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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K

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 Annual Report to shareholders for fiscal year ended December
31, 2002 are incorporated by reference into Part II, Items 6, 7, 7A and 8 of
this Form 10-K

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.





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TABLE OF CONTENTS



|                                             |  |  |  |  |  |  |  | 
|-------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                      
|PART II                                     
|PART III                                    
|PART IV                                     
|SIGNATURES                                  
|CERTIFICATIONS                              
|EXHIBIT INDEX                               
|EX-10.3 EMPLOYMENT AGREEMENT / Mrs. Rivera  
|EX-10.6 PAYMENT AGREEMENT / Mr. Morgando    
|EX-10.7 PAYMENT AGREEMENT / Mr. Vidal       
|EX-10.8 PAYMENT AGREEMENT / Mr. Hernandez   
|EX-10.9 PAYMENT AGREEMENT / Mr. Dominguez   
|EX-10.10 PAYMENT AGREEMENT / Mr. Maldonado  
|EX-13.1 PORTIONS OF THE 2002 ANNUAL REPORT  
|EX-21.1 SUBSIDIARIES OF THE REGISTRANT      
|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
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 or the Bank) 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.

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.

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The Companys financial performance is reported in two primary business
segments, the operations of Westernbank in Puerto Rico and those of the Banks
division known as Westernbank International. The international division was
established to offer commercial banking and related services outside of Puerto
Rico. At year-end 2002, the international division reported total assets of
$2.08 billion, substantially all of which were investment securities and
purchased loans. As of the date of this report, the Company does not conduct
significant banking business outside of Puerto Rico. For segment information,
please refer to Note 21 of the audited consolidated financial statements.

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



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##### 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



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##### 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.

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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.

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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 |               
|                                                                           |                                                              |                        |         |               

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.

Other off-balance-sheet instruments In the ordinary course of business,
the Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit-card arrangements,
commercial letters of credit, commitments to purchased mortgage loans and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Bank 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.

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



ITEM 2. PROPERTIES

The Company owns the condominium offices space housing its main offices at
19 West McKinley Street, Mayagüez, Puerto Rico. As of December 31, 2002,
Westernbank owned approximately 12 branch premises and other facilities, five
(5) lots for future development, and one office building, all of them located
in Puerto Rico. In addition, as of such date, Westernbank leased properties for
branch operations in approximately 40 locations in Puerto Rico.

At December 31, 2002, the Companys future rental commitments under
non-cancelable operating leases aggregated $26.1 million, not considering
renewal options.

The principal property owned by Westernbank for banking operations and
other services is described below:



| |  |  | Westernbank World Plaza  a 23-story office building
located at Puerto Ricos main business district and which serves
as Westernbank San Juan metropolitan area headquarters, our
regional commercial lending office and the headquarters for the
Westernbank Business Credit and Expresso of Westernbank divisions.
The book value of this at December 31, 2002, was $40.4 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys investment in premises and equipment, exclusive of leasehold
improvements, at December 31, 2002, was $79.7 million. The combined net book
value of the Companys main offices as of December 31, 2002 was $878,000.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings other than ordinary
routine legal proceedings incidental to the business of the Company to which
the Company or any of its subsidiaries is the subject or of which any of their
property is the subject.

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

Not applicable.

27



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##### Table of Contents






PART II

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

The following table sets forth the range of high and low closing sale
prices of the Companys common stock, as quoted in the NYSE system, at the end
of each quarter for 2002 and 2001. The prices reflect interdealer quotations,
without retail mark-up, mark-down or commissions and do not necessarily
represent actual transactions:

|               |  |            |       |           |  |   |       | 
|-------------- |  | ---------- | ----- | --------- |  | - | ----- | 
|Quarter Ended  |  | High(1)(2) |       | Low(1)(2)
|December 2002  |  | $          | 18.28 |           |  | $ | 15.14 | 
|September 2002 |  |            | 19.25 |           |  |   | 13.94 | 
|June 2002      |  |            | 16.13 |           |  |   | 11.83 | 
|March 2002     |  |            | 12.00 |           |  |   | 10.67 | 
|               |  |           
|December 2001  |  | $          | 10.89 |           |  | $ | 9.17  | 
|September 2001 |  |            | 11.28 |           |  |   | 7.99  | 
|June 2001      |  |            | 8.67  |           |  |   | 7.30  | 
|March 2001     |  |            | 8.67  |           |  |   | 7.00  | 

As of February 28, 2003, the Company had 642 stockholders of record of its
Common Stock, not including beneficial owners whose shares are held in record
names of brokers or other nominees. The last sales price for the Companys
Common Stock on such date, as quoted on NYSE was $16.4 1 per share.

On June 17, 2002, the Company declared a three-for-two stock split, for
all stockholders of record as of June 28, 2002, distributed on July 10, 2002.
As a result, 20,748,322 shares of common stock were distributed on July 10,
2002.

The Companys cash dividends corresponding to 2002 and 2001 were as
follows:

|                   |  |                    |  |                        
|------------------ |  | ------------------ |  | -----------------------
|RECORD DATE        |  | PAYABLE DATE       |  | AMOUNT PER SHARE(1) (2)
|                   |  |                    |  |                        
|                  
|YEAR 2002          |  |                    |  |                        
|                  
|January 31, 2002   |  | February 15, 2002  |  | $0.01778               
|February 28, 2002  |  | March 15, 2002     |  | 0.01778                
|March 31, 2002     |  | April 15, 2002     |  | 0.01778                
|April 30, 2002     |  | May 15, 2002       |  | 0.01778                
|May 31, 2002       |  | June 15, 2002      |  | 0.01778                
|June 30, 2002      |  | July 15, 2002      |  | 0.01778                
|July 31, 2002      |  | August 15, 2002    |  | 0.01834                
|August 31, 2002    |  | September 15, 2002 |  | 0.01834                
|September 30, 2002 |  | October 15, 2002   |  | 0.01834                
|October 31, 2002   |  | November 15, 2002  |  | 0.01834                
|November 30, 2002  |  | December 13, 2002  |  | 0.01834                
|December 31, 2002  |  | January 15, 2003   |  | 0.01834                
|                   |  |                    |  |                        
|Total              |  |                    |  | $0.22000               
|                   |  |                    |  |                        
|                  
|YEAR 2001          |  |                    |  |                        
|                  
|January 31, 2001   |  | February 15, 2001  |  | $0.01386               
|February 29, 2001  |  | March 15, 2001     |  | 0.01386                
|March 31, 2001     |  | April 15, 2001     |  | 0.01393                
|April 30, 2001     |  | May 15, 2001       |  | 0.01386                
|May 31, 2001       |  | June 15, 2001      |  | 0.01386                
|June 30, 2001      |  | July 15, 2001      |  | 0.01393                
|July 31, 2001      |  | August 15, 2001    |  | 0.01386                
|August 31, 2001    |  | September 15, 2001 |  | 0.01386                
|September 30, 2001 |  | October 15, 2001   |  | 0.01393                
|October 31, 2001   |  | November 15, 2001  |  | 0.01386                
|November 30, 2001  |  | December 15, 2001  |  | 0.01386                
|December 31, 2001  |  | January 15, 2002   |  | 0.01393                
|                   |  |                    |  |                        
|Total              |  |                    |  | $0.16666               
|                   |  |                    |  |                        

28



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##### Table of Contents





| | (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.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Dividend amounts in the table are rounded.                                                                                                                        

Information concerning legal or regulatory restrictions on the payment of
dividends by the Company and Westernbank is contained under the caption
Dividend Restrictionsin Item 1 herein.

The Puerto Rico Internal Revenue Code of 1994, as amended, generally
imposes a withholding tax on the amount of any dividends paid by Puerto Rico
corporations to individuals, whether residents of Puerto Rico or not, trusts,
estates, and special partnerships at a special 10% withholding tax rate.
Dividends distributed by Puerto Rico corporations to foreign corporations or
partnerships not engaged in trade or business in Puerto Rico are also generally
subject to withholding tax at a 10% rate. Prior to the first dividend
distribution for the taxable year, such shareholders may elect to be taxed on
the dividends at the regular rates, in which case the special 10% tax will not
be withheld from such years distributions.

United States citizens who are non-residents of Puerto Rico will not be
subject to Puerto Rico tax on dividends if said individuals gross income from
sources within Puerto Rico during the taxable year does not exceed $1,300 if
single, or $3,000 if married, and form AS 2732 of the Puerto Rico Treasury
Department Withholding Tax Exemption Certificate for the Purpose of Section
1147 is filed with the withholding agent. U.S. income tax law permits a credit
against the U.S. income tax liability, subject to certain limitations, for
certain foreign income taxes paid or deemed paid with respect to such
dividends.

29



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##### Table of Contents



ITEM 6. SELECTED FINANCIAL AND OTHER DATA

The information required by this item is incorporated herein by reference
from the Companys 2002 Annual Report.

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

The information required by this item appears in the MD&A section of the
Companys 2002 Annual Report, which is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The information regarding the market risk of the Company appears in the
MD&A of the Companys 2002 Annual Report, under caption Market Risk, and is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item appears in the Consolidated
Financial Statements in the Companys 2002 Annual Report, and is incorporated
herein by reference. Item 14. Exhibits, Financial Statements Schedules, and
Reports on Form 8-K of this Form 10-K sets forth the listing of all reports
required by this item and included herein.

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

Not applicable.

30



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##### Table of Contents






PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required herein with respect to directors is incorporated
herein by reference from the definitive proxy statement for the Companys
annual meeting of stockholders to be held on May 15, 2003 (the Proxy
Statement) which will be filed with the Securities and Exchange Commission
within 120 days of the Companys 2002 fiscal year end.

ITEM 11. EXECUTIVE COMPENSATION

The information required herein is incorporated by reference from the
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

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 | 
|                                                           |  |                     |           |                     |  |                             |      |                     |  |                      |           | 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required herein is incorporated by reference from the
Proxy Statement.

ITEM 14. CONTROLS AND PROCEDURES

(a)  The Companys management, including the Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Companys disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) (the
Exchange Act) as of a date (the Evaluation Date) within 90 days prior to
the filing date of this report. Based upon that evaluation, the Companys
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that, as of the Evaluation Date, the Companys disclosure controls
and procedures were effective in timely alerting them to any material
information relating to the Company and its subsidiary required to be included
in the Companys Exchange Act filings.

(b)  There were no significant changes made in the Companys internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of the evaluation performed by the Companys
Chief Executive Officer and Chief Financial Officer.

31



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##### Table of Contents






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.
| | --- |  | ---------------

32



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##### Table of Contents





| | (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)                                                                               
|10.3    |  | Employment agreement between Westernbank Puerto Rico
and Mrs. Migdalia Rivera.                                                                                                                                                             
|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).
|10.6    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Andres Morgado.                                                                                                                              
|10.7    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. William Vidal.                                                                                                                               
|10.8    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Ricardo Hernandez.                                                                                                                           
|10.9    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Pedro Dominguez.                                                                                                                             
|10.10   |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Freddy Maldonado.                                                                                                                            
|21.1    |  | Subsidiaries of the Registrant                                                                                                                                                                                                             
|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.                                                                                                                                                                                                                                                                                     

33



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##### Table of Contents






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: March 28, 2003
|                        |  |     |  |                                                                               |  |                     
|                        |  |     |  | Frank C. Stipes, Chairman of the
Board, Chief Executive Officer
and President |  |                     

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|                                                                                                          |  |                     
|--------------------------------------------------------------------------------------------------------- |  | --------------------
|/s/ FRANK C. STIPESFrank C. Stipes,
Chairman of the Board,
Chief Executive Officer and President          |  | Date: March 28, 2003
|                                                                                                         
|/s/ CESAR A. RUIZCesar A. Ruiz, Director                                                                  |  | Date: March 28, 2003
|                                                                                                         
|/s/ PEDRO R. DOMINGUEZPedro R. Dominguez,
Director                                                        |  | Date: March 28, 2003
|                                                                                                         
|/s/ CORNELIUS TAMBOERCornelius Tamboer,
Director                                                          |  | Date: March 28, 2003
|                                                                                                         
|/s/ FREDESWINDA G. FRONTERAFredeswinda G. Frontera,
Directress                                            |  | Date: March 28, 2003
|                                                                                                         
|/s/ FREDDY MALDONADOFreddy Maldonado
Chief Financial Officer and Vice
President of Finance and Investment |  | Date: March 28, 2003

34



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##### Table of Contents






CERTIFICATIONS

I, Frank C. Stipes, certify that:

1.     I have reviewed this annual report on Form 10-K 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: March 28, 2003 |  | By: |  | /s/ Frank C. Stipes    
|                     |  |     |  |                        
|                     |  |     |  | Chief Executive Officer

35



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##### Table of Contents



I, Freddy Maldonado, certify that:

1.     I have reviewed this annual report on Form 10-K 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: March 28, 2003 |  | By: |  | /s/ Freddy Maldonado   
|                     |  |     |  |                        
|                     |  |     |  | Chief Financial Officer

36



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##### Table of Contents






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)                                                                               
|10.3    |  | Employment agreement between Westernbank Puerto Rico
and Mrs. Migdalia Rivera.                                                                                                                                                             
|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).
|10.6    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico and Mr. Andres Morgado.                                                                                                                              
|10.7    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. William Vidal.                                                                                                                               
|10.8    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Ricardo Hernandez.                                                                                                                           
|10.9    |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Pedro Dominguez.                                                                                                                             
|10.10   |  | Payment Agreement in the Event of a Change in Control between Westernbank Puerto Rico
and Mr. Freddy Maldonado.                                                                                                                            
|21.1    |  | Subsidiaries of the Registrant                                                                                                                                                                                                             
|23.1    |  | Independent Auditors Consent                                                                                                                                                                                                              

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