase in common stock of
approximately $20.8 million.
|   
|    |  | During 2002, the Company issued 6,095,000 and 1,725,000 shares of the
Companys Common Stock and Series E Preferred Stock, respectively,
providing a net capital infusion of approximately $97.9 million and $41.5
million, respectively.                                                                              
|   
|    |  | During 2002, 2,000 shares of the convertible preferred stock Series A were
converted for 2,984 shares of common stock.                                                                                                                                                                                                 
|   
|    |  | The Company has issued the following non-cumulative, monthly income
preferred stock (liquidation preference $25 per share):                                                                                                                                                                                            

|         |  |                                |  |      |       |          |  |           |    |                |  |                  |           |          |  |               |             |  |  |   |           |  |  | 
|-------- |  | ------------------------------ |  | ---- | ----- | -------- |  | --------- | -- | -------------- |  | ---------------- | --------- | -------- |  | ------------- | ----------- |  |  | - | --------- |  |  | 
|         |  |                                |  |      |       |          |  |           |    | ISSUANCE       |  |                  |           |          |  | PROCEEDS FROM |             |  |  |  
|ISSUANCE |  |                                |  |      |       | DIVIDEND |  | PRICE PER |    | SHARES         |  | ISSUANCE, NET OF |           | ISSUANCE
|YEAR     |  | TYPE OF PREFERRED STOCK        |  | RATE |       | SHARE    |  | ISSUED    |    | ISSUANCE COSTS |  | COSTS           
|         |  |                                |  |      |       |          |  |           |    |                |  |                 
|1998     |  | Convertible, 1998 Series A     |  |      | 7.125 | %        |  | $         | 25 |                |  |                  | 1,219,000 |          |  | $             | 29,143,000  |  |  | $ | 1,332,000 | 
|1999     |  | Non-convertible, 1999 Series B |  |      | 7.250 |          |  |           | 25 |                |  |                  | 2,001,000 |          |  |               | 48,273,000  |  |  |   | 1,752,000 | 
|2001     |  | Non-convertible, 2001 Series C |  |      | 7.600 |          |  |           | 25 |                |  |                  | 2,208,000 |          |  |               | 53,103,000  |  |  |   | 2,097,000 | 
|2001     |  | Non-convertible, 2001 Series D |  |      | 7.400 |          |  |           | 25 |                |  |                  | 1,791,999 |          |  |               | 43,238,000  |  |  |   | 1,562,000 | 
|2002     |  | Non-convertible, 2002 Series E |  |      | 6.875 |          |  |           | 25 |                |  |                  | 1,725,000 |          |  |               | 41,463,000  |  |  |   | 1,662,000 | 
|         |  |                                |  |      |       |          |  |           |    |                |  |                  |           |          |  |               |             |  |  |   |           |  |  | 
|         |  | Total                          |  |      |       |          |  |           |    |                |  |                  | 8,944,999 |          |  | $             | 215,220,000 |  |  | $ | 8,405,000 | 
|         |  |                                |  |      |       |          |  |           |    |                |  |                  |           |          |  |               |             |  |  |   |           |  |  | 



| |  | The preferred stock rank senior to the Companys common stock as to
dividends and liquidation rights. Each share of the 1998 Series A
preferred stock is convertible, at the holders option, at any time on or
after the 90th day following the issue date, into .995 shares of the
Companys common stock, subject to adjustment upon certain events. The per
share conversion ratio equates to a price of $16.667 (as adjusted) per
share of common stock.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | The Company may redeem, in whole or in part, at any time at the following
redemption prices, if redeemed during the twelve month period beginning
July 1 for 1998 Series A, May 28 for 1999 Series B, March 30 for the 2001
Series C, August 1 for the 2001 Series D and October 31 for 2002 Series E
of the years indicated below, plus accrued and unpaid dividends, if any,
to the date of redemption:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |                            |       |          |  |          |       |          |  |          |       |  |  |   |       |  |  |   |       | 
|------------------- |  | -------------------------- | ----- | -------- |  | -------- | ----- | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |  | REDEMPTION PRICE PER SHARE
|                    |  |                           
|DECEMBER 31,        |  | SERIES A                   |       | SERIES B |  | SERIES C |       | SERIES D |  | SERIES E
|                    |  |                            |       |          |  |          |       |          |  |         
|2003                |  | $                          | 25.75 |          |  |          |      |          |  |          |      |  |  |   |      |  |  |   |       | 
|2004                |  |                            | 25.50 |          |  | $        | 26.00 |          |  |          |      |  |  |   |      |  |  |   |       | 
|2005                |  |                            | 25.25 |          |  |          | 25.50 |          |  |          |      |  |  |   |      |  |  |   |       | 
|2006                |  |                            | 25.00 |          |  |          | 25.00 |          |  | $        | 25.50 |  |  | $ | 25.50 |  |  |   |       | 
|2007                |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.25 |  |  |   | 25.25 |  |  | $ | 25.50 | 
|2008                |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |  |  |   | 25.00 |  |  |   | 25.25 | 
|2009 and thereafter |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |  |  |   | 25.00 |  |  |   | 25.00 | 



|17. |  | STOCK COMPENSATION PLANS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In June 1999, the Board of Directors approved the 1999 Qualified Stock
Option Plan (the 1999 Qualified Option Plan) and the 1999 Nonqualified
Stock Option Plan (the 1999 Nonqualified Option Plan), for the benefit
of employees of the Company and its subsidiaries. These plans offer to key
officers, directors and employees an opportunity to purchase shares of the
Companys common stock. Under the 1999 Qualified Option Plan, options for
up to 6,300,000 (as adjusted) shares of common stock can be granted. Also,
options for up to 6,300,000 (as adjusted) shares of common stock, reduced
by any share issued under the 1999 Qualified Option Plan can be granted
under the 1999 Nonqualified Option Plan. The option price for both plans
is determined at the grant date. Both plans will remain in effect for a
term of 10 years. The Board of Directors has sole authority and absolute
discretion as to the number of stock options to be granted, their vesting
rights, and the options exercise price. The Plans provide for a
proportionate adjustment in the exercise price and the number of shares
that can be purchased in the event of a stock split, reclassification of
stock and a merger or reorganization. At December 31, 2002 and 2001, the
Company had outstanding 3,678,000 and 3,555,000 options (as adjusted),
respectively, under the 1999 Qualified Stock Option Plan. These options
were granted to various executive officers and employees, which will
become fully exercisable after five years following the grant date. During
2002, 2001 and 2000, the Company granted 123,000, 113,000 and 3,442,000
options (as adjusted), respectively, to various executive officers. None
of these options were exercised or forfeited in 2002, 2001 and 2000.

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| |  | The Company has only three exercise prices for options granted, all of
them granted at three different dates. The following table summarizes the
exercise prices and the weighted average remaining contractual life of the
options outstanding at December 31, 2002:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|                |  |         |             |              |             |  |          |  |  |  |           |  | 
|--------------- |  | ------- | ----------- | ------------ | ----------- |  | -------- |  |  |  | --------- |  | 
|                |  |         | OUTSTANDING |              | EXERCISABLE
|                |  |         |             |              |            
|                |  |         |             |              |             |  | WEIGHTED |  |  |  |          
|                |  |         |             |              |             |  | AVERAGE  |  |  |  |          
|                |  |         | NUMBER      |              | CONTRACT    |  | NUMBER  
|EXERCISE PRICES |  | OPTIONS |             | LIFE (YEARS) | OPTIONS    
|                |  |         |             |              |            
|$6.67           |  |         | 3,442,000   |              |             |  | 7.12     |  |  |  | 1,377,000 | 
|7.83            |  |         | 113,000     |              |             |  | 8.38     |  |  |  | 23,000    | 
|15.85           |  |         | 123,000     |              |             |  | 9.56     |  |  |  |          | 
|                |  |         |             |              |             |  |          |  |  |  |           | 
|Total           |  |         | 3,678,000   |              |             |  | 7.24     |  |  |  | 1,400,000 | 
|                |  |         |             |              |             |  |          |  |  |  |           | 




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|18. |  | FINANCIAL INSTRUMENTS:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|    |  | In the normal course of business, the Company becomes a party to financial
instruments with off-balance sheet risk to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest
rates. These financial instruments include commitments to extend credit
and commercial letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statements of financial condition. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.                                                                                                                                         
|   
|   
|    |  | COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|   
|    |  | The Companys exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and commercial letters of credit is represented by the contractual
notional amount of those instruments, which do not necessarily represent
the amounts potentially subject to risk. In addition, the measurement of
the risks associated with these instruments is meaningful only when all
related and offsetting transactions are identified. The Company uses the
same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments.                                                                                                                                                                          
|   
|   
|    |  | Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customers credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of
credit, is based on managements credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income producing commercial properties.
|   
|   
|    |  | Commercial letters of credit are conditional commitments issued by the
Company on behalf of a customer authorizing a third party to draw drafts
on the Company up to a stipulated amount and with specified terms and
conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|   
|    |  | The contract amount of financial instruments, whose amounts represent
credit risk at December 31, was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       




|                                       |                |                        |         |                |        |      |       |         |        | 
|-------------------------------------- | -------------- | ---------------------- | ------- | -------------- | ------ | ---- | ----- | ------- | ------ | 
|                                       |                |                        |         | 2002           |        | 2001
|                                       |                |                        |         |                |        |     
|                                       |                |                        |         | (IN THOUSANDS)
|Commitments to extend credit:          |                |                        |         |                |        |      |       |        
|                                       | Fixed rates    |                        | $       | 16,710         |        |      | $     | 11,839  |       
|                                       | Variable rates |                        |         | 161,902        |        |      |       | 151,757 |       
|Unused lines of credit:                |                |                        |         |                |        |      |       |        
|                                       |                | Commercial             |         |                | 64,037 |      |       |         | 53,723 | 
|                                       |                | Credit cards and other |         |                | 77,776 |      |       |         | 75,683 | 
|Commercial letters of credit           |                |                        | 4,574   |                |        |      | 2,340 |        
|Commitments to purchase mortgage loans |                |                        | 100,000 |                |        |      |      |        




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| |  | DERIVATIVE FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company utilizes various derivative instruments for hedging purposes
and other than hedging purposes such as asset/liability management. These
transactions involve both credit and market risk. The notional amounts are
amounts on which calculations and payments are based. Notional amounts do
not represent direct credit exposures. Direct credit exposure is limited
to the net difference between the calculated amounts to be received and
paid, if any. The actual risk of loss is the cost of replacing, at market,
these contracts in the event of default by the counterparties. The Company
controls the credit risk of its derivative financial instrument agreements
through credit approvals, limits and monitoring procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Company enters into interest-rate swap contracts in managing its
interest rate exposure. Interest-rate swap contracts generally involve the
exchange of fixed and floating-rate interest-payment obligations without
the exchange of the underlying principal amounts. Entering into
interest-rate swap contracts involves not only the risk of dealing with
counterparties and their ability to meet the terms of the contracts, but
also the interest rate risk associated with unmatched positions. Interest
rate swaps are the most common type of derivative contract that the
Company utilizes. Situations in which the Company utilizes interest rate
swaps are: a) to convert its fixed-rate certificates of deposit
(liabilities) to a variable rate, and b) to convert its variable rate -
term notes and FHLB advances (liabilities) to a fixed rate. By entering
into the swap, the principal amount of the hedged item would remain
unchanged but the interest payment streams would change.                                                                                                                                                                                                                                                                                            
|
| |  | Interest-rate swap contracts used to convert its fixed-rate certificates
of deposit (liabilities) to a variable rate, mature between one to twenty
years with a right by the counterparty to call after the first
anniversary. The Company has an identical right to call the certificates
of deposit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In addition, the Company offers its customers certificates of deposit
which contain an embedded derivative tied to the performance of Standard &
Poors 500 Composite Stock Index that is bifurcated from the host deposit
and recognized in the statement of financial condition in accordance with
SFAS No. 133. At the end of five years, the depositor will receive a
specified percent of the average increase of the month-end value of the
stock index. If such index decreases, the depositor receives the principal
without any interest. The Company uses interest rate swap and option
agreements with major broker dealer companies to manage its exposure to
the stock market. Under the terms of the swap agreements, the Company will
receive the average increase in the month-end value of the index in
exchange for a quarterly fixed interest cost. Under the option agreements,
the Company also will receive the average increase in the month-end value
of the index but in exchange for the payment of a premium when the
contract is initiated. Since the embedded derivative instrument of the
certificates of deposit and the interest rate swap and option agreements
do not qualify for hedge accounting, these derivative instruments are
marked to market through earnings.
|
| |  | Interest rate options, which include caps, are contracts that transfer,
modify, or reduce interest rate risk in exchange for the payment of a
premium when the contract is initiated. The credit risk inherent in
options is the risk that the exchange party may default.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Derivative instruments are generally negotiated over-the-counter (OTC)
contracts. Negotiated OTC derivatives are generally entered into between
two counterparties that negotiate specific agreement terms, including the
underlying instrument, amount, exercise price and maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |  | Information pertaining to the notional amounts of the Companys derivative
financial instruments as of December 31, was as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------

|                                     |                   |                                                                                         |            |         |                 |   |         |         |         |        | 
|------------------------------------ | ----------------- | --------------------------------------------------------------------------------------- | ---------- | ------- | --------------- | - | ------- | ------- | ------- | ------ | 
|                                     |                   |                                                                                         |            |         | NOTIONAL AMOUNT
|                                     |                   |                                                                                         |            |         |                
|                                     |                   |                                                                                         |            |         | 2002            |   | 2001   
|                                     |                   |                                                                                         |            |         |                 |   |        
|TYPE OF CONTRACT                     |                   | (IN THOUSANDS)                                                                         
|                                     |                   |                                                                                        
|HEDGING ACTIVITIES:                  |                   |                                                                                         |            |         |                 |   |         |        
|                                     | FAIR VALUE HEDGE: |                                                                                         |            |         |                 |   |         |         |        
|                                     |                   | Interest rate swaps used to hedge
fixed rate certificates of deposit                    |            | $       | 528,227         |   |         | $       | 548,347 |       
|CASH FLOW HEDGE:                     |                   |                                                                                         |            |         |                 |   |         |        
|                                     |                   | Interest rate swaps used to hedge variable rate:                                        |            |         |                 |   |         |         |         |       
|                                     |                   |                                                                                         | Term notes |         |                 |  |         |         |         | 40,000 | 
|                                     |                   |                                                                                         |            |         |                 |   |         |        
|                                     | TOTAL             |                                                                                         | $          | 528,227 |                 |   | $       | 588,347 |        
|                                     |                   |                                                                                         |            |         |                 |   |         |        
|DERIVATIVES NOT DESIGNATED AS HEDGE: |                   |                                                                                         |            |         |                 |   |         |        
|                                     |                   | Interest rate swaps (unmatched portion)                                                 |            | $       | 1,773           |   |         | $       | 11,653  |       
|                                     |                   | Interest rate swaps used to manage exposure
to the stock market                         |            |         | 36,329          |   |         |         | 36,329  |       
|                                     |                   | Embedded options on stock indexed deposits                                              |            |         | 65,134          |   |         |         | 37,952  |       
|                                     |                   | Purchased options used to manage exposure
to the stock market on stock indexed deposits |            |         | 28,773          |   |         |         | 1,623   |       
|                                     |                   | Caps                                                                                    |            |         |                |   |         |         | 100,000 |       
|                                     |                   |                                                                                         |            |         |                 |   |         |        
|TOTAL                                |                   | $                                                                                       | 132,009    |         |                 | $ | 187,557 |        
|                                     |                   |                                                                                         |            |         |                 |   |         |        



| |  | At December 31, 2002, the fair value of derivatives qualifying for fair
value hedge represented an unrealized net loss of approximately $8.0
million, which was recorded as Other Liabilities and as a decrease to
the hedged Deposits in the accompanying December 31, 2002 statement of
financial condition.                                                                                                                             
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2001, the fair value of derivatives qualifying for fair
value hedge represented an unrealized net loss of $10.8 million, which was
recorded as Other Liabilities and as a decrease to the hedged Deposits
in the accompanying December 31, 2001 statement of financial condition.                                                                                                                                          
|
| |  | At December 31, 2001, the fair value of the cash flow hedge derivative
activities represented an unrealized loss of $356,000 and was recorded as
Other Liabilities in the accompanying December 31, 2001, statement of
financial condition. Their effect on Other Comprehensive Income at
December 31, 2001, was a decrease of $217,000, net of taxes of $139,000.
No such derivatives activities were outstanding as of December 31, 2002.
|
| |  | At December 31, 2002, the fair value of derivatives not qualifying as a
hedge represented an unrealized net loss of $6,056,000 and was recorded as
part of Other assets $1,495,000, Deposits $1,618,000 and Other
liabilities $5,933,000 in the accompanying December 31, 2002, statement
of financial condition.                                                                                                                        
|
| |  | At December 31, 2001, the fair value of the derivatives not qualifying as
a hedge represented an unrealized loss of $7,865,000, and was recorded as
part of Other Assets $8,000, Deposits $3,821,000 and Other
Liabilities $4,036,000 in the accompanying December 31, 2001, statement
of financial condition.                                                                                                                           

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| |  | A summary of the types of swaps used, excluding those used to manage
exposure to the stock market, and their terms at December 31, follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

|                            |                                                                                                        |  |                        |         |      |  |   |         |  
|--------------------------- | ------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                            |                                                                                                        |  | 2002                   |         | 2001
|                            |                                                                                                        |  |                        |         |     
|                            |                                                                                                        |  | (DOLLARS IN THOUSANDS)
|Pay floating/receive fixed: |                                                                                                        |  |                        |         |      |  |   |        
|                            | Notional amount                                                                                        |  | $                      | 530,000 |      |  | $ | 560,000 |  
|                            | Weighted average receive rate at year end                                                              |  |                        | 5.67    | %    |  |   | 6.13    | %
|                            | Weighted average pay rate at year end                                                                  |  |                        | 1.90    | %    |  |   | 2.21    | %
|                            | Floating rate as a percentage of three month LIBOR,
plus a spread ranging from minus .25% to plus .25% |  |                        | 100     | %    |  |   | 100     | %

|                            |                                                                |  |                        |   |      |  |             |        |  
|--------------------------- | -------------------------------------------------------------- |  | ---------------------- | - | ---- |  | ----------- | ------ | -
|                            |                                                                |  | 2002                   |   | 2001
|                            |                                                                |  |                        |   |     
|                            |                                                                |  | (DOLLARS IN THOUSANDS)
|Pay fixed/receive floating: |                                                                |  |                        |   |      |  |             |       
|                            | Notional amount                                                |  |                        |  |      |  | $           | 40,000 |  
|                            | Weighted average receive rate at year end                      |  |                        |  |      |  |             | 1.60   | %
|                            | Weighted average pay rate at year end                          |  |                        |  |      |  |             | 4.49   | %
|                            | Floating rate as a percentage of
three month LIBOR, minus .10% |  |                        |  |      |  | 85% to 100%



| |  | The changes in notional amount of swaps outstanding during the years ended
December 31, follows:
| |  | ------------------------------------------------------------------------------------------------

|                         |  |                |          |      |  |   |          |  
|------------------------ |  | -------------- | -------- | ---- |  | - | -------- | -
|                         |  | 2002           |          | 2001
|                         |  |                |          |     
|                         |  | (IN THOUSANDS)
|Beginning balance        |  | $              | 636,329  |      |  | $ | 834,979  |  
|New swaps                |  |                | 316,000  |      |  |   | 456,329  |  
|Called and matured swaps |  |                | (386,000 | )    |  |   | (654,979 | )
|                         |  |                |          |      |  |   |          |  
|Ending balance           |  | $              | 566,329  |      |  | $ | 636,329  |  
|                         |  |                |          |      |  |   |          |  

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| |  | At December 31, 2002, the maturities of interest rate swaps, embedded
options and purchased options by year were as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------

|             |  |                |         |         |  |          |        |           |  |   |        | 
|------------ |  | -------------- | ------- | ------- |  | -------- | ------ | --------- |  | - | ------ | 
|YEAR ENDING  |  |                |         |         |  | EMBEDDED |        | PURCHASED
|DECEMBER 31, |  | SWAPS          |         | OPTIONS |  | OPTIONS 
|             |  |                |         |         |  |         
|             |  | (IN THOUSANDS)
|2003         |  | $              | 115,000 |         |  | $        |       |           |  | $ |       | 
|2004         |  |                | 25,000  |         |  |          |       |           |  |   |       | 
|2005         |  |                | 15,000  |         |  |          |       |           |  |   |       | 
|2006         |  |                | 36,329  |         |  |          | 37,952 |           |  |   | 1,623  | 
|2007         |  |                | 7,500   |         |  |          | 27,182 |           |  |   | 27,150 | 
|Thereafter   |  |                | 367,500 |         |  |          |       |           |  |   |       | 
|             |  |                |         |         |  |          |        |           |  |   |        | 
|Total        |  | $              | 566,329 |         |  | $        | 65,134 |           |  | $ | 28,773 | 
|             |  |                |         |         |  |          |        |           |  |   |        | 



| |  | Swap agreements amounting to $530,000,000 at December 31, 2002, provide
the counterparties the option to cancel the swap agreements on any
interest payment date after the first anniversary (matching the call
option that the Company has on $528,227,000 of hedged certificates of
deposit). During the years ended December 31, 2002 and 2001, various
counterparties of swap agreements exercised their option to cancel their
swaps and immediately, the Company exercised its option to call the hedged
certificates of deposit. No gains or losses resulted from above
cancellations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002, the carrying value of the specific collateral held
by the counterparties consisted of investments securities held to maturity
of $11,589,000.                                                                                                                                                                                                                                                                                                                                                                                                                          

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FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the Companys financial instruments at
December 31, were as follows:

|                       |                                                 |                      |   |                |           |       |   |           |           |       |   |           |           |  |   |           |           | 
|---------------------- | ----------------------------------------------- | -------------------- | - | -------------- | --------- | ----- | - | --------- | --------- | ----- | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                                                 |                      |   | 2002           |           | 2001 
|                       |                                                 |                      |   |                |           |      
|                       |                                                 |                      |   | CARRYING       |           | FAIR  |   | CARRYING  |           | FAIR 
|                       |                                                 |                      |   | VALUE          |           | VALUE |   | VALUE     |           | VALUE
|                       |                                                 |                      |   |                |           |       |   |           |           |      
|                       |                                                 |                      |   | (IN THOUSANDS)
|Financial Assets:      |                                                 |                      |   |                |           |       |   |           |           |       |   |           |           |  |   |          
|                       | Cash and due from banks                         |                      | $ | 76,080         |           |       | $ | 76,080    |           |       | $ | 62,414    |           |  | $ | 62,414    |          
|                       | Securities purchased under
agreements to resell |                      |   | 261,847        |           |       |   | 261,847   |           |       |   | 136,096   |           |  |   | 136,096   |          
|                       | Federal funds sold                              |                      |   | 197,300        |           |       |   | 197,300   |           |       |   | 20,037    |           |  |   | 20,037    |          
|                       | Interest-bearing deposits in banks              |                      |   | 17,459         |           |       |   | 17,459    |           |       |   | 26,214    |           |  |   | 26,214    |          
|                       | Trading securities                              |                      |   |               |           |       |   |          |           |       |   | 4,609     |           |  |   | 4,609     |          
|                       | Investment securities available for sale        |                      |   | 160,887        |           |       |   | 160,887   |           |       |   | 281,682   |           |  |   | 281,682   |          
|                       | Investment securities held to maturity          |                      |   | 3,501,057      |           |       |   | 3,503,379 |           |       |   | 2,369,775 |           |  |   | 2,362,836 |          
|                       | Federal Home Loan Bank stock                    |                      |   | 43,322         |           |       |   | 43,322    |           |       |   | 38,450    |           |  |   | 38,450    |          
|                       | Mortgage loans held for sale                    |                      |   | 7,446          |           |       |   | 7,446     |           |       |   | 5,253     |           |  |   | 5,253     |          
|                       | Loans (excluding allowance for loan losses)     |                      |   | 3,801,471      |           |       |   | 3,867,590 |           |       |   | 2,876,768 |           |  |   | 2,924,974 |          
|                       | Accrued interest receivable                     |                      |   | 46,653         |           |       |   | 46,653    |           |       |   | 32,820    |           |  |   | 32,820    |          
|                       | Mortgage servicing rights                       |                      |   | 1,926          |           |       |   | 1,926     |           |       |   | 2,091     |           |  |   | 2,091     |          
|                       | Derivative options purchased                    |                      |   | 1,495          |           |       |   | 1,495     |           |       |   | 323       |           |  |   | 323       |          
|FINANCIAL LIABILITIES: |                                                 |                      |   |                |           |       |   |           |           |       |   |           |           |  |   |          
|                       | Deposits:                                       |                      |   |                |           |       |   |           |           |       |   |           |           |  |   |           |          
|                       |                                                 | Non-interest bearing |   |                | 156,143   |       |   |           | 156,143   |       |   |           | 123,932   |  |   |           | 123,932   | 
|                       |                                                 | Interest bearing     |   |                | 4,118,782 |       |   |           | 4,143,616 |       |   |           | 3,084,501 |  |   |           | 3,081,878 | 
|                       | Securities sold under
agreements to repurchase  |                      |   | 3,097,341      |           |       |   | 3,241,180 |           |       |   | 2,059,646 |           |  |   | 2,164,736 |          
|                       | Advances from FHLB                              |                      |   | 120,000        |           |       |   | 123,631   |           |       |   | 120,000   |           |  |   | 133,227   |          
|                       | Term notes                                      |                      |   |               |           |       |   |          |           |       |   | 43,000    |           |  |   | 43,438    |          
|                       | Mortgage note payable                           |                      |   | 37,822         |           |       |   | 40,701    |           |       |   |          |           |  |   |          |          
|                       | Accrued interest payable                        |                      |   | 35,491         |           |       |   | 35,491    |           |       |   | 35,976    |           |  |   | 35,976    |          
|                       | Interest rate swaps in a net payable position   |                      |   | 13,955         |           |       |   | 13,955    |           |       |   | 15,164    |           |  |   | 15,164    |          
|                       | Other                                           |                      |   | 3,198          |           |       |   | 3,198     |           |       |   | 2,435     |           |  |   | 2,435     |          

|                        |              |                                        |                        |   |             |        |       |   |                |      |             |   |         |        |  |   |        |      |  
|----------------------- | ------------ | -------------------------------------- | ---------------------- | - | ----------- | ------ | ----- | - | -------------- | ---- | ----------- | - | ------- | ------ |  | - | ------ | ---- | -
|                        |              |                                        |                        |   | 2002        |        | 2001 
|                        |              |                                        |                        |   |             |        |      
|                        |              |                                        |                        |   | CONTRACT OR |        |       |   |                |      | CONTRACT OR |   |         |        | 
|                        |              |                                        |                        |   | NOTIONAL    |        | FAIR  |   | NOTIONAL       |      | FAIR       
|                        |              |                                        |                        |   | AMOUNT      |        | VALUE |   | AMOUNT         |      | VALUE      
|                        |              |                                        |                        |   |             |        |       |   |                |      |            
|                        |              |                                        |                        |   |             |        |       |   | (IN THOUSANDS) |      |             |   |        
|Off-Balance Sheet Items |              |                                        |                        |   |             |        |       |   |                |      |             |   |         |        |  |  
|                        | LIABILITIES: |                                        |                        |   |             |        |       |   |                |      |             |   |         |        |  |   |       
|                        |              | Commitments to extend credit           |                        | $ | 178,612     |        |       | $ | (1,588         | )    |             | $ | 163,596 |        |  | $ | (1,622 | )   
|                        |              | Unused lines of credit:                |                        |   |             |        |       |   |                |      |             |   |         |        |  |   |        |     
|                        |              |                                        | Commercial             |   |             | 64,037 |       |   |                | (125 | )           |   |         | 53,723 |  |   |        | (55  | )
|                        |              |                                        | Credit cards and other |   |             | 77,776 |       |   |                | (254 | )           |   |         | 75,683 |  |   |        | (171 | )
|                        |              | Stand-by letters of credit             |                        |   | 4,574       |        |       |   | (46            | )    |             |   | 2,340   |        |  |   | (23    | )   
|                        |              | Commitments to purchase mortgage loans |                        |   | 100,000     |        |       |   |                |      |             |   |         |        |  |   |        |     

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|19. |  | RESERVE FUND:                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Banking Law of Puerto Rico requires that a reserve fund be established
by banking institutions and that annual transfers of at least 10% of net
income be made, until such reserve fund equals 10% of total deposits or
total paid-in capital, whichever is greater. Such transfers restrict the
retained earnings, which would otherwise be available for dividends.
|   
|20. |  | QUARTERLY FINANCIAL DATA (UNAUDITED):                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The following is a summary of the unaudited quarterly results of
operations (in thousands except for per share data):                                                                                                                                                                                                                                                    

|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|--------------------------------------------------- |  | -------- | ------- | ------- |  | -------- | ------- | ------- |  | - | ------- | --- |  | - | ------- | ---
|2002                                                |  | MARCH 31 |         | JUNE 30 |  | SEPT. 30 |         | DEC. 31
|                                                    |  |          |         |         |  |          |         |        
|Total interest income                               |  | $        | 88,688  |         |  | $        | 94,469  |         |  | $ | 98,337  |     |  | $ | 104,240 |    
|Total interest expense                              |  |          | 51,792  |         |  |          | 54,703  |         |  |   | 56,299  |     |  |   | 56,619  |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income                                 |  |          | 36,896  |         |  |          | 39,766  |         |  |   | 42,038  |     |  |   | 47,621  |    
|Provision for loan losses                           |  |          | 3,624   |         |  |          | 3,467   |         |  |   | 3,828   |     |  |   | 4,164   |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income after
provision for loan losses |  |          | 33,272  |         |  |          | 36,299  |         |  |   | 38,210  |     |  |   | 43,457  |    
|Total other income, net                             |  |          | 5,601   |         |  |          | 5,287   |         |  |   | 7,348   |     |  |   | 6,507   |    
|Total operating expenses                            |  |          | (16,754 | )       |  |          | (17,605 | )       |  |   | (19,731 | )   |  |   | (19,827 | )  
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Income before income taxes                          |  |          | 22,119  |         |  |          | 23,981  |         |  |   | 25,827  |     |  |   | 30,137  |    
|Provision for income taxes                          |  |          | 4,227   |         |  |          | 3,911   |         |  |   | 3,152   |     |  |   | 4,811   |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net income                                          |  | $        | 17,892  |         |  | $        | 20,070  |         |  | $ | 22,675  |     |  | $ | 25,326  |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Basic earnings per common share                     |  | $        | 0.23    | (1)     |  | $        | 0.27    | (1)     |  | $ | 0.30    |     |  | $ | 0.32    |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Diluted earnings per common share                   |  | $        | 0.23    | (1)     |  | $        | 0.27    | (1)     |  | $ | 0.30    |     |  | $ | 0.31    |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|2001                                                |  | MARCH 31 |         | JUNE 30 |  | SEPT. 30 |         | DEC. 31
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Total interest income                               |  | $        | 84,432  |         |  | $        | 87,416  |         |  | $ | 87,521  |     |  | $ | 83,966  |    
|Total interest expense                              |  |          | 55,816  |         |  |          | 55,525  |         |  |   | 55,301  |     |  |   | 51,627  |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income                                 |  |          | 28,616  |         |  |          | 31,891  |         |  |   | 32,220  |     |  |   | 32,339  |    
|Provision for loan losses                           |  |          | 3,000   |         |  |          | 3,000   |         |  |   | 3,228   |     |  |   | 3,050   |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income after
provision for loan losses |  |          | 25,616  |         |  |          | 28,891  |         |  |   | 28,992  |     |  |   | 29,289  |    
|Total other income, net                             |  |          | 4,907   |         |  |          | 3,275   |         |  |   | 5,066   |     |  |   | 4,933   |    
|Total operating expenses                            |  |          | (14,214 | )       |  |          | (14,825 | )       |  |   | (15,085 | )   |  |   | (16,186 | )  
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Income before income taxes                          |  |          | 16,309  |         |  |          | 17,341  |         |  |   | 18,973  |     |  |   | 18,036  |    
|Provision for income taxes                          |  |          | 2,569   |         |  |          | 1,987   |         |  |   | 2,079   |     |  |   | 1,869   |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net income                                          |  | $        | 13,740  |         |  | $        | 15,354  |         |  | $ | 16,894  |     |  | $ | 16,167  |    
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Basic and diluted earnings per
common share (1)     |  | $        | 0.20    | (1)     |  | $        | 0.21    | (1)     |  | $ | 0.22    | (1) |  | $ | 0.20    | (1)
|                                                    |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    



---

|(1) |  | Adjusted to reflect the three-for-two stock split in the form of a stock
dividend on our common stock declared on June 17, 2002, and distributed on
July 10, 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|21. |  | SEGMENT INFORMATION:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|    |  | The Companys management monitors and manages the financial performance
of two reportable business segments, the traditional banking operations
of Westernbank Puerto Rico and the activities of the division known as
Westernbank International. Other operations of the Company not
reportable in either segment include Westernbank Business Credit
Division, which specializes in asset-based commercial business lending;
Westernbank Trust Division, which offers trust services; SRG Net, Inc.,
which operates an electronic funds transfer network; Westernbank
Insurance, Corp., which operates a general insurance agency;
Westernbank World Plaza, Inc., which operates the Westernbank World
Plaza, a 23-story office building located in Hato Rey, Puerto Rico,
and the transactions of the parent company only, which mainly consists
of other income related to the equity in the net income of its two
subsidiaries. Separate condensed financial information of the Parent
Company is provided in Note 22.
|   
|    |  | Management determined the reportable segments based on the internal
reporting used to evaluate performance and to assess where to allocate
resources. Other factors such as the Companys organizational structure
by divisions, nature of the products, distribution channels, and the
economic characteristics of the products were also considered in the
determination of the reportable segments. The Company evaluates
performance based on net interest income and other income. Operating
expenses and the provision for income taxes are analyzed on a combined
basis.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Westernbank Puerto Ricos traditional banking operations consist of the
Banks retail operations, such as its branches, including the branches
of the Expresso division, together with consumer loans, mortgage loans,
commercial loans (excluding the asset-based lending operations) and
deposits products. Consumer loans include loans such as personal,
collateralized personal loans, credit cards, and small loans.
Commercial products consist of commercial loans including commercial
real estate, unsecured commercial and construction loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | Westernbank International operates as an International Banking Entity
(IBE) under Puerto Rico Act No. 52, of August 11, 1989, as amended,
known as the International Banking Regulatory Act. Under Puerto Rico
tax law, an IBE can hold non-Puerto Rico assets, and earn interest on
these assets, as well as generate fee income outside of Puerto Rico on
a tax-exempt basis. Westernbank Internationals business activities
consist of commercial banking and related services, and treasury and
investment activities outside of Puerto Rico. As of December 31, 2002,
2001, and 2000 and for the years then ended, substantially all of
Westernbank Internationals business activities consisted of investment
in securities and purchasing of loans. Loans outstanding at December
31, 2002, 2001, and 2000 amounted to $56,833,000, $24,656,000, and
$20,451,000, respectively.                                                                                                                                   
|   
|    |  | Intersegment sales and transfers, if any, are accounted for as if the
sales or transfers were to third parties, that is, at current market
prices. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The financial information presented below was derived from the internal
management accounting system and does not necessarily represent each
segments financial condition and results of operations as if these
were independent entities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |         | 
|------------------------------------------ | ------------------------------------------ | - | ---------------------------- | ------- | ------------- | - | --------- | ------ | -------- | - | ------------ | ------- | ----- | - | --------- | ------ |  | - | ------------ | ------ | - | - | --------- | ------- | 
|                                           |                                            |   | As of and for the year ended
|                                           |                                            |   | December 31, 2002           
|                                           |                                            |   |                             
|                                           |                                            |   |                              |         |               |   |           |        |          |   | Total Major  |         | Other |   |           |        |  |   | Consolidated
|                                           |                                            |   | Puerto Rico                  |         | International |   | Segments  |        | Segments |   | Eliminations |         | Total
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |      
|                                           |                                            |   | (In thousands)              
|Interest income:                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|                                           | Consumer loans                             |   | $                            | 52,818  |               |   | $         |       |          |   | $            | 52,818  |       |   | $         |       |  |   | $            |       |   |   | $         | 52,818  | 
|                                           | Commercial loans                           |   |                              | 100,328 |               |   |           | 2,615  |          |   |              | 102,943 |       |   |           |       |  |   |              |       |   |   |           | 102,943 | 
|                                           | Asset-based loans                          |   |                              |        |               |   |           |       |          |   |              |        |       |   |           | 15,800 |  |   |              |       |   |   |           | 15,800  | 
|                                           | Mortgage loans                             |   |                              | 49,114  |               |   |           |       |          |   |              | 49,114  |       |   |           |       |  |   |              |       |   |   |           | 49,114  | 
|                                           | Treasury and investment
activities         |   |                              | 66,485  |               |   |           | 97,821 |          |   |              | 164,306 |       |   |           | 1,875  |  |   |              | (1,122 | ) |   |           | 165,059 | 
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Total interest income                      |                                            |   | 268,745                      |         |               |   | 100,436   |        |          |   | 369,181      |         |       |   | 17,675    |        |  |   | (1,122       | )      |   |   | 385,734   |        
|Interest expense                           |                                            |   | 161,948                      |         |               |   | 51,914    |        |          |   | 213,862      |         |       |   | 6,673     |        |  |   | (1,122       | )      |   |   | 219,413   |        
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Net interest income                        |                                            |   | 106,797                      |         |               |   | 48,522    |        |          |   | 155,319      |         |       |   | 11,002    |        |  |   |             |        |   |   | 166,321   |        
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Provision for loan losses                  |                                            |   | (13,179                      | )       |               |   |          |        |          |   | (13,179      | )       |       |   | (1,904    | )      |  |   |             |        |   |   | (15,083   | )      
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Other income, net:                         |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|                                           | Service charges and other fees
on deposits |   |                              | 18,678  |               |   |           | 237    |          |   |              | 18,915  |       |   |           | 199    |  |   |              | (199   | ) |   |           | 18,915  | 
|                                           | Trust account fees                         |   |                              |        |               |   |           |       |          |   |              |        |       |   |           | 604    |  |   |              |        |   |   |           | 604     | 
|                                           | Insurance commission fees                  |   |                              |        |               |   |           |       |          |   |              |        |       |   |           | 1,414  |  |   |              |       |   |   |           | 1,414   | 
|                                           | Asset-based lending related fees           |   |                              |        |               |   |           |       |          |   |              |        |       |   |           | 1,572  |  |   |              |       |   |   |           | 1,572   | 
|                                           | Other                                      |   |                              | 1,805   |               |   |           | 433    |          |   |              | 2,238   |       |   |           |       |  |   |              |       |   |   |           | 2,238   | 
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Total other income, net                    |                                            |   | 20,483                       |         |               |   | 670       |        |          |   | 21,153       |         |       |   | 3,789     |        |  |   | (199         | )      |   |   | 24,743    |        
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Equity in income of subsidiaries,
net      |                                            |   | 217                          |         |               |   |          |        |          |   | 217          |         |       |   | 86,048    |        |  |   | (86,265      | )      |   |   |          |        
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Total net interest income
and other income |                                            | $ | 114,318                      |         |               | $ | 49,192    |        |          | $ | 163,510      |         |       | $ | 98,935    |        |  | $ | (86,464      | )      |   | $ | 175,981   |        
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        
|Total assets                               |                                            | $ | 6,649,595                    |         |               | $ | 2,083,259 |        |          | $ | 8,732,854    |         |       | $ | 1,292,391 |        |  | $ | (1,820,168   | )      |   | $ | 8,205,077 |        
|                                           |                                            |   |                              |         |               |   |           |        |          |   |              |         |       |   |           |        |  |   |              |        |   |   |           |        




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|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |         |  
|------------------------------------------ | ------------------------------------------ | - | ---------------------------- | ------ | ------------- | - | --------- | ------ | -------- | - | ------------ | ------- | ----- | - | ------- | ----- |  | - | ------------ | ---- | - | - | --------- | ------- | -
|                                           |                                            |   | As of and for the year ended
|                                           |                                            |   | December 31, 2001           
|                                           |                                            |   |                             
|                                           |                                            |   |                              |        |               |   |           |        |          |   | Total Major  |         | Other |   |         |       |  |   | Consolidated
|                                           |                                            |   | Puerto Rico                  |        | International |   | Segments  |        | Segments |   | Eliminations |         | Total
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |      
|                                           |                                            |   | (In thousands)              
|Interest income:                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|                                           | Consumer loans                             |   | $                            | 43,561 |               |   | $         |       |          |   | $            | 43,561  |       |   | $       |      |  |   | $            |     |   |   | $         | 43,561  |  
|                                           | Commercial loans                           |   |                              | 93,944 |               |   |           | 2,315  |          |   |              | 96,259  |       |   |         |      |  |   |              |     |   |   |           | 96,259  |  
|                                           | Asset-based loans                          |   |                              |       |               |   |           |       |          |   |              |        |       |   |         | 7,319 |  |   |              |     |   |   |           | 7,319   |  
|                                           | Mortgage loans                             |   |                              | 60,246 |               |   |           |       |          |   |              | 60,246  |       |   |         |      |  |   |              |     |   |   |           | 60,246  |  
|                                           | Treasury and investment
activities         |   |                              | 57,705 |               |   |           | 77,525 |          |   |              | 135,230 |       |   |         | 1,083 |  |   |              | (363 | ) |   |           | 135,950 |  
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Total interest income                      |                                            |   | 255,456                      |        |               |   | 79,840    |        |          |   | 335,296      |         |       |   | 8,402   |       |  |   | (363         | )    |   |   | 343,335   |        
|Interest expense                           |                                            |   | 174,888                      |        |               |   | 40,243    |        |          |   | 215,131      |         |       |   | 3,501   |       |  |   | (363         | )    |   |   | 218,269   |        
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Net interest income                        |                                            |   | 80,568                       |        |               |   | 39,597    |        |          |   | 120,165      |         |       |   | 4,901   |       |  |   |              |      |   |   | 125,066   |        
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Provision for loan losses                  |                                            |   | (12,070                      | )      |               |   |          |        |          |   | (12,070      | )       |       |   | (208    | )     |  |   |             |      |   |   | (12,278   | )      
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Other income, net:                         |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|                                           | Service charges and other
fees on deposits |   |                              | 17,225 |               |   |           | 158    |          |   |              | 17,383  |       |   |         | 198   |  |   |              | (198 | ) |   |           | 17,383  |  
|                                           | Trust account fees                         |   |                              |       |               |   |           |       |          |   |              |        |       |   |         | 256   |  |   |              |     |   |   |           | 256     |  
|                                           | Insurance commission fees                  |   |                              |       |               |   |           |       |          |   |              |        |       |   |         | 596   |  |   |              |     |   |   |           | 596     |  
|                                           | Asset-based lending related
fees           |   |                              |       |               |   |           |       |          |   |              |        |       |   |         | 624   |  |   |              |     |   |   |           | 624     |  
|                                           | Other                                      |   |                              | (1,283 | )             |   |           | 605    |          |   |              | (678    | )     |   |         |       |  |   |              |     |   |   |           | (678    | )
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Total other income, net                    |                                            |   | 15,942                       |        |               |   | 763       |        |          |   | 16,705       |         |       |   | 1,674   |       |  |   | (198         | )    |   |   | 18,181    |        
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Equity in income (loss) of
subsidiaries    |                                            |   | (192                         | )      |               |   |          |        |          |   | (192         | )       |       |   | 62,014  |       |  |   | (61,822      | )    |   |   |          |        
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Total net interest income
and other income |                                            | $ | 84,248                       |        |               | $ | 40,360    |        |          | $ | 124,608      |         |       | $ | 68,381  |       |  | $ | (62,020      | )    |   | $ | 130,969   |        
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        
|Total assets                               |                                            | $ | 4,514,001                    |        |               | $ | 1,825,915 |        |          | $ | 6,339,916    |         |       | $ | 642,398 |       |  | $ | (1,094,120   | )    |   | $ | 5,888,194 |        
|                                           |                                            |   |                              |        |               |   |           |        |          |   |              |         |       |   |         |       |  |   |              |      |   |   |           |        

|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |         |  
|------------------------------------------ | ------------------------------------------ | - | ---------------------------- | ------ | ------------- | - | -------- | ------ | -------- | - | ------------ | ------- | ----- | - | ------- | --- |  | - | ------------ | ---- | - | - | --------- | ------- | -
|                                           |                                            |   | As of and for the year ended
|                                           |                                            |   | December 31, 2000           
|                                           |                                            |   |                             
|                                           |                                            |   |                              |        |               |   |          |        |          |   | Total Major  |         | Other |   |         |     |  |   | Consolidated
|                                           |                                            |   | Puerto Rico                  |        | International |   | Segments |        | Segments |   | Eliminations |         | Total
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |      
|                                           |                                            |   | (In thousands)              
|Interest income:                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|                                           | Consumer loans                             |   | $                            | 38,831 |               |   | $        |       |          |   | $            | 38,831  |       |   | $       |    |  |   | $            |     |   |   | $         | 38,831  |  
|                                           | Commercial loans                           |   |                              | 82,305 |               |   |          | 1,726  |          |   |              | 84,031  |       |   |         |    |  |   |              |     |   |   |           | 84,031  |  
|                                           | Mortgage loans                             |   |                              | 60,634 |               |   |          |       |          |   |              | 60,634  |       |   |         |    |  |   |              |     |   |   |           | 60,634  |  
|                                           | Treasury and investment
activities         |   |                              | 63,838 |               |   |          | 43,253 |          |   |              | 107,091 |       |   |         |    |  |   |              |     |   |   |           | 107,091 |  
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Total interest income                      |                                            |   | 245,608                      |        |               |   | 44,979   |        |          |   | 290,587      |         |       |   |        |     |  |   |             |      |   |   | 290,587   |        
|Interest expense                           |                                            |   | 167,040                      |        |               |   | 25,097   |        |          |   | 192,137      |         |       |   |        |     |  |   |             |      |   |   | 192,137   |        
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Net interest income                        |                                            |   | 78,568                       |        |               |   | 19,882   |        |          |   | 98,450       |         |       |   |        |     |  |   |             |      |   |   | 98,450    |        
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Provision for loan losses                  |                                            |   | (8,700                       | )      |               |   |         |        |          |   | (8,700       | )       |       |   |        |     |  |   |             |      |   |   | (8,700    | )      
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Other income, net:                         |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|                                           | Service charges and other
fees on deposits |   |                              | 14,411 |               |   |          |       |          |   |              | 14,411  |       |   |         | 193 |  |   |              | (193 | ) |   |           | 14,411  |  
|                                           | Trust account fees                         |   |                              |        |               |   |          |       |          |   |              |        |       |   |         | 10  |  |   |              |     |   |   |           | 10      |  
|                                           | Other                                      |   |                              | (572   | )             |   |          | 19     |          |   |              | (553    | )     |   |         |    |  |   |              |     |   |   |           | (553    | )
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Total other income, net                    |                                            |   | 13,839                       |        |               |   | 19       |        |          |   | 13,858       |         |       |   | 203     |     |  |   | (193         | )    |   |   | 13,868    |        
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Intersegment revenue (expense)             |                                            |   | (266                         | )      |               |   | 266      |        |          |   |             |         |       |   |        |     |  |   |             |      |   |   |          |        
|Equity in income (loss)
of subsidiaries    |                                            |   | (219                         | )      |               |   |         |        |          |   | (219         | )       |       |   | 44,586  |     |  |   | (44,367      | )    |   |   |          |        
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Total net interest income
and other income |                                            | $ | 83,222                       |        |               | $ | 20,167   |        |          | $ | 103,389      |         |       | $ | 44,789  |     |  | $ | (44,560      | )    |   | $ | 103,618   |        
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        
|Total assets                               |                                            | $ | 3,344,581                    |        |               | $ | 916,815  |        |          | $ | 4,261,396    |         |       | $ | 253,312 |     |  | $ | (253,851     | )    |   | $ | 4,260,857 |        
|                                           |                                            |   |                              |        |               |   |          |        |          |   |              |         |       |   |         |     |  |   |              |      |   |   |           |        




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|22. |  | CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY:                                        
|--- |  | -----------------------------------------------------------------------------------------
|   
|    |  | Condensed financial information pertaining only to W Holding Company, Inc.
is as follows:

CONDENSED STATEMENT OF FINANCIAL CONDITION
(PARENT COMPANY ONLY)

|                                                             |  |                |         |      |  |   |         | 
|------------------------------------------------------------ |  | -------------- | ------- | ---- |  | - | ------- | 
|                                                             |  | DECEMBER 31,  
|                                                             |  |               
|                                                             |  | 2002           |         | 2001
|                                                             |  |                |         |     
|                                                             |  | (IN THOUSANDS)
|ASSETS
Cash                                                  |  | $              | 275     |      |  | $ | 1       | 
|Federal fund sold                                            |  |                | 1,000   |      |  |   |        | 
|Dividends and other accounts receivable
from bank subsidiary |  |                | 1,556   |      |  |   | 1,599   | 
|Investment security held to maturity                         |  |                | 14,208  |      |  |   |        | 
|Investment in bank subsidiary                                |  |                | 567,285 |      |  |   | 371,022 | 
|Investment in nonbank subsidiary                             |  |                | 2,475   |      |  |   | 1,773   | 
|Advance to nonbank subsidiary                                |  |                |        |      |  |   | 15,000  | 
|Accrued interest receivable                                  |  |                | 70      |      |  |   |        | 
|                                                             |  |                |         |      |  |   |         | 
|TOTAL ASSETS                                                 |  | $              | 586,869 |      |  | $ | 389,395 | 
|                                                             |  |                |         |      |  |   |         | 
|LIABILITIES AND
STOCKHOLDERS EQUITY
LIABILITIES:            |  |                |         |      |  |   |         | 
|Dividends payable                                            |  | $              | 1,931   |      |  | $ | 1,419   | 
|Other liabilities                                            |  |                | 190     |      |  |   | 67      | 
|                                                             |  |                |         |      |  |   |         | 
|TOTAL LIABILITIES                                            |  |                | 2,121   |      |  |   | 1,486   | 
|STOCKHOLDERS EQUITY                                         |  |                | 584,748 |      |  |   | 387,909 | 
|                                                             |  |                |         |      |  |   |         | 
|TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY                   |  | $              | 586,869 |      |  | $ | 389,395 | 
|                                                             |  |                |         |      |  |   |         | 

CONDENSED STATEMENT OF INCOME
(PARENT COMPANY ONLY)

|                                                                                  |                    |   |                |        |      |   |        |        | 
|--------------------------------------------------------------------------------- | ------------------ | - | -------------- | ------ | ---- | - | ------ | ------ | 
|                                                                                  |                    |   | YEARS ENDED   
|                                                                                  |                    |   |               
|                                                                                  |                    |   | DECEMBER 31,  
|                                                                                  |                    |   |               
|                                                                                  |                    |   | 2002           |        | 2001
|                                                                                  |                    |   |                |        |     
|                                                                                  |                    |   | (IN THOUSANDS)
|Dividends from bank subsidiary                                                    |                    | $ | 27,820         |        |      | $ | 22,138 |       
|Interest income on investment security                                            |                    |   | 752            |        |      |   | 720    |       
|                                                                                  |                    |   |                |        |      |   |        |       
|                                                                                  | Total income       |   |                | 28,572 |      |   |        | 22,858 | 
|Operating expenses                                                                |                    |   | 842            |        |      |   | 512    |       
|                                                                                  |                    |   |                |        |      |   |        |       
|Income before income taxes and increase
in undistributed earnings of subsidiaries |                    |   | 27,730         |        |      |   | 22,346 |       
|Provision (credit) for income taxes  current                                     |                    |   | (4             | )      |      |   | 67     |       
|                                                                                  |                    |   |                |        |      |   |        |       
|Income before increase in undistributed
earnings of subsidiaries                  |                    |   | 27,734         |        |      |   | 22,279 |       
|Increase in undistributed earnings from :                                         |                    |   |                |        |      |   |        |       
|                                                                                  | Bank subsidiary    |   |                | 57,527 |      |   |        | 39,603 | 
|                                                                                  | Nonbank subsidiary |   |                | 702    |      |   |        | 273    | 
|                                                                                  |                    |   |                |        |      |   |        |       
|Net income                                                                        |                    | $ | 85,963         |        |      | $ | 62,155 |       
|                                                                                  |                    |   |                |        |      |   |        |       

CONDENSED STATEMENT OF CASH FLOW
(PARENT COMPANY ONLY)

|                                                                                  |                                                                                     |                         |          |                |         |      |         |         |   | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------- | -------- | -------------- | ------- | ---- | ------- | ------- | - | 
|                                                                                  |                                                                                     |                         |          | YEARS ENDED   
|                                                                                  |                                                                                     |                         |          |               
|                                                                                  |                                                                                     |                         |          | DECEMBER 31,  
|                                                                                  |                                                                                     |                         |          |               
|                                                                                  |                                                                                     |                         |          | 2002           |         | 2001
|                                                                                  |                                                                                     |                         |          |                |         |     
|                                                                                  |                                                                                     |                         |          | (IN THOUSANDS)
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |                                                                                     |                         |          |                |         |      |         |        
|Net income                                                                        |                                                                                     | $                       | 85,963   |                |         | $    | 62,155  |        
|Adjustments to reconcile net income
to net cash provided by operating activities: |                                                                                     |                         |          |                |         |      |         |        
|                                                                                  | Increase in undistributed earnings
of subsidiaries                                  |                         |          | (58,229        | )       |      |         | (39,876 | )
|                                                                                  | Increase (decrease) in dividends and other
accounts receivable from bank subsidiary |                         |          | 14,973         |         |      |         | (700    | )
|                                                                                  | Increase in other liabilities                                                       |                         |          | 636            |         |      |         | 67      |  
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|Net cash provided by operating activities                                         |                                                                                     |                         | 43,343   |                |         |      | 21,646  |        
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |                                                                                     |                         |          |                |         |      |         |        
|                                                                                  | Increase in advance to bank subsidiary                                              |                         |          |               |         |      |         | (15,000 | )
|                                                                                  | Net increase in federal funds sold                                                  |                         |          | (1,000         | )       |      |         |        |  
|                                                                                  | Investment securities available for sale:                                           |                         |          |                |         |      |         |         |  
|                                                                                  |                                                                                     | Purchases               |          |                | (30,000 | )    |         |         |  | 
|                                                                                  |                                                                                     | Maturities              |          |                | 30,000  |      |         |         |  | 
|                                                                                  | Capital contributions in subsidiaries                                               |                         |          | (139,942       | )       |      |         | (81,740 | )
|                                                                                  | Purchase of nonbank subsidiary,
net of cash acquired                                |                         |          |               |         |      |         | (1,070  | )
|                                                                                  | Investment securities held to maturity:                                             |                         |          |                |         |      |         |         |  
|                                                                                  |                                                                                     | Purchases               |          |                | (15,755 | )    |         |         |  | 
|                                                                                  |                                                                                     | Proceeds from repayment |          |                | 994     |      |         |         |  | 
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|Net cash used in investing activities                                             |                                                                                     |                         | (155,703 | )              |         |      | (97,810 | )      
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |                                                                                     |                         |          |                |         |      |         |        
|                                                                                  | Issuance of stocks                                                                  |                         |          | 139,942        |         |      |         | 96,341  |  
|                                                                                  | Repurchase of common stock
for retirement                                           |                         |          |               |         |      |         | (28     | )
|                                                                                  | Dividends paid                                                                      |                         |          | (27,308        | )       |      |         | (20,148 | )
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|                                                                                  | Net cash provided by financing activities                                           |                         |          | 112,634        |         |      |         | 76,165  |  
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|NET INCREASE IN CASH                                                              |                                                                                     |                         | 274      |                |         |      | 1       |        
|CASH AT JANUARY 1, 2002                                                           |                                                                                     |                         | 1        |                |         |      |        |        
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        
|CASH AT DECEMBER 31, 2002                                                         |                                                                                     | $                       | 275      |                |         | $    | 1       |        
|                                                                                  |                                                                                     |                         |          |                |         |      |         |        

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| |  | The principal source of income for the Company consists of dividends from
its bank subsidiary, Westernbank. As a member subject to the regulations
of the Federal Reserve Board, the Company must obtain approval from the
Federal Reserve Board for any dividend if the total of all dividends by it
in any calendar year would exceed the total of its consolidated net
profits for the year, as defined by the Federal Reserve Board, combined
with its retained net profits for the two preceding years. The payment of
dividends by Westernbank to the Company may also be affected by other
regulatory requirements and policies, such as the maintenance of certain
regulatory capital levels. Up to December 31, 2000, the Company had no
other operations other than those from its investment in Westernbank
Puerto Rico and the stockholders equity transactions. Cash dividend paid
by Westernbank to the Company amounted to $18,886,184 for the year ended
December 31, 2000.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

******







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PART III













ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT




Except for the tables below, the information required herein is
incorporated by reference from the Proxy Statement.

STOCK OWNED BY MANAGEMENT AND
PRINCIPAL SHAREHOLDERS

The following table
sets forth certain information as of March 31, 2003, with
respect to the amount of the Companys common stock beneficially
owned by each director of the Company, each nominee for election as a
director, each of the named executive officers, by all directors and
executive officers of the Company as a group and by each person
believed by management to be the beneficial owner of more than 5% of
the outstanding common stock of the Company.

|                                                |                                                                          |              |            |          |  |  |       |   | 
|----------------------------------------------- | ------------------------------------------------------------------------ | ------------ | ---------- | -------- |  |  | ----- | - | 
|                                                |                                                                          | Amount and   |            |         
|                                                |                                                                          | Nature of    |            |         
|                                                |                                                                          | Beneficial   |            | Percent 
|Name of Beneficial Owner                        |                                                                          | Ownership(1) |            | of Class
|                                                |                                                                          |              |            |         
|Ileana G. Carr                                  |                                                                          |              | 8,558,064  | (2)      |  |  | 12.52 | %
|                                                | Honorary Directress                                                      |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Fredeswinda G. Frontera                         |                                                                          |              | 7,260,773  | (3)      |  |  | 10.62 | %
|                                                | Directress                                                               |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Cornelius Tamboer                               |                                                                          |              | 2,494,860  | (4)      |  |  | 3.65  | %
|                                                | Director                                                                 |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|FMR Corp.                                       |                                                                          |              | 3,549,427  |          |  |  | 5.19  | %
|                                               
|                                               
|                                               
|                                               
|Frank C. Stipes, Esq.                           |                                                                          |              | 2,809,538  | (5)      |  |  | 4.11  | %
|                                                | Chairman of the Board, President and Chief
    Executive Officer         |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Freddy Maldonado                                |                                                                          |              | 1,281,341  | (6)      |  |  | 1.87  | %
|                                                | Chief Financial Officer and Vice President of
    Finance and Investment |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Pedro Dominguez                                 |                                                                          |              | 415,500    | (7)      |  |  | *     |  
|                                                | Director                                                                 |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Ricardo Hernandez, CPA                          |                                                                          |              | 55,671     | (8)      |  |  | *     |  
|                                                | Vice-President Comptroller                                               |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|William Vidal, Esq.                             |                                                                          |              | 54,329     | (9)      |  |  | *     |  
|                                                | First Vice-President - North Region                                      |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|César A. Ruiz                                   |                                                                          |              | 38,550     |          |  |  | *     |  
|                                                | Director and Secretary of the Board of Directors                         |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Andrés Morgado, CPA                             |                                                                          |              | 33,001     | (10)     |  |  | *     |  
|                                                | President Trust Division                                                 |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Miguel Vazquez                                  |                                                                          |              | 16,416     | (11)     |  |  | *     |  
|                                                | President Business Credit Division                                       |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|Alfredo Archilla                                |                                                                          |              | 7,500      | (12)     |  |  | *     |  
|                                                | Vice President of Administration and Human
    Resources                 |              |            |          |  |  |       |   | 
|                                               
|                                               
|                                               
|                                               
|All Directors and Executive Officers as a Group |                                                                          |              | 23,064,093 |          |  |  | 33.75 | %




Equity Compensation Plan Information

|                                                           |  |                     |           |                     |  |                             |      |                     |  |                      |           | 
|---------------------------------------------------------- |  | ------------------- | --------- | ------------------- |  | --------------------------- | ---- | ------------------- |  | -------------------- | --------- | 
|                                                           |  |                     |           |                     |  |                             |      |                     |  | Number of securities
|                                                           |  | Number of           |           |                     |  |                             |      | remaining available
|                                                           |  | securities to be    |           |                     |  |                             |      | for future issuance
|                                                           |  | issued upon         |           | Weighted-average    |  | under equity compensation  
|                                                           |  | exercise of         |           | exercise price of   |  | plans (excluding securities
|                                                           |  | outstanding options |           | outstanding options |  | reflected in column (a))   
|Plan Category                                              |  | (a)                 |           | (b)                 |  | (c)                        
|                                                           |  |                     |           |                     |  |                            
|Equity compensation
plans approved by
security holders     |  |                     | 1,400,000 |                     |  | $                           | 6.69 |                     |  |                      | 4,900,000 | 
|                                                           |  |                     |           |                     |  |                             |      |                     |  |                      |           | 
|Equity compensation
plans not approved
by security holders |  |                     |          |                     |  |                             |     |                     |  |                      |          | 
|                                                           |  |                     |           |                     |  |                             |      |                     |  |                      |           | 
|Total                                                      |  |                     | 1,400,000 |                     |  | $                           | 6.69 |                     |  |                      | 4,900,000 | 
|                                                           |  |                     |           |                     |  |                             |      |                     |  |                      |           | 







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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a) |  | Documents filed as part of this Report
|--- |  | --------------------------------------



| | (1) |  | The following financial statements are incorporated by reference
from Item 8 hereof:
| | --- |  | ------------------------------------------------------------------------------------



| |  |  | Report of Independent Accountants                                                                                                                       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Consolidated Statements of Financial Condition as of December 31, 2002 and 2001                                                                         
|
| |  |  | Consolidated Statements of Income
for each of the three years in the period ended
December 31, 2002                                                     
|
| |  |  | Consolidated Statements of Changes
in Stockholders Equity and of Comprehensive Income for
each of the three years in the period ended December
31, 2002
|
| |  |  | Consolidated Statements of Cash
Flows for each of the three years in the period ended
December 31, 2002                                                 
|
| |  |  | Notes to Consolidated Financial
Statements                                                                                                              



| | (2) |  | Not applicable.
| | --- |  | ---------------

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| | (3) |  | The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
| | --- |  | -----------------------------------------------------------------------------------------------------




|        |  |                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                            
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                            
|3.1     |  | Articles of Incorporation (incorporated by reference
herein to Exhibit 3.1 to the Companys Registration
Statement on Form S-4, File No. 333-76975)                                                                                        
|3.2     |  | Bylaws (incorporated by reference herein to Exhibit
4 to the Companys Registration Statement on Form
8-A, Filed on November 29, 2001                                                                                                      
|4.1     |  | Certificate of Resolution establishing the rights of the Series B
Preferred Stock (incorporated by reference to Exhibit 3.1.1
to the Registrants Registration Statement on Form S-4 (Reg. No.
333-76975)                                  
|4.2     |  | Certificate of Resolution establishing the rights of the Series C
Preferred Stock (incorporated by reference to Exhibit 4.2
to the Registrants Current Report on Form 8-K as filed on March
30, 2001)                                     
|4.3     |  | Certificate of Resolution establishing the rights of the Series D
Preferred Stock (incorporated by reference to Exhibit 4.2
to the Registrants Current Report on Form 8-K as filed on August
1, 2001)                                     
|4.4     |  | Certificate of Resolution establishing the rights of the Series E
Preferred Stock (incorporated herein by reference as Exhibit 4.2
to the Registrants Current Report on Form 8-K, as filed on
October 31, 2002)                           
|10.1    |  | Form of 1999 Qualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.1 to
the Companys Registration Statement on Form S-4 No.
333-76975)                                                                              
|10.2    |  | Form of 1999 Nonqualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.2 to
the Companys Registration Statement on Form S-4
333-76975)                                                                               
|10.4    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Mike Vazquez (incorporated by reference herein to the
Companys Form 10-K for the year ended December 31,
2001, filed on March 29, 2002).    
|10.5    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Alfredo Archilla (incorporated by reference herein to
the Companys Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002).
|23.1    |  | Independent Auditors Consent                                                                                                                                                                                                              






|(b) |  | Reports Form 8-K.                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the last quarter of the period covered by this report, the Company
filed a Current Report on Form 8-K on October 31, 2002 to file certain
documents related to the Companys issuance of its 6.875% Noncumulative,
Monthly Income Preferred Stock, 2002 Series E ($1.00 par value per share).
|   
|(c) |  | See (a) (3) above for all exhibits filed herewith and the Exhibit Index.                                                                                                                                                                                                                            
|   
|(d) |  | Not applicable.                                                                                                                                                                                                                                                                                     

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SIGNATURES

Pursuant to the requirements of Section 13 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.

|                        |  |     |  |                                                                               |  |                   
|----------------------- |  | --- |  | ----------------------------------------------------------------------------- |  | ------------------
|W Holding Company, Inc. |  |    
|                       
|                        |  |     |  |                                                                               |  |                   
|                        |  | By: |  | /s/ FRANK C. STIPES                                                           |  | Date: May 12, 2003
|                        |  |     |  |                                                                               |  |                   
|                        |  |     |  | Frank C. Stipes, Chairman of the
Board, Chief Executive Officer
and President |  |                   




95



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CERTIFICATIONS

I, Frank C. Stipes, certify that:




1.     I have reviewed
this annual report on Form 10-K/A of W Holding Company, Inc.




2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
functions):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
|
| | b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.




|                   |  |     |  |                        
|------------------ |  | --- |  | -----------------------
|Date: May 12, 2003 |  | By: |  | /s/ Frank C. Stipes    
|                   |  |     |  |                        
|                   |  |     |  | Chief Executive Officer




96



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##### Table of Contents



I, Freddy Maldonado, certify that:




1.     I have reviewed
this annual report on Form 10-K/A of W Holding Company, Inc.




2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|
| | b) Evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
functions):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
|
| | b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.




|                   |  |     |  |                        
|------------------ |  | --- |  | -----------------------
|Date:
May 12, 2003 |  | By: |  | /s/ Freddy Maldonado   
|                   |  |     |  |                        
|                   |  |     |  | Chief Financial Officer




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EXHIBIT INDEX




|        |  |                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                            
|NO.     |  | EXHIBIT                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                            
|3.1     |  | Articles of Incorporation (incorporated by reference
herein to Exhibit 3.1 to the Companys Registration
Statement on Form S-4, File No. 333-76975)                                                                                        
|3.2     |  | Bylaws (incorporated by reference herein to Exhibit
4 to the Companys Registration Statement on Form
8-A, Filed on November 29, 2001                                                                                                      
|4.1     |  | Certificate of Resolution establishing the rights of the Series B
Preferred Stock (incorporated by reference to Exhibit 3.1.1
to the Registrants Registration Statement on Form S-4 (Reg. No.
333-76975)                                  
|4.2     |  | Certificate of Resolution establishing the rights of the Series C
Preferred Stock (incorporated by reference to Exhibit 4.2
to the Registrants Current Report on Form 8-K as filed on March
30, 2001)                                     
|4.3     |  | Certificate of Resolution establishing the rights of the Series D
Preferred Stock (incorporated by reference to Exhibit 4.2
to the Registrants Current Report on Form 8-K as filed on August
1, 2001)                                     
|4.4     |  | Certificate of Resolution establishing the rights of the Series E
Preferred Stock (incorporated herein by reference as Exhibit 4.2
to the Registrants Current Report on Form 8-K, as filed on
October 31, 2002)                           
|10.1    |  | Form of 1999 Qualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.1 to
the Companys Registration Statement on Form S-4 No.
333-76975)                                                                              
|10.2    |  | Form of 1999 Nonqualified Stock Option Plan
(incorporated by reference herein to Exhibit 10.2 to
the Companys Registration Statement on Form S-4
333-76975)                                                                               
|10.4    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Mike Vazquez (incorporated by reference herein to the
Companys Form 10-K for the year ended December 31,
2001, filed on March 29, 2002).    
|10.5    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Alfredo Archilla (incorporated by reference herein to
the Companys Form 10-K for the year ended
December 31, 2001, filed on March 29, 2002).
|23.1    |  | Independent Auditors Consent                                                                                                                                                                                                              




98