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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   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, 2003 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
(State or Other Jurisdiction of
Incorporation or Organization)
    
    66-0573197
(IRS Employer
Identification No.)
 19 WEST MCKINLEY STREET, MAYAGUEZ, PUERTO RICO
(Address of Principal Executive Offices)
    
    00681
(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)




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7.60% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 2001 SERIES C
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS) 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) 6.70% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 2003 SERIES F
($1.00 PAR VALUE PER SHARE)
(TITLE OF CLASS) 6.90% NONCUMULATIVE, NON-CONVERTIBLE MONTHLY INCOME PREFERRED STOCK, 2003 SERIES G
($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. Yes [ ] No [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b-2 of the Exchange Act).
YES [X] NO [   ] The
aggregate market value of the voting and non-voting stock held by nonaffiliates
of the registrant as of June 30, 2003: was $821,918,122 based upon the reported closing sales
price of $11.06 (as adjusted) on the New York Stock Exchange as of
June 30, 2003. Number of shares of Common Stock
outstanding as of February 27, 2004:   
106,524,975 DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the Registrants Annual Meeting
of Shareholders to be held on May 18, 2004 are incorporated by reference into
Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.




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TABLE OF CONTENTS  FORWARD-LOOKING STATEMENTSPART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERSITEM 6. SELECTED FINANCIAL AND OTHER DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXEX-21.1 SUBSIDIARIES OF THE COMPANYEX-23.1 INDEPENDENT AUDITOR'S CONSENTEX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO    Table of Contents  
 FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K, especially within Managements
Discussion and Analysis of Financial Condition and Results of Operations, will
include forward-looking statements within the meaning of the Securities
Exchange Act of 1934, as amended. In general, the word or phrases will likely
result, are expected to, will continue, is anticipated, estimate,
project, believe or similar expressions are intended to identify
forward-looking statements. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the
adequacy of the allowance for loan losses or an analysis of the interest rate
sensitivity of the Companys assets and liabilities, are inherently based upon
predictions of future events and circumstances. Although the Company makes such
statements based on assumptions which it believes to be reasonable, there can
be no assurance that actual results will not differ materially from the
Companys expectations. Some of the important factors which could cause its
results to differ from any results which might be projected, forecasted or
estimated, based on such forward-looking statements include: (i) general
economic and competitive conditions in the markets in which the Company
operates, and the risks inherent in its operations; (ii) the Companys ability
to manage its credit risk and control its operating expense, increase earning
assets and non-interest income, and maintain its net interest margin; and (iii)
the level of demand for new and existing products. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described in the
forward-looking statements. Except as required by applicable law, the Company
does not intend, and specifically disclaims any obligation, to update
forward-looking statements. 
 PART I 
 ITEM 1. BUSINESS GENERAL W Holding Company, Inc. (the Company) is a financial holding company
offering a full range of financial services. The business of the Company is
conducted primarily through its wholly owned commercial bank subsidiary,
Westernbank Puerto Rico (Westernbank). The Companys other operating
subsidiary is 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 placing property, casualty, life and disability
insurance. The assets, liabilities, revenues and expenses of Westernbank
Insurance Corp. at December 31, 2003 and 2002, and for each of the three years
in the period ended December 31, 2003, were not significant. In July 2000, the Company became a financial holding company under the
Bank Holding Company Act. As a financial holding company, the Company is
permitted to engage in financial related activities, including insurance and
securities activities, provided that the Company and its banking subsidiary
meet certain regulatory standards. The Company is the third largest financial holding company headquartered
in Puerto Rico, as measured by total assets as of December 31, 2003. As of
December 31, 2003, the Company had total assets of $11.52 billion, a net loans
portfolio of $4.68 billion, an investment portfolio of $6.51 billion, deposits
of $5.39 billion, borrowings of $5.23 billion and stockholders equity of
$828.5 million. The Company has improved its efficiency ratio from 47.18% in
1999 to 31.75% for the year ended December 31, 2003. 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
mortgage loans to assets with shorter maturities and greater repricing
flexibility. As of December 31, 2003, commercial loans were $2.80 billion or
58.92% (81.17% collateralized by real estate) and consumer loans were $863.2
million or 18.19% (60.51% collateralized by real estate) of the $4.74 billion
loan portfolio. Investment securities totaled $6.51 billion at December 31,
2003. These loans and securities tend to have shorter maturities and reprice
more rapid 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 83% of its loans
collateralized by real estate as of December 31, 2003. 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 19 full-service branches, called ''Expresso of
Westernbank, denoting the branches emphasis on small, unsecured consumer
loans up to $15,000 and real estate collateralized consumer loans up to
$75,000.




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The Company is focused on the expansion of Westernbank in the San Juan
metropolitan area. We have opened 11 branches in the San Juan metropolitan area
since 1998, including seven Expresso of Westernbank branches in July 2002. In
the first quarter of 2002, Westernbank acquired Westernbank World Plaza
(formerly known as Hato Rey Tower); a 23-story office building that is the
tallest in Puerto Ricos main business district and now serves as the Companys
San Juan metropolitan area headquarters, its regional commercial lending office
and the headquarters for the Westernbank Business Credit and Expresso of
Westernbank divisions. In addition, the Company continues to build upon its
existing platform and further expand its fee-based businesses, including
insurance brokerage, trust services and securities brokerage. Commercial lending, including commercial real estate and asset-based
lending, unsecured business lending and construction lending, generally carry a
greater risk than residential lending because such loans are typically larger
in size and more risk is concentrated in a single borrower. In addition, the
borrowers ability to repay a commercial loan or a construction loan depends,
in the case of a commercial loan, on the successful operation of the business
or the property securing the loan and, in the case of a construction loan, on
the successful completion and sale or operation of the project. Substantially
all of the Companys borrowers and properties and other collateral securing the
commercial, real estate mortgage and consumer loans are located in Puerto Rico.
These loans may be subject to a greater risk of default if the Puerto Rico
economy suffers adverse economic, political or business developments, or if
natural disasters affect Puerto Rico. The Companys financial performance is reported in two primary business
segments, the traditional banking operations of Westernbank Puerto Rico and the
activities of the Banks division known as Westernbank International. Other
operations of the Company not reportable in either segment include Westernbank
Business Credit Division, which specializes in asset-based commercial business
lending; Westernbank Trust Division, which offers trust services; SRG Net,
Inc., which operates an electronic funds transfer network; Westernbank
Insurance Corp., which operates a general insurance agency; Westernbank World
Plaza, Inc., which operates the Westernbank World Plaza, a 23-story office
building located in Hato Rey, Puerto Rico; and the transactions of the parent
company only, which mainly consist of other income related to the equity in the
net income of its two subsidiaries. Separate condensed financial information of
the Parent Company is provided in Note 22 of the Audited Consolidated Financial
Statements. The traditional banking operations of Westernbank Puerto Rico include
retail operations, such as branches, including the branches of the Expresso
division, together with consumer loans, mortgage loans, commercial loans
(excluding the asset-based lending operations) and deposit products. Consumer
loans include loans such as personal, collateralized personal loans, credit
cards, and small loans. Commercial products consist of commercial loans
including commercial real estate, unsecured commercial and construction loans. Westernbank International operates as an International Banking Entity
(IBE) under Puerto Rico Act No. 52, of August 11, 1989, as amended, known as
the International Banking Regulatory Act. Under Puerto Rico tax law, an IBE can
hold non-Puerto Rico assets, and earn interest on these assets, as well as
generate fee income outside of Puerto Rico on a tax-exempt basis. Westernbank
Internationals business activities consist of commercial banking and related
services, and treasury and investment activities outside of Puerto Rico.
Pursuant to the provisions of Act No. 13 of January 8, 2004, for taxable years
commencing after June 30, 2003, an IBE that operates as a unit of a bank under
the Puerto Rico Banking Law will be considered taxable and subject to income
taxes at the current tax rates in the amount by which the IBE net income
exceeds 40% in the first applicable taxable year (2004), 30% in the second year
(2005) and 20% thereafter; of the net taxable income of Westernbank, including
its IBE net taxable income. Westernbanks IBE carries on its books a
significant amount of securities which are indeed tax-exempt by law. Moreover,
Act No. 13 provides that IBEs operating as subsidiaries will continue to be
exempt from the payment of income taxes. Management estimates that the
provisions of this new Act will not have a significant effect in the Companys
result of operations. As of December 31, 2003, 2002 and 2001 and for the years
then ended, substantially all of Westernbank Internationals business
activities have consisted of investment in securities and purchasing of loans.
Note 21 to the Audited Consolidated Financial Statements presents further
information about the Companys business segments. Westernbank seeks to differentiate itself from other banks by focusing on
customer relationships and personalized service, offering customers direct
access to senior management. As part of this strategy, Westernbank strives to
make fast and effective decisions locally. Westernbanks branches offer modern
facilities with advanced technology and remain open to customers for longer
hours compared to many other local banks, with a number of branches offering
both Saturday and Sunday hours. In addition, Westernbank trains its employees
to promote an effective and customer-focused sales culture. Westernbank is one
of the fastest-growing commercial banks in Puerto Rico, increasing both total
assets and loans at an average annual growth rate of over 28.23% for the last
five fiscal years. The Company has achieved this growth while maintaining a
ratio of non-performing loans to total loans of below 1.00%. 3




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Westernbank operates through a network of 51 bank branches, including 19
Expresso of Westernbank branches, located throughout Puerto Rico, and a fully
functional banking site on the Internet. 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 real estate collateralized
consumer loans up to $75,000; Westernbank Trust Division, which offers a full
array of trust services; and Westernbank International Division, which
activities consist of commercial banking and related services, and treasury and
investment activities outside of Puerto Rico. In addition, Westernbank offers a
broad array of fee income products including credit cards, merchant card
services, commercial 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 00681, and the
telephone number is (787) 834-8000, or through the Companys website,
http://www.wholding.com. The information required by Item 101 (b) of
Regulation S-K appears in the
Companys Audited Consolidated Financial Statements, and is incorporated herein by
reference. For information about the geographical areas in which we operate, see
Economic Conditions, Market Area and Competition and is incorporated herein
by reference. Note 21 to the Audited Consolidated Financial
Statements presents further information about the Companys
business segments. LENDING ACTIVITIES GENERAL. At December 31, 2003, Westernbanks net loans amounted to $4.68
billion or 40.65% of total assets. The following table sets forth the composition of Westernbanks loan
portfolio by type of loan at the dates indicated. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Residential real estate:Mortgage
    
    $
    894,007
    
    
    
    19.1
    %
    
    $
    844,803
    
    
    
    22.5
    %
    
    $
    847,462
    
    
    
    29.9
    %
    
    $
    781,213
    
    
    
    35.5
    %
    
    $
    704,718
    
    
    
    37.7
    %Construction
    
    
    202,600
    
    
    
    4.3
    
    
    
    181,266
    
    
    
    4.8
    
    
    
    117,957
    
    
    
    4.2
    
    
    
    80,905
    
    
    
    3.7
    
    
    
    101,979
    
    
    
    5.5Commercial, industrial
and agricultural: (1)Real estate
    
    
    2,261,465
    
    
    
    48.3
    
    
    
    1,461,606
    
    
    
    38.9
    
    
    
    1,115,700
    
    
    
    39.3
    
    
    
    887,084
    
    
    
    40.2
    
    
    
    677,924
    
    
    
    36.3Business and others
    
    
    524,747
    
    
    
    11.2
    
    
    
    570,196
    
    
    
    15.2
    
    
    
    378,696
    
    
    
    13.3
    
    
    
    99,483
    
    
    
    4.5
    
    
    
    79,343
    
    
    
    4.2Consumer and others (2)
    
    
    861,907
    
    
    
    18.4
    
    
    
    743,600
    
    
    
    19.8
    
    
    
    416,953
    
    
    
    14.7
    
    
    
    383,903
    
    
    
    17.4
    
    
    
    329,682
    
    
    
    17.6Total loans
    
    
    4,744,726
    
    
    
    101.3
    
    
    $
    3,801,471
    
    
    
    101.3
    
    
    $
    2,876,768
    
    
    
    101.4
    
    
    $
    2,232,588
    
    
    
    101.3
    
    
    $
    1,893,646
    
    
    
    101.3Allowance for loan losses
    
    
    (61,608
    )
    
    
    (1.3
    )
    
    
    (47,114
    )
    
    
    (1.3
    )
    
    
    (38,364
    )
    
    
    (1.4
    )
    
    
    (28,928
    )
    
    
    (1.3
    )
    
    
    (23,978
    )
    
    
    (1.3
    )Loan - net
    
    $
    4,683,118
    
    
    
    100.0
    %
    
    $
    3,754,357
    
    
    
    100.00
    %
    
    $
    2,838,404
    
    
    
    100.00
    %
    
    $
    2,203,660
    
    
    
    100.00
    %
    
    $
    1,869,668
    
    
    
    100.00
    %
  (1)
    
    Includes $641.1 million, $427.7 million and $255.8 million of Westernbank Business Credit division outstanding loans
at December 31, 2003, 2002 and 2001, respectively. Westernbank Business Credit began operations in 2001.  (2)
    
    Includes $155.6 million and $117.4 million of the Expresso of Westernbank division outstanding loans at December 31,
2003 and 2002, respectively. The Expresso of Westernbank began operations on July 10, 2002. Residential real estate mortgage loans at December 31, 2003, are mainly
comprised of loans secured by first mortgages on one-to-four family residential
properties. At December 31, 2003, residential mortgage loans included $19.1
million of mortgages insured or guaranteed by government agencies of the United
States or Puerto Rico. Westernbank originated $1.01 billion of commercial real estate loans,
including asset-based and constructions loans, during the year ended December
31, 2003. At December 31, 2003, commercial real estate loans totaled $2.26
billion. In general, commercial real estate loans are considered by management
to be of somewhat greater risk of uncollectibility than residential lending
because such loans are typically larger in 4




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size and more risk is concentrated
in a single borrower. In addition, the borrowers ability to
repay a commercial
loan or a construction loan depends, in the case of a commercial loan, on the
successful operation of the business or the property securing the loan and, in
the case of a construction loan, on the successful completion and sale or
operation of the project. Substantially all of the Companys borrowers and
properties and other collateral securing the commercial, real estate mortgage
and consumer loans are located in Puerto Rico. These loans may be subject to a
greater risk of default if the Puerto Rico economy suffers adverse economic,
political or business developments, or if natural disasters affect Puerto Rico.
At December 31, 2003, the Company maintained its status as a secured lender,
with approximately 83% of its loans collateralized by real estate. The portfolio of Consumer and Other loans at December 31, 2003, consisted
of consumer loans of $861.9 million, of which $521.6 million are secured by
real estate, $340.4 million are unsecured consumer loans (including $142.7
million of the Expresso of Westernbank division loan portfolio, credit card
loans of $54.8 million and loans secured by deposits in Westernbank totaling
$30.8 million). During 2003, Westernbank securitized $13.9 million and $8.6 million of
residential mortgage loans into Government National Mortgage Association and
Fannie Mae participation certificates, respectively. Westernbank continues to
service outstanding loans which are securitized. The following table summarizes the contractual maturities of Westernbanks
total loans for the periods indicated as of December 31, 2003. Contractual
maturities do not necessarily reflect the actual term of a loan, including
prepayments. MaturitiesAfter one year to five years
    
    After five years(In thousands)Balanceoutstanding at
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fixed
    
    VariableDecember 31,
    
    One year or
    
    Fixed interest
    
    Variable
    
    interest
    
    interest2003
    
    less
    
    rates
    
    interest rates
    
    rates
    
    ratesResidential real estate:Mortgage
    
    $
    894,007
    
    
    $
    8,751
    
    
    $
    15,178
    
    
    $
    185
    
    
    $
    298,409
    
    
    $
    571,484Construction
    
    
    202,600
    
    
    
    141,604
    
    
    
    
    
    
    
    60,996
    
    
    
    
    
    
    
    Commercial, industrial
and agricultural:Real estate
    
    
    2,261,465
    
    
    
    707,863
    
    
    
    136,563
    
    
    
    194,505
    
    
    
    42,808
    
    
    
    1,179,726Business and others
    
    
    524,747
    
    
    
    398,716
    
    
    
    20,511
    
    
    
    14,445
    
    
    
    5,212
    
    
    
    85,863Consumer and others
    
    
    861,907
    
    
    
    110,122
    
    
    
    213,224
    
    
    
    
    
    
    
    538,561
    
    
    
    Total
    
    $
    4,744,726
    
    
    $
    1,367,056
    
    
    $
    385,476
    
    
    $
    270,131
    
    
    $
    884,990
    
    
    $
    1,837,073
 ORIGINATION, PURCHASE AND SALE OF LOANS. Westernbank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. Westernbank originates loans in accordance with written,
non-discriminatory underwriting standards and loan origination procedures
prescribed in the Board of Directors approved loan policies. Detailed loan
applications are obtained to determine the borrowers repayment ability.
Applications are verified through the use of credit reports, financial
statements and other confirmation procedures. Property valuations by Board of
Directors approved independent appraisers are required for mortgage and all
real estate loans. Westernbanks Credit Committee approval is required for all
residential and commercial real estate loans originated up to $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 Westernbanks policy to require borrowers to provide title insurance
policies certifying or ensuring that Westernbank 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 Westernbank makes disbursements for
items such as real estate taxes, hazard insurance premiums and private mortgage
insurance premiums as they fall due. 5




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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 Westernbank 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%. Westernbank 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. In addition to its residential loan originations, Westernbank also
purchases residential first mortgage loans from other mortgage originators in
Puerto Rico. Those loans are purchased at floating rates based on a negotiated
spread over the three-month LIBOR rate. During the year ended December 31,
2003, Westernbank purchased $328.8 million of such loans. Westernbank originates primarily variable and adjustable rate commercial
business and real estate loans. Westernbank also makes real estate construction
loans subject to firm permanent financing commitments. As of December 31, 2003,
Westernbanks commercial loan portfolio had a total delinquency ratio,
including the categories of 60 days and over, of 0.84% (less than 1%), compared
to 0.33% (less than 1%) at December 31, 2002. For further explanation on the
increase in the delinquency ratio of the Companys commercial loan portfolio
refer to section Non-performing Loans and Foreclosed Real Estate Held for
Sale on page 8. Westernbank 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 Westernbank there are various types of secured and
unsecured consumer loans with varying amortization schedules. In addition,
Westernbank makes fixed-rate residential second mortgage loans. In July 2002,
Westernbank launched a new division focused on offering consumer loans through
19 full-service branches, called Expresso of Westernbank, denoting the
branches emphasis on small, unsecured consumer loans up to $15,000 and real
estate collateralized consumer loans up to $75,000. Westernbank offers the service of VISA and Master Card  credit cards. At
December 31, 2003, there were approximately 25,901 outstanding accounts, with
an aggregate outstanding balance of $54.8 million and unused credit card lines
available of $81.5 million. In connection with all consumer and second mortgage loans originated,
Westernbank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,
2003, Westernbanks consumer loan portfolio, including the Expresso of
Westernbank loan portfolio, had a total delinquency ratio, including the
categories of 60 days and over, of 0.89% (less than 1%), compared to 0.59%
(less than 1%) at December 31, 2002. The increase in the delinquency ratio from
2002 to 2003 reflects the delinquencies of the Expresso of Westernbank loan
portfolios, which is principally composed of small unsecured personal loans and
have expected higher delinquency and charge-offs. INCOME FROM LENDING ACTIVITIES. Westernbank realizes interest income and
fee income from its lending activities. For the most part, interest rates
charged by Westernbank on loans depend upon the general interest rate
environment, the demand for loans and the availability of funds. Westernbank
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. Westernbank accounts for loan
origination and commitment fees based on the provisions of Financial Accounting
Standards Board Statement (FASB) 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 the provisions of Statement of Financial Accounting
Standards Board Statement (SFAS) No. 140, Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities, an Amendment
of FASB Statement No. 65, Westernbank recognizes as separate assets the rights
to service mortgage loans for others, regardless of how those servicing rights
are acquired. SFAS No. 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, Westernbank 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 normal collection
procedures, it 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 Westernbank may
acquire the property. Thereafter, if Westernbank acquires the property, such
acquired property is appraised and included in the foreclosed real estate held
for sale account at the fair value at the date of acquisition. Then this asset
is carried at 6




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##### Table of Contents



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. The following table sets forth information regarding non-performing loans
and foreclosed real estate held for sale by Westernbank at the dates indicated: December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Residential real estate mortgage and construction loans
    
    $
    2,259
    
    
    $
    2,026
    
    
    $
    2,735
    
    
    $
    1,817
    
    
    $
    1,719Commercial, industrial and agricultural loans
    
    
    24,142
    
    
    
    13,567
    
    
    
    7,947
    
    
    
    6,140
    
    
    
    4,366Consumer loans
    
    
    4,845
    
    
    
    3,812
    
    
    
    3,431
    
    
    
    1,733
    
    
    
    870Total non-performing loans
    
    
    31,246
    
    
    
    19,405
    
    
    
    14,113
    
    
    
    9,690
    
    
    
    6,955Foreclosed real estate held for sale
    
    
    4,082
    
    
    
    3,679
    
    
    
    3,013
    
    
    
    2,454
    
    
    
    2,232Total non-performing loans and foreclosed real estate held for sale
    
    $
    35,328
    
    
    $
    23,084
    
    
    $
    17,126
    
    
    $
    12,144
    
    
    $
    9,187Interest that would have been recorded if the
loans had not been classifiedas non-performing
    
    $
    2,500
    
    
    $
    1,102
    
    
    $
    1,123
    
    
    $
    979
    
    
    $
    514Interest recorded on non-performing loans
    
    $
    583
    
    
    $
    775
    
    
    $
    1,716
    
    
    $
    780
    
    
    $
    1,470Total non-performing loans as a percentage
of loans receivable (1)
    
    
    0.66
    %
    
    
    0.51
    %
    
    
    0.49
    %
    
    
    0.43
    %
    
    
    0.37
    %Total non-performing loans and foreclosed real estate
held for sale as apercentage of total assets (2)
    
    
    0.31
    %
    
    
    0.28
    %
    
    
    0.29
    %
    
    
    0.28
    %
    
    
    0.27
    %
   (1)
    
    Computed using end of period loans.(2)
    
    Computed using end of period assets. The increase in non-performing loans from 2002 to 2003 is mostly
attributed to eight commercial loans with principal balances of $1.6 million,
$1.5 million, $1.1 million and $1.0 million, and four other loans with
outstanding principal balances below $1.0 million, all of which are
collateralized by real estate properties. At December 31, 2003, two of these
loans with outstanding balances of $1.1 million and $695,000, required a
specific valuation allowance of $277,000 and $201,000, respectively. At
December 31, 2003, the allowance for possible loan losses was 197.17% of total
non-performing loans (reserve coverage). The increase in non-performing loans 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 were
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). 7




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##### Table of Contents



ALLOWANCE FOR LOAN LOSSES. Westernbank 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 our 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 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 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. 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 non-performing loans expected to result from existing
conditions, collateral values, loan volumes and concentrations, seasoning of
the loan 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, 2003, the allowance for loan losses was $61.6 million,
consisting of $53.9 million formula allowance, $5.4 million of specific
allowances and $2.3 million of unallocated allowance. As of December 31, 2003,
the allowance for loan losses equals 1.30% of total loans, and 197.17% of total
non-performing loans, compared with an allowance for loan losses at December
31, 2002, of $47.1 million, or 1.24% of total loans, and 242.80% of total
non-performing loans. 8




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##### Table of Contents



As of December 31, 2003, 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. The table below presents a reconciliation of changes in the allowance for loan
losses for the periods indicated: YEAR ENDED DECEMBER 31,2003
    
    2002
    
    
    
    
    
    2001
    
    2000
    
    1999(Dollars in thousands)Balance, beginning of year
    
    $
    47,114
    
    
    $
    38,364
    
    
    
    
    
    
    $
    28,928
    
    
    $
    23,978
    
    
    $
    15,800Loans charged-off:Consumer loans (1)
    
    
    12,203
    
    
    
    4,576
    
    
    
    
    
    
    
    3,840
    
    
    
    4,760
    
    
    
    5,154Commercial, industrial and agricultural loans
    
    
    2,479
    
    
    
    3,389
    (2,3
    )
    
    
    
    
    
    2,970
    
    
    
    372
    
    
    
    1,913Real estate-mortgage and
construction loans
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    231
    
    
    
    291Total loans charged-off
    
    
    14,866
    
    
    
    7,965
    
    
    
    
    
    
    
    7,038
    
    
    
    5,363
    
    
    
    7,358Recoveries of loans previously
charged-off:Consumer loans
    
    
    799
    
    
    
    858
    
    
    
    
    
    
    
    996
    
    
    
    795
    
    
    
    1,003Commercial, industrial and agricultural loans
    
    
    1,141
    
    
    
    584
    
    
    
    
    
    
    
    133
    
    
    
    594
    
    
    
    335Real estate-mortgage and
construction loans
    
    
    372
    
    
    
    190
    
    
    
    
    
    
    
    175
    
    
    
    224
    
    
    
    198Total recoveries of loans previously charged-off
    
    
    2,312
    
    
    
    1,632
    
    
    
    
    
    
    
    1,304
    
    
    
    1,613
    
    
    
    1,536Net loans charged-off
    
    
    12,554
    
    
    
    6,333
    
    
    
    
    
    
    
    5,734
    
    
    
    3,750
    
    
    
    5,822Provision for loan losses
    
    
    27,048
    
    
    
    15,083
    
    
    
    
    
    
    
    12,278
    
    
    
    8,700
    
    
    
    14,000Allowance acquired on loans purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,892
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    61,608
    
    
    $
    47,114
    
    
    
    
    
    
    $
    38,364
    
    
    $
    28,928
    
    
    $
    23,978Ratios:Allowance for loan losses to total end of year loans
    
    
    1.30
    %
    
    
    1.24
    %
    
    
    
    
    
    
    1.33
    %
    
    
    1.29
    %
    
    
    1.26
    %Provision for loan losses to net loans
charged-off
    
    
    215.45
    %
    
    
    238.17
    %
    
    
    
    
    
    
    214.13
    %
    
    
    232.00
    %
    
    
    240.47
    %Recoveries of loans to loans charged-off in
previous period
    
    
    29.03
    %
    
    
    23.19
    %
    
    
    
    
    
    
    24.31
    %
    
    
    21.92
    %
    
    
    36.36
    %Net loans charged-off to average loans (4)
    
    
    0.29
    %
    
    
    0.19
    %
    
    
    
    
    
    
    0.23
    %
    
    
    0.19
    %
    
    
    0.35
    %Allowance for loans losses to
non-performing loans
    
    
    197.17
    %
    
    
    242.80
    %
    
    
    
    
    
    
    271.83
    %
    
    
    298.53
    %
    
    
    344.76
    %
   (1)
    
    Includes $7.9 million and $62,000 of Expresso of Westernbank charged-offs, for the
years ended December 31, 2003 and 2002, respectively. The Expresso of Westernbank
began operations in July 10, 2002.(2)
    
    Includes $505,000 of Westernbank Business Credit division, consisting of one loan
originally acquired in the purchased loan portfolio from Congress Credit Corporation,
a subsidiary of First Union National Bank N.A on June 15, 2001. This loan was fully
reserved at the acquisition date.(3)
    
    Includes $1,100,000, consisting of one loan fully collateralized by real estate and charged-off
for regulatory purposes.(4)
    
    Average loans were computed using beginning and
ending balances. 9




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##### Table of Contents



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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Commercial, industrial and
agricultural loans (1)
    
    $
    41,400
    
    
    
    58.7
    %
    
    $
    31,671
    
    
    
    53.3
    %
    
    $
    24,397
    
    
    
    51.8
    %
    
    $
    16,273
    
    
    
    44.1
    %
    
    $
    11,772
    
    
    
    39.9
    %Consumer loans (2)
    
    
    17,472
    
    
    
    18.2
    
    
    
    12,004
    
    
    
    19.5
    
    
    
    8,203
    
    
    
    14.5
    
    
    
    7,194
    
    
    
    17.2
    
    
    
    5,718
    
    
    
    17.4Residential real estate mortgage
and construction loans
    
    
    415
    
    
    
    23.1
    
    
    
    443
    
    
    
    27.2
    
    
    
    494
    
    
    
    33.7
    
    
    
    526
    
    
    
    38.7
    
    
    
    1,743
    
    
    
    42.7Unallocated allowance
    
    
    2,321
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    5,270
    
    
    
    
    
    
    
    4,935
    
    
    
    
    
    
    
    4,745
    
    
    
    Total allowance for loan losses
    
    $
    61,608
    
    
    
    100.0
    %
    
    $
    47,114
    
    
    
    100.0
    %
    
    $
    38,364
    
    
    
    100.0
    %
    
    $
    28,928
    
    
    
    100.0
    %
    
    $
    23,978
    
    
    
    100.00
    %
   (1)
    
    Includes $6.6 million, $4.5 million and $3.1 million of Westernbank Business Credit loans at December 31, 2003, 2002 and 2001, respectively.
Westernbank Business Credit began operations in 2001.(2)
    
    Includes $10.0 million and $1.5 million of Expresso of Westernbank loans portfolio at December 31, 2003 and 2002, respectively. The Expresso
of Westernbank began operations in July 10, 2002. Loans are classified as impaired or not impaired in accordance with SFAS
No. 114. A loan is impaired when, based on current information and events, it
is probable Westernbank will be unable to collect the scheduled payments of
principal or interest when due, according to the contractual terms of the
agreement. Westernbank 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: 2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Investment in impaired loans:Covered by a valuation allowance
    
    $
    28,217
    
    
    $
    26,074
    
    
    $
    21,996
    
    
    $
    8,040
    
    
    $
    8,136Do not require a valuation allowance
    
    
    22,088
    
    
    
    24,515
    
    
    
    20,482
    
    
    
    4,834
    
    
    
    4,947Total
    
    $
    50,305
    
    
    $
    50,589
    
    
    $
    42,478
    
    
    $
    12,874
    
    
    $
    13,083Valuation allowance for impaired loans
    
    $
    4,646
    
    
    $
    4,752
    
    
    $
    4,181
    
    
    $
    1,157
    
    
    $
    1,268Average investment in impaired loans
    
    $
    46,676
    
    
    $
    46,147
    
    
    $
    20,293
    
    
    $
    11,873
    
    
    $
    14,919Interest collected in impaired loans
    
    $
    2,452
    
    
    $
    4,041
    
    
    $
    1,716
    
    
    $
    780
    
    
    $
    1,470
 At December 31, 2003, Westernbanks investment in impaired loans remained
relatively stable when compared to year 2002, although the loans comprising the
balance may have changed. At December 31, 2002, Westernbank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 were collateralized by real estate and required a combined
valuation allowance of $823,000. 10




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##### Table of Contents



INVESTMENT ACTIVITIES The Company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 asset-backed securities, Puerto
Rico and U.S. Government and agency obligations, municipal securities rated A
or better by any of the nationally recognized rating agencies and commercial
paper rated P-1 by Moodys Investors Service, Inc. or A-1 by Standard and
Poors, a Division of the McGraw-Hill Companies, Inc. In addition, the
Investment Department is responsible for the pricing and sale of deposits and
securities sold under agreements to repurchase. See Sources of Funds-Deposits
and Borrowings and Equity Risk Investments. At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity; trading; or available for sale.
At each reporting date, the appropriateness of the classification is
reassessed. Investments in debt securities for which management has the
positive intent and ability to hold to maturity are classified as held to
maturity and stated at cost increased by accretion of discounts and reduced by
amortization of premiums, both computed by the interest method. Securities that
are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Securities
not classified as either held to maturity or trading are classified as
available for sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, as a component of accumulated
other comprehensive income (loss) until realized. Gains and losses on sales of
securities are determined using the specific-identification method. The Companys investment strategy is affected by both the rates and terms
available on competing investments and tax and other legal considerations. The following table presents the carrying value of investments as of year
end for each of the years indicated: 2003
    
    2002
    
    2001(IN THOUSANDS)Held to maturity:US Government and agency obligations
    
    $
    4,463,493
    
    
    $
    2,671,344
    
    
    $
    1,788,000Puerto Rico Government and agency obligations
    
    
    34,500
    
    
    
    19,695
    
    
    
    22,607Commercial paper
    
    
    174,976
    
    
    
    74,997
    
    
    
    59,992Corporate notes
    
    
    51,409
    
    
    
    66,697
    
    
    
    66,460Mortgage and asset-backed securities
    
    
    999,332
    
    
    
    668,324
    
    
    
    432,716Total
    
    
    5,723,710
    
    
    
    3,501,057
    
    
    
    2,369,775Available for sale:US Government and agency obligations
    
    
    
    
    
    
    
    
    
    
    196,446Corporate notes
    
    
    
    
    
    
    10,381
    
    
    
    56,080Collateralized mortgage obligations
    
    
    49,910
    
    
    
    145,276
    
    
    
    29,156Other investments
    
    
    5,170
    
    
    
    5,230
    
    
    
    Total
    
    
    55,080
    
    
    
    160,887
    
    
    
    281,682Trading securities - mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    4,609Total investments
    
    $
    5,778,790
    
    
    $
    3,661,944
    
    
    $
    2,656,066
 At December 31, 2003, no investment of a single issuer (in aggregate
balance) exceeded 10% of the consolidated stockholders equity. 11




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##### Table of Contents



The carrying amount of investment securities at December 31, 2003, by
contractual maturity (excluding mortgage and asset-backed securities),
are shown below: Carrying
    
    Weightedamount
    
    average yield(Dollars in thousands)US Government and agencies obligations:Due within one year
    
    $
    
    
    
    
    
    %Due after one year through five years
    
    
    934,549
    
    
    
    3.65Due after five years through ten years
    
    
    3,528,944
    
    
    
    4.06Due after ten years
    
    
    
    
    
    
    4,463,493
    
    
    
    3.97Puerto Rico Government and agencies obligations:Due within one year
    
    
    
    
    
    
    Due after one year through five years
    
    
    17,700
    
    
    
    6.00Due after five years through ten years
    
    
    15,450
    
    
    
    4.22Due after ten years
    
    
    1,350
    
    
    
    6.1534,500
    
    
    
    5.21Other:Due within one year
    
    
    174,976
    
    
    
    1.09Due after one year through five years
    
    
    29,987
    
    
    
    2.71Due after five years through ten years
    
    
    
    
    
    
    Due after ten years
    
    
    26,592
    
    
    
    8.07231,555
    
    
    
    2.10Total
    
    
    4,729,548
    
    
    
    3.89Mortgage and asset-backed securities
    
    
    1,049,242
    
    
    
    4.31Total
    
    $
    5,778,790
    
    
    
    3.97
    %
 Mortgage and other asset-backed securities at December 31, 2003 and 2002,
consists of: 2003
    
    2002(In Thousands)Available for sale - Collateralized Mortgage Obligations (CMOs) certificates
    
    $
    49,910
    
    
    $
    145,276Held to maturity:Federal Home Loan Mortgage Corporation (FHLMC) certificates
    
    
    7,297
    
    
    
    10,435Government National Mortgage Association (GNMA) certificates
    
    
    9,753
    
    
    
    13,657Federal National Mortgage Association (FNMA) certificates
    
    
    4,542
    
    
    
    6,906CMO certificates
    
    
    969,898
    
    
    
    565,068Other
    
    
    7,842
    
    
    
    72,258Total held to maturity
    
    
    999,332
    
    
    
    668,324Total mortgage and asset-backed securities
    
    $
    1,049,242
    
    
    $
    813,600
 12




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##### Table of Contents



The Companys investment portfolio at December 31, 2003 had an average
contractual maturity of 63 months, when compared to an average maturity of 50
months at December 31, 2002. The Companys interest rate risk model takes into
consideration the callable feature of certain investment securities. Given the
present interest rate scenario, and taking into consideration the callable
features of these securities, the Companys investment portfolio as of December
31, 2003, had a remaining average contractual maturity of 8 months. However,
no assurance can be given that such levels will be maintained in future
periods. The Company evaluates its investment securities for other than temporary
impairment on a quarterly basis or earlier if other factors indicative of
potential impairment exist. An impairment charge in the consolidated statements
of income is recognized when the decline in the fair value of the securities
below their cost basis is judged to be other-than-temporary. The Company
considers various factors in determining whether it should recognize an
impairment charge, including, but not limited to the length of time and extent
to which the fair value has been less than its cost basis, expectation of
recoverability of its original investment in the securities, the employment of
a systematic methodology that considers available evidence in evaluating
potential impairment, available secondary market prices from broker/dealers,
and the Companys intention and ability to hold the securities for a period of
time sufficient to allow for any anticipated recovery in fair value. In applying the foregoing analysis, management concluded that at March 31,
2003, its investments in corporate bond and loan obligations (CBOs and
CLOs) were other-than-temporary impaired. First, two tranches of a CBO with
an amortized cost of $13.0 million were downgraded by two different rating
agencies on April 3 and 15, 2003. Second, the available secondary market prices
for those two securities and the remaining portfolio of CBOs and CLOs with a
carrying value of $56.0 million continued to deteriorate. In line with such
decline, management concluded, based on these facts and the secondary market
prices that a $15.7 million other than temporary impairment write-down was
warranted. The same was recorded effective for the quarterly period ended March
31, 2003. In connection with the write-down, and in accordance with applicable
accounting pronouncements, management also reassessed its intent to hold to
maturity and reclassified the securities related to the CBO that were
downgraded as available for sale as of March 31, 2003. As of March 31, 2003,
there were no defaults within the securities portfolio underlying the CBOs and
CLOs. During the quarter ended June 30, 2003, the Company, based upon additional
information available from trustees, further downgradings, a default on the
scheduled interest payment of a CBO and further declines in quoted market
prices for such investments, reclassified the remaining portfolio of CBOs and
CLOs to available for sale and subsequently on June 6, 2003 sold its entire
portfolio of CBOs and CLOs. The sale of the portfolio, with an original total
investment of $62.9 million and adjusted to a fair value of $45.4 million as of
March 31, 2003, was completed at a loss of $7.0 million recorded during the
quarter ended June 30, 2003. As of December 31, 2003 and 2002, management concluded that there was no
other than temporary impairment on its investment securities portfolio. SOURCES OF FUNDS GENERAL. Deposits, securities sold under agreements to repurchase, Federal
Home Loan Bank (FHLB) advances and lines of credit are the primary sources of
Westernbanks funds for use in lending and for other general business purposes.
In addition, Westernbank 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
securities sold under agreements to repurchase 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. Westernbank offers a diversified choice of deposit accounts.
Savings deposits increased from $560.5 million as of December 31, 2002, to
$692.2 million as of December 31, 2003, an increase of $131.7 million or
23.48%. Also, other deposits represented mainly by time deposits, brokered
deposits and Individual Retirement Account deposits (IRAs), increased from
$3.74 billion as of December 31, 2002, to $4.69 billion as of December 31,
2003, an increase of $955.1 million or 25.55%. Other deposits include brokered
deposits amounting to $3.51 billion and $2.55 billion as of December 31, 2003
and 2002, respectively. These accounts have historically been a stable source
of funds. 13




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##### Table of Contents



At December 31, 2003, Westernbank had total deposits of $5.39 billion, of
which $692.2 million or 12.85% consisted of savings deposits, $246.5 million or
4.58% consisted of interest bearing demand deposits, $192.8 million or 3.58%
consisted of noninterest bearing deposits and $4.23 billion or 78.55% consisted
of time deposits. Westernbank also offers negotiable order of withdrawal
(NOW) accounts, Super Now accounts, special checking accounts and commercial
demand accounts. At December 31, 2003, the scheduled maturities of time deposits in amounts
of $100,000 or more are as follows: (In thousands)3 months or less
    
    $
    143,790over 3 months through 6 months
    
    
    32,179over 6 months through 12 months
    
    
    34,184over 12 months
    
    
    63,250Total
    
    $
    273,403
 The following table sets forth the average amount and the average rate
paid on the following deposit categories for the years ended December 31: 2003
    
    2002
    
    2001Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    Averageamount
    
    rate
    
    amount
    
    rate
    
    amount
    
    rate(Dollars in thousands)Time deposits
    
    $
    3,775,263
    
    
    
    2.59
    %
    
    $
    2,889,649
    
    
    
    3.40
    %
    
    $
    2,177,399
    
    
    
    5.21
    %Savings deposits
    
    
    605,854
    
    
    
    2.15
    %
    
    
    509,114
    
    
    
    2.46
    %
    
    
    432,626
    
    
    
    2.96
    %Interest bearing demand
deposits
    
    
    160,015
    
    
    
    2.55
    %
    
    
    124,127
    
    
    
    2.90
    %
    
    
    100,960
    
    
    
    3.45
    %Noninterest bearing demand
deposits
    
    
    227,358
    
    
    
    
    
    
    
    167,352
    
    
    
    
    
    
    
    136,251
    
    
    
    Total
    
    $
    4,768,490
    
    
    
    2.41
    %
    
    $
    3,690,242
    
    
    
    3.10
    %
    
    $
    2,847,236
    
    
    
    4.55
    %
 The increase in deposits during the last three years is primarily the
result of the increase in the volume of business. BORROWINGS. The following table sets forth the borrowings of Westernbank
at the dates indicated: 2003
    
    2002
    
    2001(In thousands)Securities sold under agreements to repurchase
    
    $
    5,046,045
    
    
    $
    3,097,341
    
    
    $
    2,059,646Advances from Federal Home Loan Bank (FHLB)
    
    
    146,000
    
    
    
    120,000
    
    
    
    120,000Term notes
    
    
    
    
    
    
    
    
    
    
    43,000Mortgage note payable
    
    
    37,234
    
    
    
    37,822
    
    
    
    Total
    
    $
    5,229,279
    
    
    $
    3,255,163
    
    
    $
    2,222,646
 Westernbank has made use of institutional securities sold under agreements
to repurchase in order to obtain funding, primarily through investment banks
and brokerage firms. Securities sold under agreements to repurchase are
collateralized with investment securities. Westernbank had $5.05 billion in
securities sold under agreements to repurchase outstanding at December 31,
2003, at a weighted average rate of 2.36%. Securities sold under agreements to
repurchase outstanding as of December 31, 2003, mature as follows: $672.9
million within 30 days; $1.29 billion in 2004; $1.27 billion in 2005; $724.9
million in 2006, $73.4 million in 2007; and $1.02 billion thereafter. Westernbank also obtains advances from FHLB of New York. As of December
31, 2003, Westernbank had $146.0 million in outstanding FHLB advances at a
weighted average rate of 4.06%. Advances from FHLB mature as follows: $40.0
million within 30 days; $14.0 million in 2005; $50.0 million in 2006; and $42.0
million after 2008. 14




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##### Table of Contents



At December 31, 2003, Westernbank World Plaza, Inc., a wholly-owned
subsidiary of Westernbank Puerto Rico, had outstanding $37.2 million of a
mortgage note, at a fixed interest rate of 8.05% per year up to September 11,
2009. Subsequent to September 11, 2009, the mortgage note will bear interest on
the then outstanding principal balance at a rate per year equal to the (1)
greater of 13.05% or the Treasury Rate plus five percentage points or (2)
10.05%, depending on the fulfillment of 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. The following table presents certain information regarding Westernbanks
short-term borrowings for the periods indicated. 2003
    
    2002
    
    2001(Dollars in thousands)Amount outstanding at period end
    
    $
    1,964,641
    
    
    $
    1,043,493
    
    
    $
    806,548Monthly average outstanding balance
    
    
    1,267,234
    
    
    
    1,378,074
    
    
    
    353,003Maximum outstanding balance at any month end
    
    
    2,147,934
    
    
    
    2,104,599
    
    
    
    806,548Weighted average interest rate:For the year
    
    
    1.24
    %
    
    
    1.51
    %
    
    
    2.18
    %At year end
    
    
    1.31
    %
    
    
    1.96
    %
    
    
    3.73
    %
 FINANCIAL INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS. As part of the Companys
asset/liability management, Westernbank 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) hedge of the
exposure to variability of cash flows of a recognized asset, liability or
forecasted transaction (cash flow hedge) or (c) hedge of foreign currency
exposure (foreign currency hedge). In the case of a qualifying fair value hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in
current period earnings along with the change in value of the designated hedged
item. In the case of a qualifying cash flow hedge, changes in the value of the
derivative instruments that have been highly effective are recognized in other
comprehensive income, until such time those earnings are affected by the
variability of the cash flows of the underlying hedged item. In either a fair
value hedge or a cash flow hedge, net earnings may be impacted to the extent
the changes in the value of the derivative instruments do not perfectly offset
changes in the value of the 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
bifurcated and carried at fair value. 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. 15




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##### Table of Contents



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 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 to convert its
fixed-rate certificates of deposit (liabilities) to a variable rate, and to
convert certain equity linked deposits 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 the Companys fixed-rate
certificates of deposit (liabilities) to a variable rate mature between one to
twenty years with a right by the counterparty to call after the first
anniversary. The Company has an identical right to call the certificates of
deposit. In addition, the Company offers its customers certificates of deposit
which contain an embedded derivative tied to the performance of Standard &
Poors 500 Composite Stock Index which is bifurcated from the host deposit and
recognized in the statement of financial condition in accordance with SFAS No.
133. At the end of five years, the depositor will receive a specified percent
of the average increase of the month-end value of the stock index. If such
index decreases, the depositor receives the principal without any interest. The
Company uses interest rate swap and option agreements with major broker dealer
companies to manage its exposure to the stock market. Under the terms of the
swap agreements, the Company will receive the average increase in the month-end
value of the index in exchange for a quarterly fixed interest cost. Under the
option agreements, the Company also will receive the average increase in the
month-end value of the index but in exchange for the payment of a premium when
the contract is initiated. Since the embedded derivative instrument of the
certificates of deposit and the interest rate swap and option agreements do not
qualify for hedge accounting, these derivative instruments are marked to market
through earnings. Interest rate options 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 to receive the average
increase of the month-end value of the stock index at a predetermined date 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 or index, 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 Company enters into off-balance-sheet financial instruments consisting of
commitments to extend credit, commitments under credit-card arrangements,
commercial letters of credit and commitments to purchase loans. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received. Westernbank 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, 2003, 2002 and 2001, Westernbank
did not record any loss allowances in connection with risks involved in other
off-balance sheet instruments. At December 31, 2003 and 2002, there were no
additional off-balance sheet instruments other than those mentioned above. 16




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##### Table of Contents



YIELDS EARNED AND RATES PAID The net income of Westernbank 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, 2003, was $239.3 million, an increase of $73.0
million or 43.88%, from $166.3 million in 2002. The increase in 2003 was the
result of increases in interest income from loans, investment securities and
money market instruments, which was partially offset by increases in interest
expense on deposits and securities sold under agreements to repurchase. For the
year ended December 31, 2002, net interest income reached $166.3 million,
compared to $125.1 million reported in 2001, an increase of $41.3 million or
32.99%. 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 on securities sold under
agreements to repurchase. 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 monthly 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 for investment securities
available for sale. YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    AverageInterest
    
    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)
    
    $
    275,848
    
    
    $
    4,278,468
    
    
    
    6.45
    %
    
    $
    220,676
    
    
    $
    3,315,514
    
    
    
    6.66
    %
    
    $
    207,385
    
    
    $
    2,534,486
    
    
    
    8.18
    %Mortgage and asset-backed securities (3)
    
    
    40,140
    
    
    
    998,257
    
    
    
    4.02
    %
    
    
    44,848
    
    
    
    859,991
    
    
    
    5.21
    %
    
    
    28,273
    
    
    
    411,922
    
    
    
    6.86
    %Investment securities (4)
    
    
    134,273
    
    
    
    3,571,299
    
    
    
    3.76
    %
    
    
    112,759
    
    
    
    2,600,210
    
    
    
    4.34
    %
    
    
    98,946
    
    
    
    1,606,744
    
    
    
    6.16
    %Money market instruments
    
    
    11,633
    
    
    
    534,444
    
    
    
    2.18
    %
    
    
    7,451
    
    
    
    314,633
    
    
    
    2.37
    %
    
    
    8,731
    
    
    
    203,081
    
    
    
    4.30
    %Total
    
    
    461,894
    
    
    
    9,382,468
    
    
    
    4.92
    %
    
    
    385,734
    
    
    
    7,090,348
    
    
    
    5.44
    %
    
    
    343,335
    
    
    
    4,756,233
    
    
    
    7.22
    %Interest-bearing liabilities:Deposits
    
    
    114,755
    
    
    
    4,768,490
    
    
    
    2.41
    %
    
    
    114,374
    
    
    
    3,690,242
    
    
    
    3.10
    %
    
    
    129,676
    
    
    
    2,847,236
    
    
    
    4.55
    %Securities sold under
agreements to
repurchase
    
    
    101,652
    
    
    
    3,891,972
    
    
    
    2.61
    %
    
    
    98,233
    
    
    
    2,815,608
    
    
    
    3.49
    %
    
    
    79,882
    
    
    
    1,484,639
    
    
    
    5.38
    %Advances from FHLB
    
    
    6,037
    
    
    
    137,838
    
    
    
    4.38
    %
    
    
    6,202
    
    
    
    120,008
    
    
    
    5.17
    %
    
    
    6,597
    
    
    
    120,000
    
    
    
    5.50
    %Other borrowings
    
    
    142
    
    
    
    3,698
    
    
    
    3.85
    %
    
    
    604
    
    
    
    15,469
    
    
    
    3.91
    %
    
    
    2,114
    
    
    
    47,798
    
    
    
    4.42
    %Total
    
    
    222,586
    
    
    
    8,801,998
    
    
    
    2.53
    %
    
    
    219,413
    
    
    
    6,641,327
    
    
    
    3.30
    %
    
    
    218,269
    
    
    
    4,499,673
    
    
    
    4.85
    %Net interest income
    
    $
    239,308
    
    
    
    
    
    
    
    
    
    
    $
    166,321
    
    
    
    
    
    
    
    
    
    
    $
    125,066Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.39
    %
    
    
    
    
    
    
    
    
    
    
    2.14
    %
    
    
    
    
    
    
    
    
    
    
    2.37
    %Net interest-earning assets
    
    
    
    
    
    $
    580,470
    
    
    
    
    
    
    
    
    
    
    $
    449,021
    
    
    
    
    
    
    
    
    
    
    $
    256,560Net yield on interest-earning
assets (5)
    
    
    
    
    
    
    
    
    
    
    2.55
    %
    
    
    
    
    
    
    
    
    
    
    2.35
    %
    
    
    
    
    
    
    
    
    
    
    2.63
    %Interest-earning assets to
interest-bearing
liabilities ratio
    
    
    
    
    
    
    106.59
    %
    
    
    
    
    
    
    
    
    
    
    106.76
    %
    
    
    
    
    
    
    
    
    
    
    105.70
    %Tax Equivalent Spread:Interest-earnings assets
    
    $
    461,894
    
    
    $
    9,382,468
    
    
    
    4.92
    %
    
    $
    385,734
    
    
    $
    7,090,348
    
    
    
    5.44
    %
    
    $
    343,335
    
    
    $
    4,756,233
    
    
    
    7.22
    %Tax equivalent adjustment
    
    
    31,522
    
    
    
    
    
    
    
    0.34
    %
    
    
    23,708
    
    
    
    
    
    
    
    0.33
    %
    
    
    19,053
    
    
    
    
    
    
    
    0.40
    %Interest-earning assets -
tax equivalent
    
    
    493,416
    
    
    
    9,382,468
    
    
    
    5.26
    %
    
    
    409,442
    
    
    
    7,090,348
    
    
    
    5.77
    %
    
    
    362,388
    
    
    
    4,756,233
    
    
    
    7.62
    %Interest-bearing liabilities
    
    
    222,586
    
    
    $
    8,801,998
    
    
    
    2.53
    %
    
    
    219,413
    
    
    $
    6,641,327
    
    
    
    3.30
    %
    
    
    218,269
    
    
    $
    4,499,673
    
    
    
    4.85
    %Net interest income
    
    $
    270,830
    
    
    
    
    
    
    
    
    
    
    $
    190,029
    
    
    
    
    
    
    
    
    
    
    $
    144,119Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.73
    %
    
    
    
    
    
    
    
    
    
    
    2.47
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Net yield on interest-earning assets (5)
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    2.68
    %
    
    
    
    
    
    
    
    
    
    
    3.03
    %
   (1)
    
    Average balance on interest-earning assets and interest-bearing liabilities
is
computed using daily monthly average balances during the periods.(2)
    
    Average loans exclude non-performing loans. Loans fees amounted to $8.7
million;
$5.6 million and $4.6 million as of December 31, 2003, 2002 and 2001,
respectively.(3)
    
    Includes mortgage-backed securities available for sale and trading
securities.(4)
    
    Includes trading account securities and investments available for sale.(5)
    
    Net interest income divided by average
interest-earning assets. 17




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##### 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 31,2003 vs. 2002
    
    2002 vs. 2001Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(In thousands)Interest income:Loans
    
    $
    61,842
    
    
    $
    (6,670
    )
    
    $
    55,172
    
    
    $
    33,687
    
    
    $
    (20,397
    )
    
    $
    13,290Mortgage and asset-backed
securities (1)
    
    
    11,103
    
    
    
    (15,811
    )
    
    
    (4,708
    )
    
    
    21,273
    
    
    
    (4,698
    )
    
    
    16,575Investment
securities (2)
    
    
    33,413
    
    
    
    (11,899
    )
    
    
    21,514
    
    
    
    26,483
    
    
    
    (12,670
    )
    
    
    13,813Money market instruments
    
    
    4,828
    
    
    
    (646
    )
    
    
    4,182
    
    
    
    3,611
    
    
    
    (4,891
    )
    
    
    (1,280
    )Total increase (decrease)
in interest income
    
    
    111,186
    
    
    
    (35,026
    )
    
    
    76,160
    
    
    
    85,054
    
    
    
    (42,656
    )
    
    
    42,398Interest expense:Deposits
    
    
    1,618
    
    
    
    (1,237
    )
    
    
    381
    
    
    
    193,545
    
    
    
    (208,847
    )
    
    
    (15,302
    )Securities sold under
agreements to repurchase
    
    
    9,985
    
    
    
    (6,566
    )
    
    
    3,419
    
    
    
    30,191
    
    
    
    (11,840
    )
    
    
    18,351Advances from FHLB
    
    
    6,304
    
    
    
    (6,469
    )
    
    
    (165
    )
    
    
    
    
    
    
    (395
    )
    
    
    (395
    )Other borrowings
    
    
    (453
    )
    
    
    (9
    )
    
    
    (462
    )
    
    
    (1,227
    )
    
    
    (283
    )
    
    
    (1,510
    )Total increase (decrease) in
interest expense
    
    
    17,454
    
    
    
    (14,281
    )
    
    
    3,173
    
    
    
    222,509
    
    
    
    (221,365
    )
    
    
    1,144Increase (decrease) in
net interest income
    
    $
    93,732
    
    
    $
    (20,745
    )
    
    $
    72,987
    
    
    $
    (137,455
    )
    
    $
    178,709
    
    
    $
    41,254
   (1)
    
    Includes mortgage-backed securities available for sale and trading securities.(2)
    
    Includes investments available for sale.(3)
    
    Certain reclassifications have been made to prior
periods to conform with current year presentation. The following table sets forth, for the periods indicated, certain ratios
reflecting the productivity and profitability of the Company: YEAR ENDED DECEMBER 31, (1)2003
    
    2002
    
    2001Return on
average assets (2)
    
    
    1.15
    %
    
    
    1.22
    %
    
    
    1.22
    %Return on common stockholders equity (3)
    
    
    22.79
    
    
    
    25.39
    
    
    
    27.49Dividend payout ratio to common stockholders (4)
    
    
    19.97
    
    
    
    19.46
    
    
    
    19.99Equity-to-asset ratio (5)
    
    
    7.19
    
    
    
    7.13
    
    
    
    6.29
   (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. 18




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##### Table of Contents



ECONOMIC CONDITIONS, MARKET AREA AND COMPETITION Puerto Rico (the Island), a Commonwealth of the United States of America
(the U.S.), is the easternmost of the Greater Antilles and the fourth largest
island of the Caribbean. The Island is located at the crossroads between North
and South America, at just 3.5 hours airtime from New York and 60 minutes from
Venezuela and has a population of approximately four (4) million people. In
1917 the people of Puerto Rico became citizens of the U.S., and therefore
Puerto Ricans serve in the United States Armed Forces. As in the U.S., the
Island has a local judicial system. The Island constitutes a District in the
Federal Judiciary and has its own U.S. district court. Also, most of the U.S.
federal agencies are represented on the Island. However, the Island has its own
Internal Revenue system and is not subject to U.S. taxes. Spanish and English
are the official languages of the Island. The Island economy operates as a region within the U.S., and therefore its
financial performance is closely linked to the U.S. performance. The external
sector is a key element of the economy of Puerto Rico, as it has a very open
economy, with large flows of trade, investment and income. The Island uses
U.S. currency and forms part of the U.S. financial system. As a Commonwealth of
the U.S., the Island falls within the U.S. for purposes of customs and
migration, and therefore there is a full exchange of funds, people and goods
between Puerto Rico and the U.S. Puerto Rico banks are subject to the same
Federal laws, regulations and supervision as those of the financial
institutions operating in the rest of U.S. The Federal Deposit Insurance Corp.
insures the deposits of Puerto Rico chartered commercial banks, including
Westernbank, the banking subsidiary of W Holding Company, Inc. In early 2003, the performance of economic indicators suggested that the
Puerto Rican economy was relatively stagnant in line with overall economic
conditions in the U.S. Although this stagnation was not seen in all sectors of
the economy, the key sectors of the economy showed no signs of notable
improvement. Historically, Puerto Rico unemployment rate has been higher than
the average U.S. unemployment rate, averaging approximately between 10% - 12%
during the past years, since although the number of jobs was increasing; the
workforce was growing in a parallel fashion. Manufacturing and construction
continues to be the backbone of the Island economy, and many multinational
corporations have substantial operations in the Island. The islands
pharmaceutical industry continues to be very strong, being the primary driver
for employment in the Island, along with the construction industry; both of
them labor intensive industries. During the past years there has been a
slowdown in both industries, primarily due to the reduction of tax incentives
in the manufacturing sector and the recession effects over the construction
industry. Nevertheless, the Island economy has been able to be somewhat less
dependant of these industries thanks to its diversification into other business
areas such as tourism, retail, banking and transportation. The Banking sector has been the main driver of such diversification, being
the financial support for all the industrial and commercial activity on the
Island. At December 31, 2003, there are approximately eleven (12) banks
operating in Puerto Rico, with total assets of approximately $161.0 billion at
September 30, 2003. U.S. banks, foreign banks and the major Puerto Rican banks,
all offer commercial banking services designed to support the emerging
requirements of its local clients as well as of its international clients. The
economic strength and liquidity of local financial institutions, considered as
the pillar of the Islands economy, have allowed the Puerto Rico banking sector
to extend credit, without which the Islands economy couldnt be sustained. The
growing combination of loans, deposits and assets has been the key elements to
the economic progress for the past years. Loans, in particular, have played a
key role in keeping the Island economy afloat, through either personal,
mortgage or commercial loans. The Islands average growth in its gross national
product (GNP) for the past years has been approximately 8%, while the combined
commercial bank loan portfolio average growth has been approximately 12%, for
the same period. The financial services and banking business are 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 its market place. 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. Significant deterioration in the local economy or external
economic conditions, such as inflation, recession, unemployment, real estate
values and other factors beyond the Companys control, could also substantially
impact the Companys performance. There can be no assurance that future adverse
changes in the local economy would not have a material adverse effect on the
Companys consolidated financial condition, results of operations or cash
flows. 19




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##### Table of Contents



EMPLOYEES At December 31, 2003, the Company had 1,092 full-time employees, including
its executive officers. 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 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, 2003, the Companys ratio of Tier 1 capital to total average
assets was 7.22%, its ratio of Tier 1 capital to risk-weighted assets was
13.98%, and its ratio of qualifying total capital to risk-weighted assets was
14.87%. 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 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, 2003, the Company and the Bank are deemed to be well-capitalized
institutions. 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. 20




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##### Table of Contents



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, 2003,
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s Annual Report to Stockholders for the year
ended December 31, 2003, which is included herein by reference. DIVIDEND RESTRICTIONS. The principal source of funds of the Company is
dividends from Westernbank. The ability of Westernbank 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 restored 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 Westernbank 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. PUERTO RICO BANKING LAW. Westernbank is a bank chartered under the Puerto
Rico Banking Law. 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 of Financial Institutions 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 Law 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 of Financial Institutions has
extensive rulemaking power and administrative discretion under the Puerto Rico
Banking Law, and generally examines Westernbank on an annual basis. 21




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##### Table of Contents



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 or 10% of total deposits. At December 31,
2003, Westernbank had an adequate reserve fund established. The Puerto Rico
Banking Law 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, 2003, Westernbank had a
legal reserve of 285.43%. 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 of Financial Institutions. 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
January 1, 2004 is 1.54 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, rollover 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. 22




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##### Table of Contents



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 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 non-banking 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). 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. 23




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##### Table of Contents



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 CRA 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 its
total assets. At December 31, 2003, the Bank held $39.8 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, 2003, Westernbank had
$146.0 million in outstanding advances and $649.0 million in securities sold
under agreements to repurchase from the FHLB of New York. INTERNATIONAL BUSINESS 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 of Financial Institutions, 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 of Financial Institutions (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 of Financial Institutions finds
that the business or affairs of the IBE are conducted in a manner that is not
consistent with the public interest. Pursuant to the provisions of Act No. 13 of January 8, 2004, for taxable
years commencing after June 30, 2003, an IBE that operates as a unit of a bank
under the Puerto Rico Banking Law will be considered taxable and subject to
income taxes at the current tax rates in the amount by which the IBE net income
exceeds 40% in the first applicable taxable year (2004), 30% in the second year
(2005) and 20% thereafter; of the net taxable income of Westernbank, including
its IBE net taxable income. Westernbanks IBE carries on its books a
significant amount of securities which are indeed tax-exempt by law. Moreover,
the Act No. 13 provides that IBEs operating as subsidiaries will continue to
be exempt from the payment of income taxes. Management estimates that the
provisions of this new Act will not have a significant effect in the Companys
result of operations. As of December 31, 2003, 2002 and 2001 and for the years
then ended, substantially all of Westernbank Internationals business
activities have consisted of investment in securities and purchasing of loans.
Note 21 to the Audited Consolidated Financial Statements presents further
information about the Companys business segments. 24




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##### Table of Contents



PRIVACY. Under the GLB Act, all financial institutions, including the
Company, the Bank and 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 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. CAPITAL, DIVIDENDS, STOCK SPLIT AND OPTION PLANS Total stockholders equity as a measure of capital increased by
approximately $243.7 million in 2003 and $196.8 million in 2002. In
June 1998, Westernbank issued 1,219,000 shares of its 7.125%
Non-cumulative, Convertible Monthly Income Preferred Stock, Series A, with a
liquidation preference of $25 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. At
December 31, 2003, the Company had outstanding 797,746 shares of
its 7.125%
Non-cumulative, Convertible Monthly Income Preferred Stock, Series A. In
April and June 1999, Westernbank issued 2,001,000 shares of its 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 the issuance of
preferred stock amounted to $53.1 million, net of $2.1 million of issuance
cost. 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 the 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 in the form
of a stock dividend on its common stock, for 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. During 2003, the Company issued 4,232,000 and 2,640,000 shares of the
Companys Series F and Series G Preferred Stock, respectively, with a
liquidation preference of $25 per share, providing a net capital infusion of
$102.2 million and $63.7 million, respectively. On November 4, 2003, the Company declared a three-for-two split in the
form of a stock dividend on its common stock, for stockholders of record as of
November 28, 2003, distributed on December 10, 2003. The effect of the stock
split was a decrease to retained earnings, an increase in paid-in-capital and
an increase in common stock of approximately $34.7 million. On November 11, 2003, the Company declared a two percent (2%) stock
dividend, for stockholders of record as of November 28, 2003, distributed on
December 10, 2003. The effect of the stock dividend was a decrease to retained
earnings, an increase in paid-in-capital and an increase in common stock of
approximately $35.2 million, $33.1 million and $2.1 million, respectively. 25




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##### Table of Contents



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, October 31 for 2002 Series E, May 30 for 2003 Series F and
August 29 for 2003 Series G of the years indicated below, plus accrued and
unpaid dividends, if any, for the current period to the date of redemption: Redemption Price per ShareDecember 31,
    
    Series A
    
    Series B
    
    Series C
    
    Series D
    
    Series E
    
    Series F
    
    Series G2003
    
    $
    25.75
    
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    25.50
    
    
    $
    26.00
    
    
    
    
    
    
    
    2005
    
    
    25.25
    
    
    
    25.50
    
    
    
    
    
    
    
    2006
    
    
    25.00
    
    
    
    25.00
    
    
    $
    25.50

    
    
    $
    25.502007
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    
    25.25
    
    
    $
    25.502008
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    $
    25.50
    
    
    $
    25.502009
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.25
    
    
    
    25.252010 and thereafter
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    25.00
 Series A, B, C, D, E, F and G 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, 2003 and 2002
amounted to $21.6 million and $13.8 million, respectively. During 2002 and 2001, the Company acquired and retired shares of common
stock as follows: $42,000 (1,678 shares) in 2002; and $28,000 (1,700 shares) in
2001. No shares were acquired and retired during 2003. Total common stock dividends declared in 2003 amounted to $18.3 million
compared to $14.0 million in 2002. On January 15, 2004, the Companys Board of Directors approved an increase
in its annual dividend payments to stockholders for 2004 to $0.22 per share.
This represents an increase of 26.31% over the average dividends paid in 2003. 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
9,639,000 shares (as adjusted) of common stock can be granted. Also, options
for up to 9,639,000 shares (as adjusted) 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,
2003, the Company had outstanding 4,863,000 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 and 2001,
the Company granted 187,000 and 172,000 options (as adjusted), respectively, to
various executive officers. No options were granted during 2003. During 2003,
one of the Companys executive officers exercised 765,000 options (as adjusted)
under the Companys 1999 Qualified Option Plan at an exercise price of $4.36.
No options were exercised in 2002. No options were forfeited in 2003 and 2002. 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. 26




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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, 2003, the Company had approximately $79.6
million of regular taxable income, on which it is required to pay current
income tax of $31.1 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. Westernbank International operates as an International Banking Entity
(IBE) under Puerto Rico Act No. 52, of August 11, 1989, as amended, known as
the International Banking Regulatory Act. Under Puerto Rico tax law, an IBE can
hold non-Puerto Rico assets, and earn interest on these assets, as well as
generate fee income outside of Puerto Rico on a tax-exempt basis. Pursuant to
the provisions of Act No. 13 of January 8, 2004, for taxable years commencing
after June 30, 2003, an IBE that operates as a unit of a bank under the Puerto
Rico Banking Law will be considered taxable and subject to income taxes at the
current tax rates in the amount by which the IBE net income exceeds 40% in the
first applicable taxable year (2004), 30% in the second year (2005) and 20%
thereafter; of the net taxable income of Westernbank, including its IBE net
taxable income. Westernbanks IBE carries on its books a significant amount of
securities which are indeed tax-exempt by law. Moreover, Act No. 13 provides
that IBEs operating as subsidiaries will continue to be exempt from the
payment of income taxes. Management estimates that the provisions of the Act
will not have a significant effect on the Companys result of operations. 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 on 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). In addition, our Internet
website also includes our Code of Ethics for CEO and Senior Financial Officers
and the charters of each of the standing committees of
our Board of Directors. We also make 27




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##### Table of Contents



available in print to any
stockholder who requests them copies of our corporate governance principles,
and the charters of each standing committee of our board of directors.
Requests for copies of these documents should be directed to Mr. César A. Ruiz,
Secretary, W Holding Company, Inc., P.O. Box 1180, Mayagüez, Puerto Rico 00681.
To the extent required by SEC rules, we intend to disclose any amendments to
our code of conduct and ethics, and any waiver of a provision of the code with
respect to the companys directors, principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions, on our web site referred to above within five
business days following any such amendment or waiver, or within any other
period that may be required under SEC rules from time to time. 
 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, 2003,
Westernbank owned approximately 12 branch premises and other facilities, eight
(8) 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 39 locations in Puerto Rico. At December 31, 2003, the Companys future rental commitments under
non-cancelable operating leases aggregated $24.1 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 property at December 31, 2003, was $40.9
million. The Companys investment in premises and equipment, exclusive of leasehold
improvements, at December 31, 2003, was $80.5 million. The combined net book
value of the Companys main offices as of December 31, 2003 was $1.1 million. 
 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. 28




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Companys common stock is traded on the New York Stock Exchange
(NYSE). 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 2003 and 2002. The prices reflect inter-dealer 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 2003
    
    $
    19.03
    
    
    $
    11.77September 2003
    
    
    12.67
    
    
    
    11.03June 2003
    
    
    13.53
    
    
    
    9.16March 2003
    
    
    12.05
    
    
    
    10.43December 2002
    
    $
    11.95
    
    
    $
    9.90September 2002
    
    
    12.58
    
    
    
    9.11June 2002
    
    
    10.54
    
    
    
    7.73March 2002
    
    
    7.84
    
    
    
    6.97
 As of December 31, 2003, the Company had 623 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 $18.61 per share. On June 17, 2002, the Company declared a three-for-two split in the form
of a stock dividend on its common stock, 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
approximately $20.8 million. On November 4, 2003, the Company declared a three-for-two stock split in
the form of a stock dividend, for all stockholders of record as of November 28,
2003, distributed on December 10, 2003. The effect of the stock split was a
decrease to retained earnings and an increase in common stock of $34.7 million. On November 11, 2003, the Company declared a 2% stock dividend, for all
stockholders of record as of November 28, 2003, distributed on December 10,
2003. The effect of the stock dividend was a decrease to retained earnings, an
increase in paid-in-capital and an increase in common stock of $35.2 million,
$33.1 million and $2.1 million, respectively. On January 15, 2004, the Companys Board of Directors approved an increase
in its annual dividend payments to stockholders for 2004 to $0.22 per share.
This represents an increase of 26.31% over the dividends paid in 2003. 29




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The Companys cash dividends corresponding to 2003 and 2002 were as
follows: RECORD DATE
    
    PAYABLE DATE
    
    AMOUNT PER SHARE (1) (2)YEAR 2003January 31, 2003
    
    February 15, 2003
    
    $
    0.01198February 28, 2003
    
    March 15, 2003
    
    
    0.01471March 31, 2003
    
    April 15, 2003
    
    
    0.01471April 30, 2003
    
    May 15, 2003
    
    
    0.01471May 30, 2003
    
    June 13, 2003
    
    
    0.01471June 30, 2003
    
    July 15, 2003
    
    
    0.01471July 31, 2003
    
    August 15, 2003
    
    
    0.01471August 29, 2003
    
    September 15, 2003
    
    
    0.01471September 30, 2003
    
    October 15, 2003
    
    
    0.01471October 31, 2003
    
    November 14, 2003
    
    
    0.01471November 28, 2003
    
    December 15, 2003
    
    
    0.01471December 31, 2003
    
    January 15, 2004
    
    
    0.01510Total
    
    
    
    
    
    $
    0.17418YEAR 2002January 31, 2002
    
    February 15, 2002
    
    $
    0.01162February 28, 2002
    
    March 15, 2002
    
    
    0.01162March 31, 2002
    
    April 15, 2002
    
    
    0.01162April 30, 2002
    
    May 15, 2002
    
    
    0.01162May 31, 2002
    
    June 15, 2002
    
    
    0.01162June 30, 2002
    
    July 15, 2002
    
    
    0.01162July 31, 2002
    
    August 14, 2002
    
    
    0.01198August 31, 2002
    
    September 15, 2002
    
    
    0.01198September 30, 2002
    
    October 15, 2002
    
    
    0.01198October 31, 2002
    
    November 15, 2002
    
    
    0.01198November 30, 2002
    
    December 13, 2002
    
    
    0.01198December 31, 2002
    
    January 15, 2003
    
    
    0.01198Total
    
    
    
    
    
    $
    0.14160
  (1)
    
    Adjusted to reflect a three-for-two stock split in the form of a stock
dividend on the Companys common stock declared on June 17, 2002, and
distributed on July 10, 2002 and the three-for-two stock split in the form
of a stock dividend and a 2% stock dividend declared on November 4, 2003
and November 11, 2003, respectively, and distributed both on December 10,
2003.  (2)
    
    Prices in table are rounded to five decimal cents. 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. 30




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL AND OTHER DATA The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Form 10-K, and the information
contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations. The selected historical consolidated financial data as
of the end of and for each of the five years in the period ended December 31,
2003 are derived from the Companys Consolidated Financial Statements which
have been audited by the Company independent accountants. Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands, except per share data)Income Statement Data:Interest income
    
    $
    461,894
    
    
    $
    385,734
    
    
    $
    343,335
    
    
    $
    290,587
    
    
    $
    232,987Interest expense
    
    
    222,586
    
    
    
    219,413
    
    
    
    218,269
    
    
    
    192,137
    
    
    
    130,806Net interest income
    
    
    239,308
    
    
    
    166,321
    
    
    
    125,066
    
    
    
    98,450
    
    
    
    102,181Provision for loan losses
    
    
    (27,048
    )
    
    
    (15,083
    )
    
    
    (12,278
    )
    
    
    (8,700
    )
    
    
    (14,000
    )Net interest income after provision for loan losses
    
    
    212,260
    
    
    
    151,238
    
    
    
    112,788
    
    
    
    89,750
    
    
    
    88,181Other income, net
    
    
    6,646
    
    
    
    24,743
    
    
    
    18,181
    
    
    
    13,868
    
    
    
    12,239Operating expenses
    
    
    (84,821
    )
    
    
    (73,917
    )
    
    
    (60,310
    )
    
    
    (53,216
    )
    
    
    (53,816
    )Income before income taxes
    
    
    134,085
    
    
    
    102,064
    
    
    
    70,659
    
    
    
    50,402
    
    
    
    46,604Income taxes
    
    
    20,771
    
    
    
    16,101
    
    
    
    8,504
    
    
    
    5,814
    
    
    
    9,480Net income
    
    
    113,314
    
    
    
    85,963
    
    
    
    62,155
    
    
    
    44,588
    
    
    
    37,124Preferred stock dividends
    
    
    21,593
    
    
    
    13,774
    
    
    
    10,264
    
    
    
    5,799
    
    
    
    4,307Net income available for common stockholders
    
    $
    91,721
    
    
    $
    72,189
    
    
    $
    51,891
    
    
    $
    38,789
    
    
    $
    32,817Per Share Data:Basic earnings per common share (1)
    
    $
    0.87
    
    
    $
    0.73
    
    
    $
    0.54
    
    
    $
    0.41
    
    
    $
    0.34Diluted earnings per common share (1)
    
    
    0.85
    
    
    
    0.72
    
    
    
    0.54
    
    
    
    0.41
    
    
    
    0.34Cash dividend declared per common share (1)(2)
    
    
    0.17
    
    
    
    0.14
    
    
    
    0.11
    
    
    
    0.08
    
    
    
    0.07Period end number of common shares outstanding (1)
    
    
    106,290,294
    
    
    
    104,569,848
    
    
    
    95,242,500
    
    
    
    95,246,402
    
    
    
    96,390,000Weighted average number of common shares outstanding (1)
    
    
    105,055,022
    
    
    
    98,504,782
    
    
    
    95,246,390
    
    
    
    95,541,445
    
    
    
    96,417,806Weighted average number of common shares
outstanding on a fully diluted basis (1)
    
    
    108,058,738
    
    
    
    99,667,527
    
    
    
    95,515,369
    
    
    
    95,541,445
    
    
    
    96,417,806Cash dividends declared on common shares
    
    $
    18,322
    
    
    $
    14,045
    
    
    $
    10,375
    
    
    $
    8,307
    
    
    $
    9,246Dividends payout ratio
    
    
    19.97
    %
    
    
    19.46
    %
    
    
    19.99
    %
    
    
    21.42
    %
    
    
    20.48
    %Book value per share data (1)
    
    $
    4.17
    
    
    $
    3.45
    
    
    $
    2.18
    
    
    $
    1.78
    
    
    $
    1.48
 31




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##### Table of Contents



Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands, except per share data)Performance ratios:Return on average assets (3)
    
    
    1.15
    %
    
    
    1.22
    %
    
    
    1.22
    %
    
    
    1.17
    %
    
    
    1.26
    %Return on average common stockholders equity (3)
    
    
    22.79
    
    
    
    25.39
    
    
    
    27.49
    
    
    
    24.75
    
    
    
    24.57Efficiency ratio
    
    
    31.75
    
    
    
    39.15
    
    
    
    41.97
    
    
    
    47.14
    
    
    
    47.18Operating expenses to total end-of-period assets
    
    
    0.74
    
    
    
    0.90
    
    
    
    1.02
    
    
    
    1.25
    
    
    
    1.59Net yield on interest-earning assets
    
    
    2.55
    
    
    
    2.35
    
    
    
    2.63
    
    
    
    2.75
    
    
    
    3.48Balance Sheet Data:Total assets
    
    $
    11,519,440
    
    
    $
    8,205,077
    
    
    $
    5,888,194
    
    
    $
    4,260,857
    
    
    $
    3,374,571Securities purchased under agreement to resell
    
    
    336,351
    
    
    
    261,847
    
    
    
    136,096
    
    
    
    125,809
    
    
    
    120,655Investments securities held to maturity,
securities available for sale and trading securities
    
    
    5,778,790
    
    
    
    3,661,944
    
    
    
    2,656,066
    
    
    
    1,686,654
    
    
    
    1,198,006Loans-net
    
    
    4,683,118
    
    
    
    3,754,357
    
    
    
    2,838,404
    
    
    
    2,203,660
    
    
    
    1,869,668Total liabilities
    
    
    10,690,931
    
    
    
    7,620,329
    
    
    
    5,500,285
    
    
    
    4,010,239
    
    
    
    3,150,752Total deposits
    
    
    5,385,476
    
    
    
    4,298,744
    
    
    
    3,233,912
    
    
    
    2,636,695
    
    
    
    2,247,865Securities sold under agreement to repurchase
    
    
    5,046,045
    
    
    
    3,097,341
    
    
    
    2,059,646
    
    
    
    1,179,073
    
    
    
    729,968Stockholders equity
    
    
    828,509
    
    
    
    584,748
    
    
    
    387,909
    
    
    
    250,618
    
    
    
    223,819Capital
Ratios:Total capital to risk-weighted assets
    
    
    14.87
    %
    
    
    13.83
    %
    
    
    12.65
    %
    
    
    11.73
    %
    
    
    13.22
    %Tier I capital to risk-weighted assets
    
    
    13.98
    
    
    
    12.93
    
    
    
    11.64
    
    
    
    10.65
    
    
    
    12.12Tier I capital to average assets
    
    
    7.22
    
    
    
    7.21
    
    
    
    7.17
    
    
    
    6.02
    
    
    
    6.68Equity-to-assets ratio
    
    
    7.19
    
    
    
    7.13
    
    
    
    6.29
    
    
    
    6.21
    
    
    
    6.46Asset Quality Ratios:Total
non-performing loans and foreclosed real estate
held for sale as a percentage of total assets (4)
    
    
    0.31
    %
    
    
    0.28
    %
    
    
    0.29
    %
    
    
    0.28
    %
    
    
    0.27
    %Total non-performing loans as a percentage of
loans receivable (5)
    
    
    0.66
    
    
    
    0.51
    
    
    
    0.49
    
    
    
    0.43
    
    
    
    0.37Net loans charged-off to average loans (6)
    
    
    0.29
    
    
    
    0.19
    
    
    
    0.23
    
    
    
    0.19
    
    
    
    0.35Allowance for loan losses to total end of period loans
    
    
    1.30
    
    
    
    1.24
    
    
    
    1.33
    
    
    
    1.29
    
    
    
    1.27Allowance for loan losses to non-performing loans
    
    
    197.17
    
    
    
    242.80
    
    
    
    271.83
    
    
    
    298.53
    
    
    
    344.76
   (1)
    
    Adjusted to reflect a three-for-two stock split in the form of a stock
dividend on the Companys common stock declared on June 17, 2002, and
distributed on July 10, 2002 and the three-for-two stock split in the form
of a stock dividend and a 2% stock dividend declared on November 4, 2003
and November 11, 2003, respectively, and distributed both on December 10,
2003.(2)
    
    Cash dividends amounts are rounded.(3)
    
    The return on average assets is computed dividing net income by average
total assets for the period. The return
on average common stockholders equity is computed by dividing net income
less preferred stock dividends by
average common stockholders equity for the period. Both ratios have been
computed using beginning and
period-end balances.(4)
    
    Computed using end of period assets.(5)
    
    Computed using end of period loans.(6)
    
    Average loans were computed using beginning and ending balances. 32




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Managements Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Companys consolidated financial
statements and should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto and other detailed information
appearing elsewhere in this Annual Report. FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 OVERVIEW Total assets at December 31, 2003, 2002 and 2001 were $11.52 billion,
$8.21 billion, and $5.89 billion, respectively. This growth was driven by
strong increases in the Companys loan and investment portfolios. Loans
receivable-net grew by $928.8 million for the year ended December 31, 2003,
when compared to the previous year, resulting from the Companys continued
strategy of growing its loan portfolio through commercial real estate,
asset-based, unsecured business and construction lending, as well as its
consumer loan portfolios. Loans receivable-net were $2.84 billion at December
31, 2001. The investment portfolio increased $2.32 billion, from $4.18 billion
in 2002 to $6.51 billion in 2003. The investment portfolio was $2.88 billion at
December 31, 2001. Total deposits (excluding accrued interest payable) reached
$5.36 billion, from $4.27 billion at December 31, 2002, and $3.21 million at
year end 2001. Net
income was $113.3 million, $86.0 million and $62.2 million and
earnings per basic common share were $0.87 ($0.85 on a diluted basis), $0.73
($0.72 on a diluted basis) (split adjusted), and $0.54 (basic and diluted)
(split adjusted) for the years 2003, 2002 and 2001,
respectively. This increase in net income was primarily the result of strong
loan and investments securities growth, maintaining strong asset quality and
expense control and resulting in returns on average assets (ROA) of 1.15%,
1.22% and 1.22% and returns on average common stockholders equity (ROCE) of
22.79%, 25.39%, and 27.49% for the years ended 2003, 2002 and 2001,
respectively. RESULTS OF OPERATIONS NET INTEREST INCOME The Companys principal source of earnings is its net interest income.
This is the difference between interest income on loans and invested assets
(interest-earning assets) and its interest expense on deposits and
borrowings, including federal funds bought and securities sold under agreements
to repurchase and advances from the FHLB (interest-bearing liabilities). Loan
origination and commitments fees, net of related costs, are deferred and
amortized over the life of the related loans as a yield adjustment. Gains or
losses on the sale of loans and investments, service charges, fees and other
income, also affect income. In addition, the Companys net income is affected
by the level of its non-interest expenses, such as the provision for loan
losses, compensation, employees benefits, occupancy costs, other operating
expenses and income taxes. The main objective of the Companys asset-liability management program is
to invest funds judiciously and reduce interest rate risks while optimizing net
income and maintaining adequate liquidity levels. The Company uses several
tools to manage the risks associated with the composition and repricing of
assets and liabilities. Therefore, management has followed a conservative
practice inclined towards the preservation of capital with adequate returns.
The Companys Investment Committee, which includes the entire Board of
Directors and senior management, is responsible for the asset-liability
management oversight. The Investment Department is responsible for implementing
the policies established by the Investment Committee. 2003 VERSUS 2002.Net interest income for the year ended December 31, 2003
was $239.3 million, an increase of $73.0 million, or 43.88%, from $166.3
million for the same period of last year. The increase in 2003 was the result
of increases in interest income from loans, investment securities and money
market instruments, which was partially offset by increases in interest expense
on deposits and securities sold under agreements to repurchase. 33




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##### Table of Contents



Average interest-earning assets for the year ended 2003 increased by $2.29
billion or 32.33%, compared to the same period in previous year, primarily
driven by a rise in the average loan portfolio of $963.0 million, particularly
a very diversified growth from all lines of loans and an increase of $1.33
billion or 35.21% in the average investment portfolio, mainly U.S. Government
and agencies obligations and mortgage-backed securities. Notwithstanding,
average yields decreased from 5.44% in year 2002 to 4.92% for the year ended
2003. The decrease on average yields was primarily due to continued low market
interest rates affecting our loan repricing, primarily our commercial loan
portfolio with floating rates and the reinvestment rates on matured, called and
purchased securities. The impact of the strong growth in average interest-earning assets was in
part offset by an increase in the average interest-bearing liabilities of $2.16
billion or 32.53% for the year 2003 when compared to 2002. In order to offset
such increase, the Company managed its liability costs carefully, decreasing
the overall cost of rates paid from 3.30% in 2002 to 2.53% in 2003, while
continuing to offer competitive rates. Interest-bearing deposits grew in
average by $1.08 billion during the year 2003, while other borrowings in
average (principally securities sold under agreements to repurchase) increased
by $1.08 billion for the same period. The Companys net yield on interest-earning assets increased 20 basis
points in 2003 to 2.55%, in spite of industry wide interest margin compression
pressures. 2002 VERSUS 2001.Net interest income for the year ended December 31,
2002, reached $166.3 million, compared to $125.1 million reported in 2001, an
increase of $41.3 million or 32.99%. 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 other
asset-backed securities, which was partially offset by an increase in interest
expense on securities sold under agreements to repurchase. Average interest-earning assets increased $2.33 billion or 49.07% from
2001 to 2002, primarily driven by a rise in the average loan portfolio of
$781.0 million, from all lines of loans and an increase of $1.55 billion in the
average investment portfolio, primarily U.S.Government and agencies obligations
and mortgage-backed securities. Notwithstanding, average yields decreased from
7.22% in year 2001 to 5.44% for the year-ended 2002. The decrease on average
yields was primarily due to a drop in market interest rates affecting our loan
repricing, primarily our commercial loan portfolio with floating rates and
reinvestment rates on matured, called and purchased securities. The increase in average interest-earning assets was partially offset by an
increase in average interest-bearing liabilities of $2.14 billion or 47.60% for
the year 2002 when compared to 2001. In order to offset such increase, the
Company managed its liability costs carefully, decreasing the overall cost of
rates paid from 4.85% in 2001 to 3.30% in 2002, while continuing to offer
competitive rates. Interest-bearing deposits grew in average by $843.0 million
during the year 2002, when compared to the previous year, while other
borrowings in average (mainly federal funds bought and securities sold under
agreements to repurchase) increased by $1.30 billion for the same period. The Companys net yield on interest-earning assets decreased 28 basis
points in 2002 to 2.35%, attributed to a decreasing interest rate scenario. 34




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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 shareholders equity. YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    AverageInterest
    
    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)
    
    $
    275,848
    
    
    $
    4,278,468
    
    
    
    6.45
    %
    
    $
    220,676
    
    
    $
    3,315,514
    
    
    
    6.66
    %
    
    $
    207,385
    
    
    $
    2,534,486
    
    
    
    8.18
    %Mortgage and asset-backed securities (3)
    
    
    40,140
    
    
    
    998,257
    
    
    
    4.02
    %
    
    
    44,848
    
    
    
    859,991
    
    
    
    5.21
    %
    
    
    28,273
    
    
    
    411,922
    
    
    
    6.86
    %Investment securities (4)
    
    
    134,273
    
    
    
    3,571,299
    
    
    
    3.76
    %
    
    
    112,759
    
    
    
    2,600,210
    
    
    
    4.34
    %
    
    
    98,946
    
    
    
    1,606,744
    
    
    
    6.16
    %Money market instruments
    
    
    11,633
    
    
    
    534,444
    
    
    
    2.18
    %
    
    
    7,451
    
    
    
    314,633
    
    
    
    2.37
    %
    
    
    8,731
    
    
    
    203,081
    
    
    
    4.30
    %Total
    
    
    461,894
    
    
    
    9,382,468
    
    
    
    4.92
    %
    
    
    385,734
    
    
    
    7,090,348
    
    
    
    5.44
    %
    
    
    343,335
    
    
    
    4,756,233
    
    
    
    7.22
    %Interest-bearing liabilities:Deposits
    
    
    114,755
    
    
    
    4,768,490
    
    
    
    2.41
    %
    
    
    114,374
    
    
    
    3,690,242
    
    
    
    3.10
    %
    
    
    129,676
    
    
    
    2,847,236
    
    
    
    4.55
    %Fed funds bought and
securities sold under
agreements to repurchase
    
    
    101,652
    
    
    
    3,891,972
    
    
    
    2.61
    %
    
    
    98,233
    
    
    
    2,815,608
    
    
    
    3.49
    %
    
    
    79,882
    
    
    
    1,484,639
    
    
    
    5.38
    %Advances from FHLB
    
    
    6,037
    
    
    
    137,838
    
    
    
    4.38
    %
    
    
    6,202
    
    
    
    120,008
    
    
    
    5.17
    %
    
    
    6,597
    
    
    
    120,000
    
    
    
    5.50
    %Other borrowings
    
    
    142
    
    
    
    3,698
    
    
    
    3.85
    %
    
    
    604
    
    
    
    15,469
    
    
    
    3.90
    %
    
    
    2,114
    
    
    
    47,798
    
    
    
    4.42
    %Total
    
    
    222,586
    
    
    
    8,801,998
    
    
    
    2.53
    %
    
    
    219,413
    
    
    
    6,641,327
    
    
    
    3.30
    %
    
    
    218,269
    
    
    
    4,499,673
    
    
    
    4.85
    %Net interest income
    
    $
    239,308
    
    
    
    
    
    
    
    
    
    
    $
    166,321
    
    
    
    
    
    
    
    
    
    
    $
    125,066Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.39
    %
    
    
    
    
    
    
    
    
    
    
    2.14
    %
    
    
    
    
    
    
    
    
    
    
    2.37
    %Net interest-earning assets
    
    
    
    
    
    $
    580,470
    
    
    
    
    
    
    
    
    
    
    $
    449,021
    
    
    
    
    
    
    
    
    
    
    $
    256,560Net yield on interest-earning
assets (5)
    
    
    
    
    
    
    
    
    
    
    2.55
    %
    
    
    
    
    
    
    
    
    
    
    2.35
    %
    
    
    
    
    
    
    
    
    
    
    2.63
    %Interest-earning assets to
interest-bearing liabilities ratio
    
    
    
    
    
    
    106.59
    %
    
    
    
    
    
    
    
    
    
    
    106.76
    %
    
    
    
    
    
    
    
    
    
    
    105.70
    %Tax Equivalent Spread:Interest-earnings assets
    
    $
    461,894
    
    
    $
    9,382,468
    
    
    
    4.92
    %
    
    $
    385,734
    
    
    $
    7,090,348
    
    
    
    5.44
    %
    
    $
    343,335
    
    
    $
    4,756,233
    
    
    
    7.22
    %Tax equivalent adjustment
    
    
    31,522
    
    
    
    
    
    
    
    0.34
    %
    
    
    23,704
    
    
    
    
    
    
    
    0.33
    %
    
    
    19,053
    
    
    
    
    
    
    
    0.40
    %Interest-earning assets -
tax equivalent
    
    
    493,416
    
    
    
    9,382,468
    
    
    
    5.26
    %
    
    
    409,438
    
    
    
    7,090,348
    
    
    
    5.77
    %
    
    
    362,388
    
    
    
    4,756,233
    
    
    
    7.62
    %Interest-bearing liabilities
    
    
    222,586
    
    
    $
    8,801,998
    
    
    
    2.53
    %
    
    
    219,413
    
    
    $
    6,641,327
    
    
    
    3.30
    %
    
    
    218,269
    
    
    $
    4,499,673
    
    
    
    4.85
    %Net interest income
    
    $
    270,830
    
    
    
    
    
    
    
    
    
    
    $
    190,025
    
    
    
    
    
    
    
    
    
    
    $
    144,119Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.73
    %
    
    
    
    
    
    
    
    
    
    
    2.47
    %
    
    
    
    
    
    
    
    
    
    
    2.77
    %Net yield on interest-
earning assets (5)
    
    
    
    
    
    
    
    
    
    
    2.89
    %
    
    
    
    
    
    
    
    
    
    
    2.68
    %
    
    
    
    
    
    
    
    
    
    
    3.03
    %
   (1)
    
    Average balance on interest-earning assets and interest-bearing liabilities is
computed using daily monthly average balances during the periods.  (2)
    
    Average loans exclude non-performing loans. Loans fees amounted to
$8.7 million; $5.6 million and $4.6 million as of December 31, 2003, 2002 and 2001, respectively.  (3)
    
    Includes mortgage-backed securities available for sale and trading securities.  (4)
    
    Includes trading account securities and investments available for sale.  (5)
    
    Net interest income divided by average interest-earning assets. 35




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##### 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 31,2003 vs. 2002
    
    2002 vs. 2001Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    Total(In thousands)Interest income:Loans
    
    $
    61,842
    
    
    $
    (6,670
    )
    
    $
    55,172
    
    
    $
    33,687
    
    
    $
    (20,397
    )
    
    $
    13,290Mortgage and asset-backed
securities (1)
    
    
    11,103
    
    
    
    (15,811
    )
    
    
    (4,708
    )
    
    
    21,273
    
    
    
    (4,698
    )
    
    
    16,575Investment securities (2)
    
    
    33,413
    
    
    
    (11,899
    )
    
    
    21,514
    
    
    
    26,483
    
    
    
    (12,670
    )
    
    
    13,813Money market instruments
    
    
    4,828
    
    
    
    (646
    )
    
    
    4,182
    
    
    
    3,611
    
    
    
    (4,891
    )
    
    
    (1,280
    )Total increase (decrease)
in interest income
    
    
    111,186
    
    
    
    (35,026
    )
    
    
    76,160
    
    
    
    85,054
    
    
    
    (42,656
    )
    
    
    42,398Interest expense:Deposits
    
    
    1,618
    
    
    
    (1,237
    )
    
    
    381
    
    
    
    193,545
    
    
    
    (208,847
    )
    
    
    (15,302
    )Fed funds bought and
securities sold under
agreements to repurchase
    
    
    9,985
    
    
    
    (6,566
    )
    
    
    3,419
    
    
    
    30,191
    
    
    
    (11,840
    )
    
    
    18,351Advances from FHLB
    
    
    6,304
    
    
    
    (6,469
    )
    
    
    (165
    )
    
    
    
    
    
    
    (395
    )
    
    
    (395
    )Other borrowings
    
    
    (453
    )
    
    
    (9
    )
    
    
    (462
    )
    
    
    (1,227
    )
    
    
    (283
    )
    
    
    (1,510
    )Total increase (decrease) in
interest expense
    
    
    17,454
    
    
    
    (14,281
    )
    
    
    3,173
    
    
    
    222,509
    
    
    
    (221,365
    )
    
    
    1,144Increase (decrease) in
net interest income
    
    $
    93,732
    
    
    $
    (20,745
    )
    
    $
    72,987
    
    
    $
    (137,455
    )
    
    $
    178,709
    
    
    $
    41,254




---

|(1) |  | Includes mortgage-backed securities available for sale and trading securities.                      
|--- |  | ----------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes investments available for sale.                                                            
|   
|(3) |  | Certain reclassifications have been made to prior periods to conform
with current year presentation.

PROVISION FOR LOAN LOSSES

The 2003 provision for loan losses was $27.0 million, an increase of $12.0
from 2002. Net charge-offs during 2003 amounted to $12.6 million, which when
subtracted from the provision for loan losses of $27.0 million resulted in a
net increase in the allowance for loan losses of $14.5 million. The provision
for the year ended 2002 was $15.1 million, an increase of $2.8 million from the
year ended December 31, 2001. Net charge-offs during 2002 amounted to $6.3
million, which when subtracted from the provision for loan losses of $15.1
million resulted in a net increase in the allowance for loan losses of $8.8
million.

The allowance for loan losses is maintained at a level which, in
managements judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on managements evaluation of
various conditions as the existing general economic and business conditions
affecting key lending areas; terms, nature and volume of the portfolio, credit
quality trends including trends in non-performing loans expected to result from
existing conditions, evaluation of the collectibility of the loan portfolio,
collateral values, credit concentrations, trends in historical loss experience,
specific impaired loans and delinquency trends, among other factors. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although no assurance can
be given, management believes that the present allowance for loan losses is
adequate considering loss experience, delinquency trends and current economic
conditions. Management regularly reviews the Companys loan loss allowance as
its loan portfolio grows and diversifies. For a more detailed discussion of the
factors affecting the provision for loan losses and changes in the underlying factors affecting
the components of the Allowance for Loan Losses refer to Financial Condition 
Allowance for Loan Losses and Item I, Business  Allowance for Loan losses.

36



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##### Table of Contents



The
increase in the provision for loan losses from 2002 to 2003 is
primarily attributed to managements policy of establishing reserves,
principally taking into consideration the overall strong growth in the
Companys loan portfolio and particularly those of Westernbanks newest
Divisions: Westernbank Business Credit, a division specializing in asset-based
lending; and Expresso of Westernbank, which specializes in small, unsecured
consumer loans up to $15,000 and collateralized consumer loans up to $75,000.
The provision for loan losses for the commercial loan portfolio grew by
$988,000 or 9.30%, from 2002 to 2003. This was primarily due to the increase in
the loan portfolio of Westernbank Business Credit and the strong growth of the
Companys commercial real estate loans portfolio. The provision for loan losses
for Westernbank Business Credit accounted for $2.1 million or 18.92% of the
total provision for loan losses in the commercial loan portfolio for the year
ended December 31, 2003, while for year 2002, it accounted for $1.5 million or
15.00% of the total provision for loan losses in the commercial loan portfolio.
The provision for loan losses for the consumer loan portfolio grew by $9.4
million or 124.39%, from 2002 to 2003. This increase of $9.4 million was
primarily due to an increase in the average outstanding loan portfolio of the
Expresso of Westernbank, in addition to the strong growth of the Companys
other consumer loan (principally collateralized by real estate) portfolio.

At December 31, 2003, the allowance for loan losses was $61.6 million or
1.30% of total loans, and 197.17% of total non-performing loans, compared to an
allowance for loan losses at December 31, 2002 of $47.1 million or 1.24% of
total loans, and 242.80% of total non-performing loans (reserve coverage). The
reserve coverage decreased from 242.80% in 2002 to 197.17% in 2003. The
decrease was principally due to an increase in non-performing loans in the
Companys commercial loans portfolio, all of which are collateralized by real
estate and only required a specific valuation allowance of $478,000.

During 2003, net charge-offs amounted to $12.6 million, an increase of
$6.2 million from $6.3 million in 2002. Net charge-offs to average loans
increased to 0.29% in 2003 compared to 0.19% in 2002. Accounts amounting to
$14.9 million were written-off against the allowance for loan losses in 2003,
compared to $7.9 million in 2002, an increase of $6.9 million. The increase in
net charge-offs was primarily due to loans charged-off in the ordinary course
of business in our consumer loan portfolio. The increase in consumer loans
charged-off for the year ended December 31, 2003, was principally due to loans
charged-off by the Expresso of Westernbank Division amounting to $7.9 million,
compared to write offs of $62,000 for 2002 (Expresso of Westernbank began
operations in July 2002). The accounts written-off are submitted to the
Collections Department recovery unit for continued collection efforts.
Recoveries made from accounts previously written-off amounted to $2.3 million
in 2003 and $1.6 million in 2002.

The increase in the provision for loan losses from 2001 to 2002 was
primarily attributed to the overall strong growth in the Companys loan
portfolio and particularly those of Westernbanks newest Divisions: Westernbank
Business Credit and the Expresso of Westernbank. The provision for loan losses
for the commercial loan portfolio grew by $2.0 million or 24.91%, from 2001 to
2002, reflecting primarily the increase in the loan portfolio of Westernbank
Business Credit in addition to the strong growth of the Companys commercial
real estate loan portfolio. The provision for Westernbank Business Credit
division accounted for $1.5 million or 15.00% of the total provision for loan
losses in the commercial loan portfolio for the year ended December 31,2002,
while for year 2001 (its first year of operations), it accounted for $208,000
or 2.58% of the total provision for loan losses for the commercial loans
portfolio. The provision for loan losses for the consumer loan portfolio grew
by $3.7 million or 95.15%, from 2001 to 2002, reflecting primarily the increase
in the loan portfolio of the Expresso of Westernbank in addition to the strong
growth of the Companys other consumer loans (principally collateralized by
real estate) portfolio. The Expresso of Westernbank division accounted for $1.5
million or 20.00% of the total provision for loan losses for the consumer loans
portfolio for the year ended December 31, 2002, its first year of operations.

37



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##### Table of Contents



Net charge-offs were $6.3 million in 2002 and $5.7 million in 2001, which
is an increase of $599,000 or 10.44%. Net charge-offs to average loans improved
to 0.19% in 2002 compared to 0.23% in 2001. Accounts amounting to $7.9 million
were written-off against the allowance for loan losses in 2002, compared to
$7.0 million in 2001, an increase of $927,000 or 13.17%. The increase in net
charge-offs was primarily attributed to the commercial and consumer loan
portfolios. The increase in net charge-offs in the commercial loans portfolio
was primarily due to a $505,000 loan charged-off by Westernbank Business Credit
Division. This loan was acquired in the purchased loan portfolio from Congress
Credit Corporation, a subsidiary of First Union Bank N.A., on June 15, 2001.
This loan was fully reserved at the acquisition date. The increase in net
charge-offs in the consumer loan portfolio was primarily due to loans
charged-off by the Expresso of Westernbank Division amounting to $62,000 for
the year ended December 31, 2002. Recoveries made from accounts previously
written-off amounted to $1.3 million in 2001. OTHER INCOME Other operating income, excluding derivative transactions and net gain
(loss) on sales and valuation of loans, securities and other assets and
unrealized gain (loss) on derivative instruments, grew $5.3 million or 23.67%,
during the year ended December 31, 2003, when compared to $22.5 million in year
2002, which had increased from $18.9 million in year 2001. The increase for the
years ended December 31, 2003 and 2002 was primarily driven by higher activity
associated with service charges on deposit accounts and other fees, including
fees associated to the trust division, insurance commissions earned by
Westernbank Insurance Corp., and fees generated by the asset-based lending
operation as well as strong increases in other areas resulting from the
Companys overall growing volume of business. The increase in other income for
2003 was partially offset by a net loss on sales and valuation of loans,
securities and other assets of $22.7 million
recorded during the first semester of year 2003, related to the corporate bond
and loan obligations (CBOs and CLOs) portfolio liquidated on June 6,
2003. See Note 3  Investment Securities  Notes to consolidated financial
statements and Management Discussion and Analysis of Results of Operations and
Financial Condition  Investments (page 48). OPERATING EXPENSES Total operating expenses increased $10.9 million or 14.75% and $13.6
million or 22.56% in 2003 and 2002, respectively. Salaries and employees benefits accounted for the majority of such
increase, rising $5.8 million or 20.78% for the year 2003, as compared to the
corresponding period in 2002, which also increased $5.1 million or 22.43% from
$22.9 million during 2001. Such increases are attributed to the continued
expansion of the Company, including increases in personnel, normal salary
increases and related employee benefits. At December 31, 2003, the Company had
1,092 full-time employees, including its executive officers, an increase of 61
employees or 5.92%, when compared to the prior year. New personnel and
additional infrastructure were added to support the continued expansion of the
Company. At December 31, 2001, the Company had 817 full-time employees,
including its executive officers, increasing to 1,031 employees by the end of
year 2002, primarily as a result of approximately 130 new employees associated
to the new Expresso of Westernbank Division that commenced operations in July
2002. Operating expenses, as a group, excluding salaries and employees
benefits, increased $5.1 million or 11.07%, during the year ended December 31,
2003, from $45.9 million in 2002, compared to an increase of $8.5 million or
22.64% from $37.4 million in 2001. These increases resulted mostly from
increases in occupancy, printing, postage, stationery and supplies, and other
expenses, primarily associated with the new Expresso Division, launched in
July 2002, as well as the costs associated with the additional investment in
technology and general infrastructure to sustain and coordinate the Companys
strong growth and expansion in all of its business areas. The Company continued its strict cost control measures, maintaining
operating expenses at adequate levels, as evidenced by its improving efficiency
ratios of 31.75%, 39.15% and 41.97% for the years 2003, 2002 and 2001,
respectively. 38




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##### Table of Contents



PROVISION FOR INCOME TAXES Under Puerto Rico income tax laws, the Company is required to pay the
higher of an alternative minimum tax of 22% or regular statutory rates raging
from 20% to 39%. The current provision for estimated Puerto Rico income taxes
for the year ended December 31, 2003 amounted to $20.8 million compared to
$16.1 million in 2002 and $8.5 million in 2001, as a result of increases in its
taxable income from its growing operations. Deferred income taxes reflect the
impact of credit and capital losses carryforwards and temporary differences
between amounts of assets and liabilities for financial reporting purposes and
their respective tax bases. The income on certain investments is exempt for
income tax purposes. Also, activities relating to the Westernbank International
division are exempt for income tax purposes. As a result, the Companys
effective tax rate is substantially below the statutory rate, being 15.00%,
16.00% and 12.00% for the years ended December 31, 2003, 2002 and 2001,
respectively. The increase in the effective tax rate for years 2003 and 2002 is
attributed to higher levels of taxable income resulting from new lines of
business commenced in 2001 and 2002. The increase in the deferred income tax
provision in 2003 is primarily attributable to the capital loss carryforward on
the liquidation of the Companys CBOs and CLOs portfolio during 2003 which is
available to offset capital gains in future years. NET INCOME The Companys net income increased $27.4 million or 31.82% from 2002 to
2003 and $23.8 million or 38.30% from 2001 to 2002. The increase in both years
resulted from an increase in net interest income and other income, which was
partially offset by increases in total operating expenses and in the provisions
for loan losses and income taxes. FINANCIAL CONDITION LOANS Loans, net were $4.68 billion or 40.65% of total assets at December 31,
2003, an increase of $928.8 million, or 24.74% from December 31, 2002. Loans,
net were $3.75 billion or 45.76% of total assets at December 31, 2002,
increasing $916.0 million or 32.27% from $2.84 billion or 48.21% of total
assets at December 31, 2001. The Company continues to focus on growing its commercial loan portfolio
through commercial real estate, asset-based, unsecured business and
construction lending, as well as its consumer loan portfolios. As a result,
the portfolio of real estate loans secured by first mortgages increased from
$2.08 billion as of December 31, 2001 to $2.67 billion as of December 31, 2002,
further increasing to $3.36 billion as of December 31, 2003. Commercial real
estate loans secured by first mortgages were $2.26 billion at December 31,
2003, an increase of $620.4 million or 37.26% from December 31, 2002.
Commercial real estate loans secured by first mortgages were $1.65 billion at
December 31, 2002, an increase of $531.5 million or 47.57%, from $1.12 billion
at December 31, 2001. The consumer loans portfolio (including credit cards and
the loan portfolio of Expresso of Westernbank since July 2002), commercial
loans (not collateralized by real estate) and other loans increased from $795.6
million as of December 31, 2001, to $1.13 billion as of December 31, 2002, to
$1.39 billion as of December 31, 2003. Westernbanks commercial real estate and other loans are primarily
variable and adjustable rate products. Commercial loan originations come from
existing customers as well as through direct solicitation and referrals.
Westernbank offers different types of consumer loans, including secured and
unsecured products, in order to provide a full range of financial services to
its retail customers. In addition, Westernbank offers VISA and Master Card
accounts to its customers. During the past five years, loans have grown at an average annualized rate
of 28.23%. As of December 31, 2003, commercial loans were 58.92% (81.17%
collateralized by real estate) and consumer loans were 18.19% (60.51%
collateralized by real estate) of the $4.74 billion loan portfolio, compared to
commercial loans of 53.88% (78.79% collateralized by real estate) and consumer
loans of 19.77% (60.23% collateralized by real estate) of the $3.80 billion
loan portfolio as of December 31, 2002. This has enabled Westernbank to shift
its asset composition to assets with shorter maturities and greater repricing
flexibility. The Company has also continued to diversify Westernbanks sources
of revenue, while maintaining its status as a secured lender, with
approximately 83% of its loans collateralized by real estate as of December 31,
2003. Westernbank has selectively entered into several new lending business
lines, including asset-based and small unsecured consumer lending to diversify
its loan portfolio while maintaining its primary focus as a secured lender. As
of December 31, 2003, Westernbank Business Credit (asset-based) and Expresso of
Westernbank (unsecured consumer lending) divisions loan portfolios amounted to
$641.1 million and $155.6 million, respectively. For the years ended December
31, 2003 and 2002, the average yields on Westernbank Business Credit division
asset-based loan portfolio and Expresso of Westernbank division loan portfolio
were 5.50% and 5.56%, and 18.41% and 19.40%, respectively. 39




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##### Table of Contents



The following table sets forth the composition of the Westernbanks loan
portfolio by type of loan at the dates indicated. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Residential real estate:Mortgage
    
    $
    894,007
    
    
    
    19.1
    %
    
    $
    844,803
    
    
    
    22.5
    %
    
    $
    847,462
    
    
    
    29.9
    %
    
    $
    781,213
    
    
    
    35.5
    %
    
    $
    704,718
    
    
    
    37.7
    %Construction
    
    
    202,600
    
    
    
    4.3
    
    
    
    181,266
    
    
    
    4.8
    
    
    
    117,957
    
    
    
    4.2
    
    
    
    80,905
    
    
    
    3.7
    
    
    
    101,979
    
    
    
    5.5Commercial, industrial
and agricultural: (1)Real estate
    
    
    2,261,465
    
    
    
    48.3
    
    
    
    1,461,606
    
    
    
    38.9
    
    
    
    1,115,700
    
    
    
    39.3
    
    
    
    887,084
    
    
    
    40.2
    
    
    
    677,924
    
    
    
    36.3Business and others
    
    
    524,747
    
    
    
    11.2
    
    
    
    570,196
    
    
    
    15.2
    
    
    
    378,696
    
    
    
    13.3
    
    
    
    99,483
    
    
    
    4.5
    
    
    
    79,343
    
    
    
    4.2Consumer and others (2)
    
    
    861,907
    
    
    
    18.4
    
    
    
    743,600
    
    
    
    19.8
    
    
    
    416,953
    
    
    
    14.7
    
    
    
    383,903
    
    
    
    17.4
    
    
    
    329,682
    
    
    
    17.6Total loans
    
    
    4,744,726
    
    
    
    101.3
    
    
    
    3,801,471
    
    
    
    101.3
    
    
    
    2,876,768
    
    
    
    101.4
    
    
    
    2,232,588
    
    
    
    101.3
    
    
    
    1,893,646
    
    
    
    101.3Allowance for loan losses
    
    
    (61,608
    )
    
    
    (1.3
    )
    
    
    (47,114
    )
    
    
    (1.3
    )
    
    
    (38,364
    )
    
    
    (1.4
    )
    
    
    (28,928
    )
    
    
    (1.3
    )
    
    
    (23,978
    )
    
    
    (1.3
    )Loan - net
    
    $
    4,683,118
    
    
    
    100.0
    %
    
    $
    3,754,357
    
    
    
    100.00
    %
    
    $
    2,838,404
    
    
    
    100.00
    %
    
    $
    2,203,660
    
    
    
    100.00
    %
    
    $
    1,869,668
    
    
    
    100.00
    %
  (1)
    
    Includes $641.1 million, $427.7 million and $255.8 million of Westernbank Business Credit division
outstanding loans at December 31, 2003, 2002 and 2001,
respectively. Westernbank Business Credit began operations in 2001.  (2)
    
    Includes $155.6 million and $117.4 million of the Expresso of Westernbank division outstanding loans at
December 31, 2003 and 2002, respectively. The Expresso of Westernbank began operations on July 10, 2002. Residential real estate mortgage loans are mainly comprised of loans
secured by first mortgages on one-to-four family residential properties. At
December 31, 2003, residential mortgage loans included $19.1 million of
mortgages insured or guaranteed by government agencies of the United States or
Puerto Rico. Westernbank originated $1.01 billion of commercial real estate loans,
including asset-based and constructions loans, during the year ended December
31, 2003,. At December 31, 2003, commercial real estate loans
totaled $2.26
billion. In general, commercial real estate loans are considered by management
to be of somewhat greater risk of uncollectibility than residential lending
because such loans are typically larger in size and more risk is concentrated
in a single borrower. In addition, the borrowers ability to repay a commercial
loan or a construction loan depends, in the case of a commercial loan, on the
successful operation of the business or the property securing the loan and, in
the case of a construction loan, on the successful completion and sale or
operation of the project. Substantially all of the Companys borrowers and
properties and other collateral securing the commercial, real estate mortgage
and consumer loans are located in Puerto Rico. These loans may be subject to a
greater risk of default if the Puerto Rico economy suffers adverse economic,
political or business developments, or if natural disasters affect Puerto Rico.
At December 31, 2003, the Company maintained its status as a secured lender,
with approximately 83% of its loans collateralized by real estate. The portfolio of Consumer and Other loans at December 31, 2003, consisted
of consumer loans of $861.9 million, of which $521.6 million are secured by
real estate, $340.4 million are unsecured consumer loans (including $155.6
million of the Expresso of Westernbank division loan portfolio, credit card
loans of $54.8 million and loans secured by deposits in Westernbank totaling
$30.8 million). During 2003, Westernbank securitized $13.9 million and $8.6 million of
residential mortgage loans into Government National Mortgage Association and
Fannie Mae participation certificates, respectively. Westernbank, continues to
service outstanding loans which are securitized. 40




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##### Table of Contents



The following table summarizes the contractual maturities of Westernbanks
total loans for the periods indicated at December 31, 2003. Contractual
maturities do not necessarily reflect the actual term of a loan, including
prepayments. MaturitiesAfter one year to five years
    
    After five years(In thousands)Balanceoutstanding at
    
    
    
    
    
    
    
    
    
    
    
    
    
    FixedDecember 31,
    
    One year or
    
    Fixed interest
    
    Variable
    
    interest
    
    Variable2003
    
    less
    
    rates
    
    interest rates
    
    rates
    
    interest ratesResidential real estate:Mortgage
    
    $
    894,007
    
    
    $
    8,751
    
    
    $
    15,178
    
    
    $
    185
    
    
    $
    298,409
    
    
    $
    571,484Construction
    
    
    202,600
    
    
    
    141,604
    
    
    
    
    
    
    
    60,996
    
    
    
    
    
    
    
    Commercial, industrialand agricultural:Real estate
    
    
    2,261,465
    
    
    
    707,863
    
    
    
    136,563
    
    
    
    194,505
    
    
    
    42,808
    
    
    
    1,179,726Business and others
    
    
    524,747
    
    
    
    398,716
    
    
    
    20,511
    
    
    
    14,445
    
    
    
    5,212
    
    
    
    85,863Consumer and others
    
    
    861,907
    
    
    
    110,122
    
    
    
    213,224
    
    
    
    
    
    
    
    538,561
    
    
    
    Total
    
    $
    4,744,726
    
    
    $
    1,367,056
    
    
    $
    385,476
    
    
    $
    270,131
    
    
    $
    884,990
    
    
    $
    1,837,073
 Westernbank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. Westernbank originates loans in accordance with written,
non-discriminatory underwriting standards and loan origination procedures
prescribed in the Board of Directors approved loan policies. Detailed loan
applications are obtained to determine the borrowers repayment ability.
Applications are verified through the use of credit reports, financial
statements and other confirmations procedures. Property valuations by Board of
Directors approved independent appraisers are required for mortgage and all
real estate loans. Westernbanks Credit Committee approval is required for all
residential and commercial real estate loans originated up to $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 Westernbanks policy to require borrowers to provide title insurance
policies certifying or ensuring that Westernbank 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 Westernbank 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 Westernbank 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%. Westernbank 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. In addition to its residential loan originations, Westernbank also
purchases residential first mortgage loans from other mortgage originators in
Puerto Rico. Those loans are purchased at floating rates based on a negotiated
spread over the three-month LIBOR rate. During the year ended December 31,
2003, Westernbank purchased $328.8 million of such loans. 41




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Westernbank originates primarily variable and adjustable rate commercial
business and real estate loans. Westernbank also makes real estate construction
loans subject to firm permanent financing commitments. As of December 31, 2003,
Westernbanks commercial loan portfolio had a total delinquency ratio,
including the categories of 60 days and over, of 0.84% (less than 1%), compared
to 0.33% (less than 1%) at December 31, 2002. For further explanation on the
increase in the delinquency ratio of the Companys commercial loan portfolio
refer to Management Discussion and Analysis of Results of Operations
and Financial Condition  Non-Performing Loans and Foreclosed
Real Estate Held for Sale. Westernbank 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 Westernbank, there are various types of secured
and unsecured consumer loans with varying amortization schedules. In addition,
Westernbank makes fixed-rate residential second mortgage consumer loans. In
July 2002, Westernbank launched a new banking division focused on offering
consumer loans through 19 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. Westernbank offers the service of VISA and Master Card credit cards. At
December 31, 2003, there were approximately 25,901 outstanding accounts, with
an aggregate outstanding balance of $54.8 million and unused credit card lines
available of $81.5 million. In connection with all consumer and second mortgage loans originated,
Westernbanks underwriting standards include a determination of the applicants
payment history on other debts and an assessment of the ability to meet
existing obligations and payments on the proposed loan. As of December 31,
2003, Westernbanks consumer loan portfolio, including the Expresso of
Westernbank loan portfolio, had a total delinquency ratio, including the
categories of 60 days and over, of 0.89% (less than 1%), compared to 0.59%
(less than 1%) at December 31, 2002. The increase in the delinquency ratio from
2002 to 2003 reflects the delinquency of the Expresso of Westernbank loan
portfolio, which is principally composed of small unsecured personal loans and
have expected higher delinquency and charge-offs. NON-PERFORMING LOANS AND FORECLOSED REAL ESTATE HELD FOR SALE When a borrower fails to make a required payment on a loan, Westernbank
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 normal collection procedures, it 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 Westernbank may acquire the property. Thereafter, if
Westernbank acquires the property, such acquired property is appraised and
included in the foreclosed real estate held for sale account at the 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. 42




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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 Westernbank at the dates indicated: December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Residential real estate mortgage and construction loans
    
    $
    2,259
    
    
    $
    2,026
    
    
    $
    2,735
    
    
    $
    1,817
    
    
    $
    1,719Commercial, industrial and agricultural loans
    
    
    24,142
    
    
    
    13,567
    
    
    
    7,947
    
    
    
    6,140
    
    
    
    4,366Consumer loans
    
    
    4,845
    
    
    
    3,812
    
    
    
    3,431
    
    
    
    1,733
    
    
    
    870Total non-performing loans
    
    
    31,246
    
    
    
    19,405
    
    
    
    14,113
    
    
    
    9,690
    
    
    
    6,955Foreclosed real estate held for sale
    
    
    4,082
    
    
    
    3,679
    
    
    
    3,013
    
    
    
    2,454
    
    
    
    2,232Total non-performing loans and foreclosed
real estate held for sale
    
    $
    35,328
    
    
    $
    23,084
    
    
    $
    17,126
    
    
    $
    12,144
    
    
    $
    9,187Interest that would have been recorded if the
loans had not been classified as
non-performing
    
    $
    2,500
    
    
    $
    1,102
    
    
    $
    1,123
    
    
    $
    979
    
    
    $
    514Interest recorded on non-performing loans
    
    $
    583
    
    
    $
    775
    
    
    $
    1,716
    
    
    $
    780
    
    
    $
    1,470Total non-performing loans as a percentage
of loans receivable (1)
    
    
    0.66
    %
    
    
    0.51
    %
    
    
    0.49
    %
    
    
    0.43
    %
    
    
    0.37
    %Total non-performing loans and foreclosed real estate
held for sale as a percentage of total assets (2)
    
    
    0.31
    %
    
    
    0.28
    %
    
    
    0.29
    %
    
    
    0.28
    %
    
    
    0.27
    %
   (1)
    
    Computed using end of period loans.(2)
    
    Computed using end of period assets. The increase in non-performing loans from 2002 to 2003 is mostly
attributed to eight commercial loans with principal balances of $1.6 million,
$1.5 million, $1.1 million, $1.0 million, and four other loans with outstanding
principal balances below $1.0 million, all of which are collateralized by real
estate. At December 31, 2003, two of these loans with outstanding balances of
$1.1 million and $695,000, had a specific valuation allowance of $277,000 and
$201,000, respectively. At December 31, 2003, the allowance for possible loan
losses was 197.17% of total non-performing loans (reserve coverage). The increase in non-performing loans 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 Westernbank 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. 43




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##### Table of Contents




    
    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. 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 loan 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, 2003, the allowance for loan losses was $61.6 million,
consisting of $53.9 million formula allowance, $5.4 million of specific
allowances and $2.3 million of unallocated allowance. As of December 31, 2003,
the allowance for loan losses equals 1.30% of total loans and 197.17% of total
non-performing loans, compared with an allowance for loan losses at December
31, 2002 of $47.1 million, or 1.24% of total loans, and 242.80% of total
non-performing loans. As of December 31, 2003, 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. 44




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The table below presents a reconciliation of changes in the allowance for
loan losses for the periods indicated: YEAR ENDED DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Balance, beginning of year
    
    $
    47,114
    
    
    $
    38,364
    
    
    $
    28,928
    
    
    $
    23,978
    
    
    $
    15,800Loans charged-off:Consumer loans (1)
    
    
    12,203
    
    
    
    4,576
    
    
    
    3,840
    
    
    
    4,760
    
    
    
    5,154Commercial, industrial and agricultural loans
    
    
    2,479
    
    
    
    3,389
    (2,3)
    
    
    2,970
    
    
    
    372
    
    
    
    1,913Real estate-mortgage and
construction loans
    
    
    184
    
    
    
    
    
    
    
    228
    
    
    
    231
    
    
    
    291Total loans charged-off
    
    
    14,866
    
    
    
    7,965
    
    
    
    7,038
    
    
    
    5,363
    
    
    
    7,358Recoveries of loans previously
charged-off:Consumer loans
    
    
    799
    
    
    
    858
    
    
    
    996
    
    
    
    795
    
    
    
    1,003Commercial, industrial and agricultural loans
    
    
    1,141
    
    
    
    584
    
    
    
    133
    
    
    
    594
    
    
    
    335Real estate-mortgage and
construction loans
    
    
    372
    
    
    
    190
    
    
    
    175
    
    
    
    224
    
    
    
    198Total recoveries of loans previously charged-off
    
    
    2,312
    
    
    
    1,632
    
    
    
    1,304
    
    
    
    1,613
    
    
    
    1,536Net loans charged-off
    
    
    12,554
    
    
    
    6,333
    
    
    
    5,734
    
    
    
    3,750
    
    
    
    5,822Provision for loan losses
    
    
    27,048
    
    
    
    15,083
    
    
    
    12,278
    
    
    
    8,700
    
    
    
    14,000Allowance acquired on loans purchased
    
    
    
    
    
    
    
    
    
    
    2,892
    
    
    
    
    
    
    
    Balance, end of period
    
    $
    61,608
    
    
    $
    47,114
    
    
    $
    38,364
    
    
    $
    28,928
    
    
    $
    23,978Ratios:Allowance for loan losses to total loans
    
    
    1.30
    %
    
    
    1.24
    %
    
    
    1.33
    %
    
    
    1.29
    %
    
    
    1.26
    %Provision for loan losses to net loans
charged-off
    
    
    215.45
    %
    
    
    238.17
    %
    
    
    214.13
    %
    
    
    232.00
    %
    
    
    240.47
    %Recoveries of loans to loans charged-off in
previous period
    
    
    29.03
    %
    
    
    23.19
    %
    
    
    24.31
    %
    
    
    21.92
    %
    
    
    36.36
    %Net loans charged-off to average loans (4)
    
    
    0.29
    %
    
    
    0.19
    %
    
    
    0.23
    %
    
    
    0.19
    %
    
    
    0.35
    %Allowance for loans losses to
non-performing loans
    
    
    197.17
    %
    
    
    242.80
    %
    
    
    271.83
    %
    
    
    298.53
    %
    
    
    344.76
    %
   (1)
    
    Includes $7.9 million and $62,000 of Expresso of Westernbank charged-offs, for the
years ended December 31, 2003 and 2002, respectively. The Expresso of Westernbank
began operations in July 10, 2002.(2)
    
    Includes $505,000 of Westernbank Business Credit division, consisting of one loan
originally acquired in the purchased loan portfolio from Congress Credit Corporation,
a subsidiary of First Union National Bank N.A on June 15, 2001. This loan was fully
reserved at the acquisition date.(3)
    
    Includes $1,100,000, consisting of one loan fully collateralized by real estate and charged-off
for regulatory purposes.(4)
    
    Average loans were computed using beginning and ending balances. 45




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##### Table of Contents



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 40. DECEMBER 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Commercial, industrial and
agricultural loans (1)
    
    $
    41,400
    
    
    
    58.7
    %
    
    $
    31,671
    
    
    
    53.3
    %
    
    $
    24,397
    
    
    
    51.8
    %
    
    $
    16,273
    
    
    
    44.1
    %
    
    $
    11,772
    
    
    
    39.9
    %Consumer loans (2)
    
    
    17,472
    
    
    
    18.2
    
    
    
    12,004
    
    
    
    19.5
    
    
    
    8,203
    
    
    
    14.5
    
    
    
    7,194
    
    
    
    17.2
    
    
    
    5,718
    
    
    
    17.4Residential real estate mortgage
and construction loans
    
    
    415
    
    
    
    23.1
    
    
    
    443
    
    
    
    27.2
    
    
    
    494
    
    
    
    33.7
    
    
    
    526
    
    
    
    38.7
    
    
    
    1,743
    
    
    
    42.7Unallocated allowance
    
    
    2,321
    
    
    
    
    
    
    
    2,996
    
    
    
    
    
    
    
    5,270
    
    
    
    
    
    
    
    4,935
    
    
    
    
    
    
    
    4,745
    
    
    
    Total allowance for loan losses
    
    $
    61,608
    
    
    
    100.0
    %
    
    $
    47,114
    
    
    
    100.0
    %
    
    $
    38,364
    
    
    
    100.0
    %
    
    $
    28,928
    
    
    
    100.0
    %
    
    $
    23,978
    
    
    
    100.00
    %
   (1)
    
    Includes $6.6 million, $4.5 million and $3.1 million of Westernbank Business Credit loans at December 31, 2003, 2002 and 2001, respectively.
Westernbank Business Credit began operations in 2001.(2)
    
    Includes $10.0 million and $1.5 million of Expresso of Westernbank loans portfolio at December 31, 2003 and 2002, respectively. The Expresso
of Westernbank began operations in July 10, 2002. Loans are classified as impaired or not impaired in accordance with SFAS
No. 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. Westernbank 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. 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: 2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Investment in impaired loans:Covered by a valuation allowance
    
    $
    28,217
    
    
    $
    26,074
    
    
    $
    21,996
    
    
    $
    8,040
    
    
    $
    8,136Do not require a valuation allowance
    
    
    22,088
    
    
    
    24,515
    
    
    
    20,482
    
    
    
    4,834
    
    
    
    4,947Total
    
    $
    50,305
    
    
    $
    50,589
    
    
    $
    42,478
    
    
    $
    12,874
    
    
    $
    13,083Valuation allowance for impaired loans
    
    $
    4,646
    
    
    $
    4,752
    
    
    $
    4,181
    
    
    $
    1,157
    
    
    $
    1,268Average investment in impaired loans
    
    $
    46,676
    
    
    $
    46,147
    
    
    $
    20,293
    
    
    $
    11,873
    
    
    $
    14,919Interest collected in impaired loans
    
    $
    2,452
    
    
    $
    4,041
    
    
    $
    1,716
    
    
    $
    780
    
    
    $
    1,470
 At December 31, 2003, Westernbanks investment in impaired loans remained
relatively stable when compared to year 2002, although the loans comprising the
balance may have changed. At December 31, 2002, Westernbank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. 46




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##### Table of Contents



INVESTMENTS The Company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 asset-backed securities, Puerto Rico
and U.S. Government and agency obligations, municipal securities rated A or
better by any of the nationally recognized rating agencies and commercial paper
rated P-1 by Moodys Investors Service, Inc or A-1 by Standard and Poors, a
Division of the McGraw-Hill Companies, Inc. In addition, the Investment
Department is responsible for the pricing and sale of deposits and securities
sold under agreements to repurchase. At the date of purchase, the Company classifies debt and equity securities
into one of three categories: held to maturity; trading; or available for sale.
At each reporting date, the appropriateness of the classification is
reassessed. Investments in debt securities for which management has the
positive intent and ability to hold to maturity are classified as held to
maturity and stated at cost increased by accretion of discounts and reduced by
amortization of premiums, both computed by the interest method. Securities that
are bought and held principally for the purpose of selling them in the near
term are classified as trading and measured at fair value in the financial
statements with unrealized gains and losses included in earnings. Securities
not classified as either held to maturity or trading are classified as
available for sale and measured at fair value in the financial statements with
unrealized gains and losses reported, net of tax, as a component of accumulated
other comprehensive income (loss) until realized. Gains and losses on sales of
securities are determined using the specific-identification method. The Companys investment strategy is affected by both the rates and terms
available on competing investments and tax and other legal considerations. The following table presents the carrying value of investments at December
31, 2003 and 2002: 2003
    
    2002(In thousands)Held to maturity :US Government and agencies obligations
    
    $
    4,463,493
    
    
    $
    2,671,344Puerto Rico Government and agencies obligations
    
    
    34,500
    
    
    
    19,695Commercial paper
    
    
    174,976
    
    
    
    74,997Corporate notes
    
    
    51,409
    
    
    
    66,697Mortgage and asset-backed securities
    
    
    999,332
    
    
    
    668,324Total
    
    
    5,723,710
    
    
    
    3,501,057Available for sale:Corporate notes
    
    
    
    
    
    
    10,381Collateralized mortgage obligations
    
    
    49,910
    
    
    
    145,276Other investments
    
    
    5,170
    
    
    
    5,230Total
    
    
    55,080
    
    
    
    160,887Total investments
    
    $
    5,778,790
    
    
    $
    3,661,944
 47




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##### Table of Contents



The carrying amount of investment securities at December 31, 2003, by
contractual maturity (excluding mortgage and asset-backed securities), are
shown below: WeightedCarrying
    
    averageamount
    
    yield(Dollars in thousands)US Government and agencies obligations:Due within one year
    
    $
    
    
    
    
    
    %Due after one year through five years
    
    
    934,549
    
    
    
    3.65Due after five years through ten years
    
    
    3,528,944
    
    
    
    4.06Due after ten years
    
    
    
    
    
    
    4,463,493
    
    
    
    3.97Puerto Rico Government and agencies obligations:Due within one year
    
    
    
    
    
    
    Due after one year through five years
    
    
    17,700
    
    
    
    6.00Due after five years through ten years
    
    
    15,450
    
    
    
    4.22Due after ten years
    
    
    1,350
    
    
    
    6.1534,500
    
    
    
    5.21Other:Due within one year
    
    
    174,976
    
    
    
    1.09Due after one year through five years
    
    
    29,987
    
    
    
    2.71Due after five years through ten years
    
    
    
    
    
    
    Due after ten years
    
    
    26,592
    
    
    
    8.07231,555
    
    
    
    2.10Total
    
    
    4,729,548
    
    
    
    3.89Mortgage and asset-backed securities
    
    
    1,049,242
    
    
    
    4.31Total
    
    $
    5,778,790
    
    
    
    3.97
    %
 Mortgage and asset-backed securities at December 31, 2003 and 2002, consists
of: 2003
    
    2002(In Thousands)Available for sale - Collateralized Mortgage Obligations
(CMOs) certificates
    
    $
    49,910
    
    
    $
    145,276Held to maturity:Federal Home Loan Mortgage Corporation (FHLMC) certificates
    
    
    7,297
    
    
    
    10,435Government National Mortgage Association (GNMA) certificates
    
    
    9,753
    
    
    
    13,657Federal National Mortgage Association (FNMA) certificates
    
    
    4,542
    
    
    
    6,906CMO certificates
    
    
    969,898
    
    
    
    565,068Other
    
    
    7,842
    
    
    
    72,258Total held to maturity
    
    
    999,332
    
    
    
    668,324Total mortgage and asset-backed securities
    
    $
    1,049,242
    
    
    $
    813,600
 The Companys investment portfolio at December 31, 2003 had an average
contractual maturity of 63 months, when compared to an average maturity of 50
months at December 31, 2002. The Companys interest rate risk model takes into
consideration the callable feature of certain investment securities. Given the
present interest rate scenario, and taking into consideration the callable
features of these securities, the Companys investment portfolio as of December
31, 2003, had a remaining average contractual maturity of 8 months. However,
no assurance can be given that such levels will be maintained in future
periods. 48




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##### Table of Contents



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


In applying the foregoing analysis, management concluded that at March 31,
2003, its investments in corporate bond and loan obligations (CBOs and
CLOs) were other-than-temporarily impaired. First, two tranches of a CBO with
an amortized cost of $13.0 million were downgraded by two different rating
agencies on April 3 and 15, 2003. Second, the available secondary
market prices for these two securities and the remaining portfolio of CBOs and
CLOs with a carrying value of $56.0 million continued to deteriorate. In line
with such decline, management concluded, based on these facts and the secondary
market prices that a $15.7 million other than temporary impairment write-down
was warranted. The same was recorded effective for the quarterly period ended
March 31, 2003. In connection with the write-down, and in accordance with
applicable accounting pronouncements, management also reassessed its intent to
hold to maturity and reclassified the securities related to the CBO that were
downgraded as available for sale as of March 31, 2003. As of March 31, 2003,
there were no defaults within the securities portfolio underlying the CBOs and
CLOs.

During the quarter ended June 30, 2003, the Company, based upon additional
information available from trustees, further downgradings, a default on the
scheduled interest payment of a CBO and further declines in quoted market
prices for such investments, reclassified the remaining portfolio of CBOs and
CLOs to available for sale and subsequently on June 6, 2003 sold its entire
portfolio of CBOs and CLOs. The sale of the portfolio, with an original total
investment of $62.9 million and adjusted to a fair value of $45.4 million as of
March 31, 2003, was completed at a loss of $7.0 million recorded during the
quarter ended June 30, 2003.

As of December 31, 2003 and 2002, management concluded that there was no
other-than-temporary impairment in its investment securities portfolio.

DEPOSITS

Westernbank offers a diversified choice of deposit accounts. Savings
deposits increased from $560.5 million as of December 31, 2002, to $692.2
million as of December 31, 2003, an increase of $131.6 million or 23.48%. Also,
other deposits represented mainly by time deposits, brokered deposits and
Individual Retirement Account deposits (IRAs), increased from $3.74 billion as
of December 31, 2002, to $4.69 billion as of December 31, 2003, an increase of
$955.1 million or 25.55%. Other deposits include brokered deposits amounting
to $3.51 billion and $2.55 billion as of December 31, 2003 and 2002,
respectively. These accounts have historically been a stable source of funds.

At December 31, 2003, Westernbank had total deposits of $5.39 billion, of
which $692.2 million or 12.85% consisted of savings deposits, $246.5 million or
4.58% consisted of interest bearing demand deposits, $192.8 million or 3.58%
consisted of noninterest bearing deposits and $4.23 billion or 78.55% consisted
of time deposits. Westernbank also offers negotiable order of withdrawal
(NOW) accounts, Super Now accounts, special checking accounts and commercial
demand accounts. At December 31, 2003, the scheduled maturities of time
certificates of deposit in amounts of $100,000 or more are as follows:

(In thousands)3 months or less
    
    $
    143,790over 3 months through 6 months
    
    
    32,179over 6 months through 12 months
    
    
    34,184over 12 months
    
    
    63,250Total
    
    $
    273,403


49



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##### Table of Contents



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

2003
    
    2002
    
    2001Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    Averageamount
    
    rate
    
    amount
    
    rate
    
    amount
    
    rate(Dollars in thousands)Time deposits
    
    $
    3,775,263
    
    
    
    2.59
    %
    
    $
    2,889,649
    
    
    
    3.40
    %
    
    $
    2,177,399
    
    
    
    5.21
    %Savings deposits
    
    
    605,854
    
    
    
    2.15
    %
    
    
    509,114
    
    
    
    2.46
    %
    
    
    432,626
    
    
    
    2.96
    %Interest bearing demand
deposits
    
    
    160,015
    
    
    
    2.55
    %
    
    
    124,127
    
    
    
    2.90
    %
    
    
    100,960
    
    
    
    3.45
    %Noninterest bearing demand
deposits
    
    
    227,358
    
    
    
    
    
    
    
    167,352
    
    
    
    
    
    
    
    136,251
    
    
    
    $
    4,768,490
    
    
    
    2.41
    %
    
    $
    3,690,242
    
    
    
    3.10
    %
    
    $
    2,847,236
    
    
    
    4.55
    %
 The increase in deposits during the last three years is primarily the
result of the increase in the volume of business. BORROWINGS The following table sets forth the borrowings of the Company at the dates
indicated: 2003
    
    2002
    
    2001(In thousands)Securities sold under agreements to repurchase
    
    $
    5,046,045
    
    
    $
    3,097,341
    
    
    $
    2,059,646Advances from Federal Home Loan Bank (FHLB)
    
    
    146,000
    
    
    
    120,000
    
    
    
    120,000Term notes
    
    
    
    
    
    
    
    
    
    
    43,000Mortgage note payable
    
    
    37,234
    
    
    
    37,822
    
    
    
    $
    5,229,279
    
    
    $
    3,255,163
    
    
    $
    2,222,646
 Westernbank has made use of institutional securities sold under agreements
to repurchase in order to obtain funding, primarily through investment banks
and brokerage firms. Securities sold under agreements to repurchase are
collateralized with investment securities. Westernbank had $5.05 billion in
securities sold under agreements to repurchase outstanding at December 31,
2003, at a weighted average rate of 2.36%. Securities sold under agreements to
repurchase outstanding as of December 31, 2003, mature as follows: $672.9
million within 30 days; $1.29 billion in 2004; $1.27 billion in 2005; $724.9
million in 2006, $73.4 million in 2007; and $1.02 billion thereafter. Westernbank also obtains advances from FHLB of New York. As of December
31, 2003, Westernbank had $146.0 million in outstanding FHLB advances at a
weighted average rate of 4.06%. Advances from FHLB mature as follows: $40.0
million within 30 days; $14.0 million in 2005; $50.0 million in 2006; and $42.0
million after 2008. At December 31, 2003, Westernbank World Plaza, Inc., a wholly-owned
subsidiary of Westernbank Puerto Rico, had outstanding $37.2 million of a
mortgage note, at a fixed interest rate of 8.05% per year up to September 11,
2009. Subsequent to September 11, 2009, the mortgage note will bear interest on
the then outstanding principal balance at a rate per year equal to the (1)
greater of 13.05% or the Treasury Rate plus five percentage points or (2)
10.05%, depending on the fulfillment of 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. 50




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##### Table of Contents



The following table presents certain information regarding Westernbanks
short-term borrowings for the periods indicated: 2003
    
    2002
    
    2001(Dollars in thousands)Amount outstanding at the period end
    
    $
    1,964,641
    
    
    $
    1,043,493
    
    
    $
    806,548Monthly average outstanding balance
    
    
    1,267,234
    
    
    
    1,378,074
    
    
    
    353,003Maximum outstanding balance at any month end
    
    
    2,147,934
    
    
    
    2,104,599
    
    
    
    806,548Weighted average interest rate:For the year
    
    
    1.24
    %
    
    
    1.51
    %
    
    
    2.18
    %At year end
    
    
    1.31
    %
    
    
    1.96
    %
    
    
    3.73
    %
 STOCKHOLDERS EQUITY Stockholders equity increased to $828.5 million as of December 31, 2003,
compared to $584.7 million in 2002, and $387.9 in 2001. The 2003 increase
resulted from the issuance of 4,232,000 and 2,640,000 shares of the Companys
Series F and Series G Preferred Stock completed in June and August 2003,
respectively, providing a net capital infusion of $102.2 million and $63.7
million, respectively, plus the net income of $113.3 million generated for the
year, partially offset by total dividends declared during the year of $39.9
million on our common and preferred stock. The increase in 2002 resulted from
the issuance of 6,095,000 and 1,725,000 shares of the Companys Common Stock
and Series E Preferred Stock, respectively, providing a net capital infusion of
$97.9 million and $41.5 million, respectively, plus the net income of $86.0
million generated for the year, partially offset by total dividends declared
during the year of $27.8 million on our common and preferred stock. On January, 18, 2002, the Companys Board of Directors approved an
increase in its annual dividend payments to common stockholders in 2002 to
$0.32 per share ($0.14 as adjusted). This represents an increase of 28% over
the dividends paid in 2001. Subsequently, on June 17, 2002, the Company
declared a three-for-two stock split in the form of a stock dividend, for all
stockholders of record as of June 28, 2002, distributed on July 10, 2002. The
effect of the stock split was a decrease to retained earnings and an increase
in common stock of $20.8 million. On January 31, 2003, the Board of Directors approved an increase of its
annual dividend payments to stockholders in 2003 to $0.18 per share (as
adjusted). This represents an increase of 22.73% over the average dividends
paid in 2002. On November 4, 2003, the Company declared a three-for-two stock split in
the form of a stock dividend, for all stockholders of record as of November 28,
2003, distributed on December 10, 2003. The effect of the stock split was a
decrease to retained earnings and an increase in common stock of $34.7 million. On November 11, 2003, the Company declared a 2% stock dividend, for all
stockholders of record as of November 28, 2003, distributed on December 10,
2003. The effect of the stock dividend was a decrease to retained earnings, an
increase in paid-in-capital and an increase in common stock of $35.2 million,
$33.1 million and $2.1 million, respectively. On January 15, 2004, the Companys Board of Directors approved an increase
in its annual dividend payments to stockholders for 2004 to $0.22 per share.
This represents an increase of 26.31% over the dividends paid in 2003. The number of common shares outstanding increased from 104,569,848 (as
adjusted) at the end of 2002 to 106,290,294 at December 31, 2003, principally
as a result of the conversion of 419,254 shares of the Companys Preferred
Stock Series A for 957,376 shares (split adjusted) of common stock and the
exercise of 765,000 options (as adjusted) by one of the Companys executive
officer during 2003. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the Companys ability to generate sufficient cash to
meet the funding needs of current loan demand; savings deposit withdrawals,
principal and interest payments with respect to outstanding borrowings and to
pay operating expenses. The Company monitors its liquidity in accordance with
guidelines established by the Investment Committee and applicable regulatory
requirements. The Companys need for liquidity is affected by loan demand, net
changes in deposit levels and the scheduled maturities of its borrowings.
Liquidity demand caused by net reductions in deposits is usually caused by
factors over which the Company has limited control. The Company derives its
liquidity from both its assets and liabilities. Liquidity is derived from
assets by receipt of 51




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interest and principal payments and prepayments, by the ability to sell
assets at market prices and by utilizing unpledged assets as collateral for
borrowings. Liquidity is derived from liabilities by maintaining a variety of
funding sources, including deposits, advances from the FHLB of New York and
other short and long-term borrowings. At December 31, 2003, the Company had
approximately $4.50 billion in securities and other short-term securities
maturing or repricing within one year or available for sale. Additional
asset-driven liquidity is provided by the remainder of the investment
securities portfolio and securitizable loans. Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits, and other short and long-term borrowing, such as
securities sold under agreements to repurchase (reverse repurchase
agreements). Other borrowings funding source limits are determined annually by
each counterparty and depend on the Banks financial condition and delivery of
acceptable collateral securities. The Bank may be required to provide
additional collateral based on the fair value of the underlying securities. In
addition, the Bank utilizes the National Certificate of Deposit (CD) Market
as a source of cost effective deposit funding in addition to local market
deposit inflows. Depositors in this market consist of credit unions, banking
institutions, CD brokers and some private corporations or non-profit
organizations. The Banks ability to acquire brokered deposits can be
restricted if it becomes in the future less than well-capitalized. An
adequately-capitalized bank, by regulation, may not accept deposits from
brokers unless it applies for and receives a waiver from the FDIC. The Company
also uses the Federal Home Loan Bank (FHLB) as a funding source, issuing notes
payable, such as advances, and other borrowings, such as reverse repurchase
agreements, through its FHLB member subsidiary, Westernbank. This funding
source requires the Bank to maintain a minimum amount of qualifying collateral
with a fair value of at least 110% and 105% of the outstanding advances and
reverse repurchase agreements, respectively. The Companys liquidity targets are reviewed monthly by the Investment
Committee and are based on the Companys commitment to make loans and
investments and its ability to generate funds. The Committees targets are also
affected by yields on available investments and upon the Committees judgment
as to the attractiveness of such yields and its expectations as to future
yields. The Companys investment portfolio at December 31, 2003 had an average
contractual maturity of 63 months. However, no assurance can be given that such
levels will be maintained in future periods. As of December 31, 2003, Westernbank had line of credit agreements with
four commercial banks permitting Westernbank to borrow a maximum aggregate
amount of $125.0 million. The agreements provide for unsecured advances to be
used by the Company on an overnight basis. Interest rate is negotiated at the
time of the transaction usually at Fed Fund rate. The credit agreements are
renewable annually. Payments due by period for the Companys contractual obligations (other
than deposit liabilities) at December 31, 2003 are presented below: Due after one
    
    Due after threeDue within one
    
    year through
    
    years through
    
    Due after fiveyear
    
    three years
    
    five years
    
    years
    
    Total(In thousands)Short-term borrowings
    
    $
    2,004,641
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,004,641Long-term borrowings
    
    
    
    
    
    
    2,054,806
    
    
    
    73,400
    
    
    
    1,096,432
    
    
    
    3,224,638Operating lease obligations
    
    
    2,103
    
    
    
    4,164
    
    
    
    3,099
    
    
    
    14,701
    
    
    
    24,067Total contractual obligations
    
    $
    2,006,744
    
    
    $
    2,058,970
    
    
    $
    76,499
    
    
    $
    1,111,133
    
    
    $
    5,253,346
 Such commitments will be funded in the normal course of business from the
Companys principal source of funds. At December 31, 2003, the Company had
$2.75 billion in certificates of deposits that mature during the following
twelve months. The Company does not anticipate any difficulty in retaining or
replacing such deposits. 52




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The contractual amount of the Companys financial instruments with
off-balance sheet risk expiring by period at December 31, 2003 is presented
below:

PAYMENTS DUE BY PERIODLess than oneTotal
    
    year
    
    2-5 years(In thousands)Lines of credit
    
    $
    174,267
    
    
    $
    89,965
    
    
    $
    84,302Commercial letters of credit
    
    
    12,287
    
    
    
    12,287
    
    
    
    Commitments to extend credit
    
    
    255,366
    
    
    
    162,754
    
    
    
    92,612Commitments to purchase mortgage loans
    
    
    200,000
    
    
    
    200,000
    
    
    
    Total
    
    $
    641,920
    
    
    $
    465,006
    
    
    $
    176,914
 Due to the nature of the Companys unfunded loan commitments, including
unfunded lines of credit, the amounts presented above do not necessarily
represent the amounts the Company anticipates funding in the periods presented
above. CRITICAL ACCOUNTING POLICIES The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Companys financial statements. The significant
accounting policies of the Company are described in the footnotes to the
consolidated financial statements. Certain accounting policies involve
significant judgments and assumptions by management which has a material impact
on the carrying value of certain assets and liabilities; management considers
such accounting policies to be critical accounting policies. The judgments and
assumptions used by management are based on historical experience and other
factors, which are believed to be reasonable under the circumstances. Because
of the nature of the judgments and assumptions made by management, actual
results could differ from these judgments and estimates which could have a
material impact on the carrying values of assets and liabilities and the
results of operations of the Company. The Company believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and complexity:  
    
    Allowance for loan losses The allowance for loan losses is a
critical accounting policy that requires the most significant
judgments and estimates used in the preparation of its consolidated
financial statements. In estimating the allowance for loan losses,
management utilizes historical experience as well as other factors
including the effect of changes in the local real estate market on
collateral values, the effects on the loan portfolio of current
economic indicators and their probable impact on borrowers and
increases or decreases in nonperforming and impaired loans. Changes
in these factors may cause managements estimate of the allowance to
increase or decrease and result in adjustments to the Companys
provision for loan losses. See - Financial Condition  Loan Review
and Allowance for Loan Losses and Note 1  Summary of Significant
Accounting Policies for a detailed description of the Companys
estimation process and methodology related to the allowance for loan
losses.  
    
    Other-than-temporary impairments The Company evaluates its
investment securities for impairment on a quarterly basis or earlier
if other factors indicative of potential impairment exist. An
impairment charge in the consolidated statements of income is
recognized when the decline in the fair value of the securities below
their cost basis is judged to be other-than-temporary. The Company
considers various factors in determining whether it should recognize
an impairment charge, including, but not limited to the length of
time and extent to which the fair value has been less than its cost
basis, expectation of recoverability of its original investment, the
employment of a systematic methodology that considers available
evidence in evaluating potential impairment, available secondary
market prices from broker/dealers and the Company s intention and
ability to hold the securities for a period of time sufficient to
allow for any anticipated recovery in fair value. See  Financial
Condition  Investments and Note 1  Summary of Significant
Accounting Policies for a detailed description of the Companys
estimation process and methodology related to the financial
instruments.  
    
    Financial instruments Certain financial instruments including
derivatives, hedged items and investment securities
available-for-sale are recorded at fair value and unrealized gains
and losses are recorded in other comprehensive income or other gains
and losses as appropriate. Fair values are based on listed market
prices, if available. If listed market prices 53




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##### Table of Contents



are not available, fair value is determined based on other relevant
factors including price quotations for similar instruments. Fair value
of certain derivative contracts are derived from pricing models that
consider current market and contractual prices for the underlying
financial instruments as well as time value and yield curve or
volatility factors underlying the positions. See - Financial Condition 
Financial Instruments and Note 1  Summary of Significant Accounting
Policies for a detailed description of the Companys estimation process
and methodology related to the financial instruments.  
    
    Certain liabilities and contingencies In the ordinary course
of business, the Companys management is required to make certain
estimates and assumptions that affect the reported amounts of
liabilities and disclosures of contingent liabilities at the date of
the consolidated financial statements and therefore the reported
amounts of revenues and expenses during the reporting period. Such
estimates are subjective in nature and involve uncertainties and
matters of significant judgment regarding past and expected gains or
losses, current economic conditions, and risk characteristics, among
other factors. The following is a description of the most significant
methods and assumptions used by the Company in estimating the amounts
reported in connection with certain liabilities and contingencies as
disclosed in the financial statements:  Income taxes The Company is required to compute income taxes in
connection with its preparation of the consolidated financial
statements. This computation involves estimates and assumptions made
by the Companys management based on its interpretation of current
and enacted tax laws and regulations that affect the reported amounts
of current and deferred income tax expense. The carrying value of the
Companys net deferred tax asset assumes that the Company will be
able to generate sufficient taxable income in the future to realize
the tax benefit. If expectations about future taxable income are not
materialized, the Company may be required to record a valuation
allowance to reduce the recorded amount of its deferred tax asset
resulting in an increase of income tax expense in the consolidated
statements of income.  Contingencies The Company is a defendant in legal actions arising
in the normal course of business. Evaluation of these contingencies
requires management of the Company, after consultation with its legal
counsel, to assume certain positions based on its interpretation of
current laws and regulations. Such interpretations are subjective in
nature and involve uncertainties and matters of significant judgment
and, therefore, actual results could differ from management position
and estimates. See Note 1  Summary of Significant Accounting Policies for a detailed
description of the Companys estimation process and methodology related to
certain liabilities and contingencies. RECENT ACCOUNTING DEVELOPMENTS Effective January 1, 2002, the Company adopted SFAS No. 141, Business
Combinationsand SFAS No. 142, Goodwill and Other Intangible Assets. Those
statements changed the accounting for business combinations and goodwill in two
significant ways. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations. Use of the pooling-of-interest method is
prohibited. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, ceased
upon adoption of this statement. Adoption of SFAS No. 141 and No. 142 did not
have a significant effect on the Companys consolidated financial statements. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement cost. SFAS No. 143 became effective
on January 1, 2003 and did not have a significant effect on the Companys
consolidated financial condition or results of operations. Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the Disposal of a Segment of a Business. Implementation of
SFAS No. 144 did not have a significant effect on the Companys consolidated
financial statements. 54




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In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No.
145 rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt-an amendment of APB Opinion No. 30, which required all gains and losses
from extinguishment of debt to be aggregated and, if material, classified as
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion No. 30 will now be used to classify those gains and losses. SFAS No.
145 also amends SFAS No. 13, Accounting for Leases, to require that certain
lease modifications that have economic effects similar to saleleaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. SFAS No. 145 did not have a significant effect on the Companys
consolidated financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. Implementation of SFAS No. 146 did not
have a significant effect on the Companys consolidated financial condition or
results of operations. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141, Business
Combinationsand SFAS No. 142, Goodwill and Other Intangible Assets. In
addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assetsto include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor-and-borrower-relationship intangible assets and credit cardholders
intangible assets. SFAS No. 147 was effective for acquisitions or impairment
measurement of such intangibles effective on or after October 1, 2002. SFAS No.
147 did not have a significant effect on the Companys financial condition or
results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Effective
January 1, 2003, the Company changed the method of accounting for employee
stock options from the intrinsic value method to the fair value method. Under
the modified prospective method selected by the Company under the provisions of
SFAS No. 148, compensation cost recognized since January 1, 2003 is the same
that would have been recognized had the recognition provisions of FASB No. 123
been applied from its original effective date. Results prior to 2003 were not
restated. The effect of implementing this Statement on the Companys financial
condition and results of operations for the year ended December 31, 2003, was a
charge of $1,031,000. Prior to January 1, 2003, the Company followed the intrinsic value-based
method of accounting prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees,and related interpretations. Compensation expense under
this method was generally recognized for any excess of the quoted market price
of the Companys stock at the measurement date over the amount an employee must
pay to acquire the stock. Since all options granted under those plans have an
exercise price equal to the market value of the underlying common stock at the
grant date, no compensation expense was recognized at the measurement date. In November 2002, the FASB issued FASB Interpretation No.45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.
This interpretation elaborates on the disclosures to be made by a guarantor in
the financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and initial
measurement provisions of FIN 45 were applicable for guarantees issued or
modified after December 31, 2002. Adoption of the recognition and measurement
provisions did not have a significant effect on the Companys financial
condition and results of operations. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 addresses consolidation by business enterprises of variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
issue voting interests (or other interests with similar rights) or (b) the
total equity investment at risk is not sufficient to permit the entity to
finance its activities. FIN 46 requires an enterprise to consolidate a variable
interest entity if that enterprise has a variable interest that will 55




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absorb a majority of the entitys expected losses if these occur, receive
a majority of the entitys expected residual returns if these occur, or both.
Qualifying Special Purpose Entities are exempt from the consolidation
requirements. In addition to numerous FASB Staff Positions written to clarify
and improve the application of FIN 46, the FASB recently announced a deferral
for certain entities, and an amendment to FIN 46 entitled FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest Entities
(FIN 46R). The Company must apply FIN 46R to their interests in all entities
subject to the interpretation as of the first interim or annual period ending
after March 15, 2004. FIN 46R is not expected to have a significant effect on
the Companys financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities.This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities.This Statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6 (b) of Statement 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying to
conform it to language used in FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,and (4) amends certain other existing
pronouncements. This Statement was effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Implementation of SFAS No. 149 did not have a significant effect
on the Companys financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
No. 150 is effective for all freestanding financial instruments entered into or
modified after May 31, 2003. For all other freestanding financial instruments,
it became effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS No. 150 applies to three categories of freestanding
financial instruments (mandatorily redeemable instruments, instruments with
repurchase obligations and instruments with obligations to issue a variable
number of shares). Instruments within the scope of SFAS No. 150 must be
classified as liabilities in the statement of financial condition. Certain
provisions of SFAS No. 150 related to mandatorily redeemable financial
instruments have been subsequently deferred indefinitely by the FASB. The
Company does not have mandatorily redeemable financial instruments outstanding.
Implementation of SFAS No. 150 did not have a significant effect on the
Companys financial position or results of operations. 56




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK OFF-BALANCE
SHEET ARRANGEMENTS For the years ended December 31, 2003, 2002 and 2001, the Company have not
entered in any type of off-balance sheet arrangements. MARKET RISK The Companys financial performance is impacted by among other factors,
interest rate risk and credit risk. Management considers interest rate risk the
Companys most significant market risk. Interest rate risk is the exposure to
adverse changes in net interest income due to changes in interest rates.
Consistency of the Companys net interest income is largely dependent upon the
effective management of interest rate risk. The Company does not utilize
derivatives to mitigate its credit risk, relying instead on an extensive
counterparty review process. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Financial Condition  Allowance
for Loan Losses herein. Interest rate risk is addressed by the Companys Asset & Liability
Committee (ALCO), which includes the full Board of Directors and certain
senior management representatives. The ALCO monitors interest rate risk by
analyzing the potential impact to the net portfolio of equity value and net
interest income from potential changes to interest rates and considers the
impact of alternative strategies or changes in balance sheet structure. The
ALCO manages the Companys balance sheet in part to minimize the potential
impact on net portfolio value and net interest income despite changes in
interest rates. The Companys exposure to interest rate risk is reviewed on a
quarterly basis by the ALCO. Interest rate risk exposure is measured using
interest rate sensitivity analysis to determine the change in net portfolio
value in the event of hypothetical changes in interest rates. If potential
changes to net portfolio value and net interest income resulting from
hypothetical interest rate changes are not within the limits established by the
Board, the Board may direct management to adjust its asset and liability mix to
bring interest rate risk within Board-approved limits. In order to reduce the
exposure to interest rate fluctuations, the Company has implemented strategies
to more closely match its balance sheet composition. Interest rate sensitivity
is computed by estimating the changes in net portfolio of equity value, or
market value over a range of potential changes in interest rates. The market
value of equity is the market value of the Companys assets minus the market
value of its liabilities plus the market value of any off-balance sheet items.
The market value of each asset, liability, and off-balance sheet item is its
net present value of expected cash flows discounted at market rates after
adjustment for rate changes. The Company measures the impact on market value
for an immediate and sustained 200 basis point increase decrease (shock) in
interest rates. The Companys profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings. The
Company is subject to interest rate risk to the degree that its
interest-earning assets reprice differently than its interest-bearing
liabilities. The Company manages its mix of assets and liabilities with the goals of
limiting its exposure to interest rate risk, ensuring adequate liquidity, and
coordinating its sources and uses of funds. Specific strategies have included
securitization and sale of long-term, fixed-rate residential mortgage loans,
shortening the average maturity of fixed-rate loans and increasing the volume
of variable and adjustable rate loans to reduce the average maturity of the
Companys interest-earning assets. All long-term, fixed-rate single family
residential mortgage loans underwritten according to Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association and Government National
Mortgage Association guidelines are sold for cash upon origination. In
addition, the Company enters into interest rate exchange agreements (swaps) to
hedge fixed callable certificates of deposit. 57




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The Company is exposed to changes in the level of Net Interest Income
(NII) in a changing interest rate environment. NII will fluctuate pursuant to
changes in the levels of interest rates and of interest-sensitive assets and
liabilities. If (1) the weighted average rates in effect at period end remain
constant, or increase or decrease on an instantaneous and sustained change of
plus 200 or minus 50 basis points in 2003 and 2002, and (2) all scheduled
repricing, reinvestments and estimated prepayments, and reissuances are at such
constant, or increase or decrease accordingly; NII will fluctuate as shown on
the table below: December 31, 2003: Change in Interest Rate
    
    Expected NII (1)
    
    Amount Change
    
    % Change(Dollars in thousands)+200 Basis Points
    
    $
    280,197
    
    
    $
    (14,573
    )
    
    
    (4.94
    )%Base Scenario
    
    
    294,770
    
    
    
    
    
    
    
    -50 Basis Points
    
    
    291,543
    
    
    
    (3,227
    )
    
    
    (1.09
    )%
 December 31, 2002: Change in Interest Rate
    
    Expected NII (1)
    
    Amount Change
    
    % Change(Dollars in thousands)+200 Basis Points
    
    $
    179,851
    
    
    $
    (8,672
    )
    
    
    (4.60
    )%Base Scenario
    
    
    188,523
    
    
    
    
    
    
    
    -50 Basis Points
    
    
    178,391
    
    
    
    (10,132
    )
    
    
    (5.37
    )%
   (1)
    
    The NII figures exclude the effect of the amortization of loan fees. Given
the fed fund rate of 1.00% and 1.25% at December 31, 2003 and 2002,
respectively, a linear 50 basis points decrease for 2003 and 2002,
respectively, was modeled in the estimated change in interest rate in place of
the linear 200 basis points decrease. The model utilized to create the information presented above makes various
estimates at each level of interest rate change regarding cash flows from
principal repayments on loans and mortgage-backed securities and/or call
activity on investment securities. Actual results could differ significantly
from these estimates which would result in significant differences in the
calculated projected change. In addition, the limits stated above do not
necessarily represent the level of change under which management would
undertake specific measures to realign its portfolio in order to reduce the
projected level of change. The interest rate sensitivity (GAP) is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or repricing
within a given time period. A GAP is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A GAP is considered negative when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets. During a period
of rising interest rates, a negative GAP would tend to adversely affect net
interest income, while a positive GAP would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative GAP
would tend to result in an increase in net interest income, while a positive
GAP would tend to affect net interest income adversely. While the GAP is a
useful measurement and contributes toward effective asset and liability
management, it is difficult to predict the effect of changing interest rates
solely on that measure. Because different types of assets and liabilities with
the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched
in each maturity category. 58




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ECONOMIC CONDITIONS, MARKET AREA AND COMPETITION Puerto Rico (the Island), a Commonwealth of the United States of America
(the U.S.), is the easternmost of the Greater Antilles and the fourth largest
island of the Caribbean. The Island is located at the crossroads between North
and South America, at just 3.5 hours airtime from New York and 60 minutes from
Venezuela and has a population of approximately four (4) million people. In
1917 the people of Puerto Rico became citizens of the U.S., and therefore Puerto Ricans serve in the United States Armed Forces.
As in the U.S., the Island has a local judicial system. The Island constitutes
a District in the Federal Judiciary and has its own U.S. district court. Also,
most of the U.S. federal agencies are represented on the Island. However, the
Island has its own Internal Revenue system and is not subject to U.S. taxes.
Spanish and English are the official languages of the Island. The Island economy operates as a region within the U.S., and therefore its
financial performance is closely linked to the U.S. performance. The external
sector is a key element of the economy of Puerto Rico, as it has a very open
economy, with large flows of trade, investment and income. The Island uses
U.S. currency and forms part of the U.S. financial system. As a Commonwealth of
the U.S., the Island falls within the U.S. for purposes of customs and
migration, and therefore there is a full exchange of funds, people and goods
between Puerto Rico and the U.S. Puerto Rico banks are subject to the same
Federal laws, regulations and supervision as those of the financial
institutions operating in the rest of U.S. The Federal Deposit Insurance Corp.
insures the deposits of Puerto Rico chartered commercial banks, including
Westernbank, the banking subsidiary of W Holding Company, Inc. In early 2003, the performance of economic indicators suggested that the
Puerto Rican economy was relatively stagnant in line with overall economic
conditions in the U.S. Although this stagnation was not seen in all sectors of
the economy, the key sectors of the economy showed no signs of notable
improvement. Historically, Puerto Rico unemployment rate has been higher than
the average U.S. unemployment rate, averaging approximately between 10% - 12%
during the past years, since although the number of jobs was increasing; the
workforce was growing in a parallel fashion. Manufacturing and construction
continues to be the backbone of the Island economy, and many multinational
corporations have substantial operations in the Island. The Islands
pharmaceutical industry continues to be very strong, being the primary driver
for employment in the Island, along with the construction industry; both of
them labor intensive industries. During the past years there has been a
slowdown in both industries, primarily due to the reduction of tax incentives
in the manufacturing sector and the recession effects over the construction
industry. Nevertheless, the Island economy has been able to be somewhat less
dependant of these industries thanks to its diversification into other business
areas such as tourism, retail, banking and transportation. The Banking sector has been the main driver of such diversification, being
the financial support for all the industrial and commercial activity on the
Island. At December 31, 2003, there are approximately twelve (12) banks
operating in Puerto Rico, with total assets of approximately $161.0 billion at
September 30, 2003. U.S. banks, foreign banks and the major Puerto Rican banks,
all offer commercial banking services designed to support the emerging
requirements of its local clients as well as of its international clients. The
economic strength and liquidity of local financial institutions, considered as
the pillar of the Islands economy, have allowed the Puerto Rico banking sector
to extend credit, without which the Islands economy couldnt be sustained. The
growing combination of loans, deposits and assets has been the key elements to
the economic progress for the past years. Loans, in particular, have played a
key role in keeping the Island economy afloat, through either personal,
mortgage or commercial loans. The Islands average growth in its gross national
product (GNP) for the past years has been approximately 8%, while the combined
commercial bank loan portfolio average growth has been approximately 12%, for
the same period. The financial services and banking business are 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 its market place. 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. Significant deterioration in the local economy or external
economic conditions, such as inflation, recession, unemployment, real estate
values and other factors beyond the Companys control, could also substantially
impact the Companys performance. There can be no assurance that future adverse
changes in the local economy would not have a material adverse effect on the
Companys consolidated financial condition, results of operations or cash
flows. 59




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS REPORT

To the Board of Directors of

W Holding Company, Inc.


Mayagüez, Puerto Rico


We have audited the accompanying consolidated
statements of financial condition of W Holding Company, Inc. and
its subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated
statements of income, changes in stockholders equity and
of comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2003. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of W Holding Company, Inc. and its
subsidiaries at December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United
States of America.

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

/s/ Deloitte & Touche LLP

San Juan, Puerto Rico


March 5, 2004


Stamp
No. 1939048

affixed to original.


60




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W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


DECEMBER 31, 2003 AND 2002





|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |           |         |           | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------- | --------- | ------- | ---------- | --------- | --------- | ------- | --------- | 
|                                         |                                                                                                                                                                                                                                                                 | 2003                                                                       |                            | 2002     
|ASSETS                                   |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|                                         | Cash and due from banks                                                                                                                                                                                                                                         |                                                                            | $                          | 92,811    |         |            | $         | 76,080    |        
|                                         | Money market instruments:                                                                                                                                                                                                                                       |                                                                            |                            |           |         |            |           |           |        
|                                         |                                                                                                                                                                                                                                                                 | Federal funds sold and securities purchased under
    agreements to resell |                            |           | 649,852 |            |           |           | 459,147 |          
|                                         |                                                                                                                                                                                                                                                                 | Interest-bearing deposits in banks                                         |                            |           | 37,767  |            |           |           | 17,459  |          
|                                         | Investment securities available for sale, with an
    amortized cost of $55,992 in 2003 and $161,958 in 2002                                                                                                                                                    |                                                                            |                            | 55,080    |         |            |           | 160,887   |        
|                                         | Investment securities held to maturity, with a
    fair value
    of $5,638,816 in 2003 and $3,503,379 in 2002                                                                                                                                                  |                                                                            |                            | 5,723,710 |         |            |           | 3,501,057 |        
|                                         | Federal Home Loan Bank stock, at cost                                                                                                                                                                                                                           |                                                                            |                            | 39,750    |         |            |           | 43,322    |        
|                                         | Mortgage loans held for sale, at lower of cost or
    fair value                                                                                                                                                                                                |                                                                            |                            | 2,555     |         |            |           | 7,446     |        
|                                         | Loans, net of allowance for loan losses of
    $61,608 in 2003 and $47,114 in 2002                                                                                                                                                                              |                                                                            |                            | 4,683,118 |         |            |           | 3,754,357 |        
|                                         | Accrued interest receivable                                                                                                                                                                                                                                     |                                                                            |                            | 75,567    |         |            |           | 46,653    |        
|                                         | Foreclosed real estate held for sale, net                                                                                                                                                                                                                       |                                                                            |                            | 4,082     |         |            |           | 3,679     |        
|                                         | Premises and equipment, net                                                                                                                                                                                                                                     |                                                                            |                            | 103,370   |         |            |           | 96,209    |        
|                                         | Deferred income taxes, net                                                                                                                                                                                                                                      |                                                                            |                            | 24,910    |         |            |           | 16,327    |        
|                                         | Other assets                                                                                                                                                                                                                                                    |                                                                            |                            | 26,868    |         |            |           | 22,454    |        
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|TOTAL                                    |                                                                                                                                                                                                                                                                 | $                                                                          | 11,519,440                 |           |         | $          | 8,205,077 |          
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|LIABILITIES:                             |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|                                         | Deposits                                                                                                                                                                                                                                                        |                                                                            | $                          | 5,385,476 |         |            | $         | 4,298,744 |        
|                                         | Securities sold under agreements to repurchase                                                                                                                                                                                                                  |                                                                            |                            | 5,046,045 |         |            |           | 3,097,341 |        
|                                         | Advances from Federal Home Loan Bank                                                                                                                                                                                                                            |                                                                            |                            | 146,000   |         |            |           | 120,000   |        
|                                         | Mortgage note payable                                                                                                                                                                                                                                           |                                                                            |                            | 37,234    |         |            |           | 37,822    |        
|                                         | Advances from borrowers for taxes and insurance                                                                                                                                                                                                                 |                                                                            |                            | 4,307     |         |            |           | 3,198     |        
|                                         | Other liabilities                                                                                                                                                                                                                                               |                                                                            |                            | 71,869    |         |            |           | 63,224    |        
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|                                         |                                                                                                                                                                                                                                                                 |                                                                            | Total liabilities          |           |         | 10,690,931 |           |           |         | 7,620,329 | 
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|COMMITMENTS AND CONTINGENCIES            |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|STOCKHOLDERS EQUITY:                    |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|                                         | Preferred stock  $1.00 par value
    per share (liquidation preference $25 per share 
    $384,893,625 in 2003 and $223,574,975 in 2002); authorized
    20,000,000 shares; issued and outstanding 15,395,745 shares in
    2003 and 8,942,999 shares in 2002 |                                                                            |                            | 15,396    |         |            |           | 8,943     |        
|                                         | Common stock  $1.00 par value per
    share; authorized 300,000,000 shares; issued
    and outstanding 106,290,294 shares in 2003 and 68,346,306 shares
    in 2002                                                                                            |                                                                            |                            | 106,290   |         |            |           | 68,346    |        
|                                         | Paid-in capital                                                                                                                                                                                                                                                 |                                                                            |                            | 514,800   |         |            |           | 319,106   |        
|                                         | Retained earnings:                                                                                                                                                                                                                                              |                                                                            |                            |           |         |            |           |           |        
|                                         |                                                                                                                                                                                                                                                                 | Reserve fund                                                               |                            |           | 43,375  |            |           |           | 32,011  |          
|                                         |                                                                                                                                                                                                                                                                 | Undivided profits                                                          |                            |           | 149,581 |            |           |           | 157,442 |          
|                                         | Accumulated other comprehensive loss                                                                                                                                                                                                                            |                                                                            |                            | (933      | )       |            |           | (1,100    | )      
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|                                         |                                                                                                                                                                                                                                                                 |                                                                            | Total stockholders equity |           |         | 828,509    |           |           |         | 584,748   | 
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          
|TOTAL                                    |                                                                                                                                                                                                                                                                 | $                                                                          | 11,519,440                 |           |         | $          | 8,205,077 |          
|                                         |                                                                                                                                                                                                                                                                 |                                                                            |                            |           |         |            |           |          

See notes to consolidated financial statements.

61




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001





|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |         |         | 
|------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                        |                                                                                   | 2003                     |         | 2002    |         | 2001
|INTEREST INCOME:                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        | Loans, including loan fees                                                        |                          | $       | 275,848 |         |      | $       | 220,676 |         |   | $       | 207,385 |        
|                                                        | Investment securities                                                             |                          |         | 134,273 |         |      |         | 112,759 |         |   |         | 98,946  |        
|                                                        | Mortgage-backed securities                                                        |                          |         | 40,092  |         |      |         | 44,694  |         |   |         | 28,216  |        
|                                                        | Money market instruments                                                          |                          |         | 11,633  |         |      |         | 7,451   |         |   |         | 8,731   |        
|                                                        | Trading securities                                                                |                          |         | 48      |         |      |         | 154     |         |   |         | 57      |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        |                                                                                   | Total interest income    |         |         | 461,894 |      |         |         | 385,734 |   |         |         | 343,335 | 
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|INTEREST EXPENSE:                                       |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        | Deposits                                                                          |                          |         | 114,755 |         |      |         | 114,374 |         |   |         | 129,676 |        
|                                                        | Federal funds bought and securities sold under
    agreements to repurchase       |                          |         | 101,652 |         |      |         | 98,233  |         |   |         | 79,882  |        
|                                                        | Advances from Federal Home Loan Bank                                              |                          |         | 6,037   |         |      |         | 6,202   |         |   |         | 6,597   |        
|                                                        | Other borrowings                                                                  |                          |         | 142     |         |      |         | 604     |         |   |         | 2,114   |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        |                                                                                   | Total interest expense   |         |         | 222,586 |      |         |         | 219,413 |   |         |         | 218,269 | 
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|NET INTEREST INCOME                                     |                                                                                   |                          | 239,308 |         |         |      | 166,321 |         |         |   | 125,066 |        
|PROVISION FOR LOAN LOSSES                               |                                                                                   |                          | 27,048  |         |         |      | 15,083  |         |         |   | 12,278  |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|NET INTEREST INCOME AFTER PROVISION FOR LOAN
    LOSSES |                                                                                   |                          | 212,260 |         |         |      | 151,238 |         |         |   | 112,788 |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|OTHER INCOME:                                           |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        | Service charges on deposit accounts and other fees                                |                          |         | 27,831  |         |      |         | 22,505  |         |   |         | 18,859  |        
|                                                        | Unrealized (loss) gain on derivative instruments                                  |                          |         | (236    | )       |      |         | 1,288   |         |   |         | (838    | )      
|                                                        | Net (loss) gain on sales and valuation of loans,
    securities, and other assets |                          |         | (20,949 | )       |      |         | 950     |         |   |         | 160     |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        |                                                                                   | Total other income, net  |         |         | 6,646   |      |         |         | 24,743  |   |         |         | 18,181  | 
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|TOTAL NET INTEREST INCOME AND OTHER INCOME              |                                                                                   |                          | 218,906 |         |         |      | 175,981 |         |         |   | 130,969 |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|OPERATING EXPENSES:                                     |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        | Salaries and employees benefits                                                  |                          |         | 33,840  |         |      |         | 28,017  |         |   |         | 22,884  |        
|                                                        | Equipment                                                                         |                          |         | 9,044   |         |      |         | 9,519   |         |   |         | 8,850   |        
|                                                        | Occupancy                                                                         |                          |         | 6,603   |         |      |         | 5,861   |         |   |         | 5,031   |        
|                                                        | Advertising                                                                       |                          |         | 6,698   |         |      |         | 6,865   |         |   |         | 4,392   |        
|                                                        | Printing, postage, stationery, and supplies                                       |                          |         | 3,253   |         |      |         | 2,836   |         |   |         | 2,262   |        
|                                                        | Telephone                                                                         |                          |         | 2,279   |         |      |         | 2,042   |         |   |         | 1,864   |        
|                                                        | Net loss (gain) from operations of
    foreclosed real estate held for sale       |                          |         | 205     |         |      |         | (88     | )       |   |         | (173    | )      
|                                                        | Other                                                                             |                          |         | 22,899  |         |      |         | 18,865  |         |   |         | 15,200  |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|                                                        |                                                                                   | Total operating expenses |         |         | 84,821  |      |         |         | 73,917  |   |         |         | 60,310  | 
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|INCOME BEFORE PROVISION FOR INCOME TAXES                |                                                                                   |                          | 134,085 |         |         |      | 102,064 |         |         |   | 70,659  |        
|PROVISION FOR INCOME TAXES                              |                                                                                   |                          | 20,771  |         |         |      | 16,101  |         |         |   | 8,504   |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|NET INCOME                                              |                                                                                   | $                        | 113,314 |         |         | $    | 85,963  |         |         | $ | 62,155  |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|NET INCOME AVAILABLE TO COMMON STOCKHOLDERS             |                                                                                   | $                        | 91,721  |         |         | $    | 72,189  |         |         | $ | 51,891  |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|BASIC EARNINGS PER COMMON SHARE                         |                                                                                   | $                        | 0.87    |         |         | $    | 0.73    |         |         | $ | 0.54    |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        
|DILUTED EARNINGS PER COMMON SHARE                       |                                                                                   | $                        | 0.85    |         |         | $    | 0.72    |         |         | $ | 0.54    |        
|                                                        |                                                                                   |                          |         |         |         |      |         |         |         |   |         |        

See notes to consolidated financial statements.

62




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

AND OF COMPREHENSIVE INCOME (IN THOUSANDS)


YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001





|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |         |      |  
|-------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ------ | ------- | ---- | -
|                                 |                                                               | 2003                                                                     |                                                                           | 2002    |         | 2001  
|CHANGES IN STOCKHOLDERS EQUITY: |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Preferred stock:                                              |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Balance at beginning of year                                             |                                                                           | $       | 8,943   |        |         | $      | 7,220   |        |         | $      | 3,220   |     
|                                 |                                                               | Issuance of preferred stock                                              |                                                                           |         | 6,872   |        |         |        | 1,725   |        |         |        | 4,000   |     
|                                 |                                                               | Conversion of preferred stock                                            |                                                                           |         | (419    | )      |         |        | (2      | )      |         |        |        |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               | Balance at end of year                                                   |                                                                           |         | 15,396  |        |         |        | 8,943   |        |         |        | 7,220   |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Common stock:                                                 |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Balance at beginning of year                                             |                                                                           |         | 68,346  |        |         |        | 41,500  |        |         |        | 41,502  |     
|                                 |                                                               | Stock split effected in the form of a stock
    dividend                 |                                                                           |         | 34,737  |        |         |        | 20,750  |        |         |        |        |     
|                                 |                                                               | Stock dividend                                                           |                                                                           |         | 2,083   |        |         |        |        |        |         |        |        |     
|                                 |                                                               | Purchase and retirement of common stock                                  |                                                                           |         | (2      | )      |         |        | (2      | )      |         |        | (2      | )   
|                                 |                                                               | Issuance of common stock                                                 |                                                                           |         |        |        |         |        | 6,095   |        |         |        |        |     
|                                 |                                                               | Issuance of common stock upon conversion of
    preferred stock          |                                                                           |         | 626     |        |         |        | 3       |        |         |        |        |     
|                                 |                                                               | Issuance of common stock upon exercise of stock
    options              |                                                                           |         | 500     |        |         |        |        |        |         |        |        |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               | Balance at end of year                                                   |                                                                           |         | 106,290 |        |         |        | 68,346  |        |         |        | 41,500  |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Paid-in capital:                                              |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Balance at beginning of year                                             |                                                                           |         | 319,106 |        |         |        | 187,628 |        |         |        | 95,313  |     
|                                 |                                                               | Issuance of preferred stock                                              |                                                                           |         | 158,991 |        |         |        | 39,738  |        |         |        | 92,341  |     
|                                 |                                                               | Stock dividend                                                           |                                                                           |         | 33,076  |        |         |        |        |        |         |        |        |     
|                                 |                                                               | Stock options exercised                                                  |                                                                           |         | 2,834   |        |         |        |        |        |         |        |        |     
|                                 |                                                               | Effect of stock options granted to employees                             |                                                                           |         | 1,031   |        |         |        |        |        |         |        |        |     
|                                 |                                                               | Issuance of common stock upon conversion of
    preferred stock          |                                                                           |         | (207    | )      |         |        |        |        |         |        |        |     
|                                 |                                                               | Purchase and retirement of common stock                                  |                                                                           |         | (31     | )      |         |        | (40     | )      |         |        | (26     | )   
|                                 |                                                               | Issuance of common stock                                                 |                                                                           |         |        |        |         |        | 91,780  |        |         |        |        |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               | Balance at end of year                                                   |                                                                           |         | 514,800 |        |         |        | 319,106 |        |         |        | 187,628 |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Reserve fund:                                                 |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Balance at beginning of year                                             |                                                                           |         | 32,011  |        |         |        | 23,476  |        |         |        | 17,302  |     
|                                 |                                                               | Transfer from undivided profits                                          |                                                                           |         | 11,364  |        |         |        | 8,535   |        |         |        | 6,174   |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               | Balance at end of year                                                   |                                                                           |         | 43,375  |        |         |        | 32,011  |        |         |        | 23,476  |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Undivided profits:                                            |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Balance at beginning of year                                             |                                                                           |         | 157,442 |        |         |        | 128,583 |        |         |        | 93,241  |     
|                                 |                                                               | Net income                                                               |                                                                           |         | 113,314 |        |         |        | 85,963  |        |         |        | 62,155  |     
|                                 |                                                               | Cash dividends on common stock                                           |                                                                           |         | (18,322 | )      |         |        | (14,045 | )      |         |        | (10,375 | )   
|                                 |                                                               | Cash dividends on preferred stock                                        |                                                                           |         | (21,593 | )      |         |        | (13,774 | )      |         |        | (10,264 | )   
|                                 |                                                               | Transfer to reserve fund                                                 |                                                                           |         | (11,364 | )      |         |        | (8,535  | )      |         |        | (6,174  | )   
|                                 |                                                               | Stock split effected in the form of a stock
    dividend                 |                                                                           |         | (34,737 | )      |         |        | (20,750 | )      |         |        |        |     
|                                 |                                                               | Stock dividend                                                           |                                                                           |         | (35,159 | )      |         |        |        |        |         |        |        |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               | Balance at end of year                                                   |                                                                           |         | 149,581 |        |         |        | 157,442 |        |         |        | 128,583 |     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Accumulated other comprehensive loss:                         |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Balance at beginning of year                                             |                                                                           |         | (1,100  | )      |         |        | (498    | )      |         |        | 40      |     
|                                 |                                                               | Cumulative effect of change in accounting for
    derivative instruments |                                                                           |         |        |        |         |        |        |        |         |        | 135     |     
|                                 |                                                               | Other comprehensive gain (loss) for the year                             |                                                                           |         | 167     |        |         |        | (602    | )      |         |        | (673    | )   
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               | Balance at end of year                                                   |                                                                           |         | (933    | )      |         |        | (1,100  | )      |         |        | (498    | )   
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|TOTAL STOCKHOLDERS EQUITY       |                                                               | $                                                                        | 828,509                                                                   |         |         | $      | 584,748 |        |         | $      | 387,909 |       
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|COMPREHENSIVE INCOME:            |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Net income                                                    |                                                                          | $                                                                         | 113,314 |         |        | $       | 85,963 |         |        | $       | 62,155 |        
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Other comprehensive income (loss), net of income
    tax:     |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Unrealized net gains (losses) on securities
    available for sale:      |                                                                           |         |         |        |         |        |         |        |         |        |         |     
|                                 |                                                               |                                                                          | Unrealized holding (losses) gains arising during
    the period           |         |         | (7,512 | )       |        |         | 718    |         |        |         | (1   | )
|                                 |                                                               |                                                                          | Reclassification adjustment for losses
    (gains) included in net income |         |         | 7,671  |         |        |         | (1,508 | )       |        |         | (351 | )
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               |                                                                          | 159                                                                       |         |         |        | (790    | )      |         |        | (352    | )     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Cash flow hedges:                                             |                                                                          |                                                                           |         |         |        |         |        |         |        |         |        |        
|                                 |                                                               | Adoption of SFAS 133, net of income tax                                  |                                                                           |         |        |        |         |        |        |        |         |        | 135     |     
|                                 |                                                               | Unrealized net derivative gain
    (loss) arising during the period      |                                                                           |         |        |        |         |        | 356     |        |         |        | (536    | )   
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 |                                                               |                                                                          |                                                                          |         |         |        | 356     |        |         |        | (401    | )     
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Income tax effect                                             |                                                                          |                                                                           | 8       |         |        |         | (168   | )       |        |         | 215    |        
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|                                 | Net change in other comprehensive loss, net of
    income tax |                                                                          |                                                                           | 167     |         |        |         | (602   | )       |        |         | (538   | )      
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       
|TOTAL COMPREHENSIVE INCOME       |                                                               | $                                                                        | 113,481                                                                   |         |         | $      | 85,361  |        |         | $      | 61,617  |       
|                                 |                                                               |                                                                          |                                                                           |         |         |        |         |        |         |        |         |       

See notes to consolidated financial statements.

63




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN
THOUSANDS)

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001





|                                      |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |         |             |         |            |  
|------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------- | ----------- | ------- | ---------- | -------- | ----------- | ------- | ---------- | ------- | ----------- | ------- | ---------- | -
|                                      |                                                                                                       | 2003                                                    |                                                          | 2002                                      |             | 2001   
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        
|                                      | Net income                                                                                            |                                                         | $                                                        | 113,314                                   |             |         | $          | 85,963   |             |         | $          | 62,155  |            
|                                      | Adjustments to reconcile net income to net cash
    provided by operating activities:                 |                                                         |                                                          |                                           |             |         |            |          |             |         |            |         |            
|                                      |                                                                                                       | Provision (credit) for:                                 |                                                          |                                           |             |         |            |          |             |         |            |         |             |        
|                                      |                                                                                                       |                                                         | Loan losses                                              |                                           |             | 27,048  |            |          |             | 15,083  |            |         |             | 12,278  |           
|                                      |                                                                                                       |                                                         | Foreclosed real estate held for sale                     |                                           |             | 37      |            |          |             | 126     |            |         |             | 20      |           
|                                      |                                                                                                       |                                                         | Deferred income tax credit                               |                                           |             | (8,575  | )          |          |             | (2,518  | )          |         |             | (3,246  | )         
|                                      |                                                                                                       | Depreciation and amortization on:                       |                                                          |                                           |             |         |            |          |             |         |            |         |             |        
|                                      |                                                                                                       |                                                         | Premises, equipment and other                            |                                           |             | 7,293   |            |          |             | 6,856   |            |         |             | 5,931   |           
|                                      |                                                                                                       |                                                         | Foreclosed real estate held for sale                     |                                           |             | 308     |            |          |             | 60      |            |         |             | 61      |           
|                                      |                                                                                                       |                                                         | Mortgage servicing rights                                |                                           |             | 648     |            |          |             | 772     |            |         |             | 477     |           
|                                      |                                                                                                       | Stock options granted to employees                      |                                                          |                                           | 1,031       |         |            |          |            |         |            |         |            |        
|                                      |                                                                                                       | Amortization of premium (discount) on:                  |                                                          |                                           |             |         |            |          |             |         |            |         |             |        
|                                      |                                                                                                       |                                                         | Investment securities available for sale                 |                                           |             | 14      |            |          |             | (647    | )          |         |             | (160    | )         
|                                      |                                                                                                       |                                                         | Investment securities held to maturity                   |                                           |             | (1,953  | )          |          |             | (9,062  | )          |         |             | (14,068 | )         
|                                      |                                                                                                       |                                                         | Mortgage-backed securities held to maturity              |                                           |             | 4,292   |            |          |             | (555    | )          |         |             | (1,634  | )         
|                                      |                                                                                                       |                                                         | Loans                                                    |                                           |             | 1,481   |            |          |             | 1,651   |            |         |             | 1,166   |           
|                                      |                                                                                                       | Amortization of discount on deposits                    |                                                          |                                           | 2,750       |         |            |          | 1,930       |         |            |         | 780         |        
|                                      |                                                                                                       | Amortization of net deferred loan origination fees      |                                                          |                                           | (8,581      | )       |            |          | (5,634      | )       |            |         | (4,710      | )      
|                                      |                                                                                                       | Net loss (gain) on sale and in valuation of:            |                                                          |                                           |             |         |            |          |             |         |            |         |             |        
|                                      |                                                                                                       |                                                         | Investment securities available for sale                 |                                           |             | 7,671   |            |          |             | (1,508  | )          |         |             | (351    | )         
|                                      |                                                                                                       |                                                         | Impairment on investment securities held to
    maturity |                                           |             | 15,701  |            |          |             |        |            |         |             |        |           
|                                      |                                                                                                       |                                                         | Mortgage loans held for sale                             |                                           |             | 3       |            |          |             | (306    | )          |         |             | 26      |           
|                                      |                                                                                                       |                                                         | Derivative instruments                                   |                                           |             | (1,561  | )          |          |             | (1,288  | )          |         |             | 838     |           
|                                      |                                                                                                       |                                                         | Foreclosed real estate held for sale                     |                                           |             | (797    | )          |          |             | (119    | )          |         |             | (89     | )         
|                                      |                                                                                                       | Capitalization of servicing rights                      |                                                          |                                           | (1,544      | )       |            |          | (607        | )       |            |         | (483        | )      
|                                      |                                                                                                       | Originations of mortgage loans held for sale            |                                                          |                                           | (17,515     | )       |            |          | (52,317     | )       |            |         | (46,963     | )      
|                                      |                                                                                                       | Proceeds from sales of mortgage loans held for
    sale |                                                          |                                           |            |         |            |          | 8,690       |         |            |         | 2,148       |        
|                                      |                                                                                                       | Decrease (increase) in:                                 |                                                          |                                           |             |         |            |          |             |         |            |         |             |        
|                                      |                                                                                                       |                                                         | Trading securities                                       |                                           |             | 22,403  |            |          |             | 87,397  |            |         |             | 41,728  |           
|                                      |                                                                                                       |                                                         | Accrued interest receivable                              |                                           |             | (28,914 | )          |          |             | (13,833 | )          |         |             | 14,131  |           
|                                      |                                                                                                       |                                                         | Other assets                                             |                                           |             | (1,629  | )          |          |             | (6,994  | )          |         |             | (5,793  | )         
|                                      |                                                                                                       | Increase (decrease) in:                                 |                                                          |                                           |             |         |            |          |             |         |            |         |             |        
|                                      |                                                                                                       |                                                         | Accrued interest on deposits and borrowings              |                                           |             | 4,265   |            |          |             | (376    | )          |         |             | (8,496  | )         
|                                      |                                                                                                       |                                                         | Other liabilities                                        |                                           |             | 4,357   |            |          |             | 21,211  |            |         |             | 3,824   |           
|                                      |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        
|                                      |                                                                                                       |                                                         |                                                          | Net cash provided by operating activities |             |         | 141,547    |          |             |         | 133,975    |         |             |         | 59,570     |  
|                                      |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        
|                                      | Net (increase) decrease in interest-bearing
    deposits in banks                                     |                                                         |                                                          | (20,308                                   | )           |         |            | 8,755    |             |         |            | (14,909 | )          
|                                      | Net (increase) decrease in federal funds
    sold and securities purchased under agreements to resell |                                                         |                                                          | (190,705                                  | )           |         |            | (303,014 | )           |         |            | 13,176  |            
|                                      | Investment securities available for sale:                                                             |                                                         |                                                          |                                           |             |         |            |          |             |         |            |         |            
|                                      |                                                                                                       | Sales                                                   |                                                          |                                           | 50,803      |         |            |          | 661,090     |         |            |         | 162,556     |        
|                                      |                                                                                                       | Purchases                                               |                                                          |                                           | (83,261     | )       |            |          | (771,152    | )       |            |         | (449,227    | )      
|                                      |                                                                                                       | Proceeds from principal repayment                       |                                                          |                                           | 182,410     |         |            |          | 191,175     |         |            |         | 32,954      |        
|                                      | Investment securities held to maturity:                                                               |                                                         |                                                          |                                           |             |         |            |          |             |         |            |         |            
|                                      |                                                                                                       | Purchases                                               |                                                          |                                           | (23,340,101 | )       |            |          | (15,600,485 | )       |            |         | (11,453,430 | )      
|                                      |                                                                                                       | Proceeds from redemption and repayment                  |                                                          |                                           | 21,450,415  |         |            |          | 14,713,873  |         |            |         | 10,998,040  |        
|                                      | Mortgage-backed securities held to maturity:                                                          |                                                         |                                                          |                                           |             |         |            |          |             |         |            |         |            
|                                      |                                                                                                       | Purchases                                               |                                                          |                                           | (1,223,736  | )       |            |          | (638,079    | )       |            |         | (420,790    | )      
|                                      |                                                                                                       | Proceeds from principal repayment                       |                                                          |                                           | 821,058     |         |            |          | 403,026     |         |            |         | 178,795     |        
|                                      | Loans:                                                                                                |                                                         |                                                          |                                           |             |         |            |          |             |         |            |         |            
|                                      |                                                                                                       | Purchases                                               |                                                          |                                           | (344,637    | )       |            |          | (213,418    | )       |            |         | (420,459    | )      
|                                      |                                                                                                       | Sales of loans                                          |                                                          |                                           | 50,959      |         |            |          |            |         |            |         |            |        
|                                      |                                                                                                       | Other increase                                          |                                                          |                                           | (655,864    | )       |            |          | (714,924    | )       |            |         | (224,004    | )      
|                                      | Purchases of derivative options                                                                       |                                                         |                                                          | (3,384                                    | )           |         |            | (4,968   | )           |         |            | (331    | )          
|                                      | Cash paid on terminated swaps                                                                         |                                                         |                                                          |                                          |             |         |            | (208     | )           |         |            |        |            
|                                      | Proceeds from sales of foreclosed real estate
    held for sale                                       |                                                         |                                                          | 882                                       |             |         |            | 462      |             |         |            | 434     |            
|                                      | Additions to premises and equipment                                                                   |                                                         |                                                          | (14,450                                   | )           |         |            | (12,520  | )           |         |            | (4,671  | )          
|                                      | Purchase of Federal Home Loan Bank stock                                                              |                                                         |                                                          |                                          |             |         |            | (4,872   | )           |         |            | (8,650  | )          
|                                      | Redemption of Federal Home Loan Bank stock                                                            |                                                         |                                                          | 3,572                                     |             |         |            |         |             |         |            |        |            
|                                      | Purchase of partnership interest, net of cash
    acquired                                            |                                                         |                                                          |                                          |             |         |            | (11,496  | )           |         |            | (1,070  | )          
|                                      |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        
|                                      |                                                                                                       |                                                         |                                                          | Net cash used in investing activities     |             |         | (3,316,347 | )        |             |         | (2,296,755 | )       |             |         | (1,611,586 | )
|                                      |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        
|Forward                               |                                                                                                       | $                                                       | (3,174,800                                               | )                                         |             | $       | (2,162,780 | )        |             | $       | (1,552,016 | )      
|                                      |                                                                                                       |                                                         |                                                          |                                           |             |         |            |          |             |         |            |        

(Continued)

64




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##### Table of Contents



W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001





|                                                   |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |          |           | 
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | --------- | --------- | ------ | ---------- | --------- | --------- | ------ | ---------- | -------- | --------- | 
|                                                   |                                                                                                | 2003                                                                                          |                                           | 2002       |           | 2001     
|                                                   | Forward                                                                                        |                                                                                               | $                                         | (3,174,800 | )         |           | $      | (2,162,780 | )         |           | $      | (1,552,016 | )       
|                                                   |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|                                                   | Net increase in deposits                                                                       |                                                                                               |                                           | 1,086,251  |           |           |        | 1,069,000  |           |           |        | 616,097    |         
|                                                   | Net (decrease) increase in securities sold
    under agreements to repurchase                  |                                                                                               |                                           | (326,280   | )         |           |        | 451,195    |           |           |        | 365,447    |         
|                                                   | Securities sold under agreements to repurchase
    with original maturities over three months: |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |         
|                                                   |                                                                                                | Proceeds                                                                                      |                                           |            | 2,740,548 |           |        |            | 1,475,773 |           |        |            | 792,500  |          
|                                                   |                                                                                                | Payments                                                                                      |                                           |            | (465,564  | )         |        |            | (889,273  | )         |        |            | (277,374 | )        
|                                                   | Payments of term notes                                                                         |                                                                                               |                                           |           |           |           |        | (43,000    | )         |           |        | (5,000     | )       
|                                                   | Payments of mortgage note payable                                                              |                                                                                               |                                           | (588       | )         |           |        |           |           |           |        |           |         
|                                                   | Advances from Federal Home Loan Bank:                                                          |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |         
|                                                   |                                                                                                | Proceeds                                                                                      |                                           |            | 189,000   |           |        |            |          |           |        |            | 64,000   |          
|                                                   |                                                                                                | Payments                                                                                      |                                           |            | (163,000  | )         |        |            |          |           |        |            | (64,000  | )        
|                                                   | Federal funds bought:                                                                          |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |         
|                                                   |                                                                                                | Proceeds                                                                                      |                                           |            | 101,000   |           |        |            |          |           |        |            |         |          
|                                                   |                                                                                                | Payments                                                                                      |                                           |            | (101,000  | )         |        |            |          |           |        |            |         |          
|                                                   | Line of credit:                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |         
|                                                   |                                                                                                | Proceeds                                                                                      |                                           |            | 50,000    |           |        |            |          |           |        |            |         |          
|                                                   |                                                                                                | Payments                                                                                      |                                           |            | (50,000   | )         |        |            |          |           |        |            |         |          
|                                                   | Net increase in advances from borrowers for taxes
    and insurance                            |                                                                                               |                                           | 1,109      |           |           |        | 763        |           |           |        | 659        |         
|                                                   | Repurchase of common stock for retirement                                                      |                                                                                               |                                           | (33        | )         |           |        | (42        | )         |           |        | (28        | )       
|                                                   | Dividends paid                                                                                 |                                                                                               |                                           | (39,109    | )         |           |        | (27,308    | )         |           |        | (20,148    | )       
|                                                   | Issuance of common stock, net of issuance costs                                                |                                                                                               |                                           |           |           |           |        | 97,875     |           |           |        |           |         
|                                                   | Issuance of preferred stock, net of issuance costs                                             |                                                                                               |                                           | 165,863    |           |           |        | 41,463     |           |           |        | 96,341     |         
|                                                   | Proceeds from stock options exercised                                                          |                                                                                               |                                           | 3,334      |           |           |        |           |           |           |        |           |         
|                                                   |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|                                                   |                                                                                                |                                                                                               | Net cash provided by financing activities |            |           | 3,191,531 |        |            |           | 2,176,446 |        |            |          | 1,568,494 | 
|                                                   |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|NET INCREASE IN CASH AND DUE FROM BANKS            |                                                                                                |                                                                                               | 16,731                                    |            |           |           | 13,666 |            |           |           | 16,478 |           
|CASH AND DUE FROM BANKS, BEGINNING OF YEAR         |                                                                                                |                                                                                               | 76,080                                    |            |           |           | 62,414 |            |           |           | 45,936 |           
|                                                   |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|CASH AND DUE FROM BANKS, END OF YEAR               |                                                                                                | $                                                                                             | 92,811                                    |            |           | $         | 76,080 |            |           | $         | 62,414 |           
|                                                   |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                                |                                                                                               |                                           |            |           |           |        |            |           |           |        |           
|                                                   | Cash paid during the year for:                                                                 |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |         
|                                                   |                                                                                                | Interest on deposits and other borrowings                                                     |                                           | $          | 229,504   |           |        | $          | 225,146   |           |        | $          | 226,765  |          
|                                                   |                                                                                                | Income tax                                                                                    |                                           |            | 18,943    |           |        |            | 11,235    |           |        |            | 8,200    |          
|                                                   | Noncash activities:                                                                            |                                                                                               |                                           |            |           |           |        |            |           |           |        |            |         
|                                                   |                                                                                                | Building acquired on purchase of partnership
    interest                                     |                                           |            |          |           |        |            | 49,852    |           |        |            |         |          
|                                                   |                                                                                                | Other assets acquired on purchase of partnership
    interest                                 |                                           |            |          |           |        |            | 249       |           |        |            |         |          
|                                                   |                                                                                                | Mortgage note assumed on purchase of partnership
    interest                                 |                                           |            |          |           |        |            | 37,822    |           |        |            |         |          
|                                                   |                                                                                                | Accrued dividends payable                                                                     |                                           |            | 2,737     |           |        |            | 1,931     |           |        |            | 1,419    |          
|                                                   |                                                                                                | Net change in other comprehensive loss                                                        |                                           |            | (167      | )         |        |            | (602      | )         |        |            | (538     | )        
|                                                   |                                                                                                | Mortgage loans securitized and transferred to
    trading securities                          |                                           |            | 22,403    |           |        |            | 41,740    |           |        |            | 44,176   |          
|                                                   |                                                                                                | Transfer from available for sale to trading
    securities                                    |                                           |            |          |           |        |            | 41,048    |           |        |            |         |          
|                                                   |                                                                                                | Transfer from held to maturity to available for
    sale                                      |                                           |            | 51,671    |           |        |            |           |           |        |            |          |          
|                                                   |                                                                                                | Transfer from loans to foreclosed real estate
    held for sale                               |                                           |            | 3,288     |           |        |            | 2,075     |           |        |            | 1,017    |          
|                                                   |                                                                                                | Mortgage loans originated to finance the sale of
    foreclosed
    real estate held for sale |                                           |            | 2,455     |           |        |            | 786       |           |        |            | 32       |          
|                                                   |                                                                                                | Unpaid additions to premises and equipment                                                    |                                           |            | 4         |           |        |            | 20        |           |        |            | 19       |          
|                                                   |                                                                                                | Transfer from undivided profits to reserve fund                                               |                                           |            | 11,364    |           |        |            | 8,535     |           |        |            | 6,174    |          
|                                                   |                                                                                                | Effect in valuation of derivatives and their
    hedged items:                                |                                           |            |           |           |        |            |           |           |        |            |          |          
|                                                   |                                                                                                |                                                                                               | (Decrease) increase in other assets       |            |           | (1,495    | )      |            |           | (3,796    | )      |            |          | 8         | 
|                                                   |                                                                                                |                                                                                               | Decrease in deposits                      |            |           | 1,962     |        |            |           | 4,438     |        |            |          | 13,666    | 
|                                                   |                                                                                                |                                                                                               | (Decrease) increase in other liabilities  |            |           | (1,094    | )      |            |           | (646      | )      |            |          | 14,965    | 
|                                                   |                                                                                                | Conversion of preferred stock into common stock:                                              |                                           |            |           |           |        |            |           |           |        |            |          |          
|                                                   |                                                                                                |                                                                                               | Common stock                              |            |           | 626       |        |            |           | (3        | )      |            |          |          | 
|                                                   |                                                                                                |                                                                                               | Paid in capital                           |            |           | (207      | )      |            |           |          |        |            |          |          | 
|                                                   |                                                                                                |                                                                                               | Preferred stock                           |            |           | (419      | )      |            |           | (2        | )      |            |          |          | 



|                                                |            
|----------------------------------------------- | -----------
|See notes to consolidated financial statements. | (Concluded)

65




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##### Table of Contents



W Holding Company, Inc. and SubsidiariesNOTES TO CONSOLIDATED FINANCIAL
STATEMENTS 
 YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



|   |                                                                   
|-- | ------------------------------------------------------------------
|1. | ORGANIZATION AND SUMMARY OF 
     SIGNIFICANT ACCOUNTING POLICIES:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | W Holding Company, Inc. (the Company)
    is a financial holding company offering a full range of
    financial services. The business of the Company is conducted
    primarily through its wholly owned commercial bank subsidiary,
    Westernbank Puerto Rico (Westernbank). The
    Companys other operating subsidiary is 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 placing property, casualty, life and disability
    insurance. The assets, liabilities, revenues and expenses of
    Westernbank Insurance Corp. at December 31, 2003 and 2002
    and for each of the three years in the period ended
    December 31, 2003, were not significant.                                                                                      
|
| | In July 2000, the Company became a financial
    holding company under the Bank Holding Company Act. As a
    financial holding company, the Company is permitted to engage in
    financial related activities, including insurance and securities
    activities, provided that the Company and its banking subsidiary
    meet certain regulatory standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Westernbank operates through 51 full service
    branch offices located throughout Puerto Rico, primarily in the
    western and southwestern regions of the island, and a fully
    functional banking site on the Internet. In addition, it
    operates four divisions: Westernbank International Division,
    which is an International Banking Entity (IBE) under the
    Puerto Rico Act No. 52 of August 11, 1989, as amended,
    known as the International Banking Regulatory Act, which
    activities consist of commercial and related services, and
    treasury and investment activities outside of Puerto Rico;
    Westernbank Business Credit, which specializes in commercial
    business loans secured principally by accounts receivable,
    inventory and equipment; Westernbank Trust Division, which
    offers a full array of trust services; and Expresso of
    Westernbank, a new division created in July 2002, which
    specializes in small, unsecured consumer loans up to $15,000 and
    real estate collateralized consumer loans up to $75,000 through
    19 full-service branches. Westernbank owns 100% of the voting
    shares of SRG Net, Inc., a Puerto Rico corporation that operates
    an electronic funds transfer network. The assets, liabilities,
    revenues and expenses of SRG Net, Inc. at December 31, 2003
    and 2002 and for each of the three years in the period ended
    December 31, 2003, were not significant.
|
| | On March 18, 2002, Westernbank, through
    Westernbank World Plaza, Inc. (WWPI), a newly
    created wholly owned subsidiary of Westernbank Puerto Rico, and
    its wholly owned subsidiary Westernbank One Percent, Inc.
    (WOPI), acquired 99% (as Limited Partner) and 1% (as
    General Partner), respectively, of the partnership interest of
    Apollo Hato Rey, L.P., a Delaware Limited Partnership (the
    Partnership). WWPI and WOPI were created for the
    purpose of owning, developing, managing and operating
    Westernbank World Plaza (formerly known as Hato Rey Tower) a
    23-story office building, including its related parking
    facility, located in Hato Rey, Puerto Rico, the main Puerto
    Rican business district. On March 23, 2002, the Partnership
    was dissolved and its net assets distributed to WWPI and WOPI.
    Immediately thereafter, WOPI was also dissolved by WWPI. Upon
    dissolution of WOPI, WWPI became the 100% owner of the net
    assets of the dissolved partnership. WWPI now
    serves as the Companys San Juan metropolitan area
    headquarters for Westernbanks regional commercial lending
    office and the headquarters for the Westernbank Business Credit
    and Expresso of Westernbank divisions.                                                                                                                                                                                     
|
| | The accounting and reporting policies of W
    Holding Company, Inc. conform to accounting principles generally
    accepted in the United States of America and banking industry
    practices. Following is a summary of the Companys most
    significant accounting policies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



Principles of
Consolidation  The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Westernbank Puerto
Rico and Westernbank Insurance Corp. All significant
intercompany transactions and balances have been eliminated in
consolidation.




Use of
Estimates  The
preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America, requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.


66




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##### Table of Contents





Significant Group Concentrations of Credit
Risk  Most of the
Companys business activities are with customers located
within Puerto Rico. Notes 2 and 3 discuss the types of
securities that the Company invests in. Note 4 discusses the
types of lending that the Company engages in. The Company does
not have any significant concentration in any one industry or
customer.




Cash and Cash
Equivalents  For
purposes of presentation in the consolidated statements of cash
flows, cash and cash equivalents are those amounts included in
the statements of financial condition as cash and due from
banks.




Interest-Bearing Deposits in Banks and
Federal Funds Sold 
Interest-bearing deposits in banks and federal funds sold are
recorded at cost and mature the next business day.




Trading
Securities  Securities
held principally for resale in the near term are classified as
trading securities and recorded at fair value. Gains and losses
on sales and changes in fair value of these securities are
included in current operating results.




Investment Securities Held to
Maturity  Investment
securities for which the Company has the positive intent and
ability to hold to maturity are carried at cost, adjusted for
premium amortization and discount accretion under the interest
method over the period to maturity.




Investment Securities Available for
Sale  Investment
securities available for sale consist of securities not
classified as trading securities nor as held to maturity
securities. These securities are reported at fair value with
unrealized holding gains and losses, net of tax, reported as a
net amount in other comprehensive income (loss). Realized gains
and losses on these securities are determined using the specific
identification method. Premium amortization and discount
accretion are recognized in interest income using the interest
method over the period to maturity.




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




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The impairment analysis on the mortgage and other
    asset-backed securities is done placing special emphasis on the
    analysis of the trustee and collateral manager monthly reports,
    as well as on sensitivity and expected cash flow analysis made
    by major brokerage houses. The Company also considers its intent
    and ability to hold these securities. If management believes,
    based on the analysis, that the principal and interest
    obligations on any mortgage and other asset-backed security will
    not be received in a timely manner, the security is written down
    to fair value based on available secondary market prices from
    broker/dealers.                                                           
|
| | The equity securities impairment analyses are
    performed and reviewed quarterly based on the latest financial
    information and any supporting research report made by major
    brokerage houses. These analyses are subjective and based, among
    other things, on relevant financial data such as capitalization,
    cash flows, liquidity, systematic risk, and debt outstanding.
    Management also considers the industry trends, the historical
    performance of the stock, as well as the Companys intent
    to hold the security. If management believes that there is a low
    probability of achieving book value in a reasonable time frame,
    then an impairment is recorded by writing down the security to
    fair value.



Mortgage Loans Held for
Sale  Mortgage loans
originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income. Realized gains or
losses on these loans are determined using the specific
identification method.




Loans 
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at
their outstanding unpaid principal balances adjusted for
charge-offs, the allowance for loan losses, and any deferred
fees or costs on originated loans. Interest income is accrued on
the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as
an adjustment of the related loan yield using the interest
method. Discounts and premiums on purchased loans are amortized
to income over the expected lives of the loans using methods
that approximate the interest method.




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

67




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Allowance for Loan
Losses  The allowance
for loan losses is a current estimate of the losses inherent in
the present portfolio based on managements ongoing
quarterly evaluations of the loan portfolio. Estimates of losses
inherent in the loan portfolio involve the exercise of judgement
and the use of assumptions. This evaluation is inherently
subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. 
The allowance is increased by a provision for loan losses,
which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans
are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process,
managements estimate of credit losses in the loan
portfolio and the related allowance may change in the near term.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company follows a systematic methodology to
    establish and evaluate the adequacy of the allowance for loan
    losses. This methodology consists of several key elements.
    Larger commercial and construction loans that exhibit potential
    or observed credit weaknesses are subject to individual review.
    Where appropriate, allowances are allocated to individual loans
    based on managements estimate of the borrowers
    ability to repay the loan given the availability of collateral,
    other sources of cash flow and legal options available to the
    Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Included in the review of individual loans are
    those that are impaired as provided in Statement of Financial
    Accounting Standards (SFAS) No. 114,
    Accounting by Creditors for Impairment of a Loan.Any allowances for impaired loans are measured based on
    the present value of expected future cash flows discounted at
    the loans effective interest rate or fair value of the
    underlying collateral. Commercial business, commercial real
    estate and construction loans exceeding $500,000 are
    individually evaluated for impairment. Other loans are evaluated
    in homogeneous groups and collectively evaluated for impairment.
    Loans that are recorded at fair value or at the lower of cost or
    fair value are not evaluated for impairment. Impaired loans for
    which the discounted cash flows or collateral value exceeds its
    carrying value do not require an allowance. The Company
    evaluates the collectibility of both principal and interest when
    assessing the need for loss accrual.
|
| | Historical loss rates are applied to other
    commercial loans not subject to specific allowance. The loss
    rates are generally derived from historical loss trends for
    three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Homogeneous loans, such as consumer installments,
    residential mortgage loans, and credit cards are not
    individually risk graded. Allowances are established for each
    pool of loans based on the expected net charge-offs for one
    year. Loss rates are based on the average net charge-off history
    for one to three years by loan category.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | An unallocated allowance is maintained to
    recognize the imprecision in estimating and measuring loss when
    evaluating allowances for individual loans or pools of loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Historical loss rates may be adjusted for
    significant factors that, in managements judgement,
    reflect the impact of any current condition on loss recognition.
    Factors which management considers in the analysis include the
    effect of the national and local economies, trends in the nature
    and volume of loans (delinquencies, charge-offs, non-accrual and
    problem loans), changes in the internal lending policies and
    credit standards, collection practices, and examination results
    from bank regulatory agencies and the Companys internal
    credit examiners.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Allowances on individual loans and historical
    loss rates are reviewed quarterly and adjusted as necessary
    based on changing borrower and/or collateral conditions and
    actual collection and charge-off experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



Foreclosed Real Estate Held for
Sale  Foreclosed real
estate held for sale is carried at the lower of fair value minus
estimated costs to sell or cost. Realized gains and losses on
sale are included in other income. Operating results are
recorded in operating expenses.




Premises and
Equipment  Premises and
equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed under the straight-line
method over the estimated useful lives of the assets, which
range from two to 40 years.




| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Leasehold improvements are amortized over the
    terms of the respective leases or the estimated useful lives of
    the improvements, whichever is shorter. Costs of maintenance and
    repairs that do not improve or extend the lives of the
    respective assets are charged to expense as incurred.



Impairment of Long-Lived
Assets  The Company
periodically reviews long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. No indications of
impairment are evident as a result of such review during 2003,
2002 and 2001.




Transfer of Financial
Assets  Transfer of
financial assets are accounted for as a sale, when control over
the assets has been surrendered. Control over transferred assets
is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the
right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to
repurchase them before maturity.


68




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Mortgage Servicing
Rights  The Company
recognizes as separate assets the rights to service mortgage
loans for others, regardless of how those servicing rights are
acquired and assesses the capitalized mortgage servicing rights
for impairment based on the fair value of those rights.
Servicing assets are evaluated for impairment based upon the
fair value of the rights as compared to amortized cost. Fair
value is determined using prices for similar assets with similar
characteristics. Impairment is recognized through a valuation
allowance for an individual servicing right, to the extent that
fair value is less than the carrying amount for that right.




| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The total cost of mortgage loans to be sold with
    servicing rights retained is allocated to the mortgage servicing
    rights and the loans (without the mortgage servicing rights),
    based on their relative fair values. Mortgage servicing rights
    are amortized in proportion to, and over the period of,
    estimated servicing income.



Stock Option
Plans  As further
discussed in Note 17 to the consolidated financial statements,
the Company has two stock option plans. Up to December 31,
2002 the Company accounted for those plans following the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stocks Issued to Employees, and
Related Interpretations. Compensation expense under this method
is generally recognized for any excess of the quoted market
price of the Companys stock at the measurement date over
the amount an employee must pay to acquire the stock. Since all
options granted under those plans had an exercise price equal to
the market value of the underlying common stock at the grant
date, no compensation expense was recognized at the measurement
date.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2003, the Company
    adopted the fair value recognition provisions of Financial
    Accounting Standards Board (FASB) Statement
    No. 123, Accounting for Stock-Based Compensation.Under the modified prospective method which was selected
    by the Company under the provisions of FASB Statement
    No. 148, Accounting for Stock-Based
    Compensation  Transition and Disclosure, an amendment
    of FASB Statement No. 123,compensation cost
    recognized since January 1, 2003 is the same that would
    have been recognized had the recognition provisions of FASB
    No. 123 been applied from its original effective date.
    Results prior to 2003 were not restated.
|
| | The following table
    illustrates the effect on net income and earnings per share if
    the fair value method had been applied to all outstanding
    options in each period:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |      |        | 
|---------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------- | ---- | ------ | ---- | ------ | - | ------ | ---- | ------ | 
|                       |                                                                                                                      |                                      
|                       |                                                                                                                      | Years ended December 31,             
|                       |                                                                                                                      | 2003                                  |         | 2002   |         | 2001
|                       |                                                                                                                      | (In
thousands, except per share data)
|Net income as reported |                                                                                                                      | $                                     | 113,314 |        |         | $    | 85,963 |      |        | $ | 62,155 |     
|                       | Add: Stock based employee compensation expense
    included in reported net income                                   |                                       |         | 1,031  |         |      |        |     |        |   |        |     |       
|                       | Deduct: Total stock based employee compensation
    expense determined under fair value based method for all options |                                       |         | (1,031 | )       |      |        | (648 | )      |   |        | (782 | )     
|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     
|                       |                                                                                                                      | Pro-forma net income                  |         | $      | 113,314 |      |        | $    | 85,315 |   |        | $    | 61,373 | 
|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     
|Earnings per share:    |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     
|                       | Basic  as reported                                                                                                  |                                       | $       | 0.87   |         |      | $      | 0.73 | (1)    |   | $      | 0.54 | (1)   
|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     
|                       | Diluted  as reported                                                                                                |                                       | $       | 0.85   |         |      | $      | 0.72 | (1)    |   | $      | 0.54 | (1)   
|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     
|                       | Basic  pro forma                                                                                                    |                                       | $       | 0.87   |         |      | $      | 0.73 | (1)    |   | $      | 0.54 | (1)   
|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     
|                       | Diluted  pro forma                                                                                                  |                                       | $       | 0.85   |         |      | $      | 0.72 | (1)    |   | $      | 0.54 | (1)   
|                       |                                                                                                                      |                                       |         |        |         |      |        |      |        |   |        |     



| | 
| | 
| | 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Adjusted to reflect the three-for-two split in
    the form of a stock dividend on our common stock declared on
    June 17, 2002, and distributed on July 10, 2002, the
    three-for-two split in the form of a stock dividend and a 2%
    stock dividend on our common stock declared on November 4,
    2003 and November 11, 2003, respectively, and distributed
    both on December 10, 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of the options granted in year
    2002 and 2001 was $2.09 and $2.12 per option (as adjusted),
    respectively. The fair value was estimated on the grant date
    using the Black-Scholes option pricing model with the following
    weighted average assumptions: (1) the dividend yield was
    1.39% in 2002 (2.14% in 2001); (2) the expected life was
    7 years; (3) the expected volatility was 21.84% in 2002
    (27.41% in 2001) (as adjusted); and, (4) the risk-free
    interest rate was 4.43% in 2002 (5.40% in 2001). The weighted average
    market price of the stock at the grant date was $10.36 in 2002 ($5.09 in
    2001) (as adjusted). No options were granted in 2003.



Income
Taxes  Deferred
income taxes are accounted for using the asset and liability
method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and the respective tax bases and
operating and


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capital losses and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowance are established,
when necessary, to reduce deferred tax assets to the amount expected
to be realized.


Financial Instruments:



|  |                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Derivative Financial
    Instruments As part of
    the Companys asset/liability management, the Company uses
    interest-rate contracts, which include interest-rate exchange
    agreements (swaps and options agreements), to hedge various
    exposures or to modify interest rate characteristics of various
    statement of financial condition items.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2001, the Company
    adopted SFAS No. 133, Accounting for Derivative
    Instruments and Hedging Activities and SFAS
    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) hedge of the
    exposure to variability of cash flows of a recognized asset,
    liability or forecasted transaction (cash flow
    hedge) or (c) hedge of foreign currency exposure
    (foreign currency hedge).
|
| | In the case of a qualifying fair value hedge,
    changes in the value of the derivative instruments that have
    been highly effective are recognized in current period earnings
    along with the change in value of the designated hedged item. In
    the case of a qualifying cash flow hedge, changes in the value
    of the derivative instruments that have been highly effective
    are recognized in other comprehensive income, until such time
    earnings are affected by the variability of the cash flows of
    the underlying hedged item. In either a fair value hedge or a
    cash flow hedge, net earnings may be impacted to the extent the
    changes in the value of the derivative instruments do not
    perfectly offset changes in the value of the hedged items. If
    the derivative is not designated as a hedging instrument, the
    changes in fair value of the derivative are recorded in
    earnings. The Company does not currently have any foreign
    currency hedges.                                                                                                       
|
| | Certain contracts contain embedded derivatives.
    When the embedded derivative possesses economic characteristics
    that are not clearly and closely related to the economic
    characteristics of the host contract, it is bifurcated and
    carried at fair value and designated as a trading or non-hedging
    derivative instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | The effect of implementing these statements on
    the Companys consolidated financial condition at
    January 1, 2001 was a decrease in deposits, an increase in
    other liabilities and an increase in accumulated other
    comprehensive income (net of tax of $45,000) of $2,607,000,
    $2,472,000 and $135,000, respectively. There was no effect on
    results of operations from the implementation of these
    Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | In the case of interest-rate exchange agreements
    that qualify for hedging accounting treatment, net interest
    income (expense) resulting from the differential between
    exchanging floating and fixed-rate interest payments is recorded
    on a current basis as an adjustment to interest income or
    expense on the corresponding hedged assets and liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other Off-Balance Sheet
    Instruments In the
    ordinary course of business, the Company enters into off-balance
    sheet instruments consisting of commitments to extend credit,
    commitments under credit card arrangements and commercial
    letters of credit. Such financial instruments are recorded in
    the financial statements when they are funded or related fees
    are incurred or received. The Company periodically evaluates the
    credit risks inherent in these commitments and commercial
    letters of credit, and establishes loss allowances for such
    risks if and when these are deemed necessary. For the years
    ended December 31, 2003, 2002 and 2001, the Company did not
    record any loss allowances in connection with risks involved in
    other off-balance sheet instruments. At December 31, 2003
    and 2002, there were no additional off-balance sheet instruments
    other than those mentioned above.



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Fair Value of Financial
    Instruments The
    following methods and assumptions were used by the Company in
    estimating fair values of financial instruments as disclosed in
    these consolidated financial statements:



|  |                                                                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and Due from
    Banks The carrying
    amounts of cash and due from banks approximate their fair value.                                                                                                                          
| 
| | Money Market
    Instruments The fair
    value of money market instruments approximates their carrying
    amount given the relatively short period of time between
    origination of the instruments and their expected realization.
| 
| | Trading
    Securities For
    securities held for trading purposes, fair values are based on
    quoted market prices.                                                                                                                

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investment Securities Available for Sale
    and Held to Maturity
    The fair values of investment securities available for sale and
    held to maturity are estimated based on bid prices published in
    financial newspapers or bid quotations received from securities
    dealers. If a quoted market price is not available, fair value
    is estimated using quoted market prices for similar securities.
| 
| | Federal Home Loan Bank
    (FHLB) Stock FHLB
    stock is valued at its redemption value.                                                                                                                                                                                                                                                                                                                           
| 
| | Loans
    Fair values are estimated for portfolios of loans with similar
    financial characteristics. Loans are segregated by type such as
    residential mortgage, commercial, consumer, credit cards and
    other loans. Each loan category is further segmented into fixed
    and adjustable interest rate terms and by performing,
    nonperforming and loans with payments in arrears.                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value of performing loans, except
    residential mortgages and credit card loans is calculated by
    discounting scheduled cash flows through the estimated maturity
    dates using estimated market discount rates that reflect the
    credit and interest rate risk inherent in the loan. For
    performing residential mortgage loans, fair value is computed
    using an estimated market rate based on secondary market sources
    adjusted to reflect differences in servicing and credit costs.
    For credit card loans, cash flows and maturities are estimated
    based on contractual interest rates and historical experience
    and are discounted using estimated market rates.
|
| | Fair value for significant nonperforming loans
    and certain loans with payments in arrears is based on recent
    external appraisals of collateral. If appraisals are not
    available, estimated cash flows are discounted using a rate that
    is commensurate with the risk associated with the estimated cash
    flows. Assumptions regarding credit risk, cash flows, and
    discount rates are judgmentally determined using available
    market information and specific borrower information.                                                                                                                                                                                                  



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mortgage Servicing
    Rights The carrying
    amount of mortgage servicing rights, which is evaluated
    periodically for impairment, approximates the fair value (fair
    value is estimated considering prices for similar assets).                                                                                                                                                                                                                                                                                            
| 
| | Deposits
    The fair value of deposits with no stated maturity, such as
    passbook accounts, money market and checking accounts is equal
    to the amount payable on demand. The fair value of fixed
    maturity certificates of deposit is based on the discounted
    value of contractual cash flows using current rates for
    certificates of deposit with similar terms and remaining
    maturities. The discount rate is estimated using the rates
    currently offered for deposits of similar remaining maturities.
| 
| | Securities Sold Under Agreements to
    Repurchase, Advances from FHLB and Mortgage Note
    Payable The fair value
    of securities sold under agreements to repurchase, advances from
    FHLB and mortgage note payable is based on the discounted value
    using rates currently available to the Company for debt with
    similar terms and remaining maturities.                                                                                                                                                           
| 
| | Accrued
    Interest The carrying
    amounts of accrued interest approximate their fair values.                                                                                                                                                                                                                                                                                                                                                                                                                                    
| 
| | Interest Rate Swap and Interest Rate Option
    Contracts The fair
    value of interest rate swap and interest rate option contracts
    was obtained from dealer quotes. This value represents the
    estimated amount the Company would receive or pay to terminate
    the contracts, at the reporting date, taking into account
    current interest rates and the current creditworthiness of the
    contracts counterparties.                                                                                              
| 
| | Commitments to Extend Credit and Commercial
    Letters of Credit The
    fair value of commitments to extend credit and commercial
    letters of credit are based on fees currently charged to enter
    into similar agreements, taking into account the remaining terms
    of the agreements and the counterparties credit standings.                                                                                                                                                                                         



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair value estimates are made at a discrete
    point in time based on relevant market information and
    information about the financial instruments. Because no market
    exists for a portion of the Companys financial instruments
    (loans and financial liabilities), fair value estimates are
    based on judgments regarding future expected loss experience,
    current economic conditions, risk characteristics of various
    financial instruments, and other factors. These estimates are
    subjective in nature and involve uncertainties and matters of
    significant judgment and, therefore, cannot be determined with
    precision.
|
| | In addition, the fair value estimates are based
    on existing on and off-balance sheet financial instruments
    without attempting to estimate the value of anticipated future
    business and the value of assets and liabilities that are not
    considered financial instruments such as premises and equipment
    and goodwill. In addition, the tax ramifications related to the
    realization of the unrealized gains and losses can have a
    significant effect on fair value estimates and have not been
    considered in the estimates.                                                                                                           



Earnings per
Share  Basic earnings
per share represents income attributable to common stockholders
divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share
reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by
the Company relate to the


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outstanding convertible preferred stock, which
are determined using the if-converted method, and the
outstanding stock options, which are determined using the
treasury stock method. The effect of convertible preferred stock
(793,757 shares in 2003, 1,210,915 shares in 2002, and 1,212,905
shares in 2001) was antidilutive in 2003, 2002 and 2001. The
effect of stock options was dilutive in 2003 and 2002, and
antidilutive in 2001.




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

|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |            |    
|-------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ----------- | ----------- | - | ---- | ---------- | ---------- | --- | - | ---------- | ---------- | ---
|                                             |                                                                       | 2003                                      |             | 2002        |   | 2001
|                                             |                                                                       |                                          
|                                             |                                                                       | (Dollars in thousands, except share data)
|Basic and diluted earnings per common share: |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           
|                                             | Net income                                                            |                                           | $           | 113,314     |   |      | $          | 85,963     |     |   | $          | 62,155     |    
|                                             | Less preferred stock dividends                                        |                                           |             | (21,593     | ) |      |            | (13,774    | )   |   |            | (10,264    | )  
|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           
|                                             | Income attributable to common stockholders                            |                                           | $           | 91,721      |   |      | $          | 72,189     |     |   | $          | 51,891     |    
|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           
|                                             | Weighted average number of common shares
    outstanding for the year |                                           |             | 105,055,022 |   |      |            | 98,504,782 | (1) |   |            | 95,246,390 | (1)
|                                             | Dilutive potential common
    shares  stock options                  |                                           |             | 3,033,716   |   |      |            | 1,162,745  |     |   |            | 268,978    |    
|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           
|Total                                        |                                                                       |                                           | 108,088,738 |             |   |      | 99,667,527 |            |     |   | 95,515,368 |           
|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           
|Basic earnings per common share              |                                                                       | $                                         | 0.87        |             |   | $    | 0.73       | (1)        |     | $ | 0.54       | (1)       
|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           
|Diluted earnings per common share            |                                                                       | $                                         | 0.85        |             |   | $    | 0.72       | (1)        |     | $ | 0.54       | (1)       
|                                             |                                                                       |                                           |             |             |   |      |            |            |     |   |            |           



| | 
| | 
| | 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Adjusted to reflect the three-for-two split in
    the form of a stock dividend on our common stock declared on
    June 17, 2002, and distributed on July 10, 2002, the
    three-for-two split in the form of a stock dividend and a 2%
    stock dividend on our common stock declared on November 4,
    2003 and November 11, 2004, respectively, and distributed
    both on December 10, 2003.



Comprehensive
Income  Comprehensive
income is defined as the change in equity of a business
enterprise during a period from transactions and other events
and circumstances, except those resulting from investments by
owners and distributions to owners. Accounting principles
generally accepted in the United States of America require that
recognized revenue, expenses, gains and losses be included in
net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the
stockholders equity section of the statement of financial
condition, such items, along with net income, are components of
comprehensive income.


Recent Accounting
Developments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2002, the Company
    adopted SFAS No. 141, Business Combinationsand SFAS No. 142, Goodwill and Other
    Intangible Assets. Those statements changed the
    accounting for business combinations and goodwill in two
    significant ways. SFAS No. 141 requires that the purchase
    method of accounting be used for all business combinations. Use
    of the pooling-of-interest method is prohibited. SFAS
    No. 142 changes the accounting for goodwill from an
    amortization method to an impairment-only approach. Thus,
    amortization of goodwill, including goodwill recorded in past
    business combinations, ceased upon adoption of this statement.
    Adoption of SFAS No. 141 and No. 142 did not have a
    significant effect on the Companys consolidated financial
    statements.
|
| | In June 2001, the FASB issued SFAS No. 143,
    Accounting for Asset Retirement Obligations. SFAS
    No. 143 addresses financial accounting and reporting for
    obligations associated with the retirement of tangible
    long-lived assets and the associated asset retirement cost. SFAS
    No. 143 became effective on January 1, 2003 and did
    not have a significant effect on the Companys consolidated
    financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                 
|
| | Effective January 1, 2002, the Company
    adopted SFAS No. 144, Accounting for the Impairment
    or Disposal of Long-Lived Assets. SFAS No. 144
    addresses financial accounting and reporting for the impairment
    or disposal of long-lived assets. This statement supersedes SFAS
    No. 121, Accounting for the Impairment of Long-Lived
    Assets and for Long-Lived Assets to Be Disposed Of,and
    the accounting and reporting provisions of APB Opinion
    No. 30, Reporting the Results of
    Operations  Reporting the Effects of Disposal of a
    Segment of a Business, and Extraordinary, Unusual and
    Infrequently Occurring Events and Transactions. Implementation of SFAS
    No. 144 did not have a significant effect on the Companys
    consolidated financial statements.                        

72




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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the FASB issued SFAS No. 145,
    Rescission of FASB Statements No. 4, 44 and 64,
    Amendment of SFAS No. 13, and Technical Corrections.SFAS No. 145 rescinds SFAS No. 4,
    Reporting Gains and Losses from Extinguishment of Debt-an
    amendment of APB Opinion No. 30,which required all
    gains and losses from extinguishment of debt to be aggregated
    and, if material, classified as extraordinary item, net of
    related income tax effect. As a result, the criteria in Opinion
    No. 30 will now be used to classify those gains and losses.
    SFAS No. 145 also amends SFAS No. 13, Accounting
    for Leases, to require that certain lease modifications
    that have economic effects similar to sale-leaseback
    transactions be accounted for in the same manner as
    sale-leaseback transactions. SFAS No. 145 did not have a
    significant effect on the Companys consolidated financial
    condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | In June 2002, the FASB issued SFAS No. 146,
    Accounting for Costs Associated with Exit or Disposal
    Activities.This Statement addresses financial
    accounting and reporting for costs associated with exit or
    disposal activities and nullifies Emerging Issues Task Force
    (EITF) Issue No. 94-3, Liability
    Recognition for Certain Employee Termination Benefits and Other
    Costs to Exit an Activity (including Certain Costs Incurred in a
    Restructuring). The provisions of this Statement are
    effective for exit or disposal activities that are initiated
    after December 31, 2002. Implementation of SFAS
    No. 146 did not have a significant effect on the
    Companys consolidated financial condition or results of
    operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | In October 2002, the FASB issued SFAS
    No. 147, Acquisitions of Certain Financial
    Institutions, an amendment of FASB Statements No. 72 and
    144 and FASB Interpretation No. 9.Except for
    transactions between two or more mutual enterprises, SFAS
    No. 147 removes acquisitions of financial institutions from
    the scope of both SFAS No. 72 and Interpretation No. 9
    and requires that those transactions be accounted for in
    accordance with SFAS No. 141, Business Combinationsand SFAS No. 142, Goodwill and Other
    Intangible Assets.In addition, SFAS No. 147 amends
    SFAS No. 144, Accounting for the Impairment or
    Disposal of Long-Lived Assetsto include in its scope
    long-term customer-relationship intangible assets of financial
    institutions such as depositor-and-borrower-relationship
    intangible assets and credit cardholders intangible
    assets. SFAS No. 147 was effective for acquisitions or
    impairment measurement of such intangibles effective on or after
    October 1, 2002. SFAS No. 147 did not have a
    significant effect on the Companys financial condition or
    results of operations.                                                                                                                                                                                                                                                                                  
|
| | In December 2002, the FASB issued SFAS
    No. 148, Accounting for Stock-Based
    Compensation  Transition and Disclosure, an amendment
    of FASB Statement No. 123.This Statement amends SFAS
    No. 123, Accounting for Stock-Based
    Compensation, to provide alternative methods of
    transition for a voluntary change to the fair value based method
    of accounting for stock-based employee compensation. In
    addition, SFAS No. 148 amends the disclosure requirements
    of Statement 123 to require prominent disclosures in both
    annual and interim financial statements about the method of
    accounting for stock-based employee compensation and the effect
    of the method used on reported results. Effective
    January 1, 2003, the Company changed the method of
    accounting for employee stock options from the intrinsic value
    method to the fair value method. Under the modified prospective
    method selected by the Company under the provisions of SFAS
    No. 148, compensation cost recognized since January 1,
    2003 is the same that would have been recognized had the
    recognition provisions of FASB No. 123 been applied from
    its original effective date. Results prior to 2003 were not
    restated. The effect of implementing this Statement on the
    Companys financial condition and results of operations for
    the year ended December 31, 2003, was a charge of
    $1,031,000.
|
| | Prior to January 1, 2003, the Company
    followed the intrinsic value-based method of accounting
    prescribed by APB Opinion No. 25, Accounting for
    Stock Issued to Employees,and related interpretations.
    Compensation expense under this method was generally recognized
    for any excess of the quoted market price of the Companys
    stock at the measurement date over the amount an employee must
    pay to acquire the stock. Since all options granted under those
    plans have an exercise price equal to the market value of the
    underlying common stock at the grant date, no compensation
    expense was recognized at the measurement date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | In November 2002, the FASB issued FASB
    Interpretation No. 45 (FIN 45),
    Guarantors Accounting and Disclosure Requirements
    for Guarantees, Including Indirect Guarantees of Indebtedness of
    Others, an Interpretation of FASB Statements No. 5, 57, and
    107 and Rescission of FASB Interpretation No. 34.This interpretation elaborates on the disclosures to be
    made by a guarantor in the financial statements about its
    obligations under certain guarantees that it has issued. It also
    clarifies that a guarantor is required to recognize, at the
    inception of a guarantee, a liability for the fair value of the
    obligation undertaken in issuing the guarantee. The initial
    recognition and initial measurement provisions of FIN 45
    were applicable for guarantees issued or modified after
    December 31, 2002. Adoption of the recognition and
    measurement provisions did not have a significant effect on the
Companys financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                     

73




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##### Table of Contents





| | In January 2003, the FASB issued FASB
    Interpretation No. 46 (FIN 46),
    Consolidation of Variable Interest Entities, an
    Interpretation of ARB No. 51.FIN 46 addresses
    consolidation by business enterprises of variable interest
    entities. A variable interest entity is a corporation,
    partnership, trust, or any other legal structure used for
    business purposes that either (a) does not issue voting
    interests (or other interests with similar rights) or
    (b) the total equity investment at risk is not sufficient
    to permit the entity to finance its activities. FIN 46
    requires an enterprise to consolidate a variable interest entity
    if that enterprise has a variable interest that will absorb a
    majority of the entitys expected losses if these occur,
    receive a majority of the entitys expected residual
    returns if these occur, or both. Qualifying Special Purpose
    Entities are exempt from the consolidation requirements. In
    addition to numerous FASB Staff Positions written to clarify and
    improve the application of FIN 46, the FASB recently
    announced a deferral for certain entities, and an amendment to
    FIN 46 entitled FASB Interpretation No. 46 (revised
    December 2003), Consolidation of Variable Interest Entities
    (FIN 46R). The Company must apply FIN 46R to their
    interests in all entities subject to the interpretation as of
    the first interim or annual period ending after March 15,
    2004. FIN 46R is not expected to have a significant effect
    on the Companys financial position or results of
    operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | In April 2003, the FASB issued SFAS No. 149,
    Amendment of Statement No. 133 on Derivative
    Instruments and Hedging Activities.This Statement
    amends and clarifies financial accounting and reporting for
    derivative instruments, including certain derivative instruments
    embedded in other contracts (collectively referred to as
    derivatives) and for hedging activities under FASB Statement
    No. 133, Accounting for Derivative Instruments and
    Hedging Activities.This Statement (1) clarifies
    under what circumstances a contract with an initial net
    investment meets the characteristic of a derivative discussed in
    paragraph 6(b) of Statement No. 133, (2) clarifies
    when a derivative contains a financing component,
    (3) amends the definition of an underlying to conform it to
    language used in FASB Interpretation No. 45,
    Guarantors Accounting and Disclosure Requirements
    for Guarantees, Including Indirect Guarantees of Indebtedness of
    Others,and (4) amends certain other existing
    pronouncements. This Statement was effective for contracts
    entered into or modified after June 30, 2003, and for
    hedging relationships designated after June 30, 2003.
    Implementation of SFAS No. 149 did not have a significant
    effect on the Companys financial position or results of
    operations.                                                                                                                                                                                                                                                               
|
| | In May 2003, the FASB issued SFAS No. 150,
    Accounting for Certain Financial Instruments with
    Characteristics of both Liabilities and Equity.SFAS
    No. 150 is effective for all freestanding financial
    instruments entered into or modified after May 31, 2003.
    For all other freestanding financial instruments, it became
    effective at the beginning of the first interim period beginning
    after June 15, 2003. SFAS No. 150 applies to three
    categories of freestanding financial instruments (mandatorily
    redeemable instruments, instruments with repurchase obligations
    and instruments with obligations to issue a variable number of
    shares). Instruments within the scope of SFAS No. 150 must
    be classified as liabilities in the statement of financial
    condition. Certain provisions of SFAS No. 150 related to
    mandatorily redeemable financial instruments have been
    subsequently deferred indefinitely by the FASB. The Company does
    not have mandatorily redeemable financial instruments
    outstanding. Implementation of SFAS No. 150 did not have a
    significant effect on the Companys financial position or
    results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                           



Reclassifications  Certain
reclassifications have been made to prior year periods financial
statements to conform with current period presentation.




|   |                                                 
|-- | ------------------------------------------------
|2. | SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:



| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company enters into purchases of securities
    under agreements to resell the same securities. These agreements
    are classified as secured loans and are reflected as assets in
    the consolidated statements of financial condition.
|
| | At December 31, 2003 and 2002, securities
    purchased under agreements to resell (classified by
    counterparty) were as follows:                                                                                                           

|                                                   |  |                |         |      |  |   |         | 
|-------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                                   |  | 2003           |         | 2002
|                                                   |  |               
|                                                   |  | (In thousands)
|Credit Suisse First Boston                         |  | $              | 200,000 |      |  | $ | 75,000  | 
|UBS Financial Services Incorporated of Puerto Rico |  |                | 75,076  |      |  |   | 70,029  | 
|Popular Securities, Inc.                           |  |                | 55,074  |      |  |   | 45,009  | 
|Doral Securities, Inc.                             |  |                | 6,201   |      |  |   | 71,809  | 
|                                                   |  |                |         |      |  |   |         | 
|Total                                              |  | $              | 336,351 |      |  | $ | 261,847 | 
|                                                   |  |                |         |      |  |   |         | 

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

|                                                                                   |                                                 |                                                                  |         |            |         |            |         |            |         |   |         |        |         |   |         |        |         | 
|---------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------- | ------- | ---------- | ------- | ---------- | ------- | ---------- | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                                                   |                                                 |                                                                  |         |           
|                                                                                   |                                                 | 2003                                                             |         | 2002      
|                                                                                   |                                                 |                                                                  |         |           
|                                                                                   |                                                 |                                                                  |         | Fair       |         |            |         | Fair      
|                                                                                   |                                                 |                                                                  |         | Value of   |         |            |         | Value of  
|                                                                                   |                                                 | Receivable                                                       |         | Underlying |         | Receivable |         | Underlying
|Underlying Collateral                                                              |                                                 | Balance                                                          |         | Collateral |         | Balance    |         | Collateral
|                                                                                   |                                                 |                                                                 
|                                                                                   |                                                 | (In thousands)                                                  
|Investment securities:                                                             |                                                 |                                                                  |         |            |         |            |         |            |         |   |         |        |         |   |         |       
|                                                                                   | U.S. Government and agencies obligations        |                                                                  | $       | 63,096     |         |            | $       | 64,371     |         |   | $       | 70,029 |         |   | $       | 71,294 |        
|                                                                                   | Puerto Rico Government and agencies obligations |                                                                  |         | 67,054     |         |            |         | 68,403     |         |   |         | 45,555 |         |   |         | 46,964 |        
|                                                                                   | Commercial paper                                |                                                                  |         |           |         |            |         |           |         |   |         | 7,910  |         |   |         | 8,074  |        
|                                                                                   | Mortgage and asset-backed securities:           |                                                                  |         |            |         |            |         |            |         |   |         |        |         |   |         |        |        
|                                                                                   |                                                 | Government National Mortgage Association
    (GNMA) certificates |         |            | 4,541   |            |         |            | 4,678   |   |         |        | 134,983 |   |         |        | 139,544 | 
|                                                                                   |                                                 | Federal National Mortgage Association
    (FNMA) certificates    |         |            | 201,660 |            |         |            | 268,567 |   |         |        |         |   |         |        |         | 
|                                                                                   |                                                 | Other                                                            |         |            |        |            |         |            |        |   |         |        | 3,370   |   |         |        | 3,435   | 
|                                                                                   |                                                 |                                                                  |         |            |         |            |         |            |         |   |         |        |         |   |         |       
|Total  excluding accrued interest
    receivable                                  |                                                 | $                                                                | 336,351 |            |         | $          | 406,019 |            |         | $ | 261,847 |        |         | $ | 269,311 |       
|                                                                                   |                                                 |                                                                  |         |            |         |            |         |            |         |   |         |        |         |   |         |       
|Accrued interest receivable on securities
    purchased under agreements to resell |                                                 | $                                                                | 2,159   |            |         |            |         |            |         | $ | 560     |        |         |   |         |       
|                                                                                   |                                                 |                                                                  |         |            |         |            |         |            |         |   |         |        |         |   |         |       



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company monitors the fair value of the
    underlying securities as compared to the related receivable,
    including accrued interest, and requests additional collateral
    when the fair value of the underlying collateral falls to less
    than the collateral requirement. The collateral requirement is
    equal to 102 percent of the related receivable, including
    interest. At December 31, 2003, repurchase agreements amounting
    to $136.4 million mature the next business day and
    $200.0 million mature over five years, on which the
    counterparties have the option to terminate the agreement
    quarterly, at each interest payment date. Securities purchased
    under agreements to resell are held in safekeeping, in the name
    of the Company, by Citibank N.A., the Companys custodian,
    or are held by the counterparty. At December 31, 2003, all
    collateral was held by the counterparty.
|
| | Average outstanding balances and maximum
    month-end outstanding balances during the years ended
    December 31, 2003 and 2002, and weighted average interest
    rates for the year and at year end are indicated below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                             |              |             |         |      |   |   |         |      |  
|-------------------------------------------- | ------------ | ----------- | ------- | ---- | - | - | ------- | ---- | -
|                                             |              | 2003        |         | 2002
|                                             |              |            
|                                             |              | (Dollars in
|                                             |              | thousands) 
|Monthly average outstanding balance          |              | $           | 246,211 |      |   | $ | 185,684 |     
|Maximum outstanding balance at any month-end |              |             | 336,351 |      |   |   | 272,019 |     
|Weighted average interest rate:              |              |             |         |      |   |   |         |     
|                                             | For the year |             |         | 2.98 | % |   |         | 2.26 | %
|                                             | At year end  |             |         | 3.11 |   |   |         | 2.44 |  

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##### Table of Contents



3. INVESTMENT SECURITIES:



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

|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |           |         | 
|------------------- | ----------------------------------------------- | --------------------------------------------------------------- | --------- | ---------- | ------- | ---------- | ------ | ------ | --- | - | ------- | ------ | ------ | - | --------- | --------- | ------- | 
|                    |                                                 |                                                                 |           | Gross      |         | Gross      |        |       
|                    |                                                 | Amortized                                                       |           | Unrealized |         | Unrealized |        | Fair  
|December 31, 2003   |                                                 | Cost                                                            |           | Gains      |         | Losses     |        | Value 
|                    |                                                 |                                                                
|                    |                                                 | (In thousands)                                                 
|Available for sale: |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|                    | Collateralized mortgage obligations (CMO)       |                                                                 | $         | 50,992     |         |            | $      |       |     |   | $       | 1,082  |        |   | $         | 49,910    |        
|                    | Other investments                               |                                                                 |           | 5,000      |         |            |        | 170    |     |   |         |       |        |   |           | 5,170     |        
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|Total               |                                                 | $                                                               | 55,992    |            |         | $          | 170    |        |     | $ | 1,082   |        |        | $ | 55,080    |          
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|Held to maturity:   |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|                    | U.S. Government and agencies obligations        |                                                                 | $         | 4,463,493  |         |            | $      | 15,632 |     |   | $       | 35,811 |        |   | $         | 4,443,314 |        
|                    | Puerto Rico Government and agencies obligations |                                                                 |           | 34,500     |         |            |        | 287    |     |   |         | 292    |        |   |           | 34,495    |        
|                    | Commercial paper                                |                                                                 |           | 174,976    |         |            |        |       |     |   |         |       |        |   |           | 174,976   |        
|                    | Corporate notes                                 |                                                                 |           | 51,409     |         |            |        | 3,196  |     |   |         |       |        |   |           | 54,605    |        
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|Subtotal            |                                                 |                                                                 | 4,724,378 |            |         |            | 19,115 |        |     |   | 36,103  |        |        |   | 4,707,390 |          
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|                    | Mortgage and asset-backed securities:           |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |           |        
|                    |                                                 | Federal Home Loan Mortgage Corporation
    (FHLMC) certificates |           |            | 7,297   |            |        |        | 445 |   |         |        |       |   |           |           | 7,742   | 
|                    |                                                 | GNMA certificates                                               |           |            | 9,753   |            |        |        | 475 |   |         |        |       |   |           |           | 10,228  | 
|                    |                                                 | FNMA certificates                                               |           |            | 4,542   |            |        |        | 303 |   |         |        |       |   |           |           | 4,845   | 
|                    |                                                 | CMO                                                             |           |            | 969,898 |            |        |        | 444 |   |         |        | 69,573 |   |           |           | 900,769 | 
|                    |                                                 | Asset-backed securities                                         |           |            | 7,842   |            |        |        |    |   |         |        |       |   |           |           | 7,842   | 
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|Subtotal            |                                                 |                                                                 | 999,332   |            |         |            | 1,667  |        |     |   | 69,573  |        |        |   | 931,426   |          
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          
|Total               |                                                 | $                                                               | 5,723,710 |            |         | $          | 20,782 |        |     | $ | 105,676 |        |        | $ | 5,638,816 |          
|                    |                                                 |                                                                 |           |            |         |            |        |        |     |   |         |        |        |   |           |          



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of the Companys investment securities
    in an unrealized loss position at December 31, 2003 have
    been in such position for less than twelve months.

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|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |           |         | 
|------------------- | ----------------------------------------------- | ----------------------- | --------- | ---------- | ------- | ---------- | ------ | ----- | --- | - | ------ | ----- | ----- | - | --------- | --------- | ------- | 
|                    |                                                 |                         |           | Gross      |         | Gross      |        |      
|                    |                                                 | Amortized               |           | Unrealized |         | Unrealized |        | Fair 
|December 31, 2002   |                                                 | Cost                    |           | Gains      |         | Losses     |        | Value
|                    |                                                 |                        
|                    |                                                 | (In thousands)         
|Available for sale: |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|                    | CMO                                             |                         | $         | 144,378    |         |            | $      | 898   |     |   | $      |      |       |   | $         | 145,276   |        
|                    | Corporate notes                                 |                         |           | 12,580     |         |            |        |      |     |   |        | 2,199 |       |   |           | 10,381    |        
|                    | Other investments                               |                         |           | 5,000      |         |            |        | 230   |     |   |        |      |       |   |           | 5,230     |        
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|Total               |                                                 | $                       | 161,958   |            |         | $          | 1,128  |       |     | $ | 2,199  |       |       | $ | 160,887   |          
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|Held to maturity:   |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|                    | U.S. Government and agencies obligations        |                         | $         | 2,671,344  |         |            | $      | 7,783 |     |   | $      | 376   |       |   | $         | 2,678,751 |        
|                    | Puerto Rico Government and agencies obligations |                         |           | 19,695     |         |            |        | 245   |     |   |        | 30    |       |   |           | 19,910    |        
|                    | Commercial paper                                |                         |           | 74,997     |         |            |        |      |     |   |        |      |       |   |           | 74,997    |        
|                    | Corporate notes                                 |                         |           | 66,697     |         |            |        | 3,173 |     |   |        |      |       |   |           | 69,870    |        
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|Subtotal            |                                                 |                         | 2,832,733 |            |         |            | 11,201 |       |     |   | 406    |       |       |   | 2,843,528 |          
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|                    | Mortgage and asset-backed securities:           |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |           |        
|                    |                                                 | FHLMC certificates      |           |            | 10,435  |            |        |       | 636 |   |        |       |      |   |           |           | 11,071  | 
|                    |                                                 | GNMA certificates       |           |            | 13,657  |            |        |       | 686 |   |        |       |      |   |           |           | 14,343  | 
|                    |                                                 | FNMA certificates       |           |            | 6,906   |            |        |       | 447 |   |        |       |      |   |           |           | 7,353   | 
|                    |                                                 | CMO                     |           |            | 565,068 |            |        |       | 986 |   |        |       | 3,366 |   |           |           | 562,688 | 
|                    |                                                 | Asset-backed securities |           |            | 72,258  |            |        |       | 250 |   |        |       | 8,112 |   |           |           | 64,396  | 
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|Subtotal            |                                                 |                         | 668,324   |            |         |            | 3,005  |       |     |   | 11,478 |       |       |   | 659,851   |          
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          
|Total               |                                                 | $                       | 3,501,057 |            |         | $          | 14,206 |       |     | $ | 11,884 |       |       | $ | 3,503,379 |          
|                    |                                                 |                         |           |            |         |            |        |       |     |   |        |       |       |   |           |          



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The amortized cost and fair value of investment
    securities available for sale and held to maturity at
    December 31, 2003, by contractual maturity (excluding
    mortgage and asset-backed securities), are shown below.

|                                       |  |                    |        |                  |  |           |        |       |  |   |           |  |  |   |           | 
|-------------------------------------- |  | ------------------ | ------ | ---------------- |  | --------- | ------ | ----- |  | - | --------- |  |  | - | --------- | 
|                                       |  |                    |        |                 
|                                       |  | Available for Sale |        | Held to Maturity
|                                       |  | Amortized          |        | Fair             |  | Amortized |        | Fair 
|                                       |  | Cost               |        | Value            |  | Cost      |        | Value
|                                       |  |                   
|                                       |  | (In thousands)    
|Due within one year                    |  | $                  |       |                  |  | $         |       |       |  | $ | 174,976   |  |  | $ | 174,976   | 
|Due after one year through five years  |  |                    |       |                  |  |           |       |       |  |   | 982,236   |  |  |   | 984,368   | 
|Due after five years through ten years |  |                    |       |                  |  |           |       |       |  |   | 3,544,394 |  |  |   | 3,522,456 | 
|Due after ten years                    |  |                    | 5,000  |                  |  |           | 5,170  |       |  |   | 22,772    |  |  |   | 25,590    | 
|                                       |  |                    |        |                  |  |           |        |       |  |   |           |  |  |   |           | 
|Total                                  |  |                    | 5,000  |                  |  |           | 5,170  |       |  |   | 4,724,378 |  |  |   | 4,707,390 | 
|Mortgage and asset-backed securities   |  |                    | 50,992 |                  |  |           | 49,910 |       |  |   | 999,332   |  |  |   | 931,426   | 
|                                       |  |                    |        |                  |  |           |        |       |  |   |           |  |  |   |           | 
|Total                                  |  | $                  | 55,992 |                  |  | $         | 55,080 |       |  | $ | 5,723,710 |  |  | $ | 5,638,816 | 
|                                       |  |                    |        |                  |  |           |        |       |  |   |           |  |  |   |           | 



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Proceeds from sales of investment securities
    available for sale and the respective gross realized gains and
    losses for the years ended December 31, 2003, 2002 and
    2001, were as follows:

|                      |  |                |        |      |  |      |         |  |  |   |         | 
|--------------------- |  | -------------- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                      |  | 2003           |        | 2002 |  | 2001
|                      |  |               
|                      |  | (In thousands)
|Proceeds from sales   |  | $              | 50,803 |      |  | $    | 661,090 |  |  | $ | 162,556 | 
|Gross realized gains  |  |                | 1,313  |      |  |      | 3,250   |  |  |   | 426     | 
|Gross realized losses |  |                | 8,984  |      |  |      | 1,742   |  |  |   | 75      | 

77




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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Unencumbered investment securities held to
    maturity at December 31, 2003, amounted to $522,434,000
    after taking into account the investment securities pledged
    (Notes 7 and 18), those sold under agreements to repurchase
    (Note 8), those pledged to the Federal Reserve Bank of
    $6,000,000, and those pledged to the Puerto Rico Treasury
    Department (for Westernbanks International Division) of
    $500,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Nontaxable interest income on investments for the
    years ended December 31, 2003, 2002 and 2001, amounted to
    $188,669,000, $163,387,000, and $131,112,000, respectively.
    Nontaxable interest income relates mostly to interest earned on
    government obligations of the United States and Puerto Rico,
    certain mortgage-backed securities, loans and investments of the
    Westernbank International division.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The Company evaluates its investment securities
    for impairment on a quarterly basis or earlier if other factors
    indicative of potential impairment exist. An impairment charge
    in the consolidated statements of income is recognized when a
    decline in the fair value of the securities below their cost
    basis is judged to be other-than-temporary. The Company
    considers various factors in determining whether it should
    recognize an impairment charge, including, but not limited to
    the length of time and extent to which the fair value has been
    less than its cost basis, expectations of recoverability of its
    original investment, the employment of a systematic methodology
    that considers available evidence in evaluating potential
    impairment, available secondary market prices from
    broker/dealers, and the Companys intention and ability to
    hold the security for a period of time sufficient to allow for
    any anticipated recovery in fair value.                                                                                                                                                                                                                                                                                     
|
| | The impairment analysis on the mortgage and other
    asset-backed securities is done placing special emphasis on the
    analysis of the trustee and collateral manager monthly reports,
    as well as on sensitivity and expected cash flow analysis made
    by major brokerage houses. The Company also considers its intent
    and ability to hold these securities. If management believes,
    based on the analysis, that the principal and interest
    obligations on any mortgage and other asset-backed security will
    not be received in a timely manner, the security is written down
    to fair value based on available secondary market prices from
    broker/dealers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The equity securities impairment analyses are
    performed and reviewed quarterly based on the latest financial
    information and any supporting research report made by major
    brokerage houses. These analyses are subjective and based, among
    other things, on relevant financial data such as capitalization,
    cash flows, liquidity, systematic risk, and debt outstanding.
    Management also considers the industry trends, the historical
    performance of the stock, as well as the Companys intent
    to hold the security. If management believes there is a low
    probability of achieving book value in a reasonable time frame,
    then an impairment is recorded by writing down the security to
    fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | In applying the foregoing analysis, management
    concluded that at March 31, 2003, its investments in
    corporate bond and loan obligations (CBOs and
    CLOs) were other-than-temporarily impaired. First,
    two tranches of a CBO with an amortized cost of
    $13.0 million were downgraded by two different rating
    agencies on April 3 and April 15, 2003, respectively.
    Second, the available secondary market prices for those two
    securities and the remaining portfolio of CBOs and
    CLOs with a carrying value of $56.0 million continued
    to deteriorate. In line with such decline, management concluded,
    based on these facts and the secondary market prices that a
    $15.7 million other-than-temporary impairment write-down
    adjustment was warranted. The same was recorded effective for
    the quarterly period ended March 31, 2003. As of
    March 31, 2003, there were no defaults within the
    securities portfolio underlying the CBOs and CLOs.
    In connection with the write-down, and in accordance with
    applicable accounting pronouncements, management also reassessed
    its intent to hold to maturity and reclassified the securities
    related to the CBO that were downgraded as available for sale as
    of March 31, 2003.
|
| | During the quarter ended June 30, 2003, the
    Company, based upon additional information available from
    trustees, further ratings downgrading, a default on the
    scheduled interest payment in one of the CBO tranches and
    further declines in quoted market prices for such investments,
    reclassified the remaining portfolio of CBOs and
    CLOs to available for sale and subsequently on
    June 6, 2003 sold its entire portfolio of CBOs and
    CLOs. The sale of the portfolio, with an original total
    investment of $62.9 million and adjusted to a fair value of
    $45.4 million as of March 31, 2003, was completed at
    an additional loss of $7.0 million which was recorded
    during the quarter ended June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | As of December 31, 2003 and 2002, management
    concluded that there was no other-than-temporary impairment on
    its investment securities portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

78




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|   |       
|-- | ------
|4. | LOANS:



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

|                                              |                                                                                                    |                                                    |           |           |         |   |           |           |         |  
|--------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------- | --------- | --------- | ------- | - | --------- | --------- | ------- | -
|                                              |                                                                                                    | 2003                                               |           | 2002     
|                                              |                                                                                                    |                                                   
|                                              |                                                                                                    | (In thousands)                                    
|REAL ESTATE LOANS SECURED BY FIRST MORTGAGES: |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Commercial real estate                                                                             |                                                    | $         | 2,269,380 |         |   | $         | 1,648,994 |        
|                                              | Conventional:                                                                                      |                                                    |           |           |         |   |           |           |        
|                                              |                                                                                                    | One-to-four-family residences                      |           |           | 873,345 |   |           |           | 827,902 |  
|                                              |                                                                                                    | Other properties                                   |           |           | 2,233   |   |           |           | 2,447   |  
|                                              | Construction and land acquisition                                                                  |                                                    |           | 207,593   |         |   |           | 186,208   |        
|                                              | Insured or guaranteed  Federal
    Housing Administration,
    Veterans Administration and others |                                                    |           | 19,117    |         |   |           | 17,201    |        
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Total                                                                                              |                                                    |           | 3,371,668 |         |   |           | 2,682,752 |        
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Plus (less):                                                                                       |                                                    |           |           |         |   |           |           |        
|                                              |                                                                                                    | Undisbursed portion of loans in process            |           |           | (4,993  | ) |           |           | (4,942  | )
|                                              |                                                                                                    | Premium on loans purchased                         |           |           | 1,016   |   |           |           | 1,485   |  
|                                              |                                                                                                    | Deferred loan fees  net                           |           |           | (9,615  | ) |           |           | (5,624  | )
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Total                                                                                              |                                                    |           | (13,592   | )       |   |           | (9,081    | )      
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Real estate loans  net                                                                            |                                                    |           | 3,358,076 |         |   |           | 2,673,671 |        
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|OTHER LOANS:                                  |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Commercial loans                                                                                   |                                                    |           | 526,105   |         |   |           | 382,416   |        
|                                              | Loans on deposits                                                                                  |                                                    |           | 30,805    |         |   |           | 32,803    |        
|                                              | Credit cards                                                                                       |                                                    |           | 54,832    |         |   |           | 56,658    |        
|                                              | Consumer loans                                                                                     |                                                    |           | 777,573   |         |   |           | 655,713   |        
|                                              | Plus (less):                                                                                       |                                                    |           |           |         |   |           |           |        
|                                              |                                                                                                    | Premium on loans purchased                         |           |           | 2,281   |   |           |           | 3,225   |  
|                                              |                                                                                                    | Deferred loan fees  net and
    unearned interest |           |           | (4,946  | ) |           |           | (3,015  | )
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|                                              | Other loans  net                                                                                  |                                                    |           | 1,386,650 |         |   |           | 1,127,800 |        
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|TOTAL LOANS                                   |                                                                                                    |                                                    | 4,744,726 |           |         |   | 3,801,471 |          
|ALLOWANCE FOR LOAN LOSSES                     |                                                                                                    |                                                    | (61,608   | )         |         |   | (47,114   | )        
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          
|LOANS  NET                                   |                                                                                                    | $                                                  | 4,683,118 |           |         | $ | 3,754,357 |          
|                                              |                                                                                                    |                                                    |           |           |         |   |           |          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company originated commercial real estate
    loans during 2003 amounting to $1,009,872,000, with outstanding
    balances totaling $2,269,380,000 at December 31, 2003. In
    general, commercial real estate loans are considered by
    management to be of somewhat greater risk of uncollectibility
    due to the dependency on income production or future development
    of the real estate. The commercial real estate loans are
    principally collateralized by property dedicated to wholesale,
    retail and rental business activities. Foreign loans amounted to
    $2,485,000 and $2,701,000 at December 31, 2003 and 2002,
    respectively.
|
| | The Company originates mortgage loans for
    portfolio investment or sale in the secondary market. During the
    period of origination, mortgage loans are designated as held for
    either sale or investment purposes. Mortgage loans held for sale
    are carried at the lower of cost or fair value. At
    December 31, 2003 and 2002, mortgage loans with a cost of
    $2,568,000 and $7,456,000, respectively, were designated as held
    for sale.                                                                                                                                                                                                      

79




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

|                                                                                                                   |  |                |        |      |  |      |        |  |  |   |        | 
|------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                                                                   |  | 2003           |        | 2002 |  | 2001
|                                                                                                                   |  |               
|                                                                                                                   |  | (In thousands)
|Outstanding principal balance at end of year                                                                       |  | $              | 31,246 |      |  | $    | 19,405 |  |  | $ | 14,113 | 
|                                                                                                                   |  |                |        |      |  |      |        |  |  |   |        | 
|Interest that would have been recorded if the
    loans had been performing and not been classified as non-accrual |  | $              | 2,500  |      |  | $    | 1,102  |  |  | $ | 1,123  | 
|                                                                                                                   |  |                |        |      |  |      |        |  |  |   |        | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Loans serviced for others are not included in the
    consolidated statements of financial condition. At
    December 31, 2003 and 2002, the unpaid principal balance of
    these loans amounted to $309,974,000 and $311,058,000,
    respectively. Servicing loans for others generally consists of
    collecting payments, maintaining escrow accounts, disbursing
    payments to investors and foreclosure processing. Loan servicing
    income includes servicing fees from investors and certain
    charges collected from borrowers, such as late payment fees. In
    connection with the loans serviced for others, the Company held
    borrowers escrow balances of $951,000 and $960,000 at
    December 31, 2003 and 2002, respectively.
|
| | Mortgage servicing rights, included as other
    assets, amounted to $2,822,000 and $1,925,000 at
    December 31, 2003 and 2002, respectively. In 2003, 2002 and
    2001, the Company capitalized mortgage servicing rights
    amounting to $1,544,000, $607,000 and $483,000, respectively.
    Amortization of mortgage servicing rights was $648,000,
    $772,000, and $477,000 in 2003, 2002, and 2001, respectively. At
    December 31, 2003 and 2002, the carrying value of mortgage
    servicing rights approximates fair value.                                                                                                                                                                                                              
|
| | In the normal course of business, the Company
    engages in business transactions with its directors, executive
    officers, principal shareholders and organizations associated
    with them. Loans to related parties, mainly mortgage loans for
    purchase of the principal residence, are substantially on the
    same terms as loans to non-related parties. The aggregate amount
    of loans outstanding to related parties at December 31,
    2003 and 2002 totaled $718,000 and $571,000, respectively.                                                                                                                                                                                                                                    
|
| | Changes in the allowance for loan losses are
    summarized below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                    |  |                |         |      |  |      |        |   |  |   |        |  
|----------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                    |  | 2003           |         | 2002 |  | 2001
|                                    |  |               
|                                    |  | (In thousands)
|Balance  at January 1              |  | $              | 47,114  |      |  | $    | 38,364 |   |  | $ | 28,928 |  
|Provision charged to income         |  |                | 27,048  |      |  |      | 15,083 |   |  |   | 12,278 |  
|Allowance acquired                  |  |                |        |      |  |      |       |   |  |   | 2,892  |  
|Recoveries                          |  |                | 2,311   |      |  |      | 1,632  |   |  |   | 1,304  |  
|Write-off of uncollectible accounts |  |                | (14,865 | )    |  |      | (7,965 | ) |  |   | (7,038 | )
|                                    |  |                |         |      |  |      |        |   |  |   |        |  
|Balance  at December 31            |  | $              | 61,608  |      |  | $    | 47,114 |   |  | $ | 38,364 |  
|                                    |  |                |         |      |  |      |        |   |  |   |        |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The total investment in impaired commercial and
    construction loans at December 31, 2003 and 2002 was
    $50,305,000 and $50,589,000, respectively. All impaired
    commercial and construction loans were measured based on the
    fair value of collateral at December 31, 2003 and 2002.
    Impaired commercial and construction loans amounting to
    $28,217,000 and $26,074,000 at December 31, 2003 and 2002,
    respectively, were covered by a valuation allowance of
    $4,646,000 and $4,752,000, respectively. Impaired commercial and
    construction loans amounting to $22,088,000 and $24,515,000 at
    December 31, 2003 and 2002, respectively, did not require a
    valuation allowance in accordance with SFAS No. 114,
    Accounting by Creditors for Impairment of a Loan.
    The average investment in impaired commercial and construction
    loans during the years ended December 31, 2003, 2002 and
    2001, amounted to $46,676,000, $46,147,000 and $20,293,000,
    respectively. The Companys policy is to recognize interest
    income related to impaired loans on a cash basis, when these are
    over 90 days in arrears on payments of principal or
    interest. Interest on impaired commercial and construction loans
    collected and recognized as income during the years ended
    December 31, 2003, 2002 and 2001, amounted to $2,452,000,
    $4,041,000 and $1,716,000, respectively.

80




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##### Table of Contents



|   |                                          
|-- | -----------------------------------------
|5. | FORECLOSED REAL ESTATE HELD FOR
    SALE:



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Foreclosed real estate held for sale at
    December 31, consisted of the following:

|                                               |                           |                |       |       |  |   |       |       | 
|---------------------------------------------- | ------------------------- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                                               |                           | 2003           |       | 2002 
|                                               |                           |               
|                                               |                           | (In thousands)
|Balance, foreclosed real estate held for sale: |                           |                |       |       |  |   |       |      
|                                               | Residential (1  4 units) |                | $     | 1,832 |  |   | $     | 701   | 
|                                               | Commercial                |                |       | 2,278 |  |   |       | 3,029 | 
|                                               |                           |                |       |       |  |   |       |      
|Total                                          |                           |                | 4,110 |       |  |   | 3,730 |      
|Less valuation allowance                       |                           |                | 28    |       |  |   | 51    |      
|                                               |                           |                |       |       |  |   |       |      
|Foreclosed real estate held for
    sale  net |                           | $              | 4,082 |       |  | $ | 3,679 |      
|                                               |                           |                |       |       |  |   |       |      



|   |                        
|-- | -----------------------
|6. | PREMISES AND EQUIPMENT:



| |                                                                       
| | ----------------------------------------------------------------------
| | Premises and equipment at December 31,
    consisted of the following:

|                                               |  |                |         |      |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                               |  | 2003           |         | 2002
|                                               |  |               
|                                               |  | (In thousands)
|Land                                           |  | $              | 30,722  |      |  | $ | 25,580  | 
|Buildings and improvements                     |  |                | 55,086  |      |  |   | 51,027  | 
|Furniture and equipment                        |  |                | 20,961  |      |  |   | 24,894  | 
|Leasehold improvements                         |  |                | 13,124  |      |  |   | 12,312  | 
|Construction in progress                       |  |                | 4,459   |      |  |   | 3,758   | 
|                                               |  |                |         |      |  |   |         | 
|Total                                          |  |                | 124,352 |      |  |   | 117,571 | 
|Less accumulated depreciation and amortization |  |                | 20,982  |      |  |   | 21,362  | 
|                                               |  |                |         |      |  |   |         | 
|Total                                          |  | $              | 103,370 |      |  | $ | 96,209  | 
|                                               |  |                |         |      |  |   |         | 



|   |                               
|-- | ------------------------------
|7. | DEPOSITS AND INTEREST EXPENSE:



| |                                                         
| | --------------------------------------------------------
| | Deposits at December 31, consisted of the
    following:

|                              |  |                |           |      |  |   |           | 
|----------------------------- |  | -------------- | --------- | ---- |  | - | --------- | 
|                              |  | 2003           |           | 2002
|                              |  |               
|                              |  | (In thousands)
|Noninterest bearings accounts |  | $              | 192,760   |      |  | $ | 156,143   | 
|Passbook accounts             |  |                | 692,190   |      |  |   | 560,549   | 
|NOW accounts                  |  |                | 218,616   |      |  |   | 138,434   | 
|Super NOW accounts            |  |                | 27,723    |      |  |   | 24,868    | 
|Money market accounts         |  |                | 198       |      |  |   | 15,303    | 
|Certificates of deposit       |  |                | 4,230,477 |      |  |   | 3,379,628 | 
|                              |  |                |           |      |  |   |           | 
|Total                         |  |                | 5,361,964 |      |  |   | 4,274,925 | 
|Accrued interest payable      |  |                | 23,512    |      |  |   | 23,819    | 
|                              |  |                |           |      |  |   |           | 
|Total                         |  | $              | 5,385,476 |      |  | $ | 4,298,744 | 
|                              |  |                |           |      |  |   |           | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted average interest rate of all
    deposits at December 31, 2003 and 2002, was approximately
    2.41% and 3.10%, respectively. At December 31, 2003, the
    aggregate amount of deposits in denominations of $100,000 or
    more was $719,933,000 ($619,280,000 at December 31, 2002).
    Deposits include brokered deposits of $3,510,482,000 and
    $2,546,000,000 at December 31, 2003 and 2002, respectively.
    Deposits of directors, executive officers, principal
    shareholders and organizations associated with them amounted to
    $9,255,000 and $8,287,000 at December 31, 2003 and 2002,
    respectively.
|
| | At December 31, 2003, the scheduled
    maturities of certificates of deposit are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                         |  |                |           | 
|------------------------ |  | -------------- | --------- | 
|                         |  | Amount        
|Year Ending December 31, |  | (In thousands)
|2004                     |  | $              | 2,751,176 | 
|2005                     |  |                | 379,919   | 
|2006                     |  |                | 217,167   | 
|2007                     |  |                | 130,246   | 
|2008                     |  |                | 191,779   | 
|Thereafter               |  |                | 560,190   | 
|                         |  |                |           | 
|Total                    |  | $              | 4,230,477 | 
|                         |  |                |           | 



81




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| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2003, the Company had
    pledged investment securities held to maturity with a carrying
    value of $9,662,000 and mortgage-backed securities held to
    maturity with a carrying value of $44,350,000 to secure public
    funds, and mortgage-backed securities held to maturity with a
    carrying value of $359,000 as bond requirement for individual
    retirement accounts.
|
| | A summary of interest expense on deposits for the
    years ended December 31, follows:                                                                                                                                                                                                                                                                                                                

|                                         |  |                |         |      |  |      |         |  |  |   |         | 
|---------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                         |  | 2003           |         | 2002 |  | 2001
|                                         |  |               
|                                         |  | (In thousands)
|Passbook                                 |  | $              | 13,014  |      |  | $    | 12,520  |  |  | $ | 12,800  | 
|NOW, Super NOW and Money Market accounts |  |                | 4,085   |      |  |      | 3,598   |  |  |   | 3,479   | 
|Certificates of deposit                  |  |                | 97,656  |      |  |      | 98,256  |  |  |   | 113,397 | 
|                                         |  |                |         |      |  |      |         |  |  |   |         | 
|Total                                    |  | $              | 114,755 |      |  | $    | 114,374 |  |  | $ | 129,676 | 
|                                         |  |                |         |      |  |      |         |  |  |   |         | 



|   |                                                    
|-- | ---------------------------------------------------
|8. | SECURITIES SOLD UNDER AGREEMENTS TO
    REPURCHASE:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company enters into sales of securities under
    agreements to repurchase (reverse repurchase
    agreements). Reverse repurchase agreements are classified
    as secured borrowings and are reflected as a liability in the
    consolidated statements of financial condition. During the years
    ended December 31, 2003 and 2002, all of the Companys
    transactions were fixed-coupon reverse repurchase agreements
    including $482,848,000 and $433,198,000 at December 31,
    2003 and 2002, respectively, of long-term agreements with fixed rate step-up
    schedule. During the period of such agreements, the securities
    were delivered to the counterparties. The dealers may have sold,
    loaned, or otherwise disposed of such securities to other
    parties in the normal course of their operations, and have
    agreed to resell to the Company the same securities at the
    maturities of the agreements. The Company may be required to
    provide additional collateral based on the fair value of the
    underlying securities.
|
| | Reverse repurchase agreements at
    December 31, 2003, mature as follows: within 30 days
    $672,928,000; in 2004 $1,291,713,000; in 2005 $1,265,956,000; in
    2006 $724,850,000; in 2007 $73,400,000 and $1,017,198,000
    thereafter. At December 31, 2003, with respect to reverse
    repurchase agreements amounting to $2,240,198,000, excluding
    FHLB reverse repurchase agreements (Note 10), the
    counterparties have the option to terminate the agreements at
    the first anniversary date and each interest payment date
    thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | At December 31, 2003 and 2002, securities
    sold under agreements to repurchase (classified by counterparty)
    were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                            |  |                |           |               |  |           |           |               |  |   |           |  |  |   |           | 
|----------------------------------------------------------- |  | -------------- | --------- | ------------- |  | --------- | --------- | ------------- |  | - | --------- |  |  | - | --------- | 
|                                                            |  |                |           |              
|                                                            |  | 2003           |           | 2002         
|                                                            |  |                |           |              
|                                                            |  |                |           | Fair Value    |  |           |           | Fair Value   
|                                                            |  | Borrowing      |           | of Underlying |  | Borrowing |           | of Underlying
|                                                            |  | Balance        |           | Collateral    |  | Balance   |           | Collateral   
|                                                            |  |               
|                                                            |  | (In thousands)
|UBS Financial Services Incorporated of Puerto Rico          |  | $              | 1,382,725 |               |  | $         | 1,435,734 |               |  | $ | 1,038,538 |  |  | $ | 1,070,657 | 
|Federal Home Loan Bank of New York                          |  |                | 649,000   |               |  |           | 648,936   |               |  |   | 692,470   |  |  |   | 700,612   | 
|Lehman Brothers Inc. and affiliates                         |  |                | 504,448   |               |  |           | 612,581   |               |  |   | 524,148   |  |  |   | 637,285   | 
|Merrill Lynch Government Securities Inc. and
    affiliates |  |                | 529,951   |               |  |           | 535,440   |               |  |   | 334,900   |  |  |   | 344,561   | 
|Bear, Stearns and Company, Inc.                             |  |                | 534,273   |               |  |           | 564,947   |               |  |   | 146,441   |  |  |   | 163,073   | 
|Credit Suisse First Boston                                  |  |                | 339,508   |               |  |           | 414,672   |               |  |   | 104,285   |  |  |   | 107,412   | 
|Salomon Smith Barney Inc. and affiliates                    |  |                | 441,800   |               |  |           | 469,819   |               |  |   | 100,000   |  |  |   | 105,569   | 
|Prudential Securities                                       |  |                |          |               |  |           |          |               |  |   | 81,559    |  |  |   | 82,854    | 
|Morgan Stanley Dean Witter                                  |  |                | 431,950   |               |  |           | 445,362   |               |  |   | 75,000    |  |  |   | 76,817    | 
|Wachovia Securities                                         |  |                | 182,390   |               |  |           | 184,217   |               |  |   |          |  |  |   |          | 
|Doral Securities                                            |  |                | 50,000    |               |  |           | 50,766    |               |  |   |          |  |  |   |          | 
|                                                            |  |                |           |               |  |           |           |               |  |   |           |  |  |   |           | 
|Total                                                       |  | $              | 5,046,045 |               |  | $         | 5,362,474 |               |  | $ | 3,097,341 |  |  | $ | 3,288,840 | 
|                                                            |  |                |           |               |  |           |           |               |  |   |           |  |  |   |           | 



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

|                                                                                  |  |                |           |            |  |            |           |            |  |   |           |  |  |   |           | 
|--------------------------------------------------------------------------------- |  | -------------- | --------- | ---------- |  | ---------- | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                                                                                  |  |                |           |           
|                                                                                  |  | 2003           |           | 2002      
|                                                                                  |  |                |           |           
|                                                                                  |  | Carrying       |           | Fair       |  | Carrying   |           | Fair      
|Securities Underlying                                                             |  | Value of       |           | Value of   |  | Value of   |           | Value of  
|Reverse Repurchase                                                                |  | Underlying     |           | Underlying |  | Underlying |           | Underlying
|Agreements                                                                        |  | Collateral     |           | Collateral |  | Collateral |           | Collateral
|                                                                                  |  |               
|                                                                                  |  | (In thousands)
|U.S. Government and agencies
    obligations  held to maturity                   |  | $              | 4,255,219 |            |  | $          | 4,234,831 |            |  | $ | 2,556,076 |  |  | $ | 2,563,199 | 
|U.S. Government and agencies obligations
    purchased under agreements to resell |  |                | 200,000   |            |  |            | 266,855   |            |  |   | 100,000   |  |  |   | 100,000   | 
|Mortgage-backed securities  held
    to maturity                                 |  |                | 880,486   |            |  |            | 813,352   |            |  |   | 621,680   |  |  |   | 620,228   | 
|Mortgage-backed
    securities  available for sale                               |  |                | 48,471    |            |  |            | 47,436    |            |  |   |          |  |  |   |          | 
|Other investments  held to
    maturity                                          |  |                |          |            |  |            |          |            |  |   | 4,983     |  |  |   | 5,413     | 
|                                                                                  |  |                |           |            |  |            |           |            |  |   |           |  |  |   |           | 
|Total                                                                             |  |                | 5,384,176 |            |  | $          | 5,362,474 |            |  |   | 3,282,739 |  |  | $ | 3,288,840 | 
|                                                                                  |  |                |           |            |  |            |           |            |  |   |           |  |  |   |           | 
|Accrued interest receivable of underlying
    securities                          |  |                | 48,973    |            |  |            |           |            |  |   | 20,198    |  |  |   |           | 
|                                                                                  |  |                |           |            |  |            |           |            |  |   |           |  |  |   |           | 
|Total                                                                             |  | $              | 5,433,149 |            |  |            |           |            |  | $ | 3,302,937 |  |  |   |           | 
|                                                                                  |  |                |           |            |  |            |           |            |  |   |           |  |  |   |           | 

82




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| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Average outstanding balances and maximum
    month-end outstanding balances during the years ended
    December 31, 2003 and 2002, and weighted average interest
    rates for the year and at year-end are indicated below:

|                                             |              |                        |           |      |   |   |           |      |  
|-------------------------------------------- | ------------ | ---------------------- | --------- | ---- | - | - | --------- | ---- | -
|                                             |              | 2003                   |           | 2002
|                                             |              |                       
|                                             |              | (Dollars in thousands)
|Monthly average outstanding balance          |              | $                      | 3,910,573 |      |   | $ | 2,822,658 |     
|Maximum outstanding balance at any month-end |              |                        | 5,046,045 |      |   |   | 3,561,167 |     
|Weighted average interest rate:              |              |                        |           |      |   |   |           |     
|                                             | For the year |                        |           | 2.54 | % |   |           | 3.48 | %
|                                             | At year end  |                        |           | 2.36 |   |   |           | 3.03 |  



|   |                 
|-- | ----------------
|9. | LINES OF CREDIT:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2003 and 2002,
    Westernbank had line of credit agreements with four commercial
    banks permitting Westernbank to borrow a maximum aggregate
    amount of $125,000,000 (there were no borrowings outstanding as
    of December 31, 2003 and 2002, under such lines of credit).
    The agreements provide for unsecured advances to be used by
    Westernbank on an overnight basis. Interest rate is negotiated
    at the time of the transaction usually at Fed Fund rate. The
    credit agreements are renewable annually.



|    |                                                                    
|--- | -------------------------------------------------------------------
|10. | ADVANCES FROM FEDERAL HOME LOAN BANK AND
    MORTGAGE NOTE PAYABLE:



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Advances from Federal Home Loan Bank
    (FHLB) and mortgage note payable at
    December 31, consisted of the following:

|                    |                                                      |                        |   |          |  |        |  |          |   |  |   |         |  |  |  |      |  
|------------------- | ---------------------------------------------------- | ---------------------- | - | -------- |  | ------ |  | -------- | - |  | - | ------- |  |  |  | ---- | -
|                    |                                                      |                        |   |         
|                    |                                                      | 2003                   |   | 2002    
|                    |                                                      |                        |   | Weighted |  |        |  | Weighted
|                    |                                                      |                        |   | Interest |  |        |  | Interest
|                    |                                                      | Amount                 |   | Rate     |  | Amount |  | Rate    
|                    |                                                      |                       
|                    |                                                      | (Dollars in thousands)
|ADVANCES FROM FHLB: |                                                      |                        |   |          |  |        |  |          |   |  |   |         |  |  |  |     
|                    | Fixed rate convertible advances
    (1.20% to 6.66%) |                        | $ | 146,000  |  |        |  | 4.06     | % |  | $ | 120,000 |  |  |  | 5.10 | %
|                    |                                                      |                        |   |          |  |        |  |          |   |  |   |         |  |  |  |     
|MORTGAGE NOTE:      |                                                      |                        |   |          |  |        |  |          |   |  |   |         |  |  |  |     
|                    | Fixed rate mortgage note                             |                        | $ | 37,234   |  |        |  | 8.05     | % |  | $ | 37,822  |  |  |  | 8.05 | %
|                    |                                                      |                        |   |          |  |        |  |          |   |  |   |         |  |  |  |     



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Advances and reverse repurchase agreements
    (Note 8) are received from the FHLB under an agreement
    whereby the Company is required to maintain a minimum amount of
    qualifying collateral with a fair value of at least 110% and
    105% of the outstanding advances and reverse repurchase
    agreements, respectively. At December 31, 2003, convertible
    advances were secured by mortgage loans amounting to
    $288,566,000. At the advances and reverse repurchase
    agreements first anniversary date and each quarter
    thereafter, the FHLB has the option to convert them into
    replacement funding for the same or a lesser principal amount
    based on any funding then offered by FHLB at the then current
    market rates, unless the interest rate has been predetermined
    between FHLB and the Company. If the Company chooses not to
    replace the funding, it will repay the convertible advances and
    reverse repurchase agreements, including any accrued interest,
    on such optional conversion date.
|
| | At December 31, 2003 and 2002, Westernbank
    World Plaza, Inc., a wholly owned subsidiary of Westernbank
    Puerto Rico, had outstanding $37.2 million and
    $37.8 million, respectively, of a mortgage note, at an
    interest rate of 8.05% per year up to September 11,
    2009. Subsequent to September 11, 2009, the mortgage note
    will bear interest on the then outstanding principal balance at
    a rate per year equal to the (1) greater of 13.05% or the
    Treasury Rate plus five percentage points or (2) 10.05%,
    depending on the fulfillment of 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.                                                                                                                                                                                 

83




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| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Advances from FHLB and the mortgage note payable
    by contractual maturities at December 31, 2003, were as
    follows:

|                         |  |                |         |          |  |   |        | 
|------------------------ |  | -------------- | ------- | -------- |  | - | ------ | 
|                         |  |                |         | Mortgage
|                         |  | Advances       |         | Note    
|Year Ending December 31, |  | from FHLB      |         | Payable 
|                         |  |               
|                         |  | (In thousands)
|2004                     |  | $              | 40,000  |          |  | $ | 378    | 
|2005                     |  |                | 14,000  |          |  |   | 418    | 
|2006                     |  |                | 50,000  |          |  |   | 454    | 
|2007                     |  |                |        |          |  |   | 492    | 
|2008                     |  |                |        |          |  |   | 526    | 
|Thereafter               |  |                | 42,000  |          |  |   | 34,966 | 
|                         |  |                |         |          |  |   |        | 
|Total                    |  | $              | 146,000 |          |  | $ | 37,234 | 
|                         |  |                |         |          |  |   |        | 



|    |              
|--- | -------------
|11. | INCOME TAXES:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the Puerto Rico Internal Revenue Code (the
    Code), all companies are treated as separate taxable
    entities and are not entitled to file consolidated tax returns.
    The Company, Westernbank, SRG Net, Inc. and Westernbank
    Insurance Corp. are subject to Puerto Rico regular income tax or
    alternative minimum tax (AMT) on income earned from
    all sources. The AMT is payable if it exceeds regular income
    tax. The excess of AMT over regular income tax paid in any one
    year may be used to offset regular income tax in future years,
    subject to certain limitations.                                                                                                                                                                                                                                                                                                                                                        
|
| | Westernbank World Plaza, Inc., a wholly owned
    subsidiary of Westernbank, elected to be treated as a special
    partnership under the Code; accordingly, its net income is taxed
    by Westernbank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | The Code provides a dividend received deduction
    of 100%, on dividends received from wholly owned subsidiaries
    subject to income taxation in Puerto Rico. The income on certain
    investments is exempt for income tax purposes. Also, Westernbank
    International division operates as an International Banking Entity
    (IBE) under Puerto Rico Act No. 52, of August 11,
    1989, as amended, known as the International Banking Regulatory
    Act. Under Puerto Rico tax law, an IBE can hold non-Puerto Rico
    assets, and earn interest on these assets, as well as generate
    fee income outside of Puerto Rico on a tax-exempt basis. As a
    result of the above, the Companys effective tax rate is
    substantially below the statutory rate.                                                                                                                                                                                               
|
| | Pursuant to the provisions of Act No. 13 of
    January 8, 2004, for taxable years commencing after
    June 30, 2003, the net income earned by an IBE that
    operates as a unit of a bank under the Puerto Rico Banking Law
    will be considered taxable and subject to income taxes at the
    current tax rates in the amount by which the IBE net income
    exceeds 40% in the first applicable taxable year (2004), 30% in
    the second year (2005) and 20% thereafter; of the net
    taxable income of Westernbank, including its IBE net taxable
    income. Westernbanks IBE carries on its books a
    significant amount of securities, which are indeed tax exempt by
    law. Moreover, the Act provides that IBEs operating as
    subsidiaries will continue to be exempt from the payment of
    income taxes. Management estimates that the provisions of the
    Act will not have a significant effect in the Companys
    result of operations.
|
| | The provision for income taxes for the years
    ended December 31, consisted of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|         |  |                |        |      |  |      |        |   |  |   |        |  
|-------- |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|         |  | 2003           |        | 2002 |  | 2001
|         |  |               
|         |  | (In thousands)
|Current  |  | $              | 29,346 |      |  | $    | 18,619 |   |  | $ | 11,750 |  
|Deferred |  |                | (8,575 | )    |  |      | (2,518 | ) |  |   | (3,246 | )
|         |  |                |        |      |  |      |        |   |  |   |        |  
|Total    |  | $              | 20,771 |      |  | $    | 16,101 |   |  | $ | 8,504  |  
|         |  |                |        |      |  |      |        |   |  |   |        |  



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

|                                       |                             |                |        |         |   |      |        |         |   |   |        |         |  
|-------------------------------------- | --------------------------- | -------------- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------ | ------- | -
|                                       |                             | 2003           |        | 2002    |   | 2001
|                                       |                             |               
|                                       |                             | (In thousands)
|Computed at Puerto Rico statutory rate |                             | $              | 52,293 |         |   | $    | 39,805 |         |   | $ | 27,557 |        
|Effect on provision of:                |                             |                |        |         |   |      |        |         |   |   |        |        
|                                       | Exempt interest income, net |                |        | (34,078 | ) |      |        | (25,700 | ) |   |        | (20,791 | )
|                                       | Net nondeductible expenses  |                |        | 169     |   |      |        | 12      |   |   |        | 26      |  
|                                       | Other                       |                |        | 2,387   |   |      |        | 1,984   |   |   |        | 1,712   |  
|                                       |                             |                |        |         |   |      |        |         |   |   |        |        
|Provision for income tax as reported   |                             | $              | 20,771 |         |   | $    | 16,101 |         |   | $ | 8,504  |        
|                                       |                             |                |        |         |   |      |        |         |   |   |        |        
|Statutory tax rate                     |                             |                | 39     | %       |   |      | 39     | %       |   |   | 39     | %      
|                                       |                             |                |        |         |   |      |        |         |   |   |        |        
|Effective tax rate                     |                             |                | 15     | %       |   |      | 16     | %       |   |   | 12     | %      
|                                       |                             |                |        |         |   |      |        |         |   |   |        |        

84




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

|                                                           |  |                |        |      |  |   |        |  
|---------------------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                                           |  | 2003           |        | 2002
|                                                           |  |               
|                                                           |  | (In thousands)
|Allowance for loan losses                                  |  | $              | 22,899 |      |  | $ | 17,247 |  
|Unrealized gain in valuation of derivative
    instruments |  |                | (746   | )    |  |   | (137   | )
|Mortgage servicing rights                                  |  |                | (1,100 | )    |  |   | (751   | )
|Allowance for foreclosed real estate held for sale         |  |                | 4      |      |  |   | 6      |  
|Capital loss on sale of investment securities              |  |                | 5,699  |      |  |   |       |  
|Other temporary differences                                |  |                | (128   | )    |  |   | (32    | )
|                                                           |  |                |        |      |  |   |        |  
|Total                                                      |  |                | 26,628 |      |  |   | 16,333 |  
|Less valuation allowance                                   |  |                | 1,718  |      |  |   | 6      |  
|                                                           |  |                |        |      |  |   |        |  
|Deferred income taxes, net                                 |  | $              | 24,910 |      |  | $ | 16,327 |  
|                                                           |  |                |        |      |  |   |        |  



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

|                                           |  |                |       |      |  |      |     |   |  |   |    | 
|------------------------------------------ |  | -------------- | ----- | ---- |  | ---- | --- | - |  | - | -- | 
|                                           |  | 2003           |       | 2002 |  | 2001
|                                           |  |               
|                                           |  | (In thousands)
|Balance  at January 1                     |  | $              | 6     |      |  | $    | 39  |   |  | $ | 39 | 
|Increase (decrease) in valuation allowance |  |                | 1,712 |      |  |      | (33 | ) |  |   |   | 
|                                           |  |                |       |      |  |      |     |   |  |   |    | 
|Balance  at December 31                   |  | $              | 1,718 |      |  | $    | 6   |   |  | $ | 39 | 
|                                           |  |                |       |      |  |      |     |   |  |   |    | 



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



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|12. | NET (LOSS) GAIN ON SALES AND VALUATION OF
    LOANS, SECURITIES AND OTHER ASSETS:



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Net gain (loss) on sales and valuation of loans,
    securities and other assets for the years ended
    December 31, consisted of the following:

|                                                                    |  |                |         |      |  |      |       |   |  |   |      |  
|------------------------------------------------------------------- |  | -------------- | ------- | ---- |  | ---- | ----- | - |  | - | ---- | -
|                                                                    |  | 2003           |         | 2002 |  | 2001
|                                                                    |  |               
|                                                                    |  | (In thousands)
|Trading account securities, mainly related to
    loans securitized |  | $              | 1,657   |      |  | $    | (866  | ) |  | $ | (192 | )
|Investment securities available for sale                            |  |                | (7,671  | )    |  |      | 1,508 |   |  |   | 351  |  
|Impairment on investment securities held to
    maturity            |  |                | (15,701 | )    |  |      |      |   |  |   |     |  
|Mortgage loans held for sale                                        |  |                | 2       |      |  |      | 306   |   |  |   | (26  | )
|Gain on sale of real estate owned                                   |  |                | 764     |      |  |      |      |   |  |   |     |  
|Other                                                               |  |                |        |      |  |      | 2     |   |  |   | 27   |  
|                                                                    |  |                |         |      |  |      |       |   |  |   |      |  
|                                                                    |  | $              | (20,949 | )    |  | $    | 950   |   |  | $ | 160  |  
|                                                                    |  |                |         |      |  |      |       |   |  |   |      |  



|    |                               
|--- | ------------------------------
|13. | COMMITMENTS AND CONTINGENCIES:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the ordinary course of business, the Company
    has various outstanding commitments and contingent liabilities
    that are not reflected in the accompanying consolidated
    financial statements. In addition, the Company is a defendant in
    certain claims and legal actions arising in the ordinary course
    of business. In the opinion of management, after consultation
    with legal counsel, the ultimate disposition of these matters is
    not expected to have a material adverse effect on the
    Companys financial condition or results of operations.                                                                                                                                                                                                                                       
|
| | The Company, as a Puerto Rico chartered financial
    holding company, and its subsidiaries are each subject to
    extensive federal and local governmental supervision and
    regulation relating to its financial holding company status and
    each banking and insurance business. There are laws and
    regulations that restrict transactions between the Company and
    its subsidiaries. In addition, the Company benefits from
    favorable tax treatment of activities relating to the
    Westernbank International Division. Any change in such
    regulations, whether by applicable regulators or as a result of
    legislation subsequently enacted by the Congress of the United
    States or the applicable local legislatures, could have a
    substantial impact on the companies operations.
|
| | At December 31, 2003, the Company is
    obligated under non-cancelable operating leases for banking
    premises. Certain leases contain escalation clauses providing
    for increased rental. Rent expense amounted to $2,576,000,
    $2,435,000, and $1,943,000 for the years ended December 31,
    2003, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

85




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##### Table of Contents





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

|                         |  |                |        | 
|------------------------ |  | -------------- | ------ | 
|                         |  | Minimum Rent  
|Year Ending December 31, |  | (In thousands)
|2004                     |  | $              | 2,103  | 
|2005                     |  |                | 2,136  | 
|2006                     |  |                | 2,028  | 
|2007                     |  |                | 1,766  | 
|2008                     |  |                | 1,333  | 
|Thereafter               |  |                | 14,701 | 
|                         |  |                |        | 
|Total                    |  | $              | 24,067 | 
|                         |  |                |        | 



|    |                          
|--- | -------------------------
|14. | RETIREMENT BENEFIT PLANS:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pension Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | The Company established a retirement plan for
    directors who were not also executive officers and who elected to
retire after January 1, 1988. The Plan
    generally provided pension benefits ranging from 80% to 100% of
    the Directors average remuneration based on consecutive
    years of service (vesting started after six years) and average
    earnings during the last five years (three years if the Director
    has served longer than 25 years). On February 24,
    1989, the Plan was substantially amended to limit the pension
    benefits to only those directors who were founders of the
    Company, had attained the age of 50 years and had served
    for 25 consecutive years on the Board. The amended plan provided
    for pension benefits equal to the Directors average
    remuneration during the last three years of service. The other
    Directors (non-founders) by approving this amendment waived and
    renounced their pension benefits under the Plan. The Plan was
    unfunded as of December 31, 2003 and 2002. The accumulated
    benefit obligation under this Plan is $136,000 and $159,000 as
    of December 31, 2003 and 2002, respectively.
|
| | Profit-Sharing and Defined Contributions
    Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | The Company has a non-contributory deferred
    profit-sharing plan, covering substantially all of its
    employees, which provides for retirement and disability
    benefits. The Companys contribution to the profit-sharing
    plan is discretionary. The Companys contributions for the
    years ended December 31, 2003, 2002 and 2001 were $250,000
    for each year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | The Company has a defined contribution plan under
    Section 1165(e) of the Puerto Rico Treasury Department
    Internal Revenue Code, covering all full-time employees of the
    Company who have one year of service and are twenty-one years or
    older. Under the provisions of this Plan, participants may
    contribute each year from 2% to 10% of their compensation after
    deducting social security, up to a specified maximum. The
    Company contributes 50 percent of the first 6 percent
    of base compensation that a participant contributes to the Plan.
    Participants are immediately vested in their contributions plus
    actual earnings thereon. The Companys contributions plus
    actual earnings thereon are 100 percent vested after three
    years of credited service. In case of death or disability, a
    participant will be 100 percent vested regardless of the
    number of years of credited service. The Companys
    contributions for the years ended December 31, 2003, 2002
    and 2001, amounted to $329,000, $305,000 and $286,000,
    respectively.                                                                                           



|    |                                             
|--- | --------------------------------------------
|15. | MINIMUM REGULATORY CAPITAL
    REQUIREMENTS:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to examination, regulation
    and periodic reporting under the Bank Holding Company Act of
    1956, as amended, which is administered by the Board of
    Governors of the Federal Reserve System. Westernbank is
    regulated by the Federal Deposit Insurance Corporation
    (FDIC) and by the Office of the Commissioner of
    Financial Institutions of Puerto Rico. Westernbanks
    deposits are insured by the Savings Association Insurance Fund
    and by the Bank Insurance Fund, which are administered by the
    FDIC, up to $100,000 per depositor.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The Company (on a consolidated basis) and
    Westernbank (the Companies) are subject to various
    regulatory capital requirements administered by the federal
    banking agencies. Failure to meet minimum capital requirements
    can initiate certain mandatory and possibly additional
    discretionary actions by regulators that, if undertaken, could
    have a direct material effect on the Companies financial
    statements. Under capital adequacy guidelines and the regulatory
    framework for prompt corrective action, the Companies must meet
    specific capital guidelines that involve quantitative measures
    of their assets, liabilities, and certain off-balance-sheet
    items as calculated under regulatory accounting practices. The
    capital amounts and classification are also subject to
    qualitative judgments by the regulators about components, risk
    weightings, and other factors. Prompt corrective action
    provisions are not applicable to bank holding companies.
|
| | Quantitative measures established by regulation
    to ensure capital adequacy require the Companies to maintain
    minimum amounts and ratios (set forth in the table below) of
    total and Tier I capital (as defined in the regulations) to
    risk-weighted assets (as defined), and of Tier I capital to
    average assets (as defined). Management believes, as of
    December 31, 2003 and 2002, that the Companies met all
    capital adequacy requirements to which they are subject.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | As of March 31, 2003, Westernbank qualified
    as a well capitalized institution under the regulatory framework
    for prompt corrective action. To be categorized as well
    capitalized, an institution must maintain minimum total
    risk-based, Tier I risk-based, and Tier I leverage
    ratios as set forth in the following table. At December 31,
    2003, there are no conditions or events that management believes
    have changed Westernbanks category.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

86




---



##### Table of Contents





| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | The Companies actual capital amounts and
    ratios as of December 31, 2003 and 2002, are also presented
    in the table below:

|                                        |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |     |  
|--------------------------------------- | ------------ | ---------------------- | - | ----------- |  | ---------- |  | ------------ | - | ----------- | - | ------- |  |  |  | - | - |  | - | ------- |  |  |  | --- | -
|                                        |              |                        |   |             |  |            |  |              |   |            
|                                        |              |                        |   |             |  |            |  |              |   | Minimum To 
|                                        |              |                        |   |             |  |            |  |              |   | Be Well    
|                                        |              |                        |   |             |  |            |  |              |   | Capitalized
|                                        |              |                        |   |             |  |            |  | Under Prompt
|                                        |              |                        |   |             |  | Minimum    |  | Corrective  
|                                        |              |                        |   | Capital     |  | Action    
|                                        |              | Actual                 |   | Requirement |  | Provisions
|                                        |              |                        |   |             |  |           
|                                        |              | Amount                 |   | Ratio       |  | Amount     |  | Ratio        |   | Amount      |   | Ratio  
|                                        |              |                       
|                                        |              | (Dollars in thousands)
|As of December 31, 2003:                |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|Total Capital to Risk Weighted Assets:  |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |                        | $ | 886,360     |  |            |  | 14.87        | % |             | $ | 476,996 |  |  |  | 8 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |                        |   | 880,001     |  |            |  | 14.76        |   |             |   | 462,167 |  |  |  | 8 |   |  | $ | 577,709 |  |  |  | 10  | %
|Tier I Capital to Risk Weighted Assets: |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |                        | $ | 826,618     |  |            |  | 13.98        | % |             | $ | 236,034 |  |  |  | 4 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |                        |   | 819,393     |  |            |  | 13.87        |   |             |   | 228,619 |  |  |  | 4 |   |  | $ | 342,929 |  |  |  | 6   | %
|Tier I Capital to Average Assets:       |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |                        | $ | 826,618     |  |            |  | 7.22         | % |             | $ | 343,586 |  |  |  | 3 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |                        |   | 819,393     |  |            |  | 7.19         |   |             |   | 341,507 |  |  |  | 3 |   |  | $ | 569,179 |  |  |  | 5   | %
|As of December 31, 2002:                |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|Total Capital to Risk Weighted Assets:  |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |                        | $ | 631,037     |  |            |  | 13.83        | % |             | $ | 365,016 |  |  |  | 8 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |                        |   | 613,574     |  |            |  | 13.46        |   |             |   | 364,606 |  |  |  | 8 |   |  | $ | 455,757 |  |  |  | 10  | %
|Tier I Capital to Risk Weighted Assets: |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |                        | $ | 583,923     |  |            |  | 12.93        | % |             | $ | 180,623 |  |  |  | 4 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |                        |   | 566,460     |  |            |  | 12.56        |   |             |   | 180,418 |  |  |  | 4 |   |  | $ | 270,628 |  |  |  | 6   | %
|Tier I Capital to Average Assets:       |              |                        |   |             |  |            |  |              |   |             |   |         |  |  |  |   |   |  |   |         |  |  |  |    
|                                        | Consolidated |                        | $ | 583,923     |  |            |  | 7.21         | % |             | $ | 242,942 |  |  |  | 3 | % |  |   | N/A     |  |  |  | N/A |  
|                                        | Westernbank  |                        |   | 566,460     |  |            |  | 7.02         |   |             |   | 241,921 |  |  |  | 3 |   |  | $ | 403,202 |  |  |  | 5   | %



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



|    |                                             
|--- | --------------------------------------------
|16. | COMMON AND PREFERRED STOCK
    TRANSACTIONS:



| |                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2003, 2002 and 2001, the Company acquired and
    retired shares of common stock as follows: $33,000 (1,903 shares)
in 2003; $42,000
    (1,678 shares) in 2002; and $28,000 (1,700 shares) in
    2001.                                                                                                                                                                                               
|
| | On November 4, 2003, the Company declared a
    three-for-two split in the form of a stock dividend on its
    common stock, for stockholders of record as of November 28,
    2003, distributed on December 10, 2003. The effect of the
    stock split was a decrease in retained earnings and an increase
    in common stock of approximately $34.7 million.                                              
|
| | On November 11, 2003, the Company declared a
    two percent (2%) stock dividend, for stockholders of record as
    of November 28, 2003, distributed on December 10,
    2003. The effect of the stock dividend was a decrease in
    retained earnings, an increase in paid-in-capital and an
    increase in common stock of approximately $35.2 million,
    $33.1 million and $2.1 million, respectively.
|
| | During 2003, the Company issued 4,232,000 and
    2,640,000 shares of the Companys Series F and
    Series G Preferred Stock, respectively, providing a net
    capital infusion of $102.2 million and $63.7 million,
    respectively.                                                                                                                                                                      
|
| | During 2003, the Company issued 765,000 shares of
    common stock (as adjusted) upon exercised of stock options by an
    executive officer of the Company (Note 17  Stock
    Option Plans).                                                                                                                                                                                                               

87




---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 17, 2002, the Company declared a
    three-for-two split in the form of a stock dividend on its
    common stock, 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 approximately $20.8 million.                                  
|
| | During 2002, the Company issued 6,095,000 and
    1,725,000 shares of the Companys Common Stock and
    Series E Preferred Stock, respectively, providing a net
    capital infusion of approximately $97.9 million and
    $41.5 million, respectively.                                                                                                                                  
|
| | During 2003 and 2002, 419,254 and
    2,000 shares, respectively, of the convertible preferred
    stock Series A were converted for 625,717 and
    2,984 shares of common stock, respectively. At
December 31, 2003 and 2002, the Company had outstanding 797,746
and 1,217,000 shares, respectively, of its 7.125% Non-cumulative, Convertible
Monthly Income Preferred Stock, Series A.
|
| | The Company has issued the following
    non-cumulative, monthly income preferred stock (liquidation
    preference $25 per share):                                                                                                                                                                                                                                                        

|         |       |                   |  |                                |  |           |       |        |  |                  |    |            |  |  |           |             |  |   |             |            |  |   |           | 
|-------- | ----- | ----------------- |  | ------------------------------ |  | --------- | ----- | ------ |  | ---------------- | -- | ---------- |  |  | --------- | ----------- |  | - | ----------- | ---------- |  | - | --------- | 
|         |       |                   |  |                                |  | Issuance  |       |        |  | Proceeds From    |    |           
|Issuance |       | Type of Preferred |  | Dividend                       |  | Price Per |       | Shares |  | Issuance, Net of |    | Issuance  
|Year     |       | Stock             |  | Rate                           |  | Share     |       | Issued |  | Issuance Costs   |    | Costs     
|         | 1998  |                   |  | Convertible, 1998 Series A     |  |           | 7.125 | %      |  | $                | 25 |            |  |  | 1,219,000 |             |  | $ | 29,143,000  |            |  | $ | 1,332,000 | 
|         | 1999  |                   |  | Non-convertible, 1999 Series B |  |           | 7.250 |        |  |                  | 25 |            |  |  | 2,001,000 |             |  |   | 48,273,000  |            |  |   | 1,752,000 | 
|         | 2001  |                   |  | Non-convertible, 2001 Series C |  |           | 7.600 |        |  |                  | 25 |            |  |  | 2,208,000 |             |  |   | 53,103,000  |            |  |   | 2,097,000 | 
|         | 2001  |                   |  | Non-convertible, 2001 Series D |  |           | 7.400 |        |  |                  | 25 |            |  |  | 1,791,999 |             |  |   | 43,238,000  |            |  |   | 1,562,000 | 
|         | 2002  |                   |  | Non-convertible, 2002 Series E |  |           | 6.875 |        |  |                  | 25 |            |  |  | 1,725,000 |             |  |   | 41,463,000  |            |  |   | 1,662,000 | 
|         | 2003  |                   |  | Non-convertible, 2003 Series F |  |           | 6.700 |        |  |                  | 25 |            |  |  | 4,232,000 |             |  |   | 102,192,000 |            |  |   | 3,608,000 | 
|         | 2003  |                   |  | Non-convertible, 2003 Series G |  |           | 6.900 |        |  |                  | 25 |            |  |  | 2,640,000 |             |  |   | 63,671,000  |            |  |   | 2,329,000 | 
|         |       |                   |  |                                |  |           |       |        |  |                  |    |            |  |  |           |             |  |   |             |            |  |   |           | 
|         | Total |                   |  |                                |  |           |       |        |  |                  |    | 15,816,999 |  |  | $         | 381,083,000 |  |   | $           | 14,342,000 | 
|         |       |                   |  |                                |  |           |       |        |  |                  |    |            |  |  |           |             |  |   |             |            |  |   |           | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preferred stock rank senior to the
    Companys common stock as to dividends and liquidation
    rights. Each share of the 1998 Series A preferred stock is
    convertible, at the holders option, at any time on or
    after the 90th day following the issue date, into
    .995 shares of the Companys common stock, subject to
    adjustment upon certain events. The per share conversion ratio
    equates to a price of $10.89 (as adjusted) per share of common
    stock.                        
|
| | 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 the 1998
    Series A, May 28 for the 1999 Series B,
    March 30 for the 2001 Series C, August 1 for the
    2001 Series D, October 31 for the 2002 Series E,
    May 30 for the 2003 Series F and August 29 for
    the 2003 Series G of the years indicated below, plus
    accrued and unpaid dividends, if any, to the date of redemption:

|                    |  |                            |       |          |  |          |       |          |  |          |       |          |  |          |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|------------------- |  | -------------------------- | ----- | -------- |  | -------- | ----- | -------- |  | -------- | ----- | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                    |  |                           
|                    |  | Redemption Price per Share
|December 31,        |  | Series A                   |       | Series B |  | Series C |       | Series D |  | Series E |       | Series F |  | Series G
|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 |  |  | $ | 25.50 |  |  | $ | 25.50 | 
|2009                |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |  |  |   | 25.00 |  |  |   | 25.25 |  |  |   | 25.25 | 
|2010 and thereafter |  |                            | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |          |  |          | 25.00 |  |  |   | 25.00 |  |  |   | 25.00 |  |  |   | 25.00 | 



|    |                          
|--- | -------------------------
|17. | STOCK COMPENSATION PLANS:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has two stock option plans, 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
    9,639,000 shares (as adjusted) of common stock can be
    granted. Also, options for up to 9,639,000 shares (as
    adjusted) 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

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2003, the Company had outstanding 4,863,000
    options (as adjusted) 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 and 2001, the
    Company granted 187,000 and 172,000 options (as adjusted),
    respectively, to various executive officers. No options were
    granted during 2003. During 2003, one of the Companys
    executive officers exercised 765,000 options (as adjusted) under
    the Companys 1999 Qualified Option Plan at an exercise
    price of $4.36. No options were exercised in 2002 and 2001. No options
    were forfeited in 2003, 2002 and 2001.
|
| | The Company has only three exercise prices for
    options granted, all of them granted at three different dates.
    The following table summarizes the exercise prices and the
    weighted average remaining contractual life of the options
    outstanding at December 31, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                   |  |             |           |              |  |            |      |  |  |  |           | 
|------------------ |  | ----------- | --------- | ------------ |  | ---------- | ---- |  |  |  | --------- | 
|                   |  |             |           |             
|                   |  | Outstanding |           | Exercisable 
|                   |  |             |           |             
|                   |  |             |           | Weighted     |  |           
|                   |  |             |           | Average      |  |           
|                   |  | Number      |           | Contract     |  | Number    
|Exercise Prices(1) |  | Options(1)  |           | Life (Years) |  | Options(1)
|$4.36              |  |             | 4,503,000 |              |  |            | 6.13 |  |  |  | 2,396,000 | 
|$5.12              |  |             | 172,000   |              |  |            | 7.38 |  |  |  | 69,000    | 
|$10.36             |  |             | 188,000   |              |  |            | 8.56 |  |  |  | 37,000    | 
|                   |  |             |           |              |  |            |      |  |  |  |           | 
|Total              |  |             | 4,863,000 |              |  |            | 6.27 |  |  |  | 2,502,000 | 
|                   |  |             |           |              |  |            |      |  |  |  |           | 

| | 
| | 
| | 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Adjusted to reflect the three-for-two split in
    the form of a stock dividend on our common stock declared on
    June 17, 2002, and distributed on July 10, 2002, the
    three-for-two split in the form of a stock dividend and a 2%
    stock dividend on our common stock declared on November 4,
    2003 and November 11, 2003, respectively, and distributed
    both on December 10, 2003.



|    |                       
|--- | ----------------------
|18. | FINANCIAL INSTRUMENTS:



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

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| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | The contract amount of financial instruments,
    whose amounts represent credit risk at December 31, was as
    follows:

|                                       |                        |                |         |         |  |  |         |         | 
|-------------------------------------- | ---------------------- | -------------- | ------- | ------- |  |  | ------- | ------- | 
|                                       |                        | 2003           |         | 2002   
|                                       |                        |               
|                                       |                        | (In thousands)
|Commitments to extend credit:          |                        |                |         |         |  |  |         |        
|                                       | Fixed rates            |                | $       | 11,541  |  |  | $       | 16,710  | 
|                                       | Variable rates         |                |         | 243,825 |  |  |         | 161,902 | 
|Unused lines of credit:                |                        |                |         |         |  |  |         |        
|                                       | Commercial             |                |         | 80,008  |  |  |         | 64,037  | 
|                                       | Credit cards and other |                |         | 94,259  |  |  |         | 77,776  | 
|Commercial letters of credit           |                        |                | 12,287  |         |  |  | 4,574   |        
|Commitments to purchase mortgage loans |                        |                | 200,000 |         |  |  | 100,000 |        



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

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

|                                   |                                                                                             |                                                                          |         |        |         |   |         |        |         | 
|---------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                   |                                                                                             |                                                                         
|                                   |                                                                                             | Notional Amount                                                         
|Type of Contract                   |                                                                                             | 2003                                                                     |         | 2002  
|                                   |                                                                                             |                                                                         
|                                   |                                                                                             | (In thousands)                                                          
|Hedging activities:                |                                                                                             |                                                                          |         |        |         |   |         |       
|                                   | Fair value hedge:                                                                           |                                                                          |         |        |         |   |         |        |        
|                                   |                                                                                             | Interest rate swaps used to hedge fixed rate
    certificates of deposit |         | $      | 636,818 |   |         | $      | 528,227 | 
|                                   |                                                                                             |                                                                          |         |        |         |   |         |       
|Derivates not designated as hedge: |                                                                                             |                                                                          |         |        |         |   |         |       
|                                   | Interest rate swaps (unmatched portion)                                                     |                                                                          | $       | 3,182  |         |   | $       | 1,773  |        
|                                   | Interest rate swaps used to manage exposure to
    the stock market                         |                                                                          |         | 36,329 |         |   |         | 36,329 |        
|                                   | Embedded options on stock indexed deposits                                                  |                                                                          |         | 85,811 |         |   |         | 65,134 |        
|                                   | Purchased options used to manage exposure to the
    stock market on stock indexed deposits |                                                                          |         | 50,343 |         |   |         | 28,773 |        
|                                   |                                                                                             |                                                                          |         |        |         |   |         |       
|Total                              |                                                                                             | $                                                                        | 175,665 |        |         | $ | 132,009 |       
|                                   |                                                                                             |                                                                          |         |        |         |   |         |       



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2003 and 2002, the fair
    value of derivatives qualifying for fair value hedge represented
    an unrealized net loss of $12.2 million and
    $8.0 million, respectively, which was recorded as
    Other liabilities and as a decrease to the hedged
    Deposits in the accompanying consolidated statements
    of financial condition.   
|
| | At December 31, 2003, the fair value of
    derivatives not qualifying as a hedge represented an unrealized
    net loss of $4.4 million and was recorded as part of
    Deposits in the accompanying December 31, 2003,
    consolidated statement of financial condition.                                                                                       
|
| | At December 31, 2002, the fair value of
    derivatives not qualifying as a hedge represented an unrealized
    net loss of $6.1 million and was recorded as part of
    Other assets $1.4 million, Deposits
    $1.6 million and Other liabilities
    $5.9 million in the accompanying December 31, 2002,
    consolidated statement of financial condition.
|
| | A summary of the types of swaps used, excluding
    those used to manage exposure to the stock market, and their
    terms at December 31, follows:                                                                                                                                                                                                                 

|                            |                                                                                                            |             |   |         |   |  |   |         |  
|--------------------------- | ---------------------------------------------------------------------------------------------------------- | ----------- | - | ------- | - |  | - | ------- | -
|                            |                                                                                                            | 2003        |   | 2002   
|                            |                                                                                                            |            
|                            |                                                                                                            | (Dollars in
|                            |                                                                                                            | thousands) 
|Pay floating/receive fixed: |                                                                                                            |             |   |         |   |  |   |        
|                            | Notional amount                                                                                            |             | $ | 640,000 |   |  | $ | 530,000 |  
|                            | Weighted average receive rate at year end                                                                  |             |   | 4.85    | % |  |   | 5.67    | %
|                            | Weighted average pay rate at year end                                                                      |             |   | 1.28    | % |  |   | 1.90    | %
|                            | Floating rate as a percentage of three month
    LIBOR, plus a spread ranging from minus .45% to plus .25% |             |   | 100     | % |  |   | 100     | %



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

|                         |  |                |          |      |  |   |          |  
|------------------------ |  | -------------- | -------- | ---- |  | - | -------- | -
|                         |  | 2003           |          | 2002
|                         |  |               
|                         |  | (In thousands)
|Beginning balance        |  | $              | 566,329  |      |  | $ | 636,329  |  
|New swaps                |  |                | 437,500  |      |  |   | 316,000  |  
|Called and matured swaps |  |                | (327,500 | )    |  |   | (386,000 | )
|                         |  |                |          |      |  |   |          |  
|Ending balance           |  | $              | 676,329  |      |  | $ | 566,329  |  
|                         |  |                |          |      |  |   |          |  



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2003, the maturities of
    interest rate swaps, embedded options and purchased options by
    year were as follows:

|                         |  |                |         |          |  |           |        |  |  |   |        | 
|------------------------ |  | -------------- | ------- | -------- |  | --------- | ------ |  |  | - | ------ | 
|                         |  |                |         | Embedded |  | Purchased
|Year Ending December 31, |  | Swaps          |         | Options  |  | Options  
|                         |  |               
|                         |  | (In thousands)
|2004                     |  | $              | 25,000  |          |  | $         |       |  |  | $ |       | 
|2005                     |  |                | 15,000  |          |  |           |       |  |  |   |       | 
|2006                     |  |                | 46,329  |          |  |           | 37,952 |  |  |   | 1,623  | 
|2007                     |  |                | 7,500   |          |  |           | 27,150 |  |  |   | 27,150 | 
|2008                     |  |                | 10,000  |          |  |           | 20,709 |  |  |   | 21,570 | 
|Thereafter               |  |                | 572,500 |          |  |           |       |  |  |   |       | 
|                         |  |                |         |          |  |           |        |  |  |   |        | 
|Total                    |  | $              | 676,329 |          |  | $         | 85,811 |  |  | $ | 50,343 | 
|                         |  |                |         |          |  |           |        |  |  |   |        | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Swap agreements amounting to $640,000,000 at
    December 31, 2003, provide the counterparties the option to
    cancel the swap agreements on any interest payment date after
    the first anniversary (matching the call option that the Company
    has purchased on $636,818,000 of hedged certificates of
    deposit). During the years ended December 31, 2003 and
    2002, various counterparties of swap agreements exercised their
    option to cancel their swaps and immediately, the Company
    exercised its option to call the hedged certificates of deposit.
    No gains or losses resulted from above cancellations.

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| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2003, the carrying value of
    the specific collateral held by the counterparties consisted of
    investments securities held to maturity of $4,700,000.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments



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

|                       |                                                                                |                      |   |           |           |          |   |           |           |  |   |           |           |  |   |           |           | 
|---------------------- | ------------------------------------------------------------------------------ | -------------------- | - | --------- | --------- | -------- | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                       |                                                                                |                      |   |          
|                       |                                                                                | 2003                 |   | 2002     
|                       |                                                                                |                      |   |          
|                       |                                                                                | Carrying             |   | Fair      |           | Carrying |   | Fair     
|                       |                                                                                | Value                |   | Value     |           | Value    |   | Value    
|                       |                                                                                |                     
|                       |                                                                                | (In thousands)      
|Financial Assets:      |                                                                                |                      |   |           |           |          |   |           |           |  |   |           |           |  |   |          
|                       | Cash and due from banks                                                        |                      | $ | 92,811    |           |          | $ | 92,811    |           |  | $ | 76,080    |           |  | $ | 76,080    |          
|                       | Federal funds sold and securities purchased
    under
    agreements to resell |                      |   | 649,852   |           |          |   | 649,852   |           |  |   | 459,147   |           |  |   | 459,147   |          
|                       | Interest-bearing deposits in banks                                             |                      |   | 37,767    |           |          |   | 37,767    |           |  |   | 17,459    |           |  |   | 17,459    |          
|                       | Investment securities available for sale                                       |                      |   | 55,080    |           |          |   | 55,080    |           |  |   | 160,887   |           |  |   | 160,887   |          
|                       | Investment securities held to maturity                                         |                      |   | 5,723,710 |           |          |   | 5,638,816 |           |  |   | 3,501,057 |           |  |   | 3,503,379 |          
|                       | Federal Home Loan Bank stock                                                   |                      |   | 39,750    |           |          |   | 39,750    |           |  |   | 43,322    |           |  |   | 43,322    |          
|                       | Mortgage loans held for sale                                                   |                      |   | 2,555     |           |          |   | 2,555     |           |  |   | 7,446     |           |  |   | 7,446     |          
|                       | Loans (excluding allowance for loan losses)                                    |                      |   | 4,744,726 |           |          |   | 4,766,373 |           |  |   | 3,801,471 |           |  |   | 3,867,590 |          
|                       | Accrued interest receivable                                                    |                      |   | 75,567    |           |          |   | 75,567    |           |  |   | 46,653    |           |  |   | 46,653    |          
|                       | Mortgage servicing rights                                                      |                      |   | 2,822     |           |          |   | 2,822     |           |  |   | 1,925     |           |  |   | 1,925     |          
|                       | Derivative options purchased                                                   |                      |   |          |           |          |   |          |           |  |   | 1,495     |           |  |   | 1,495     |          
|Financial Liabilities: |                                                                                |                      |   |           |           |          |   |           |           |  |   |           |           |  |   |          
|                       | Deposits:                                                                      |                      |   |           |           |          |   |           |           |  |   |           |           |  |   |           |          
|                       |                                                                                | Non-interest bearing |   |           | 192,760   |          |   |           | 192,760   |  |   |           | 156,143   |  |   |           | 156,143   | 
|                       |                                                                                | Interest bearing     |   |           | 5,169,204 |          |   |           | 5,168,656 |  |   |           | 4,118,782 |  |   |           | 4,143,616 | 
|                       | Securities sold under agreements to repurchase                                 |                      |   | 5,046,045 |           |          |   | 5,223,733 |           |  |   | 3,097,341 |           |  |   | 3,241,180 |          
|                       | Advances from FHLB                                                             |                      |   | 146,000   |           |          |   | 148,788   |           |  |   | 120,000   |           |  |   | 123,631   |          
|                       | Mortgage note payable                                                          |                      |   | 37,234    |           |          |   | 40,916    |           |  |   | 37,822    |           |  |   | 40,701    |          
|                       | Accrued interest payable                                                       |                      |   | 39,801    |           |          |   | 39,801    |           |  |   | 35,491    |           |  |   | 35,491    |          
|                       | Interest rate swaps in a net payable position                                  |                      |   | 16,663    |           |          |   | 16,663    |           |  |   | 13,955    |           |  |   | 13,955    |          
|                       | Other                                                                          |                      |   | 4,307     |           |          |   | 4,307     |           |  |   | 3,198     |           |  |   | 3,198     |          

|                        |                                        |                        |   |         |        |             |   |        |      |   |   |         |        |  |   |        |      |  
|----------------------- | -------------------------------------- | ---------------------- | - | ------- | ------ | ----------- | - | ------ | ---- | - | - | ------- | ------ |  | - | ------ | ---- | -
|                        |                                        |                        |   |        
|                        |                                        | 2003                   |   | 2002   
|                        |                                        |                        |   |        
|                        |                                        | Contract or            |   |         |        | Contract or |   |       
|                        |                                        | Notional               |   | Fair    |        | Notional    |   | Fair  
|                        |                                        | Amount                 |   | Value   |        | Amount      |   | Value 
|                        |                                        |                       
|                        |                                        | (In thousands)        
|Off-Balance Sheet Items |                                        |                        |   |         |        |             |   |        |      |   |   |         |        |  |   |       
|                        | Liabilities:                           |                        |   |         |        |             |   |        |      |   |   |         |        |  |   |        |     
|                        | Commitments to extend credit           |                        | $ | 255,366 |        |             | $ | (1,628 | )    |   | $ | 178,612 |        |  | $ | (1,588 | )   
|                        | Unused lines of credit:                |                        |   |         |        |             |   |        |      |   |   |         |        |  |   |        |     
|                        |                                        | Commercial             |   |         | 80,008 |             |   |        | (236 | ) |   |         | 64,037 |  |   |        | (125 | )
|                        |                                        | Credit cards and other |   |         | 94,259 |             |   |        | (236 | ) |   |         | 77,776 |  |   |        | (254 | )
|                        | Commercial letters of credit           |                        |   | 12,287  |        |             |   | (123   | )    |   |   | 4,574   |        |  |   | (46    | )   
|                        | Commitments to purchase mortgage loans |                        |   | 200,000 |        |             |   |       |      |   |   | 100,000 |        |  |   |       |     

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|    |              
|--- | -------------
|19. | RESERVE FUND:



| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Banking Law of Puerto Rico requires that a
    reserve fund be established by banking institutions and that
    annual transfers of at least 10% of net income be made, until
    such reserve fund equals 10% of total deposits or total paid-in
    capital, whichever is greater. Such transfers restrict the
    retained earnings, which would otherwise be available for
    dividends.



|    |                                          
|--- | -----------------------------------------
|20. | QUARTERLY FINANCIAL DATA
    (UNAUDITED):



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The following is a summary of the unaudited
    quarterly results of operations (in thousands except for per
    share data):

|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|------------------------------------------------------- |  | -------- | ------- | ------- |  | -------- | ------- | ------- |  | - | ------- | --- |  | - | ------- | ---
|2003                                                    |  | March 31 |         | June 30 |  | Sept. 30 |         | Dec. 31
|Total interest income                                   |  | $        | 103,348 |         |  | $        | 110,507 |         |  | $ | 116,435 |     |  | $ | 131,604 |    
|Total interest expense                                  |  |          | 53,711  |         |  |          | 54,230  |         |  |   | 54,323  |     |  |   | 60,322  |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income                                     |  |          | 49,637  |         |  |          | 56,277  |         |  |   | 62,112  |     |  |   | 71,282  |    
|Provision for loan losses                               |  |          | 6,228   |         |  |          | 6,597   |         |  |   | 7,892   |     |  |   | 6,331   |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income after provision for loan
    losses |  |          | 43,409  |         |  |          | 49,680  |         |  |   | 54,220  |     |  |   | 64,951  |    
|Total other income (loss), net                          |  |          | (8,299  | )       |  |          | 285     |         |  |   | 7,473   |     |  |   | 7,187   |    
|Total operating expenses                                |  |          | (19,199 | )       |  |          | (19,766 | )       |  |   | (21,872 | )   |  |   | (23,984 | )  
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Income before income taxes                              |  |          | 15,911  |         |  |          | 30,199  |         |  |   | 39,821  |     |  |   | 48,154  |    
|Provision for income taxes                              |  |          | 1,032   |         |  |          | 4,545   |         |  |   | 5,183   |     |  |   | 10,011  |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net income                                              |  | $        | 14,879  |         |  | $        | 25,654  |         |  | $ | 34,638  |     |  | $ | 38,143  |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|                                                       
|Basic earnings per common share                         |  | $        | 0.10    | (1)     |  | $        | 0.20    | (1)     |  | $ | 0.27    | (1) |  | $ | 0.30    | (1)
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Diluted earnings per common share                       |  | $        | 0.10    | (1)     |  | $        | 0.20    | (1)     |  | $ | 0.26    | (1) |  | $ | 0.29    | (1)
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    

|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|------------------------------------------------------- |  | -------- | ------- | ------- |  | -------- | ------- | ------- |  | - | ------- | --- |  | - | ------- | ---
|2002                                                    |  | March 31 |         | June 30 |  | Sept. 30 |         | Dec. 31
|Total interest income                                   |  | $        | 88,688  |         |  | $        | 94,469  |         |  | $ | 98,337  |     |  | $ | 104,240 |    
|Total interest expense                                  |  |          | 51,343  |         |  |          | 54,254  |         |  |   | 56,299  |     |  |   | 56,619  |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income                                     |  |          | 37,345  |         |  |          | 40,215  |         |  |   | 42,038  |     |  |   | 47,621  |    
|Provision for loan losses                               |  |          | 3,624   |         |  |          | 3,467   |         |  |   | 3,828   |     |  |   | 4,164   |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net interest income after provision for loan
    losses |  |          | 33,721  |         |  |          | 36,748  |         |  |   | 38,210  |     |  |   | 43,457  |    
|Total other income, net                                 |  |          | 5,152   |         |  |          | 4,838   |         |  |   | 7,348   |     |  |   | 6,507   |    
|Total operating expenses                                |  |          | (16,754 | )       |  |          | (17,605 | )       |  |   | (19,731 | )   |  |   | (19,827 | )  
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Income before income taxes                              |  |          | 22,119  |         |  |          | 23,981  |         |  |   | 25,827  |     |  |   | 30,137  |    
|Provision for income taxes                              |  |          | 4,227   |         |  |          | 3,911   |         |  |   | 3,152   |     |  |   | 4,811   |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Net income                                              |  | $        | 17,892  |         |  | $        | 20,070  |         |  | $ | 22,675  |     |  | $ | 25,326  |    
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|                                                       
|Basic earnings per common share                         |  | $        | 0.15    | (1)     |  | $        | 0.18    | (1)     |  | $ | 0.20    | (1) |  | $ | 0.20    | (1)
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    
|Diluted earnings per common share                       |  | $        | 0.15    | (1)     |  | $        | 0.18    | (1)     |  | $ | 0.20    | (1) |  | $ | 0.19    | (1)
|                                                        |  |          |         |         |  |          |         |         |  |   |         |     |  |   |         |    

| | 
| | 
| | 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Adjusted to reflect the three-for-two split in
    the form of a stock dividend on our common stock declared on
    June 17, 2002, and distributed on July 10, 2002, the
    three-for-two split in the form of a stock dividend and a 2%
    stock dividend on our common stock declared on November 4,
    2003 and November 11, 2003, respectively, and distributed
    both on December 10, 2003.

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|    |                     
|--- | --------------------
|21. | SEGMENT INFORMATION:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys management monitors and
    manages the financial performance of two reportable business
    segments, the traditional banking operations of Westernbank
    Puerto Rico and the activities of the division known as
    Westernbank International. Other operations of the Company not
    reportable in either segment include Westernbank Business Credit
    Division, which specializes in asset-based commercial business
    lending; Westernbank Trust Division, which offers trust
    services; SRG Net, Inc., which operates an electronic funds
    transfer network; Westernbank Insurance Corp., which operates a
    general insurance agency; Westernbank World Plaza, Inc., which
    operates the Westernbank World Plaza, a 23-story office building
    located in Hato Rey, Puerto Rico, and the transactions of the
    parent company only, which mainly consist of other income
    related to the equity in the net income of its two subsidiaries.
    Separate condensed financial information of the Parent Company
    is provided in Note 22.
|
| | Management determined the reportable segments
    based on the internal reporting used to evaluate performance and
    to assess where to allocate resources. Other factors such as the
    Companys organizational structure by divisions, nature of
    the products, distribution channels, and the economic
    characteristics of the products were also considered in the
    determination of the reportable segments. The Company evaluates
    performance based on net interest income and other income.
    Operating expenses and the provision for income taxes are
    analyzed on a combined basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Westernbank Puerto Ricos traditional
    banking operations consist of the Banks retail operations,
    such as its branches, including the branches of the Expresso
    division, together with consumer loans, mortgage loans,
    commercial loans (excluding the asset-based lending operations)
    and deposit products. Consumer loans include loans such as
    personal, collateralized personal loans, credit cards, and small
    loans. Commercial products consist of commercial loans including
    commercial real estate, unsecured commercial and construction
    loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Westernbank International operates as an
    International Banking Entity (IBE) under Puerto Rico Act
    No. 52, of August 11, 1989, as amended, known as the
    International Banking Regulatory Act. Under Puerto Rico tax law,
    an IBE can hold non-Puerto Rico assets, and earn interest on
    these assets, as well as generate fee income outside of Puerto
    Rico on a tax-exempt basis. Westernbank Internationals
    business activities consist of commercial banking and related
    services, and treasury and investment activities outside of
    Puerto Rico. As of December 31, 2003, 2002 and 2001, and
    for the years then ended, substantially all of Westernbank
    Internationals business activities consisted of investment
    in securities and purchasing of loans. Loans outstanding at
    December 31, 2003, 2002 and 2001 amounted to $73,581,000,
    $56,833,000, and $24,656,000, respectively.                                                                                                                                          
|
| | Pursuant to the provisions of Act No. 13 of
    January 8, 2004, for taxable years commencing after
    June 30, 2003, the net income earned by an IBE that
    operates as a unit of a bank under the Puerto Rico Banking Law
    will be considered taxable and subject to income taxes at the
    current tax rates in the amount by which the IBE net income
    exceeds 40% in the first applicable taxable year (2004), 30% in
    the second year (2005) and 20% thereafter; of the net taxable
    income of Westernbank, including its IBE net taxable income.
    Westernbanks IBE carries on its books a significant amount
    of securities which are indeed tax exempt by law. Moreover, the
    Act provides that IBEs operating as subsidiaries will
    continue to be exempt from the payment of income taxes.
    Management estimates that the provisions of the Act will not
    have a significant effect in the Companys result of
    operations.                                                                                                             
|
| | Intersegment sales and transfers, if any, are
    accounted for as if the sales or transfers were to third
    parties, that is, at current market prices. The accounting
    policies of the segments are the same as those described in the
    summary of significant accounting policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial information presented below was
    derived from the internal management accounting system and does
    not necessarily represent each segments financial
    condition and results of operations as if these were independent
    entities.

|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |         |  
|------------------------------------------ | ------------------------------------------ | ---------------------------------------------- | --------- | ------------- | - | -------- | --------- | -------- | - | ------------ | ---------- | ------- | - | - | --------- | ------ |  | - | ---------- | ------ | - | - | ---------- | ------- | -
|                                           |                                            |                                               
|                                           |                                            | As of and for the year ended December 31, 2003
|                                           |                                            |                                                |           | Total         |   |         
|                                           |                                            |                                                |           | Major         |   | Other    |           |         
|                                           |                                            | Puerto Rico                                    |           | International |   | Segments |           | Segments |   | Eliminations |            | Total  
|                                           |                                            |                                               
|                                           |                                            | (In thousands)                                
|Interest income:                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|                                           | Consumer loans                             |                                                | $         | 74,562        |   |          | $         |         |   |              | $          | 74,562  |   |   | $         |       |  |   | $          |       |   |   | $          | 74,562  |  
|                                           | Commercial loans                           |                                                |           | 117,132       |   |          |           | 4,250    |   |              |            | 121,382 |   |   |           |       |  |   |            |       |   |   |            | 121,382 |  
|                                           | Asset-based loans                          |                                                |           |              |   |          |           |         |   |              |            |        |   |   |           | 33,652 |  |   |            |       |   |   |            | 33,652  |  
|                                           | Mortgage loans                             |                                                |           | 46,253        |   |          |           |         |   |              |            | 46,253  |   |   |           |       |  |   |            |       |   |   |            | 46,253  |  
|                                           | Treasury and investment activities         |                                                |           | 95,269        |   |          |           | 90,090   |   |              |            | 185,359 |   |   |           | 2,378  |  |   |            | (1,692 | ) |   |            | 186,045 |  
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Total interest income                      |                                            |                                                | 333,216   |               |   |          | 94,340    |          |   |              | 427,556    |         |   |   | 36,030    |        |  |   | (1,692     | )      |   |   | 461,894    |        
|Interest expense                           |                                            |                                                | 170,303   |               |   |          | 43,703    |          |   |              | 214,006    |         |   |   | 10,272    |        |  |   | (1,692     | )      |   |   | 222,586    |        
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Net interest income                        |                                            |                                                | 162,913   |               |   |          | 50,637    |          |   |              | 213,550    |         |   |   | 25,758    |        |  |   |           |        |   |   | 239,308    |        
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Provision for loan losses                  |                                            |                                                | (24,961   | )             |   |          |          |          |   |              | (24,961    | )       |   |   | (2,087    | )      |  |   |           |        |   |   | (27,048    | )      
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Other income (loss), net:                  |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|                                           | Service charges on deposits and other fees |                                                |           | 21,479        |   |          |           | 481      |   |              |            | 21,960  |   |   |           | 221    |  |   |            | (221   | ) |   |            | 21,960  |  
|                                           | Trust account fees                         |                                                |           |              |   |          |           |         |   |              |            |        |   |   |           | 933    |  |   |            |       |   |   |            | 933     |  
|                                           | Insurance commission fees                  |                                                |           |              |   |          |           |         |   |              |            |        |   |   |           | 2,087  |  |   |            |       |   |   |            | 2,087   |  
|                                           | Asset-based lending related fees           |                                                |           |              |   |          |           |         |   |              |            |        |   |   |           | 2,851  |  |   |            |       |   |   |            | 2,851   |  
|                                           | Other                                      |                                                |           | (20,608       | ) |          |           | (577     | ) |              |            | (21,185 | ) |   |           |       |  |   |            |       |   |   |            | (21,185 | )
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Total other income (loss), net             |                                            |                                                | 871       |               |   |          | (96       | )        |   |              | 775        |         |   |   | 6,092     |        |  |   | (221       | )      |   |   | 6,646      |        
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Equity in income of subsidiaries           |                                            |                                                | 380       |               |   |          |          |          |   |              | 380        |         |   |   | 114,756   |        |  |   | (115,136   | )      |   |   |           |        
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Total net interest income and other income |                                            | $                                              | 139,203   |               |   | $        | 50,541    |          |   | $            | 189,744    |         |   | $ | 144,519   |        |  | $ | (115,357   | )      |   | $ | 218,906    |        
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        
|Total assets                               |                                            | $                                              | 9,252,118 |               |   | $        | 2,769,292 |          |   | $            | 12,021,410 |         |   | $ | 1,791,343 |        |  | $ | (2,293,313 | )      |   | $ | 11,519,440 |        
|                                           |                                            |                                                |           |               |   |          |           |          |   |              |            |         |   |   |           |        |  |   |            |        |   |   |            |        

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

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

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|    |                                                 
|--- | ------------------------------------------------
|22. | CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY



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

|                                                                 |  |                |         |      |  |   |         | 
|---------------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                                                                 |  |               
|                                                                 |  | December 31,  
|                                                                 |  | 2003           |         | 2002
|                                                                 |  |               
|                                                                 |  | (In thousands)
|ASSETS                                                           |  |                |         |      |  |   |         | 
|Cash                                                             |  | $              | 1,803   |      |  | $ | 275     | 
|Federal fund sold                                                |  |                |        |      |  |   | 1,000   | 
|Dividends and other accounts receivable from bank
    subsidiary |  |                | 1,539   |      |  |   | 1,556   | 
|Investment security held to maturity                             |  |                | 5,569   |      |  |   | 14,208  | 
|Investment in bank subsidiary                                    |  |                | 820,282 |      |  |   | 567,285 | 
|Investment in nonbank subsidiary                                 |  |                | 2,089   |      |  |   | 2,475   | 
|Accrued interest receivable                                      |  |                | 70      |      |  |   | 70      | 
|Other assets                                                     |  |                | 43      |      |  |   |        | 
|                                                                 |  |                |         |      |  |   |         | 
|TOTAL ASSETS                                                     |  | $              | 831,395 |      |  | $ | 586,869 | 
|                                                                 |  |                |         |      |  |   |         | 
|LIABILITIES AND STOCKHOLDERS
    EQUITY                         |  |                |         |      |  |   |         | 
|Liabilities:                                                     |  |                |         |      |  |   |         | 
|Dividends payable                                                |  | $              | 2,737   |      |  | $ | 1,931   | 
|Other liabilities                                                |  |                | 149     |      |  |   | 190     | 
|                                                                 |  |                |         |      |  |   |         | 
|Total Liabilities                                                |  |                | 2,886   |      |  |   | 2,121   | 
|Stockholders equity                                             |  |                | 828,509 |      |  |   | 584,748 | 
|                                                                 |  |                |         |      |  |   |         | 
|TOTAL LIABILITIES AND STOCKHOLDERS
    EQUITY                   |  | $              | 831,395 |      |  | $ | 586,869 | 
|                                                                 |  |                |         |      |  |   |         | 



| |                                                     
| | ----------------------------------------------------
| | CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY)

|                                                                                      |                    |                          |         |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------------------- | ------------------ | ------------------------ | ------- | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                      |                    |                         
|                                                                                      |                    | Years Ended December 31,
|                                                                                      |                    | 2003                     |         | 2002   |  | 2001
|                                                                                      |                    |                         
|                                                                                      |                    | (In thousands)          
|Dividends from subsidiaries                                                           |                    | $                        | 28,425  |        |  | $    | 27,820 |        |  | $ | 22,138 |       
|Interest income on investment security                                                |                    |                          | 686     |        |  |      | 752    |        |  |   | 720    |       
|                                                                                      |                    |                          |         |        |  |      |        |        |  |   |        |       
|Total income                                                                          |                    |                          | 29,111  |        |  |      | 28,572 |        |  |   | 22,858 |       
|Operating expenses                                                                    |                    |                          | 2,110   |        |  |      | 842    |        |  |   | 512    |       
|                                                                                      |                    |                          |         |        |  |      |        |        |  |   |        |       
|Income before income taxes and increase in
    undistributed earnings of subsidiaries |                    |                          | 27,001  |        |  |      | 27,730 |        |  |   | 22,346 |       
|Provision (credit) for income
    taxes  current                                     |                    |                          | 18      |        |  |      | (4     | )      |  |   | 67     |       
|                                                                                      |                    |                          |         |        |  |      |        |        |  |   |        |       
|Income before increase in undistributed earnings
    of subsidiaries                  |                    |                          | 26,983  |        |  |      | 27,734 |        |  |   | 22,279 |       
|Increase in undistributed earnings from:                                              |                    |                          |         |        |  |      |        |        |  |   |        |       
|                                                                                      | Bank subsidiary    |                          |         | 85,217 |  |      |        | 57,527 |  |   |        | 39,603 | 
|                                                                                      | Nonbank subsidiary |                          |         | 1,114  |  |      |        | 702    |  |   |        | 273    | 
|                                                                                      |                    |                          |         |        |  |      |        |        |  |   |        |       
|Net income                                                                            |                    | $                        | 113,314 |        |  | $    | 85,963 |        |  | $ | 62,155 |       
|                                                                                      |                    |                          |         |        |  |      |        |        |  |   |        |       

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| |                                                         
| | --------------------------------------------------------
| | CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)

|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |         |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | -------- | ------- | -------- | ---- | -------- | ------- | -------- | - | ------- | ------- | ------- | -
|                                                                                      |                                                                                         |                                          
|                                                                                      |                                                                                         | Year Ended December 31,                  
|                                                                                      |                                                                                         | 2003                                      |          | 2002    |          | 2001
|                                                                                      |                                                                                         |                                          
|                                                                                      |                                                                                         | (In thousands)                           
|Cash flows from operating
    activities:                                             |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Net income                                                                            |                                                                                         | $                                         | 113,314  |         |          | $    | 85,963   |         |          | $ | 62,155  |        
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|                                                                                      | Increase in undistributed earnings of subsidiaries                                      |                                           |          | (86,331 | )        |      |          | (58,229 | )        |   |         | (39,876 | )      
|                                                                                      | Effect of stock options granted to employees                                            |                                           |          | 1,031   |          |      |          |        |          |   |         |        |        
|                                                                                      | Amortization of premium (discount) on
    investment securities held to maturity        |                                           |          | 138     |          |      |          |        |          |   |         |        |        
|                                                                                      | (Increase) decrease in dividends and other
    accounts receivable from bank subsidiary |                                           |          | 17      |          |      |          | 14,973  |          |   |         | (700    | )      
|                                                                                      | Increase in other assets                                                                |                                           |          | (43     | )        |      |          |        |          |   |         |        |        
|                                                                                      | Increase in other liabilities                                                           |                                           |          | (41     | )        |      |          | 678     |          |   |         | 67      |        
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|                                                                                      |                                                                                         | Net cash provided by operating activities |          |         | 28,085   |      |          |         | 43,385   |   |         |         | 21,646  |  
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Cash flows from investing
    activities:                                             |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Increase in advance to bank subsidiary                                                |                                                                                         |                                           |         |         |          |      |         |         |          |   | (15,000 | )      
|Net decrease (increase) in federal funds sold                                         |                                                                                         |                                           | 1,000    |         |          |      | (1,000   | )       |          |   |        |        
|Investment securities available for sale:                                             |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|                                                                                      | Purchases                                                                               |                                           |          |        |          |      |          | (30,000 | )        |   |         |        |        
|                                                                                      | Maturities                                                                              |                                           |          |        |          |      |          | 30,000  |          |   |         |        |        
|Capital contributions in subsidiaries                                                 |                                                                                         |                                           | (166,113 | )       |          |      | (139,338 | )       |          |   | (81,740 | )      
|Purchase of nonbank subsidiary, net of cash
    acquired                              |                                                                                         |                                           |         |         |          |      |         |         |          |   | (1,070  | )      
|Investment securities held to maturity:                                               |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|                                                                                      | Purchases                                                                               |                                           |          | (10,867 | )        |      |          | (15,755 | )        |   |         |        |        
|                                                                                      | Proceeds from redemptions and repayment                                                 |                                           |          | 19,368  |          |      |          | 994     |          |   |         |        |        
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|                                                                                      |                                                                                         | Net cash used in investing activities     |          |         | (156,612 | )    |          |         | (155,099 | ) |         |         | (97,810 | )
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Cash flows from financing
    activities:                                             |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Issuance of stocks                                                                    |                                                                                         |                                           | 165,863  |         |          |      | 139,338  |         |          |   | 96,341  |        
|Repurchase of common stock for retirement                                             |                                                                                         |                                           | (33      | )       |          |      | (42      | )       |          |   | (28     | )      
|Stock options exercised                                                               |                                                                                         |                                           | 3,334    |         |          |      |         |         |          |   |        |        
|Dividends paid                                                                        |                                                                                         |                                           | (39,109  | )       |          |      | (27,308  | )       |          |   | (20,148 | )      
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|                                                                                      |                                                                                         | Net cash provided by financing activities |          |         | 130,055  |      |          |         | 111,988  |   |         |         | 76,165  |  
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Net increase in cash                                                                  |                                                                                         |                                           | 1,528    |         |          |      | 274      |         |          |   | 1       |        
|Cash at beginning of year                                                             |                                                                                         |                                           | 275      |         |          |      | 1        |         |          |   |        |        
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        
|Cash at end of year                                                                   |                                                                                         | $                                         | 1,803    |         |          | $    | 275      |         |          | $ | 1       |        
|                                                                                      |                                                                                         |                                           |          |         |          |      |          |         |          |   |         |        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The principal source of income for the Company
    consists of dividends from its bank subsidiary, Westernbank. As
    a member subject to the regulations of the Federal Reserve
    Board, the Company must obtain approval from the Federal Reserve
    Board for any dividend if the total of all dividends by it in
    any calendar year would exceed the total of its consolidated net
    profits for the year, as defined by the Federal Reserve Board,
    combined with its retained net profits for the two preceding
    years. The payment of dividends by Westernbank to the Company
    may also be affected by other regulatory requirements and
    policies, such as the maintenance of certain regulatory capital
    levels.



|    |                  
|--- | -----------------
|23. | SUBSEQUENT EVENT:



| |                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 27, 2004 and January 30,
    2004, three of the Companys executive officers exercised
    69,000, 100,000 and 46,000 options, respectively, under the
    Companys 1999 Qualified Option Plan (See
    Note 17) at an exercise price of $4.36 (169,000
    options) and $5.12 (46,000 options).

99




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information responsive to this Item 10 is incorporated herein by reference
to the Companys definitive proxy statement for its 2004 annual meeting of
shareholders.
 
 ITEM 11. EXECUTIVE COMPENSATION Information responsive to this Item 11 is incorporated herein by reference
to the Companys definitive proxy statement for its 2004 annual meeting of
shareholders. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information responsive to this Item 12 is incorporated herein by reference
to the Companys definitive proxy statement for its 2004 annual meeting of
shareholders. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information responsive to this Item 13 is incorporated herein by reference
to the Companys definitive proxy statement for its 2004 annual meeting of
shareholders. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information responsive to this Item 14 is incorporated herein by reference
to the Companys definitive proxy statement for its 2004 annual meeting of
shareholders. 
 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, 2003 and 2002
    
    Consolidated Statements of Income
for each of the three years in the period ended
December 31, 2003
    
    Consolidated Statements of Changes
in Stockholders Equity and of Comprehensive Income for
each of the three years in the period ended December
31, 2003
    
    Consolidated Statements of Cash
Flows for each of the three years in the period ended
December 31, 2003
    
    Notes to Consolidated Financial
Statements  (2)
    
    Not applicable. 100




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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. NO.
    
    EXHIBIT3.1
    
    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, 200110.1
    
    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)21.1
    
    Subsidiaries of the Registrant23.1
    
    Independent Auditors Consent31.1
    
    CEO Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K. During the last quarter of
the period covered by this report, the Company filed the following
Current Reports on Form 8-K: On
November 4, 2003, the Company filed a press release announcing that its Board of Directors had declared a three-for-two stock split
on the Companys common stock to be effected in the form of a stock dividend. On
November 11, 2003, the Company filed a press release announcing
a 2% stock dividend on the Companys common stock. (c) See (a) (3) above for all exhibits filed herewith and the Exhibit Index. (d) Not applicable. 101




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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. STIPESFrank C. Stipes, Chairman of the
    
    Date: March 12, 2004Board, Chief Executive Officerand 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,
    
    Date: March 12, 2004Chief Executive Officer and President/s/ CESAR A. RUIZCesar A. Ruiz, Director
    
    Date: March 12, 2004/s/ PEDRO R. DOMINGUEZPedro R. Dominguez,Director
    
    Date: March 12, 2004/s/ CORNELIUS TAMBOERCornelius Tamboer,Director
    
    Date: March 12, 2004/s/ FREDESWINDA G. FRONTERAFredeswinda G. Frontera,Directress
    
    Date: March 12, 2004/s/ HECTOR L. DEL RIOHector L. del Rio,Director
    
    Date: March 12, 2004/s/ JUAN C. FRONTERAJuan C. Frontera,Director
    
    Date: March 12, 2004/s/ FREDDY MALDONADOFreddy Maldonado
    
    Date: March 12, 2004Chief Financial Officer and VicePresident of Finance and Investment
 102




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##### Table of Contents



EXHIBIT INDEX EXHIBITNO.
    
    EXHIBIT3.1
    
    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, 200110.1
    
    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)21.1
    
    Subsidiaries of the Registrant23.1
    
    Independent Auditors Consent31.1
    
    CEO Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    CFO Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    CEO Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.32.2
    
    CFO Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.
 103