<PAGE>
================================================================================

                       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, 2001

                                       OR

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

                        FOR THE TRANSITION PERIOD FROM TO

                          COMMISSION FILE NO. 000-27377

                             W HOLDING COMPANY, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           COMMONWEALTH OF PUERTO RICO                      66-0573197
         (State or Other Jurisdiction of                  (IRS Employer
         Incorporation or Organization)                 Identification No.)

 19 WEST MCKINLEY STREET, MAYAGUEZ, PUERTO RICO                00680
   (Address of Principal Executive Offices)                  (Zip Code)

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

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

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


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


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

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


<PAGE>

      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)

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. [ ]

Aggregate market value of the voting and non-voting stock held by nonaffiliates
of the registrant: $455,280,884 based on the closing sales price of $16.55 at
February 28, 2002, for 27,509,419 shares.

Number of shares of Common Stock outstanding as of February 28, 2002: 41,500,000

================================================================================


<PAGE>


                                     PART I

ITEM 1.  BUSINESS

GENERAL

         W Holding Company, Inc. (the "Company") is a financial holding company
offering a full range of financial services through its wholly-owned
subsidiaries, Westernbank Puerto Rico ("Westernbank" or the "Bank") and
Westernbank Insurance, Corp. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999 to become the bank holding company
of Westernbank. The business of the Company is mainly conducted through
Westernbank. The Bank, which was founded as a savings institution in 1958, is a
Puerto Rico-chartered commercial bank, deposits in which are insured to
applicable limits by the United States Federal Deposit Insurance Corporation
("FDIC"). The Bank offers a full array 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.

         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, locally controlled banking company
headquartered in Puerto Rico, based on total assets at December 31, 2001. The
Company had total assets of $5.89 billion, loans of $2.84 billion, deposits of
$3.23 billion and stockholders' equity of $387.9 million at year end 2001. The
Bank operates through 35 full service branch offices located throughout Puerto
Rico, primarily in the Southwestern portion of the island, and a fully
functional banking site on the Internet at www.westernetbank.com.

         In recent years, Westernbank has emphasized expansion in the San Juan
metropolitan area, having opened four branches there since 1998. The Bank has
also focused on shifting its asset composition from primarily traditional
long-term fixed rate residential loans to assets with shorter maturities and
greater repricing flexibility, such as commercial real estate, business and
consumer loan products, as well as investment securities.

         For segment information, please refer to Note 22 of the audited
consolidated financial statements. The Company's financial performance is
reported in two primary business segments, the operations of Westernbank in
Puerto Rico and those of the Bank's division known as Westernbank International.
The international division was established to offer commercial banking and
related services outside of Puerto Rico. At year-end 2001, the international
division reported total assets of $1.83 billion, substantially all of which were
investment securities and purchased loans. As of the date of this report, the
Company does not conduct significant banking business outside of Puerto Rico.

         The Company's executive office is located at 19 West McKinley Street,
Mayaguez, Puerto Rico; its telephone number is (787) 834-8000.

LENDING ACTIVITIES

         GENERAL. At December 31, 2001, the Bank's net loans, including mortgage
loans held for sale, amounted to $2.84 billion or 48.29% of total assets.


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                           December 31,
                           ---------------------------------------------------------------------------------------------------------
                                   2001                  2000                 1999                  1998                 1997
                            Amount     Percent      Amount   Percent     Amount    Percent    Amount     Percent   Amount    Percent
                           ----------  -------   ----------  -------   ----------  -------   ----------  -------   --------  -------
                                                                       (Dollars in Thousands)
<S>                        <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>       <C>       <C>
Residential real estate:
    Mortgage (1)           $  852,715    30.0%   $  785,853    35.5%   $  706,792    37.8%   $  407,245    29.9%   $230,416    29.4%
    Construction              117,957     4.2        80,905     3.7       101,979     5.5        69,215     5.1      24,192     3.1
Commercial, industrial
and agricultural:
    Real estate             1,115,700    39.2       887,084    40.2       677,924    36.2       518,893    38.1     234,071    29.8
    Business and others       378,696    13.3        99,483     4.5        79,343     4.3        72,235     5.3      40,001     5.1
Consumer and others           416,953    14.7       383,903    17.4       329,682    17.6       309,509    22.7     269,316    34.3
                           ----------   -----    ----------   -----    ----------   -----    ----------   -----    --------   -----
Total loans                 2,882,021   101.4%    2,237,228   101.3%    1,895,720   101.4%    1,377,097   101.1%    797,996   101.7%
Allowance for loan losses     (38,364)   (1.4)      (28,928)   (1.3)      (23,978)   (1.4)      (15,800)   (1.1)    (13,201)   (1.7)
                           ----------   -----    ----------   -----    ----------   -----    ----------   -----    --------   -----
Loans, net                 $2,843,657   100.0%   $2,208,300   100.0%   $1,871,742   100.0%   $1,361,297   100.0%   $784,795   100.0%
                           ==========   =====    ==========   =====    ==========   =====    ==========   =====    ========   =====
</TABLE>

(1)      Includes mortgage loans held for sale. At December 31, 2001, mortgage
         loans held for sale totaled $5.3 million.

         Residential real estate mortgage loans at December 31, 2001 are mainly
comprised of loans secured by first mortgages on one-to-four family residential
properties. At year end 2001, residential mortgage loans included $16.9 million
of mortgages insured or guaranteed by government agencies of the United States
or Puerto Rico.

         The Bank originated $542.8 million of commercial real estate loans
during 2001. At year-end, commercial real estate loans totaled $1.12 billion. In
general, commercial real estate loans are considered by management to be of
somewhat greater risk of uncollectibility than other loans due to the dependency
on income production and future development of real estate. Commercial real
estate loans are collateralized by various types of property, including
warehouse, retail and other business properties.

         Consumer loans and others at December 31, 2001, includes consumer loans
totaling $318.8 million (of which $167.9 million are secured by real estate),
credit card loans of $63.1 million and loans secured by deposits in the Bank
totaling $35.1 million.

         During 2001, the Bank securitized $11.2 million and $32.0 million of
residential mortgage loans into Government National Mortgage Association and
Fannie Mae participation certificates, respectively. The Bank continues to
service outstanding loans which are securitized.


                                       3
<PAGE>

         The following table summarizes the contractual maturities of the Bank's
total loans, excluding mortgage loans held for sale, for the periods indicated
as of December 31, 2001. Contractual maturities do not necessarily reflect the
actual term of a loan, including prepayments.

<TABLE>
<CAPTION>
                                                                                      MATURITIES
                                                     --------------------------------------------------------------------------
                                                                  AFTER ONE YEAR TO FIVE YEARS         AFTER FIVE YEARS
                                                                -------------------------------  ------------------------------
                                      BALANCE
                                  OUTSTANDING AT     ONE YEAR        FIXED          VARIABLE          FIXED         VARIABLE
                                DECEMBER 31, 2001     OR LESS    INTEREST RATES  INTEREST RATES  INTEREST RATES  INTEREST RATES
                                -----------------    ---------   --------------  --------------  --------------  --------------
<S>                                  <C>                  <C>         <C>             <C>             <C>             <C>
                                                                         (IN THOUSANDS)
Residential real estate:
    Mortgage .................      $   847,462      $   4,016      $   9,266      $      94      $ 416,522      $   417,564
    Construction .............          117,957         51,266             --         66,691             --               --
Commercial, industrial and
  agricultural:
    Real estate (1) ..........        1,115,700        223,311        142,432         71,701         62,835          615,421
    Business and other .......          378,696        187,181         21,219         38,298          6,365          125,633
Consumer and other ...........          416,953        122,308        124,453             --        170,192               --
                                    -----------      ---------      ---------      ---------      ---------      -----------
        Total ................      $ 2,876,768      $ 588,082      $ 297,370      $ 176,784      $ 655,914      $ 1,158,618
                                    ===========      =========      =========      =========      =========      ===========
</TABLE>


(1)  Includes foreign loans amounting to $3.9 million, secured by real estate
     collateral and unlimited guaranty of a Puerto Rico resident.

         As of December 31, 2001, the maximum unsecured amount which Westernbank
could have loaned to one borrower and the borrower's related entities under
applicable banking laws was approximately $46.6 million. The maximum loan to one
borrower for secured debts at December 31, 2001 was $97.9 million. At such date,
Westernbank's largest loan outstanding balance of a group of loans to one
borrower aggregated $96.4 million, of which a loan amounting to $49.4 million is
secured by real estate. The second largest loan outstanding balance of loans to
one borrower aggregated $67.9 million, all of which are secured by real estate.
At December 31, 2001, such loans were current.

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

         The Bank originates loans in accordance with written,
non-discriminatory underwriting standards and loan origination procedures
prescribed in Board of Director approved loan policies. Detailed loan
applications are obtained to determine the borrower's repayment ability.
Applications are verified through the use of credit reports, financial
statements and other confirmations procedures. Property valuations by Board of
Director approved independent appraisers are required for mortgage loans. The
Bank's Credit Committee approval is required for all residential and commercial
real estate loans originated up to $1.0 million, and all other commercial loans
from $250,000 up to $3.0 million. Loans in excess of $1.0 million are also
reviewed by the full Board of Directors, including those loans approved by the
Credit Committee.

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

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

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


                                       4
<PAGE>

         In addition to its residential loan originations, the Bank also
purchases residential first mortgage loans from other mortgage originators in
Puerto Rico. In 2001 and 2000, Westernbank purchased $256.7 million and $261.8
million, of such loans, respectively.

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

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

         The Bank offers the service of VISA and Master Card. At December 31,
2001, there were approximately 28,080 outstanding accounts, with an aggregate
outstanding balance of $63.1 million and unused credit card lines available of
$53.5 million.

         In connection with all consumer and second mortgage loans originated,
the Bank'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, 2001, only
$4.3 million or 1.03% of the consumer loan portfolio consisted of loans more
than 60 days delinquent in payment.

         Commercial loans have increased from $986.6 million as of December 31,
2000, to $1.49 billion as of December 31, 2001. As of December 31, 2001, only
$10.4 million or .69% of the commercial loan portfolio consisted of loans more
than 60 days delinquent in payment.

         The following table reflects the Bank's net portfolio loan origination,
purchase, and sale activities for the periods indicated:

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                              ---------------------------------------------------------------------
                                                 2001            2000           1999           1998          1997
                                              -----------    -----------    -----------    -----------    ---------
                                                                            (IN THOUSANDS)
<S>                                               <C>            <C>            <C>            <C>            <C>
Beginning balance of net loans, including
  residential real estate mortgage loans
  held for sale ...........................   $ 2,208,300    $ 1,871,742    $ 1,361,297    $   784,795    $ 623,621
Residential real estate mortgage loans
  held for sale originated ................        47,446         44,389         63,812         75,660       39,506
Residential real estate mortgage loans
  held for sale securitized and transferred
  to trading and available for sale
  securities ..............................       (44,176)       (38,289)       (68,350)       (71,217)     (53,963)
Sales of residential real estate mortgage
  loans held for sale .....................        (2,148)        (3,123)            --             --           --

Residential real estate mortgage and
  construction loans originated and
  purchased ...............................       380,258        347,154        449,055        299,397      135,719
Residential real estate mortgage loans
  sold ....................................            --             --        (20,101)            --           --
Residential real estate mortgage loans
  foreclosed ..............................        (1,017)          (569)          (291)        (1,233)        (176)
Residential real estate mortgage and
  construction loans repayments(1) ........      (276,449)      (291,575)       (91,814)       (80,755)     (12,694)
Commercial loans purchased ................       163,800             --             --             --           --
Commercial loans-other net increase(1)  ...       344,029        229,300        166,139        317,056       45,777
Consumer and other-net increase(1) ........        33,050         54,221         20,173         40,193        8,179
Decrease (increase) in allowance for loan
  losses ..................................        (9,436)        (4,950)        (8,178)        (2,599)      (1,174)
                                              -----------    -----------    -----------    -----------    ---------

End Balance ...............................   $ 2,843,657    $ 2,208,300    $ 1,871,742    $ 1,361,297    $ 784,795
                                              ===========    ===========    ===========    ===========    =========
Net increase in net loans, including
  mortgage loans held for sale ............   $   635,357    $   336,558    $   510,445    $   576,502    $ 161,174
                                              ===========    ===========    ===========    ===========    =========
</TABLE>

---------
(1)  Excludes effect of amounts charged off.


                                       5
<PAGE>

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

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

         In accordance with requirements of Financial Accounting Standards Board
Statement No. 140, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, AN AMENDMENT OF
FASB STATEMENT NO. 65 ("SFAS 140"), the Bank recognizes as separate assets the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. SFAS 140 also requires that the entities assess the
capitalized mortgage servicing rights for impairment based on the fair value of
those rights.

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

         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 the Bank at the dates
indicated:

<TABLE>
<CAPTION>
                                                                                AT DECEMBER 31,
                                                          ------------------------------------------------------------
                                                            2001          2000        1999        1998          1997
                                                          ---------    ---------    --------    ---------    ---------
                                                                                  (IN THOUSANDS)
<S>                                                          <C>          <C>          <C>         <C>          <C>
Residential real estate mortgage and
  construction loans ..................................   $   2,735    $   1,817    $  1,719    $   1,183    $   1,651
Commercial, industrial and agricultural
  loans ...............................................       7,947        6,140       4,366        5,427        4,988
Consumer loans ........................................       3,431        1,733         870        1,172          967
                                                          ---------    ---------    --------    ---------    ---------
     Total non-performing loans .......................      14,113        9,690       6,955        7,782        7,606
Foreclosed real estate held for sale ..................       3,013        2,454       2,232        3,271        2,396
                                                          ---------    ---------    --------    ---------    ---------
     Total non-performing loans and
       foreclosed real estate held for sale ...........   $  17,126    $  12,144    $  9,187    $  11,053    $  10,002
                                                          =========    =========    ========    =========    =========
Interest which could have been recorded if
  the loans had not been classified as
  non-performing ......................................   $   1,123    $     979    $    514    $   1,027    $     713
                                                          =========    =========    ========    =========    =========
Interest recorded in non-performing loans .............   $   1,716    $     780    $  1,470    $     242    $     220
                                                          =========    =========    ========    =========    =========
     Total non-performing loans as a percentage
       of total loans receivable, including
       mortgage loans held for sale ...................        0.49%        0.43%       0.37%        0.57%        0.95%
                                                          =========    =========    ========    =========    =========
     Total non-performing loans and foreclosed
       real estate held for sale as a percentage
       of total assets ................................        0.29%        0.28%       0.27%        0.45%        0.64%
                                                          =========    =========    ========    =========    =========
</TABLE>

         As of December 31, 2001, there were only three non-accrual loans with a
principal balance in excess of $500,000.


                                       6
<PAGE>

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

            The Formula Allowance. The formula allowance is calculated by
     applying loss factors to outstanding loans not otherwise covered by
     specific allowances. Loss factors are based on 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 significant increase in such loan portfolios
             over the last few years.

         -   Pooled loan loss factors are also based on historical loss trends
             for one to three years. Pooled loans are loans that are homogeneous
             in nature, such as consumer installment and residential mortgage
             loans.

            Specific Allowances for Identified Problem Loans and Portfolio
     Segments. Specific allowances are established and maintained where
     management has identified significant 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 Statement of Financial Accounting
     Standards No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN ("SFAS
     114"). This accounting standard prescribe 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 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 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.


                                       7
<PAGE>

         At December 31, 2001, the Bank's allowance for loan losses was $38.4
million, consisting of $22.0 million formula allowance, $2.0 million of specific
allowances and $5.3 million of unallocated allowance. As of December 31, 2001,
the allowance for loan losses equals 1.33% of total loans, and 271.83% of total
non-performing loans, compared with an allowance for loan losses at December 31,
2000 of $28.9 million, or 1.29% of total loans, and 298.5% of total
non-performing loans.

         During 2001, there were 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:

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                           ----------------------------------------------------------------
                                                              2001         2000          1999         1998          1997
                                                           ---------     ---------     --------     ---------     ---------
                                                                                 (DOLLARS IN THOUSANDS)

<S>                                                             <C>           <C>           <C>          <C>           <C>
Balance, beginning of year ............................    $  28,928     $  23,978     $ 15,800     $  13,201     $  12,027
                                                           ---------     ---------     --------     ---------     ---------
Loans charged off:
  Consumer loans ......................................        3,840         4,760        5,154         4,090         2,458
  Commercial, industrial and agricultural
     loans ............................................        2,970           372        1,913           134           139
  Real estate-mortgage and construction
     loans ............................................          228           231          291                           4
                                                           ---------     ---------     --------     ---------     ---------
       Total loans charged off ........................        7,038         5,363        7,358         4,224         2,601
                                                           ---------     ---------     --------     ---------     ---------
Recoveries of loans previously charged off:
  Consumer loans ......................................          996           795        1,003           601           480
  Commercial, industrial and agricultural
     loans ............................................          133           594          335            42           184
  Real estate-mortgage and construction
     loans ............................................          175           224          198           180           411
                                                           ---------     ---------     --------     ---------     ---------
       Total recoveries of loans previously
          charged off .................................        1,304         1,613        1,536           823         1,075
                                                           ---------     ---------     --------     ---------     ---------
Net loans charged off .................................        5,734         3,750        5,822         3,401         1,526
Provision for loan losses .............................       12,278         8,700       14,000         6,000         2,700
Allowance acquired on loans purchased..................        2,892            --           --            --            --
                                                           ---------     ---------     --------     ---------     ---------
Balance, end of year ..................................    $  38,364     $  28,928     $ 23,978     $  15,800     $  13,201
                                                           =========     =========     ========     =========     =========
Ratios:
  Allowance for loan losses to total loans ............         1.33%         1.29%        1.26%         1.15%         1.65%
  Provision for loan losses to net loans
     charged off ......................................       214.09%       232.00%      240.47%       176.42%       176.93%
  Recoveries of loans to loans charged off in
     previous year ....................................        24.31%        21.92%       36.36%        31.64%        40.26%
  Net loans charged off to average loans ..............         0.23%         0.19%        0.35%         0.32%         0.22%
  Allowance for loans losses to
     non-performing loans .............................       271.83%       298.53%      344.76%       203.03%       173.56%
</TABLE>

    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 3.

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                       ---------------------------------------------------------------------------------------------
                                             2001               2000                1999                1998                1997
                                       ----------------   ----------------   -----------------  ----------------   -----------------
                                       AMOUNT   PERCENT   AMOUNT   PERCENT    AMOUNT   PERCENT   AMOUNT  PERCENT    AMOUNT   PERCENT
                                       -------  -------   -------  -------   -------   -------  -------  -------   -------   -------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                    <C>      <C>       <C>      <C>       <C>       <C>      <C>      <C>       <C>       <C>
Commercial, industrial and
 agricultural loans.................   $24,397    51.8%   $16,273    44.1%   $11,772    39.9%   $ 7,747    42.9%   $ 5,143    34.4%
Consumer loans .....................     8,203    14.5      7,194    17.2      5,718    17.4      5,044    22.5      3,629    33.7
Residential real estate-mortgage and
 construction-loans ................       494    33.7        526    38.7      1,743    42.7      1,043    34.6        551    31.9
Unallocated allowance...............     5,270      --      4,935      --      4,745      --      1,966      --      3,878      --
                                       -------   -----    -------   -----    -------   -----    -------   -----    -------   -----
  Total allowance for loan losses ..   $38,364   100.0%   $28,928   100.0%   $23,978   100.0%   $15,800   100.0%   $13,201   100.0%
                                       =======   =====    =======   =====    =======   =====    =======   =====    =======   =====
</TABLE>

         Loans are classified as impaired or not impaired in accordance with
SFAS 114, which was implemented in 1995. 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.


                                       8
<PAGE>

         The Bank measures the impairment of a loan based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
or as a practical expedient, at the observable market price of the loan or the
fair value of the collateral, if the loan is collateral dependent. Significant
loans (those exceeding $500,000) are individually evaluated for impairment.
Large groups of small balance, homogeneous loans are collectively evaluated for
impairment, loans that are recorded at fair value or at the lower of cost of
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 on
impaired loans:

<TABLE>
<CAPTION>
                                                             2001          2000        1999        1998        1997
                                                           ---------    ---------    --------    --------    --------
                                                                                   (IN THOUSANDS)
<S>                                                        <C>          <C>          <C>         <C>         <C>
Investment in impaired loans:
  Covered by a valuation allowance ....................    $  21,996    $   8,040    $  8,136    $  5,499    $  1,465
  Do not require a valuation allowance ................       20,482        4,834       4,947       4,309       4,234
                                                           ---------    ---------    --------    --------    --------
          Total .......................................    $  42,478    $  12,874    $ 13,083    $  9,808    $  5,699
                                                           =========    =========    ========    ========    ========
Valuation allowance on impaired loans .................    $   4,181    $   1,157    $  1,268    $  1,120    $    248
                                                           =========    =========    ========    ========    ========
Average investment on impaired loans ..................    $  20,293    $  11,873    $ 14,919    $  6,561    $  5,646
                                                           =========    =========    ========    ========    ========
Interest collected on impaired loans ..................    $   1,716    $     780    $  1,470    $    242    $    220
                                                           =========    =========    ========    ========    ========
</TABLE>

         During 2001, the Bank's investment in impaired loans increased $29.6
million, from $12.9 million in 2000 to $42.5 as of December 31, 2001. This
increase is principally attributed to four newly classified loans with and
aggregate outstanding principal balance of $25.2 million as of December 31,
2001. The largest impaired loan with an outstanding principal balance of $9.3
million is collateralized by real estate and required no specific valuation
allowance. The second largest impaired loan with an outstanding principal
balance of $6.6 million was acquired as part of the purchase of the entire loan
portfolio of the Puerto Rico branch of Congress Credit Corporation, a subsidiary
of First Union Bank, N.A. This loan is collateralized by equipment, inventory
and accounts receivable and required a specific valuation allowance of $1.3
million at December 31, 2001, which was established in connection with the
acquisition of the loan. Two other loans with outstanding principal balances of
$4.7 and $4.6 million are collateralized by real estate. A specific valuation
allowance of $170,000 was established for the $4.7 million loan while no
specific allowance was necessary for the $4.6 million loan. As of December 31,
2001, all four loans were current in the payment of principal and interest.

INVESTMENT ACTIVITIES

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

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

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


                                       9
<PAGE>

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

<TABLE>
<CAPTION>
                                                     2001          2000           1999
                                                 -----------    -----------    -----------
                                                              (IN THOUSANDS)
<S>                                              <C>            <C>            <C>
Held to maturity:
  US Government and agency obligations ......    $ 1,788,000    $ 1,367,417    $ 1,029,450
  Puerto Rico Government and agency obligations       22,607         13,769         16,668
  Commercial paper ..........................         59,992         34,994             --
  Corporate notes ...........................         66,460         51,420         17,165
  Mortgage and other asset-backed securities         432,716        189,087        111,249
                                                 -----------    -----------    -----------
          Total .............................      2,369,775      1,656,687      1,174,532
                                                 -----------    -----------    -----------
Available for sale:
    US Government and agency obligations ....        196,446             --             --
    Corporate notes .........................         56,080             --             --
    Mortgage-backed securities ..............         29,156         27,806         22,185
                                                 -----------    -----------    -----------
           Total ............................        281,682         27,806         22,185
                                                 -----------    -----------    -----------
Trading securities- mainly mortgage-backed
  securities ................................          4,609          2,161          1,289
                                                 -----------    -----------    -----------
Total investments ...........................    $ 2,656,066    $ 1,686,654    $ 1,198,006
                                                 ===========    ===========    ===========
</TABLE>

At December 31, 2001, the only investment of an issuer which aggregate balance
exceeded 10% of the consolidated stockholders, equity follows:

<TABLE>
<CAPTION>
        NAME OF ISSUER                        INVESTMENT CATEGORY                CARRYING VALUE      FAIR VALUE
<S>                                <C>                                           <C>                 <C>
Constellation Energy Group, Inc.   Commercial paper - matures next business day      $ 39,993         $ 39,993
</TABLE>

         The carrying amount of investment securities at December 31, 2001, by
contractual maturity (excluding mortgage and others asset- backed securities),
are shown below:

<TABLE>
<CAPTION>
                                                           CARRYING       WEIGHTED
                                                            AMOUNT      AVERAGE YIELD
                                                          -----------   -------------
                                                                (IN THOUSANDS)
<S>                                                       <C>               <C>
 US Government and agency obligations:
   Due within one year or less ....................       $   198,597         1.96%
   Due after one year through five years ..........         1,419,035         4.59
   Due after five years through ten years .........           254,585         5.75
   Due after ten years ............................           112,229         7.03
                                                          -----------       ------
                                                            1,984,446         4.62
                                                          -----------       ------
 Puerto Rico Government and agency obligations:
   Due within one year ............................               600         7.60
   Due after one year through five years ..........             6,000         4.88
   Due after five years through ten years .........            14,012         7.11
   Due after ten years ............................             1,995         6.15
                                                          -----------       ------
                                                               22,607         6.45
                                                          -----------       ------
 Other:
   Due within one year ............................            59,992         2.82
   Due after one year through five years ..........            45,300         4.16
   Due after ten years ............................            77,240         4.99
                                                          -----------       ------
                                                              182,532         4.07
                                                          -----------       ------
           Total ..................................         2,189,585         4.59
 Mortgage and other asset-backed securities .......           466,481         5.17
                                                          -----------       ------
           Total ..................................       $ 2,656,066         4.69%
                                                          ===========       ======
</TABLE>


                                       10
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
Trading securities:
    Government National Mortgage Association (GNMA)
         certificates .......................................       $   2,579
    Fannie Mae (FNMA) certificates ..........................           2,030
                                                                    ---------
         Total ..............................................           4,609
                                                                    ---------
 Available for sale- Collaterized Mortgage Obligation
         (CMO) certificates .................................          29,156
                                                                    ---------
Held to maturity:
    Federal Home Loan Mortgage Corporation Certificates .....          13,475
    GNMA certificates .......................................          18,500
    FNMA certificates .......................................          10,011
    CMO certificates ........................................         319,386
    Other ...................................................          71,344
                                                                    ---------
         Total held to maturity .............................         432,716
                                                                    ---------
         Total mortgage and other asset-backed
           securities .......................................       $ 466,481
                                                                    =========
</TABLE>

SOURCES OF FUNDS

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

         DEPOSITS. The Bank offers a diversified choice of deposit accounts. At
December 31, 2001, the Bank had total deposits of $3.2 billion (excluding
accrued interest payable), of which $465.3 million or 14.50% consisted of
savings deposits, $141.4 million or 4.41% consisted of interest bearing demand
deposits, $123.9 million or 3.86% consisted of noninterest bearing deposits, and
$2.5 billion or 77.23% consisted of time deposits. Time deposits include $1.6
billion of brokered deposits. These accounts have historically been a stable
source of funds. The Bank also offers negotiable order of withdrawal ("NOW")
accounts, Super Now Accounts, special checking accounts and commercial demand
accounts. At December 31, 2001, the scheduled maturities of time certificates of
deposit in amounts of $100,000 or more are as follows:

<TABLE>
<CAPTION>
                                                                (IN THOUSANDS)
<S>                                                                <C>
3 months or less  ..........................................       $ 227,255
over 3 months through 6 months .............................          64,411
over 6 months through 12 months ............................          52,944
over 12 months .............................................          63,030
                                                                   ---------
          Total ............................................       $ 407,640
                                                                   =========
</TABLE>

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

<TABLE>
<CAPTION>
                                           2001                            2000                         1999
                                 -----------------------        -----------------------        -----------------------
                                   AVERAGE        AVERAGE         AVERAGE       AVERAGE         AVERAGE        AVERAGE
                                   AMOUNT          RATE            AMOUNT         RATE           AMOUNT          RATE
                                 -----------      -------       -----------     -------        -----------     -------
                                                                 (DOLLARS IN THOUSANDS)
<S>                              <C>                <C>         <C>                <C>         <C>                <C>
Time deposits ............       $ 2,177,399        5.21%       $ 1,765,493        6.34%       $ 1,377,977        5.44%
Savings deposits .........           432,626        2.96            407,636        3.06            405,288        3.07
Interest bearing demand
  deposits ...............           100,960        3.45             97,168        3.28            105,774        2.93
Noninterest bearing demand
  deposits ...............           136,251          --            118,632          --            120,059          --
                                 -----------       -----        -----------       -----        -----------       -----
          Total ..........       $ 2,847,236        4.55%       $ 2,388,929        5.34%       $ 2,009,098        4.51%
                                 ===========       =====        ===========       =====        ===========       =====
</TABLE>

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


                                       11
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                    ---------------------------------------------
                                                       2001               2000             1999
                                                    -----------       -----------       ---------
                                                                    (IN THOUSANDS)
<S>                                                 <C>               <C>               <C>
          Reverse repurchase agreements .....       $ 2,059,646       $ 1,179,073       $ 729,968
          Advances from FHLB ................           120,000           120,000          70,000
          Term notes ........................            43,000            48,000          79,000
                                                    -----------       -----------       ---------
                    Total ...................       $ 2,222,646       $ 1,347,073       $ 878,968
                                                    ===========       ===========       =========
</TABLE>

         The Bank has made use of institutional reverse repurchase agreements in
order to obtain funding, primarily through investment banks and brokerage firms.
Such agreements are collateralized with investment securities. The Bank had $2.1
billion in total reverse repurchase agreements outstanding at December 31, 2001,
at a weighted average rate of 4.19%. Reverse repurchase agreements outstanding
as of December 31, 2001, mature as follows: $503.3 million within 30 days;
$303.2 million in 2001; $164.6 million in 2005; $47.5 million in 2006; and $1.04
billion thereafter.

         Westernbank also obtains advances from FHLB of New York. As of December
31, 2001, Westernbank had $120.0 million in outstanding FHLB advances at a
weighted average rate of 5.10%. Advances from FHLB mature as follows: $14.0
million in 2003; $14.0 million in 2005; $50.0 million in 2006; and $42.0 million
in 2010.

         At December 31, 2001, the Bank had outstanding $43.0 million of term
notes payable, consisting of variable rate notes (83% to 89% of three month
LIBID rate), at a weighted average rate of 1.66%. At such date, $43.0 million
mature in 2002.

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                         ---------------------------------------------
                                                            2001              2000              1999
                                                         ----------        ----------        ---------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                                      <C>               <C>               <C>
Amount outstanding at year end ...................       $  806,548        $  170,225        $ 174,266
Monthly average outstanding balance ..............          353,003           274,669          171,914
Maximum outstanding balance at any month-end .....          806,548           472,916          276,956
Weighted average interest rate:
     For the year ................................             3.73%             6.29%            5.22%
     At year end .................................             2.18              6.65             5.86
</TABLE>

FINANCIAL INSTRUMENTS

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

         Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES and Statement of Financial Accounting Standards No. 138
("SFAS 138"), ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES. These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statements require that all
derivative instruments be recognized as assets and liabilities at fair value. If
certain conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges: (a) hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment ("fair value hedge"); (b) a hedge of the
exposure to variability of cash flows of a recognized asset, liability or
forecasted transaction ("cash flow hedge") or (c) a hedge of foreign currency
exposure ("foreign currency hedge").

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


                                       12
<PAGE>

         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 and designated as a trading or non-hedging
derivative instrument.

         The effect of implementing these Statements on the Company's financial
condition 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 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 payment is
recorded on a current basis as an adjustment to interest income or expense on
the corresponding hedged assets and liabilities.

         The Company utilizes various derivative instruments for hedging
purposes and other than hedging purposes such as asset/liability management.
These transactions involve both credit and market risk. The notional amounts are
amounts in which calculations and payments are based. Notional amounts do not
represent direct credit exposures. Direct credit exposure is limited to the net
difference between the calculated amounts to be received and paid, if any. The
actual risk of loss is the cost of replacing, at market, these contracts in the
event of default by the counterparties. The Company controls the credit risk of
its derivative financial instruments agreements through credit approvals, limits
and monitoring procedures.

         The Company enters into interest-rate swap contracts in managing its
interest rate exposure. Interest-rate swap contracts generally involve the
exchange of fixed and floating-rate interest-payment obligations without the
exchange of the underlying principal amounts. Entering into interest-rate swap
contracts involves not only the risk of dealing with counterparties and their
ability to meet the terms of the contracts, but also the interest rate risk
associated with unmatched positions. Interest rate swaps are the most common
type of derivative contract that the Company utilizes. Situations in which the
Company utilizes interest rate swaps are: a) to convert its fixed-rate
certificates of deposit (liabilities) to a variable rate, and b) to convert its
variable rate - term notes and FHLB advances (liabilities) to a fixed rate. By
entering into the swap, the principal amount of the hedged item would remain
unchanged but the interest payment streams would change.

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

         In addition, the Company offers its customers certificates of deposit
which contain an embedded derivative tied to the performance of Standard &
Poor's 500 Composite Stock Index that must be bifurcated from the host deposit
and recognized in the statement of financial condition in accordance with SFAS
133. At the end of five years, the depositor will receive a specified percent of
the average increase of the month-end value of the stock index. If such index
decreases, the depositor receives the principal without any interest. The
Company uses interest rate swap and option agreements with major broker dealer
companies to manage its exposure to the stock market. Under the terms of the
swap agreements, the Company will receive the average increase in the month-end
value of the index in exchange for a quarterly fixed interest cost. Under the
option agreements, the Company also will receive the average increase in the
month-end value of the index but in exchange for the payment of a premium when
the contract is initiated. Since the embedded derivative instrument of the
certificates of deposit and the interest rate swap and option agreements do not
qualify for hedge accounting, these derivative instruments are marked to market
through earnings.

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

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

         See Note 19 to the consolidated financial statements for a detail of
derivative transactions.


                                       13
<PAGE>

         OTHER OFF-BALANCE SHEET INSTRUMENTS. In the ordinary course of
business, the Bank enters into off-balance sheet instruments consisting of
commitments to extend credit, commitments under credit-card arrangements, and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Bank periodically evaluates the credit risks inherent in these
commitments and letters of credit, and establishes loss allowances for such
risks if and when these are deemed necessary.

YIELDS EARNED AND RATES PAID

         The net income of the Bank depends primarily upon the difference or
spread between the interest income received on its interest-earning assets and
the interest paid on its interest-bearing liabilities. Net interest income
increased $26.6 million or 27.04% for the year ended December 31, 2001, reaching
$125.1 million, compared to $98.5 million reported in 2000 and $102.2 million in
1999. The increase in 2001 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 increases in interest expense, principally on deposits and reverse
repurchase agreements. The decrease in 2000 was primarily the result of
increases in interest expense on deposit, reverse repurchase agreements and FHLB
advances associated with rising interest rates for most of year 1999. These
expenses offset the increases in interest in interest income from loans,
investment securities, and money market instruments.

         The following table reflects the interest income and interest expense,
the average balance, the average yield and the average rate paid for each major
category of interest-earning assets and interest-bearing liabilities for the
periods indicated:

<TABLE>
<CAPTION>
                                             INTEREST                       AVERAGE BALANCE                     AVERAGE RATE
                                  ------------------------------   ------------------------------------   ------------------------
                                    2001        2000      1999        2001        2000          1999       2001     2000     1999
                                  --------   --------   --------   ----------   ----------   ----------   ------   ------   ------
                                                                        (DOLLARS IN THOUSANDS)
<S>                               <C>        <C>        <C>        <C>          <C>          <C>          <C>      <C>      <C>
Interest-earning assets:
  Loans (1) ....................  $207,385   $183,497   $151,398   $2,534,486   $2,023,169   $1,686,477     8.18%    9.07%    8.98%
  Mortgage and other asset-
    backed securities (2) ......    28,273     12,387      9,490      411,922      142,911      122,496     6.86     8.67     7.75
  Investment securities (3) ....    98,946     84,532     65,926    1,606,744    1,253,011    1,009,945     6.16     6.75     6.53
  Money market instruments .....     8,731     10,171      6,173      203,081      160,224      119,851     4.30     6.35     5.15
                                  --------   --------   --------   ----------   ----------   ----------   ------   ------   ------
Total interest-earning
  assets .......................   343,335    290,587    232,987    4,756,233    3,579,315    2,938,769     7.22     8.12     7.93
                                  --------   --------   --------   ----------   ----------   ----------   ------   ------   ------
Interest-bearing
 liabilities:
  Deposits .....................   129,676    127,640     90,554    2,847,236    2,388,929    2,009,098     4.55     5.34     4.51
  Reverse repurchase
    agreements .................    79,882     53,968     33,511    1,484,639      847,028      672,657     5.38     6.37     4.98
  Advances from FHLB ...........     6,597      6,920      2,809      120,000      106,715       51,476     5.50     6.48     5.46
  Term notes ...................     2,114      3,609      3,932       47,798       74,863       83,785     4.42     4.82     4.69
                                  --------   --------   --------   ----------   ----------   ----------   ------   ------   ------
Total interest-bearing
  liabilities ..................   218,269    192,137    130,806    4,499,673    3,417,535    2,817,016     4.85     5.62     4.64
                                  --------   --------   --------   ----------   ----------   ----------   ------   ------   ------
Net interest income ............  $125,066   $ 98,450   $102,181                                            2.37%    2.50%    3.29%
                                  ========   ========   ========                                          ======   ======   ======
Net interest-earning assets ....                                     $256,560     $161,780     $121,753
                                                                   ==========   ==========   ==========
Net yield on interest-earning
  assets (4) ...................                                                                            2.63%    2.75%    3.48%
                                                                                                          ======   ======   ======
Interest-earning assets to
  interest-bearing liabilities
  ratio ........................                                       105.70%      104.73%      104.32%
                                                                   ==========   ==========   ==========
</TABLE>
----------

(1)  Includes loans held for sale. Average loans exclude non-performing loans.
     Loans fees amounted to $4.6 million; $3.5 million; and $4.9 million in
     2001, 2000 and 1999, respectively.
(2)  Includes mortgage-backed securities available for sale and for trading
     purposes.
(3)  Includes trading account securities and investments available for sale.
(4)  Net interest income divided by average interest-earning assets.


                                       14
<PAGE>

         The following table sets forth information regarding changes in
interest income and interest expense for the Bank for the periods indicated. For
each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (1) changes in volume
(changes in volume times old rate) and (2) changes in rates (changes in rate
times old volume). The changes that are not due solely to volume or rate are
allocated based on the proportion of the change in each category.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                         -------------------------------------------------------------------------
                                                   2001 VS. 2000                           2000 VS. 1999
                                         ----------------------------------     ----------------------------------
                                         VOLUME         RATE        TOTAL        VOLUME        RATE         TOTAL
                                         --------     --------     --------     --------     --------     --------
                                                                        (IN THOUSANDS)
<S>                                      <C>          <C>          <C>          <C>          <C>          <C>
Interest income:
  Loans (1) .........................    $ 38,974     $(15,086)    $ 23,888     $ 30,522     $  1,577     $ 32,099
  Mortgage and other assets-backed
     securities (2) .................      17,861       (1,975)      15,886        1,691        1,206        2,897
  Investment securities (3) .........      20,854       (6,440)      14,414       16,333        2,273       18,606
  Money market instruments ..........       2,323       (3,763)      (1,440)       3,640          358        3,998
                                         --------     --------     --------     --------     --------     --------
Total increase (decrease) in interest
  income ............................      80,012      (27,264)      52,748       52,186        5,414       57,600
                                         --------     --------     --------     --------     --------     --------
Interest expense:
  Deposits ..........................       8,824       (6,788)       2,036       18,722       18,364       37,086
  Reverse repurchase agreements .....      32,662       (6,748)      25,914        9,854       10,603       20,457
  Advances from FHLB ................       1,450       (1,773)        (323)       3,497          614        4,111
  Term notes ........................      (1,165)        (330)      (1,495)        (427)         104         (323)
                                         --------     --------     --------     --------     --------     --------
Total increase (decrease) in interest
     expense ........................      41,771      (15,639)      26,132       31,646       29,685       61,331
                                         --------     --------     --------     --------     --------     --------
Increase (decrease) in net interest
     income .........................    $ 38,241     $(11,625)    $ 26,616     $ 20,540     $(24,271)    $ (3,731)
                                         ========     ========     ========     ========     ========     ========
</TABLE>
--------

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

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

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31, (1)
                                                             -----------------------------------
                                                              2001          2000           1999
                                                             -----          -----          -----
<S>                                                          <C>            <C>            <C>
Return on total assets (2) .........................          1.22%          1.17%          1.27%
Return on common stockholders' equity (3) ..........         27.49          24.75          24.57
Dividend payout ratio to common stockholders (4) ...         19.99          21.42          20.48(5)
Equity-to-asset ratio (6) ..........................          6.29           6.21           6.46
</TABLE>
-------

(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)  The amount of $2,525,000 dividends corresponding to the second semester
     of 1998, which were declared for stockholders of record on January 15,
     1999, and paid on January 25, 1999, was excluded from the 1999 ratio
     (included in the 1998 ratio).
(6)  Average net worth divided by average total assets.

MARKET AREA AND COMPETITION

         The Company operates through 35 full service branch offices throughout
Puerto Rico, primarily in the Southwestern portion of the island. In recent
years, the Company has expanded into the San Juan metropolitan area, where it
now has four branches. In addition, the Company has four branches in
northeastern Puerto Rico. As of December 31, 2001, the Company was the third
largest locally controlled banking company headquartered in Puerto Rico, based
on total assets.

         The Company competes mainly with other commercial banks in attracting
and retaining deposits and in making real estate and commercial loans. At year
end 2001, there were approximately 13 other banks, including affiliates of banks
headquartered in the United States, Canada and Spain, operating branches in
Puerto Rico.


                                       15
<PAGE>

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."

EMPLOYEES

         At December 31, 2001, the Company had 817 full-time employees,
including its executive officers; and 6 part time employees.

REGULATION

         FEDERAL 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 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 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 qualifying total capital to risk-weighted assets of 8.0%, and a minimum
ratio of Tier 1 capital to risk-weighted assets of 4.0%. As of December 31,
2001, the Company's ratio of Tier 1 capital to total average assets was 7.17%,
its ratio of Tier 1 capital to risk-weighted assets was 11.64%, and its ratio of
qualifying total capital to risk-weighted assets was 12.65%.

         The Company's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking or nonbanking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve Board's guidelines. In addition, any bank holding company
whose capital falls below levels specified in the guidelines can be required to
implement a plan to increase capital.

         The Federal Reserve Board is empowered to initiate cease and desist
proceedings and other supervisory actions for violations of the Bank Holding
Company Act, or the Federal Reserve Board's regulations, orders or notices
issued thereunder. Under applicable regulations, banks and bank holding
companies which do not meet minimum capital adequacy guidelines are considered
to be undercapitalized and are required to submit an acceptable plan for
achieving capital adequacy.

         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 a financial holding company acquires all or
substantially all of the assets of a bank or merges or consolidates with another
bank holding company.

         Under the Change in Bank Control Act, persons who intend to acquire
control of a financial holding company, either directly or indirectly or through
or in concert with one or more persons, must give 60 days' prior written notice
to the Federal Reserve Board. "Control" would exist when an acquiring party
directly or indirectly has voting control of at least 25% of the Company's
voting securities or the power to direct the management or policies of the
Company. Under Federal Reserve Board regulations, a rebuttable presumption of
control would arise with respect to an acquisition where, after the transaction,
the acquiring party has ownership, control or the power to vote at least 10%
(but less than 25%) of the Company's common stock.

         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 (the "Puerto Rico
Commissioner"). Control is defined to mean the power to, directly or indirectly,
direct or decisively influence the management or the operations of the holding
company.


                                       16
<PAGE>

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.

         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.

         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
Company's bank has adapted its systems and procedures to accomplish this.  The
Secretary of the Treasury has proposed additional regulations to further
implement Title III.  Although the Company cannot predict when and in what form
these regulations will be adopted, the Company believes that the cost of
compliance with Title III of the USA Patriot Act is not likely to be material to
the Company.

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

         Westernbank derives its lending, investment and other powers primarily
from the applicable provisions of the Puerto Rico Banking 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 has extensive rulemaking power and
administrative discretion under the Puerto Rico Banking Law, and generally
examines Westernbank on an annual basis.

         The Puerto Rico Banking Law requires that at least 10% of the yearly
net income of Westernbank be credited annually to a reserve fund. This must be
done every year until the reserve fund is equal to the total paid-in capital for
common stock and preferred stock. At December 31, 2001, 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 Law, 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, 2001, Westernbank had a
legal reserve of 186.68%.

         The Puerto Rico Regulatory Financial Board (the "Financial Board")
which is part of the Office of the 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 unincorporated businesses 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.

         CAPITAL REQUIREMENTS. Westernbank is subject to minimum capital
requirements imposed by the FDIC that are substantially similar to the capital
requirements imposed on the Company. The FDIC regulations require that
Westernbank maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, and a minimum ratio of Tier 1 capital to
risk-weighted assets of 4.0%. In addition, under the minimum leverage-based
capital requirement adopted by the FDIC, Westernbank must maintain a ratio of


                                       17
<PAGE>
Tier 1 capital to average total assets (leverage ratio) of at least 3% to 5%,
depending on Westernbank's CAMELS rating. As of December 31, 2001, Westernbank's
ratio of total capital to risk--weighted assets was 12.15%, its ratio of Tier 1
capital to risk-weighted assets was 11.13%, and its ratio of Tier 1 capital to
average total assets was 6.86%. Capital requirements higher than the generally
applicable minimum requirements may be established for a particular bank if the
FDIC determines that a bank's capital is, or may become, inadequate in view of
its particular circumstances. Failure to meet capital guidelines could subject a
bank to a variety of enforcement actions, including actions under the FDIC's
prompt corrective action regulations.

         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 Federal Deposit Insurance Act 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,
passed in 1999, 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.

         ENFORCEMENT. The FDIC, as well as the Puerto Rico Commissioner, has
extensive enforcement authority over insured banks, including Westernbank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease and desist orders and to remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and to unsafe or unsound practices.

         DEPOSIT INSURANCE. Westernbank is subject to quarterly payments on
semiannual insurance premium assessments for its FDIC deposit insurance.
However, the FDIC has recently announced that it may have to impose premiums
commencing in 2002. 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, 2002 is 1.82 basis
points for BIF- assessable and SAIF-assessable deposits. Most of Westernbank's
deposits are presently insured by SAIF.

         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.

         TRANSACTIONS WITH AFFILIATES 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.

         In addition, Sections 22 (h) and (g) of the Federal Reserve Act places
restrictions on loans 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 financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the


                                       18
<PAGE>
institution's unimpaired capital and surplus). Section 22 (h) also requires that
loans to directors, executive officers and principal stockholders 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 institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the financial
institution. Section 22 (h) also requires prior board approval for certain
loans, and the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22 (h) places additional restrictions on loans
to executive officers.

         SAFETY AND SOUNDNESS STANDARDS. Westernbank is subject to certain FDIC
standards designed to maintain the safety and soundness of individual banks and
the banking system. The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth and quality; (vi) earnings; and (vii) compensation
and benefit standards for officers, directors, employees and principal
stockholders. A state nonmember bank not meeting one or more of the safety and
soundness guidelines may be required to file a compliance plan with the FDIC.

         PROMPT CORRECTIVE ACTION. Under the FDIC's prompt corrective action
regulations, insured institutions will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater
(provided that the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specified capital level for any capital measure), (ii) "adequately capitalized"
if the institution has a total risk-based capital ratio of 8% or greater, a Tier
1 risk based capital ratio of 4% or greater and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite CAMELS 1 in its
most recent report of examination and is not experiencing or anticipating
significant growth), (iii) "undercapitalized" if the institution has a total
risk-based capital ratio that is less than 8%, or a Tier 1 risk-based ratio of
less than 4% and a leverage ratio that is less than 4% (3% if the institution is
rated composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At December 31, 2001, Westernbank qualified as a
"well capitalized" institution.

         An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency,
which would be the FDIC for Westernbank. An undercapitalized institution also is
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the FDIC. In addition, the FDIC may take any other action that
it determines will better carry out the purpose of prompt corrective action
initiatives.

         DIVIDEND RESTRICTIONS. Westernbank is not permitted to pay dividends
if, as the result of the payment, it would become undercapitalized, as defined
in the prompt corrective action regulations of the FDIC. In addition, if
Westernbank becomes "undercapitalized" under these regulations, payment of
dividends would be prohibited without the prior approval of the FDIC.
Westernbank also could be subject to these dividend restrictions if the FDIC
determines that Westernbank is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice.

         OTHER. The Gramm-Leach-Bliley Act imposes certain obligations on
financial institutions, including state-chartered banks like Westernbank, to
develop privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data.

FEDERAL HOME LOAN BANK SYSTEM

         Westernbank is a member of the FHLB System. The System consists of 12
regional Federal Home Loan Banks, with each subject to supervision and
regulation by the Federal Housing Finance Board. The Federal Home Loan Bank
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,


                                       19
<PAGE>
or 5% of its FHLB advances outstanding or one percent of thirty percent of total
assets. At December 31, 2001, the Bank had $38.5 million in FHLB's capital
stock.

         Advances from the FHLB of New York are secured by a member's shares of
stock in the FHLB of New York, 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 of New York. As of
December 31, 2001, there were $120.0 million in outstanding advances and $649.0
million in securities sold under agreements to repurchase from the FHLB of New
York.

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 from assets is provided by receipt of interest and principal payments
and prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. At December 31, 2001, the Company
had approximately $727.8 million 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.

         As of December 31, 2001, the Bank had line of credit agreements with
three commercial banks permitting the Bank to borrow a maximum aggregate amount
of $75.0 million (no borrowings were made during the year ended December 31,
2001 under such lines of credit). 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. The credit agreements are renewable annually.

         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 Bank's investment portfolio at December 31, 2001 had an average
maturity of 73 months. However, no assurance can be given that such levels will
be maintained in future periods.

CAPITAL, DIVIDENDS, STOCK SPLIT AND OPTION PLANS

         Total shareholders' equity as a measure of capital increased by
approximately $137.3 million in 2001 and $26.8 million in 2000.

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


                                       20
<PAGE>

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

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

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

         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 and August 1 for the 2001 Series D of the years indicated below,
plus accrued and unpaid dividends, if any, for the current period to the date of
redemption:

<TABLE>
<CAPTION>
                                                     REDEMPTION PRICE PER SHARE
                                      --------------------------------------------------------
                    YEAR              SERIES A       SERIES B        SERIES C       SERIES D
          ------------------------------------------------------------------------------------
<S>                                   <C>            <C>             <C>            <C>
          2002                         $26.00              --              --              --
          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
          2008 and thereafter           25.00           25.00           25.00           25.00
</TABLE>

         Series A, B, C and D 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, 2001 and 2000 amounted to $10.3
million and $5.8 million, respectively.

         During 2001, 2000 and 1999 the Company acquired and retired shares of
common stock as follows: $28,000 (1,700 shares) in 2001; $4.8 million (498,300
shares) in 2000; and $1.2 million (80,309 shares) in 1999.

         Total common stock dividends declared in 2001 amounted to $10.4 million
compared to $8.3 million in 2000.

         On January 18, 2002, the Board of Directors approved an increase of its
annual dividend payments to shareholders in 2002 to $0.32 per share. This
represents an increase of 28% over the dividends paid the previous year of $0.25
per share.

         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 4,200,000
shares of common stock can be granted. Also, options for up to 4,200,000 shares
of common stock, reduced by any share issued under the 1999 Qualified Option
Plan, can be granted under the 1999 Nonqualified Option Plan. The option price
for both plans is determined at the grant date. Both plans will remain in effect
for a term of 10 years. The Board of Directors has sole authority and absolute
discretion as to the number of stock options to be granted, their vesting
rights, and the options' exercise price. The Plans provide for a proportionate
adjustment in the exercise price and the number of shares that can be purchased
in the event of a stock split, reclassification of stock and a merger or a
reorganization. At December 31, 2001, and 2000, the Company had outstanding
2,370,000 and 2,295,000 options, respectively, under the 1999 Qualified


                                       21
<PAGE>

Stock Option Plan. These options were granted to various executives' officers
and employees, which will become fully exercisable after five years following
the grant date. During 2001 and 2000, the Company granted 75,000 and 2,295,000
options, respectively, to various executive officers and employees. None of
these options were exercised or forfeited in 2001 and 2000.

         On February 28, 1998 and on February 3, 1997, the Bank declared a
two-for-one stock split and a fifteen percentage stock dividend of its common
shares.

COMMONWEALTH TAXATION

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

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

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

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

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

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

         For the year ended December 31, 2001, the Company had approximately
$26.4 million of regular taxable income, on which it was required to pay current
income tax of $11.7 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.

ITEM 2.  PROPERTIES

         The Company owns the condominium offices space housing its main offices
at 19 West McKinley Street, Mayaguez, Puerto Rico.

         The Company's investment in premises and equipment, exclusive of
leasehold improvements, at December 31, 2001, was $33.4 million. The combined
net book value of the Company's main offices as of December 31, 2001 was $1.5
million.


                                       22
<PAGE>

         The Company's properties, owned (excluding its main offices) or leased,
at book value as of December 31, 2001 follow:

<TABLE>
<CAPTION>
                                                  BOOK VALUE OF:
                                            ------------------------
                                             LEASEHOLD      PROPERTY              LEASE
        LOCATION                            IMPROVEMENTS      OWNED          EXPIRATION DATE(*)
----------------------------------------    ------------    --------       ------------------------
                                                 (IN THOUSANDS)
<S>                                         <C>             <C>            <C>
Mayaguez, Puerto Rico
  Mayaguez Mall ........................      $    236      $      --      March 20, 2006
  Mayaguez Main ........................                          465      N/A
  Mayaguez Plaza .......................                          497      N/A
  Other location .......................                          180      N/A
Aguadilla-- Aguadilla Mall .............           162                     January 30, 2005
Aguada-- Aguada II .....................         1,203                     July 31, 2002
Camuy ..................................           117                     May 3, 2002
Cabo Rojo-- La Hacienda ................                        1,498      N/A
Sabana Grande ..........................                          215      N/A
Carolina
  Campo Rico ...........................           461                     April 31, 2004
  Plaza Carolina .......................           218                     January 30, 2009
San German -- La Quinta Shopping
  Center ...............................                          374      N/A
Bayamon ................................                          483      N/A
Caguas .................................           576                     August 31, 2002
Guaynabo ...............................         4,333                     March 31, 2039
Yauco ..................................           679
Land lots for future developments ......                       12,683      N/A
Other properties-- (individually .......                                   Various dates throughout
  less than $100,000) ..................           345            134      November 12, 2006
                                              --------      ---------
  Total ................................      $  8,330      $  16,529
                                              ========      =========
</TABLE>

         (*) Excludes renewal options.

         At December 31, 2001, the Company's future rental commitments under
non-cancelable operating leases aggregated $24.6 million, not considering
renewal options.

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.


                                       23
<PAGE>

                                     PART II

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

         The Company's Common Stock is traded on the New York Stock Exchange
(NYSE) since December 5, 2001 under the symbol "WHI" (before that date it was
traded on the National Association of Securities Dealers Automated Quotation
(Nasdaq) under the symbol "WBPR"). The following table sets forth the closing
sale prices for the Common Stock for the periods indicated.

<TABLE>
<CAPTION>
                         HIGH           LOW
                      ---------      ---------
<S>                   <C>            <C>
 2001
 1st quarter ...      $   11.88      $   11.00
 2nd quarter ...          13.00          12.00
 3rd quarter ...          14.49          13.50
 4th quarter ...          16.40          15.96
 2000
 1st quarter ...      $   10.75      $    9.13
 2nd quarter ...           9.25           7.88
 3rd quarter ...          10.19           9.25
 4th quarter ...          12.06          11.56
</TABLE>

         The closing price of the Common Stock on December 31, 2001 was $16.20.
The approximate number of holders of record of the Company's Common Stock at
December 31, 2001 was 642.

         The Company's cash dividends corresponding to 2001 and 2000 were as
follows:

<TABLE>
<CAPTION>
   RECORD DATE                   PAYABLE DATE              AMOUNT PER SHARE
------------------             ------------------          ----------------
<S>                            <C>                         <C>
YEAR 2001
January 31, 2001               February 15, 2001              $  0.0208
February 28, 2001              March 15, 2001                    0.0208
March 31, 2001                 April 15, 2001                    0.0209
April 30, 2001                 May 15, 2001                      0.0208
May 31, 2001                   June 15, 2001                     0.0208
June 30, 2001                  July 15, 2001                     0.0209
July 31, 2001                  August 15, 2001                   0.0208
August 31, 2001                September 15, 2001                0.0208
September 30, 2001             October 15, 2001                  0.0209
October 31, 2001               November 15, 2001                 0.0208
November 30, 2001              December 15, 2001                 0.0208
December 31, 2001              January 15, 2002                  0.0209
                                                              ---------
      Total                                                   $  0.2500
                                                              =========

YEAR 2000
March 31, 2000                 April 17, 2000                 $  0.0500
April 30, 2000                 May 15, 2000                      0.0167
May 31, 2000                   June 15, 2000                     0.0167
June 30, 2000                  July 15, 2000                     0.0167
July 31, 2000                  August 14, 2000                   0.0167
August 31, 2000                September 15, 2000                0.0167
September 30, 2000             October 15, 2000                  0.0167
October 31, 2000               November 15, 2000                 0.0166
November 30, 2000              December 15, 2000                 0.0166
December 31, 2000              January 15, 2001                  0.0166
                                                              ---------
      Total                                                   $  0.2000
                                                              =========
</TABLE>


                                       24
<PAGE>

ITEM 6.  SELECTED FINANCIAL AND OTHER DATA

<TABLE>
<CAPTION>
                                              SELECTED FINANCIAL AND OTHER DATA
                                                   Year Ended December 31,
                                        (Dollars in thousands, except per share data)

                                                             2001           2000         1999           1998          1997
                                                           ----------    ----------    ----------    ----------    ----------
<S>                                                        <C>           <C>           <C>           <C>           <C>
Balance Sheet Data:
Total Assets:                                              $5,888,194    $4,260,857    $3,374,571    $2,481,176    $1,555,799
   Securities purchased under agreements to resell            136,096       125,809       120,655        91,211        42,878
   Interest-bearing deposits in other banks and federal
       funds sold                                              46,251        54,805        25,671         7,787         5,442
   Investment securities held to maturity, securities
      available for sale and trading securities             2,656,066     1,686,654     1,198,006       892,169       631,121
   Loans-net and mortgage loans held for sale               2,843,657     2,208,300     1,871,742     1,361,297       784,795

-----------------------------------------------------------------------------------------------------------------------------

Total Liabilities:                                         $5,500,285    $4,010,239    $3,150,752    $2,326,894    $1,453,564
   Savings deposits                                           465,267       416,684       409,423       403,753       362,317
   Other deposits (excluding accrued interest payable)      2,743,166     2,188,538     1,819,975     1,276,320       676,088
   Securities sold under agreement to repurchase            2,059,646     1,179,073       729,968       506,325       281,750
   Term notes                                                  43,000        48,000        79,000        84,000       112,000
   Advances from Federal Home Loan Bank                       120,000       120,000        70,000        31,000
Total Stockholders' Equity                                    387,909       250,618       223,819       154,282       102,235

-----------------------------------------------------------------------------------------------------------------------------

Operations Data:
     Interest income                                       $  343,335    $  290,587    $  232,987    $  157,446    $  113,528
     Interest expense                                         218,269       192,137       130,806        84,308        57,198
                                                           ----------    ----------    ----------    ----------    ----------
     Net interest income                                      125,066        98,450       102,181        73,138        56,330
     Provision for loan losses                                (12,278)       (8,700)      (14,000)       (6,000)       (2,700)
     Other income, net                                         18,181        13,868        12,239        10,154         9,979
     Operating expenses                                       (60,310)      (53,216)      (53,816)      (41,705)      (35,012)
                                                           ----------    ----------    ----------    ----------    ----------

     Income before income taxes                                70,659        50,402        46,604        35,587        28,597
     Income taxes                                               8,504         5,814         9,480         6,892         5,693
                                                           ----------    ----------    ----------    ----------    ----------
     Net income                                            $   62,155    $   44,588    $   37,124    $   28,695    $   22,904
                                                           ==========    ==========    ==========    ==========    ==========
     Net income attributable to common stockholders        $   51,891    $   38,789    $   32,817    $   27,604    $   22,904
                                                           ==========    ==========    ==========    ==========    ==========

-----------------------------------------------------------------------------------------------------------------------------

Basic and Diluted Earnings per Common Share
     (after effect of stock splits)                        $     1.25    $     0.93    $     0.78    $     0.66    $     0.54
                                                           ==========    ==========    ==========    ==========    ==========
Dividends per Common Share
     (after effect of stock splits)                        $     0.25    $     0.20    $     0.16    $     0.12    $     0.09
                                                           ==========    ==========    ==========    ==========    ==========
</TABLE>


                                       25
<PAGE>

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                ---------------------------------------------------
                                                                2001       2000        1999        1998        1997
                                                                ----      ----         ----        ----        ----
<S>                                                             <C>       <C>          <C>         <C>         <C>
Other Selected Data:
     Average yield earned on all interest-earning
          assets                                                7.21%     8.12%        7.93%       8.28%       8.50%
     Average rate paid on all interest-bearing
          liabilities                                           4.85%     5.62%        4.64%       4.54%       4.41%
     Average interest rate spread                               2.37%     2.50%        3.29%       3.74%       4.09%

     Branch offices                                               35        35           36          36          35
</TABLE>

Ratios

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

<TABLE>
<CAPTION>
                                                                       Years Ended December 31, (1)
                                                           ------------------------------------------------------
                                                           2001         2000        1999        1998         1997
                                                           -----       -----       -----       -----        -----
<S>                                                        <C>         <C>         <C>         <C>          <C>
Return on assets (2)                                        1.22%       1.17%       1.27%       1.42%        1.61%

Return on common stockholders' equity  (3)                 27.49%      24.75%      24.57%      24.42%       24.71%

Equity-to-assets ratio (4)                                  6.29%       6.21%       6.46%       6.35%        6.53%

Net yield on interest earning assets (5)                    2.63%       2.75%       3.48%       3.84%        4.21%
</TABLE>

(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)  Average net worth divided by average total assets.
(5)  Net interest income divided by average interest-earning assets.


                                       26
<PAGE>

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

         This financial discussion contains an analysis of the consolidated
financial position and financial performance of W Holding Company, Inc. and its
wholly owned subsidiaries, Westernbank Puerto Rico ("Westernbank") and
Westernbank Insurance, Corp. The Company was organized under the laws of the
Commonwealth of Puerto Rico in February 1999 to become the bank holding company
of Westernbank. Westernbank offers a full array of business and consumer
financial services, including banking, trust services, and brokerage services.
Westernbank Insurance Corp. is a general insurance agent placing property,
casualty, life and disability insurance.

         The Company's principal source of earnings is its net interest income.
This is the difference between interest income on loans, investments,
mortgage-backed securities and other assets and its interest expense on deposits
and borrowings, including securities sold under repurchase agreements, term
notes and advances from Federal Home Loan Bank. 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 and service charges, fees and other income, also affect income. In
addition, the Company's net income is affected by the level of its non-interest
expenses, such as compensation, employees' benefits, occupancy costs and other
operating expenses.

         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 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.

         The Company's total assets increased by $1.63 billion from year-end
2000 to year-end 2001. This growth reflects a $635.4 million increase in net
loans and a $969.4 million increase in investment securities. Liabilities to
fund the growth increased by $1.49 billion.

         The Company also has assets managed by its trust division. This
division offers a variety of IRA products and manages 401 (K) and Keogh
retirement plans, custodian and corporate accounts. At December 31, 2001, total
assets managed by Westernbank's trust amounted to $110.2 million, an increase of
$109.9 million or 521.05% when compared to $211,000 as of December 31, 2000.
Such increase was the result of effective aggressive marketing efforts
throughout the year.

         Net income increased to $62.2 million in 2001, up 39.40% from $44.6
million in 2000, and net income available to common stockholders increased to
$51.9 million in 2001, up 33.78% from $38.8 million in 2000. The increase for
the year ended December 31, 2001 was the result of increases in all components
of interest income, but principally from interest income from loans, investment
securities and mortgage and other asset-backed securities, which was partially
offset by increases in interest expense, principally on deposits and reverse
repurchase agreements.

FINANCIAL CONDITION

         The Company had total assets of $5.89 billion, $4.26 billion and $3.37
billion as of December 31, 2001, 2000 and 1999, respectively. As of December 31,
2001, total liabilities amounted to $5.50 billion, an increase of $1.49 billion
or 37.16% when compared to $4.01 billion as of December 31, 2000. In 2000, total
liabilities totaled $4.01 billion, an increase of $859.5 million or 27.28% from
December 31, 1999.

INTEREST-EARNING ASSETS

         Interest-earning assets amounted to $5.74 billion at December 31, 2001,
an increase of $1.62 billion or 39.28% when compared to $4.12 billion as of
December 31, 2000, which represented an increase of $878.7 million or 27.07%
when compared to $3.25 billion as of December 31, 1999. The increase in
interest-earnings assets reflects the increases in loans and investment
securities.

         During 2001 and 2000, the Bank continued its emphasis on the
origination of commercial real estate loans as well as origination and purchase
of residential mortgage loans. Residential mortgage and construction loans,
including mortgage loans held for sale, increased from $815.9 million as of
December 31, 1999, to $871.8 million as of December 31, 2000, and to $974.3
million as of December 31, 2001. Commercial real estate loans increased from
$677.9 million as of December 31, 1999, to $887.1 million as of December 31,
2000, and to $1.12 billion as of December 31, 2001. Total other loans, which
includes consumer loans (including credit cards), commercial loans (not
collateralized by real estate) increased from $409.0 million at December 31,
1999, to $483.4 million as of December 31, 2000, and to $795.6 million as of
December 31, 2001. This increase was mainly due to the continuous emphasis in


                                       27
<PAGE>

the credit granting activity and the acquisition of the entire loan portfolio of
the Puerto Rico branch of Congress Credit Corporation, a subsidiary of First
Union National Bank, N.A. for $163.8 million on June 15, 2001.

         Trading, available for sale and held to maturity investment securities,
which principally include United States and Puerto Rico Government and agency
obligations and mortgage and other asset-backed securities increased from $1.20
billion as of December 31, 1999, to $1.69 billion as of December 31, 2000, and
to $2.66 billion as of December 31, 2001, an increase of $488.6 million or
40.79% in 2000, and $969.4 million or 57.48% in 2001.

         Securities purchased under agreements to resell increased from $120.7
million as of December 31, 1999, to $125.8 million as of December 31, 2000, and
to $136.1 million as of December 31, 2001, an increase of $5.2 million or 4.27%
and $10.3 million or 8.18%, respectively.

INTEREST-BEARING LIABILITIES

         Interest-bearing liabilities amounted to $5.31 billion at December 31,
2001, an increase of $1.48 billion or 38.51% when compared to $3.83 billion as
of December 31, 2000. In 2000, interest-bearing liabilities increased by $827.1
million or 27.53% when compared to $3.00 billion at December 31, 1999.

         The increase in interest-bearing liabilities from year-end 2000 to
year-end 2001 reflects an increase of $599.8 million in deposits (excluding
noninterest-bearing accounts and accrued interest payable), $880.6 million in
securities sold under agreements to repurchase, net of a decrease of $5.0
million in term notes. The increase in 2000 was mainly related to a $358.9
million increase in deposits, $449.1 million increase in securities sold under
agreements to repurchase and $50.0 million increase in advances from FHLB, net
of a decrease of $31.0 million in term notes.

         The Bank offers a variety of deposit accounts and certificates of
deposit. Savings deposits increased from $409.4 million as of December 31, 1999,
to $416.7 million as of December 31, 2000, and to $465.3 million as of December
31, 2001, an increase of $7.3 million or 1.77% and $48.6 million or 11.66%,
respectively. In addition, other deposits, represented mainly by time deposits,
including brokered deposits and Individual Retirement Account Deposits (IRA's),
increased from $1.82 billion as of December 31, 1999, to $2.19 billion as of
December 31, 2000, and to $2.74 billion as of December 31, 2001, an increase of
$368.6 million or 20.25% in 2000, and $554.6 million or 25.34% in 2001. Other
deposits include brokered deposits amounting to $1.57 billion, $1.27 billion and
$894.8 million as of December 31, 2001, 2000 and 1999, respectively.

STOCKHOLDERS' EQUITY

         As of December 31, 2001, total stockholders' equity amounted to $387.9
million, an increase of $137.3 million or 54.78% when compared to $250.6 million
as of December 31, 2000. In 2000, total stockholders' equity increased by $26.8
million or 11.97% when compared to $223.8 million at December 31, 1999. The
increase during 2001 was primarily due to a net income of $62.2 million, the
issuance of 2001 Series C and D preferred stock for $96.3 million (net of cost
of issuance of $3.7 million), offset by cash dividends declared on common and
preferred stock totaling $20.6 million. The increase during 2000 was primarily
due to a net income of $44.6 million, net of cash dividends declared on common
and preferred stocks totaling $14.1 million and of the repurchase of 498,300
shares of common stock for $4.8 million.

RESULTS OF OPERATIONS

NET INTEREST INCOME

         Net interest income represents the main source of earnings of the
Company. As further discussed in "Quantitative and Qualitative Disclosure About
Market Risk", the Company uses several tools to manage the risks associated with
the composition and repricing of assets and liabilities.

         Net interest income increased $26.6 million or 27.04% for the year
ended December 31, 2001, reaching $125.1 million, compared to $98.5 million
reported in 2000 and $102.2 million in 1999. The increase in 2001 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 increases in interest
expense, principally on deposits and reverse repurchase agreements. The decrease
in 2000 was primarily the result of increases in interest expense on deposits,


                                       28
<PAGE>
reverse repurchase agreements and FHLB advances associated with rising interest
rates for most of year 1999. These expenses offset the increases in interest
income from loans, investment securities, and money market instruments.

         Average interest-earning assets increased $1.18 billion or 32.88% from
2000 to 2001, and $640.5 million or 21.80% from 1999 to 2000. The rise in
average interest-earning assets in both periods is mainly related to increases
in average loans, which is the higher yielding category of interest-earning
assets, followed by a significant increase in investment securities and mortgage
and other asset-backed securities.

         The increase in average interest-earning assets was partially offset by
an increase in average interest-bearing liabilities of $1.08 billion or 31.66%
and $600.5 million or 21.32% experienced in 2001 and 2000, respectively. The
increase in average interest-bearing liabilities was mainly related to
significant increases in average deposits and in securities sold under
agreements to repurchase.

         Interest income on loans amounted to $207.4 million for the year ended
December 31, 2001, compared to $183.5 million in 2000 and $151.4 million in
1999. Commercial loans - collateralized by real estate as well as other
commercial loans accounted for the majority of the increase in average loans
during 2001. The increase was primarily from a combination of business growth
experienced as a result of the Company continuous emphasis in the credit
granting activity and the purchases of mortgage and commercial loans, which
includes the purchase of the entire loan portfolio of the Puerto Rico branch of
Congress Credit Corporation for $163.8 million. Mortgage loans accounted for the
majority of the increase in average loans in 2000, mainly attributed to the
purchase of mortgage loans portfolios. In addition, commercial real estate loans
contributed to the increase as a result of a business growth experienced during
2000. The average balance on loans increased $511.3 million or 25.27% in 2001,
and $336.7 million or 19.96% in 2000. The average yield on loans increased from
8.98% in 1999, to 9.07% in 2000 and decreased to 8.18% in 2001, as a result of
fluctuation on market interest rates during both years.

         Interest income on investment securities amounted to $98.9 million for
the year ended December 31, 2001 compared to $84.5 million in 2000 and $65.9
million in 1999. A rise in average balances of $353.7 million in 2001 and $243.1
million in 2000 caused these increases in income from investment securities for
2001 and 2000. The average yield on investments securities increased from 6.53%
in 1999, to 6.75% in 2000 and decreased to 6.16% in 2001.

         Interest income on mortgage and other asset-backed securities and
trading securities amounted to $28.3 million for the year ended December 31,
2001, compared to $12.4 million in 2000 and $9.5 million in 1999. A rise in
average balance of $269.0 million or 188.24% in 2001, and $29.0 million or
25.48% in 2000 mainly caused these increases in income on mortgage and other
asset-backed securities and trading securities for both years. The average yield
on mortgage and other asset-backed securities and trading securities increased
from 7.65% in 1999, to 8.67% in 2000 and decreased to 6.86% in 2001.

         Interest income on money market instruments decreased to $8.7 million
for the year ended December 31, 2001, compared to $10.2 million in 2000 and $6.2
million in 1999. The decrease in 2001 was mainly related to a decrease in the
average yield on money market instruments from 6.35% in 2000, to 4.30% in 2001.
The average yield during 1999 was 5.15%. The increase in 2000 was due to a
combination of an increase in the average balance and in the average yield. The
average balance on money market instruments increased by $40.4 million or 33.69%
in 2000 and $42.9 million or 26.75% in 2001.

         Interest expense on deposits amounted to $129.7 million for the year
ended December 31, 2001, compared to $127.6 million in 2000 and $90.6 million in
1999. The increase in 2001 was mainly attributed to a rise in the average
balance on deposits. The increase in 2000 was due to a combination of an
increase in the average balance of deposits and in the average rate paid on
them. The average balance of deposits increased $458.3 million or 19.18% in
2001, and $379.8 million or 18.91% in 2000. The average rate paid on deposits
decreased from 5.34% in 2000, to 4.55% in 2001. The average rate paid during
1999 was 4.51%.

         Interest expense on securities sold under agreements to repurchase
amounted to $80.0 million for the year ended December 31, 2001, compared to
$54.0 million in 2000, and $33.5 million in 1999. The increase in 2001 was
mainly caused by an increase in the average balance of securities sold under
agreements to repurchase. The increase in 2000 was due to a combination of an
increase in the average balance of securities sold under agreements to
repurchase and in the average rate paid on them. The average balance of
securities sold under agreements to repurchase increased $637.6 million or
75.28% in 2001, and $174.4 million or 25.92% in 2000. The average rate paid on
securities sold under agreements to repurchase decreased from 6.37% in 2000, to
5.38% in 2001. The average rate paid during 1999 was 4.98%.

         Interest expense on advances from FHLB amounted to $6.6 million for the
year ended December 31, 2001, compared to $6.9 million in 2000 and $2.8 million
in 1999. The decrease in 2001 was primarily related to a decrease in the average



                                       29
<PAGE>
interest rates paid on them from 6.48% in 2000, to 5.50% in 2001. In 2001, the
average balance increased $13.3 million or 12.45%. The increase in 2000 was
mainly due to an increase in the average balance of advances from FHLB of $55.2
million or 107.31%.

         Interest expense on term notes totaled $2.1 million for the year ended
December 31, 2001, compared to $3.6 million in 2000 and $3.9 million in 1999.
This decrease is mainly related to a decrease in the average balance of term
notes in 2001 and 2000.

PROVISION FOR LOAN LOSSES

         The provision for loan losses for the year ended December 31, 2001,
amounted to $12.3 million, with an allowance for loan losses at December 31,
2001 of $38.4 million. In 2000, the provision for loan losses amounted to $8.7
million, with an allowance for loan losses at December 31, 2000 of $28.9
million. While for the year ended December 31, 1999 the provision for loan
losses amounted to $14.0 million, with an allowance for loan losses of $24.0
million at December 31, 1999. The decrease in the provision for loan losses of
$5.3 million in 2000 was mainly due to a lower level of delinquencies in the
loan portfolio and a reduction in net loans charged off of $2.1 million.

         The allowance for loan losses is a current estimate of the losses
inherent in the present portfolio based on management's ongoing quarterly
evaluations of the loan portfolio. Estimates of losses inherent in the loan
portfolio involve the exercise of judgment and the use of assumptions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

         The Company follows a systematic methodology to establish and evaluate
the adequacy of the allowance for loan losses. This methodology includes the
consideration of factors such as current economic conditions, trends in the
nature and volume (delinquencies, charge-off, non-accrual and problem loans),
prior loss experience results of periodic credit reviews of individuals 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. (see Note 1 to the consolidated financial
statements for a detailed description of methodology). Because of uncertainties
inherent in the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may change in the near
term.

         At December 31, 2001, the allowance for loan losses was $38.4 million,
or 1.33% of total loans, and 271.83% of total non-performing loans, compared
with an allowance for loan losses at December 31, 2000 of $28.9 million, or
1.30% of total loans, and 298.53% of total non-performing loans.

         During 2001, accounts amounting to $7.0 million were written-off
against the allowance for loan losses, as compared to $5.4 million in 2000. The
accounts written-off are submitted to the Collections Department recovery unit
for continued collection efforts. Recoveries made from accounts previously
written-off amounted to $1.3 million in 2001 and $1.6 million in 2000.

OTHER INCOME

         Service charges on deposit accounts and other fees amounted to $18.9
million for the year ended December 31, 2001, compared to $14.4 million in 2000
and $11.9 million in 1999. The increase of $4.4 million or 30.60% in 2001 as
compared to 2000, was primarily the result of an increase in fees charged to
checking accounts, credit cards and other loan fees and fees from other services
consistent with the Company strategy of increasing its fee base and other
income.

OPERATING EXPENSES

         Total operating expenses amounted to $60.3 million for the year ended
December 31, 2001, as compared to $53.2 million in 2000 and $53.8 million in
1999.

         Salaries and employee benefits, which are the largest components of
total operating expenses, amounted to $22.9 million for the year ended December
31, 2001, compared to $20.1 million in 2000, and $21.8 million in 1999, an
increase of $2.8 million or 13.74% in 2001, and a decrease of $1.7 million or
7.76% in 2000. The increase in 2001 was mainly due to an increase in personnel
to support the continued expansion of the Company, including the inception of
new lines of businesses, normal salary increases and related employees'
benefits. The decrease in 2000 was primary the result of a strict cost reduction
plan while at the same time, supporting the expansion of the Company.



                                       30
<PAGE>
         Equipment expenses amounted to $8.8 million in 2001, $8.7 million in
2000, and $6.8 million in 1999, an increase of $155,000 or 1.78% and $1.9
million or 27.25%, respectively. This increase was the result of continued
investment in technological resources to support the Company's expansion,
increases on furniture and fixtures and equipment expenses, including
depreciation and property taxes.

         Occupancy expenses amounted to $5.0 million for years 2001, 2000 and in
1999. This is the result of a strict cost reduction plan while at the same time
supporting the expansion of the Company.

         Advertising expense amounted to $4.4 million in 2001, $3.3 million in
2000, and $4.1 million in 1999. The increase in 2001 of $1.0 million or 31.18%,
was due to promotional efforts launched in connection to the individual
retirement's accounts campaign as well as for the consumer loans and credit
cards programs. The decrease in 2000 of $724,000 or 17.78%, was the result of
strict cost reduction measures.

         All other operating expenses amounted to $19.1 million in 2001 compared
to $16.1 million in 2000 and $16.2 million in 1999. The increase in 2001 was
mainly due to increases in the volume of operations, new businesses and the
inception in new markets. The slight decrease in 2000 resulted from a general
increase in other operating expenses related to the expansion of the Company and
the increase in the volume of business, both of which were significantly offset
by strict cost reduction measures.

PROVISION FOR INCOME TAXES

         Under Puerto Rico income tax laws, the Company and its subsidiaries are
required to pay the higher of an alternative minimum tax of 22% or a regular
statutory rate up to 39%. The current provision for estimated Puerto Rico income
taxes for the year ended December 31, 2001 amounted to $11.7 million compared to
$7.7 million in 2000 and $13.8 million in 1999. Deferred income taxes reflect
the impact of credit carryforwards and "temporary differences" between amounts
of assets and liabilities for financial reporting purposes and their respective
tax bases. The income on certain investments is exempt for income tax purposes.
Also, activities relating to the Westernbank International division are exempt
for income tax purposes. As a result, the Company's effective tax rate is
substantially below the statutory rate.

NET INCOME

The Company's net income increased $17.6 million or 39.40% and $7.5 million or
20.11% in 2001 and 2000, respectively. The increase in 2001 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. The increase in 2000, is mainly due to a decrease in operating
expenses and in the provision for income taxes and loan losses.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

As disclosed in the notes to the consolidated financial statements, the Company
has certain obligations and commitments to make future payments under contracts.
At December 31, 2001, the aggregate contractual obligations and commercial
commitments are:

<Table>
<Caption>
                                                            Payments Due by Period
                                             ----------------------------------------------------
                                                          Less than 1
                                               Total         year       2-5 years   After 5 years
                                             ----------   -----------   ---------   -------------
                                                            (Dollars in Thousands)
<S>                                          <C>          <C>           <C>           <C>
CONTRACTUAL OBLIGATIONS:
Securities sold under agreements to
  repurchase                                 $2,059,646     $806,548     $212,150     $1,040,948
Advances from FHLB                             120,000           --       78,000         42,000
Term notes                                       43,000       43,000           --             --
Annual rental commitments under
  noncancelable operating leases                 24,593        1,726        6,109         16,758
Purchase obligation                              50,500       12,645        1,606         36,249
                                             ----------     --------     --------     ----------
Total                                        $2,297,739     $863,919     $297,865     $1,135,955
                                             ==========     ========     ========     ==========

OTHER COMMERCIAL COMMITMENTS:
Lines of credit                              $  129,406     $ 50,382     $ 79,024     $       --
Stand-by letters of credit                        2,340        2,340           --             --
Commitments to extend credit                    163,596       83,636       79,960             --
                                             ----------     --------     --------     ----------
Total                                        $  295,342     $136,358     $158,984     $       --
                                             ==========     ========     ========     ==========
</Table>

         Such commitments will be funded in the normal course of business from
the Bank's principal sources of funds. At December 31, 2001, the Bank had $1.34
billion in certificate of deposit that mature during the following twelve
months. The Bank does not anticipate any difficulty in retaining such deposits.

IMPACT OF INFLATION AND CHANGING PRICES

         The financial statements and related data presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America which require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.

         Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services since such prices are affected by inflation.

NEW ACCOUNTING DEVELOPMENTS

         Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 140 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS 140 replaces FASB Statement No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("SFAS 125"). SFAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. SFAS 140 supersedes SFAS 125,
although it retains most of SFAS 125's provisions without modification. SFAS 140
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. Adoption of SFAS 140 did not have
an effect on the Company's consolidated financial statements.


         Effective April 1, 2001, the Company adopted, the Emerging Issues Task
Force of the Financial Accounting Standards Board ("EITF") No. 99-20. This
document, establishes guidance for (1) recognizing interest income (including
amortization of premiums or discounts) on (a) all credit-sensitive mortgage and
asset-backed securities and (b) certain prepayment-sensitive securities
including agency interest-only strips and (2) determining when these securities
must be written down to fair value because of impairment. Existing generally
accepted accounting principles did not provide interest recognition and
impairment guidance for securities on which cash flows change as a result of
both prepayments and credit losses and, in some cases, interest rate
adjustments. Implementation of EITF No. 99-20 did not have an effect on the
Company's consolidated financial results.

         On July 20, 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). Those statements changed the accounting
for business combinations and goodwill in two significant ways. SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interest
method is prohibited. SFAS 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, will cease
upon adoption of that statement, which for the Company, will be January 1, 2002.
The Company does not expect that SFAS 141 and SFAS 142 to have a material effect
on the Company's financial position or results of operations.

         In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
cost. SFAS 143 becomes effective January 1, 2003, and is not expected to have a
material effect on the Company's consolidated financial condition.

         In August 2001, the Financial Accounting Standards Board issued SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 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.
SFAS 144 becomes effective January 1, 2002, and is not expected to have a
material effect on the Company's consolidated financial statements.


                                       31
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET 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 principal objective of the Company's asset and liability management
function is to evaluate the interest rate risk included in certain balance sheet
accounts and in off-balance sheet commitments, determine the appropriate level
of risk given the Company's business focus, operating environment, capital and
liquidity requirements and performance objectives, establish prudent asset
concentration guidelines and manage the risk consistent with Board of Directors
approved guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates and to manage the
ratio of interest rate sensitive assets to interest rate sensitive liabilities
within specified maturities or repricing dates.

         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 amortized 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
variable term notes and fixed callable certificates of deposit.


                                       32
<PAGE>

         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 year end remain
constant, or increase or decrease on an instantaneous and sustained change of
plus or minus 200 basis points (minus 100 basis points for 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, 2001:

<TABLE>
<CAPTION>
                      CHANGE IN INTEREST         EXPECTED NII         AMOUNT
                           RATE                       (1)             CHANGE          % CHANGE
                     -----------------------     -------------       ---------        --------
                                                               (DOLLARS IN THOUSANDS)
<S>                                              <C>                 <C>              <C>
                     + 200 Basis Points.....      $  141,560         $  20,471          16.91%
                     Base Scenario..........         121,089                --             --
                     - 100 Basis Points.....         100,279           (20,810)        (17.19)%
</TABLE>

December 31, 2000:

<TABLE>
<CAPTION>
                      CHANGE IN INTEREST         EXPECTED NII         AMOUNT
                           RATE                       (1)             CHANGE          % CHANGE
                     -----------------------     -------------       ---------        --------
                                                               (DOLLARS IN THOUSANDS)
<S>                                              <C>                 <C>              <C>
                     +200 Basis Points......        $127,174         $   3,596           2.91%
                     Base Scenario..........         123,578                --             --
                     - 200 Basis Points.....         118,217            (5,361)         (4.34)%
</TABLE>
----------

Given the current fed fund rate of 1.75% at December 31, 2001, a linear 100
basis points decrease was modeled in the estimated change in interest rate in
place of the linear 200 basis points decrease. The NII figures exclude the
effect of the amortization of loan fees.

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.



                                       33
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated statements of financial condition
of W Holding Company, Inc. and its subsidiaries (the "Company") as of December
31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, 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.




Deloitte & Touche LLP
San Juan, Puerto Rico
February 22, 2002


Stamp No. 1775095
affixed to original.


                                       34
<PAGE>

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                2001                   2000
<S>                                                                                        <C>                     <C>
ASSETS
Cash and due from banks                                                                    $      62,414           $     45,936
Money market instruments:
  Securities purchased under agreements to resell                                                136,096                125,809
  Federal funds sold                                                                              20,037                 43,500
  Interest-bearing deposits in banks                                                              26,214                 11,305
Trading securities, with an amortized cost of $4,624 in 2001
  and $2,146 in 2000                                                                               4,609                  2,161
Investment securities available for sale, with an amortized cost
  of $281,963 in 2001 and $27,735 in 2000                                                        281,682                 27,806
Investment securities held to maturity, with a fair value of
  $2,362,836 in 2001 and $1,620,264 in 2000                                                    2,369,775              1,656,687
Federal Home Loan Bank stock, at cost                                                             38,450                 29,800
Mortgage loans held for sale, at lower of cost or fair value                                       5,253                  4,640
Loans, net of allowance for loan losses of $38,364 in 2001 and
  $28,928 in 2000                                                                              2,838,404              2,203,660
Accrued interest receivable                                                                       32,820                 46,951
Foreclosed real estate held for sale, net                                                          3,013                  2,454
Premises and equipment, net                                                                       40,673                 41,738
Deferred income taxes, net                                                                        13,862                 10,445
Other assets                                                                                      14,892                  7,965
                                                                                           -------------           ------------
TOTAL                                                                                      $   5,888,194           $  4,260,857
                                                                                           =============           ============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Deposits                                                                                 $   3,233,912           $  2,636,695
  Securities sold under agreements to repurchase                                               2,059,646              1,179,073
  Advances from Federal Home Loan Bank                                                           120,000                120,000
  Term notes                                                                                      43,000                 48,000
  Advances from borrowers for taxes and insurance                                                  2,435                  1,776
  Other liabilities                                                                               41,292                 24,695
                                                                                           -------------           ------------
           Total liabilities                                                                   5,500,285              4,010,239
                                                                                           -------------           ------------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock - $1.00 par value per share (liquidation preference $25 per
     share); 20,000,000 shares authorized; issued and outstanding 7,219,999
     shares in 2001 and 3,220,000 shares in 2000                                                   7,220                  3,220
  Common stock - $1.00 par value per share;  authorized 300,000,000 shares;
   issued and outstanding 41,500,000 shares in 2001 and 41,501,700 shares in 2000                 41,500                 41,502
  Paid-in capital                                                                                187,628                 95,313
  Retained earnings:
    Reserve fund                                                                                  23,476                 17,302
    Undivided profits                                                                            128,583                 93,241
  Accumulated other comprehensive income (loss)                                                     (498)                    40
                                                                                           -------------           ------------
           Total stockholders' equity                                                            387,909                250,618
                                                                                           -------------           ------------
TOTAL                                                                                      $   5,888,194           $  4,260,857
                                                                                           =============           ============

</TABLE>


See notes to consolidated financial statements.



                                       35
<PAGE>
W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                2001                  2000                  1999
<S>                                                                         <C>                   <C>                   <C>
INTEREST INCOME:
  Loans, including loan fees                                                $   207,385           $   183,497           $   151,398
  Investment securities                                                          98,946                84,532                65,926
  Mortgage-backed securities                                                     28,216                12,251                 9,214
  Money market instruments                                                        8,731                10,171                 6,173
  Trading securities                                                                 57                   136                   276
                                                                            -----------           -----------           -----------
        Total interest income                                                   343,335               290,587               232,987
                                                                            -----------           -----------           -----------
INTEREST EXPENSE:
  Deposits                                                                      129,676               127,640                90,554
  Securities sold under agreements to repurchase                                 79,882                53,968                33,511
  Advances from Federal Home Loan Bank                                            6,597                 6,920                 2,809
  Term notes                                                                      2,114                 3,609                 3,932
                                                                            -----------           -----------           -----------
        Total interest expense                                                  218,269               192,137               130,806
                                                                            -----------           -----------           -----------
NET INTEREST INCOME                                                             125,066                98,450               102,181
PROVISION FOR LOAN LOSSES                                                        12,278                 8,700                14,000
                                                                            -----------           -----------           -----------
NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                                              112,788                89,750                88,181
                                                                            -----------           -----------           -----------
OTHER INCOME (LOSS):
  Service charges on deposit accounts and other fees                             18,859                14,440                11,872
  Unrealized gain (loss) on derivative instruments                                 (838)                   11                  (323)
  Net gain (loss) on sales and valuation of loans, securities,
    and other assets                                                                160                  (583)                  690
                                                                            -----------           -----------           -----------
        Total other income, net                                                  18,181                13,868                12,239
                                                                            -----------           -----------           -----------
TOTAL NET INTEREST INCOME AND OTHER INCOME                                      130,969               103,618               100,420
                                                                            -----------           -----------           -----------
OPERATING EXPENSES:
  Salaries and employees' benefits                                               22,884                20,120                21,812
  Equipment                                                                       8,850                 8,695                 6,833
  Occupancy                                                                       5,031                 4,997                 4,930
  Advertising                                                                     4,392                 3,348                 4,072
  Printing, postage, stationery, and supplies                                     2,262                 2,029                 2,393
  Telephone                                                                       1,864                 1,620                 1,800
  Net gain from operations of foreclosed real estate held for sale                 (173)                 (236)                  (40)
  Other                                                                          15,200                12,643                12,016
                                                                            -----------           -----------           -----------
        Total operating expenses                                                 60,310                53,216                53,816
                                                                            -----------           -----------           -----------
INCOME BEFORE PROVISION FOR INCOME TAXES                                         70,659                50,402                46,604
PROVISION FOR INCOME TAXES                                                        8,504                 5,814                 9,480
                                                                            -----------           -----------           -----------
NET INCOME                                                                  $    62,155           $    44,588           $    37,124
                                                                            ===========           ===========           ===========
NET INCOME ATTRIBUTABLE TO COMMON
  STOCKHOLDERS                                                              $    51,891           $    38,789           $    32,817
                                                                            ===========           ===========           ===========
BASIC AND DILUTED EARNINGS PER COMMON SHARE                                 $      1.25           $      0.93           $      0.78
                                                                            ===========           ===========           ===========

</TABLE>


See notes to consolidated financial statements.


                                       36
<PAGE>

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND OF COMPREHENSIVE INCOME  (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                 2001                 2000                 1999
<S>                                                                           <C>                  <C>                  <C>
CHANGES IN STOCKHOLDERS' EQUITY:
  Preferred stock:
    Balance at beginning of year                                              $    3,220           $    3,220           $    1,219
    Issuance of preferred stock                                                    4,000                                     2,001
                                                                              ----------           ----------           ----------
    Balance at end of year                                                         7,220                3,220                3,220
                                                                              ----------           ----------           ----------
  Common stock:
    Balance at beginning of year                                                  41,502               42,000               42,080
    Purchase and retirement of common stock                                           (2)                (498)                 (80)
                                                                              ----------           ----------           ----------
    Balance at end of year                                                        41,500               41,502               42,000
                                                                              ----------           ----------           ----------
  Paid-in capital:
    Balance at beginning of year                                                  95,313               99,596               54,466
    Purchase and retirement of common stock                                          (26)              (4,283)              (1,142)
    Issuance of preferred stock                                                   92,341                                    46,272
                                                                              ----------           ----------           ----------
    Balance at end of year                                                       187,628               95,313               99,596
                                                                              ----------           ----------           ----------
  Reserve fund:
    Balance at beginning of year                                                  17,302               12,843                9,131
    Transfer from undivided profits                                                6,174                4,459                3,712
                                                                              ----------           ----------           ----------
    Balance at end of year                                                        23,476               17,302               12,843
                                                                              ----------           ----------           ----------
  Undivided profits:
    Balance at beginning of year                                                  93,241               67,218               47,359
    Net income                                                                    62,155               44,588               37,124
    Cash dividends on common stock                                               (10,375)              (8,307)              (9,246)
    Cash dividends on preferred stock                                            (10,264)              (5,799)              (4,307)
    Transfer to reserve fund                                                      (6,174)              (4,459)              (3,712)
                                                                              ----------           ----------           ----------
    Balance at end of year                                                       128,583               93,241               67,218
                                                                              ----------           ----------           ----------
  Accumulated other comprehensive income (loss):
    Balance at beginning of year                                                      40               (1,058)                  28
    Cumulative effect of change in accounting
      for derivative instruments                                                     135
    Other comprehensive income (loss) for the year                                  (673)               1,098               (1,086)
                                                                              ----------           ----------           ----------
    Balance at end of year                                                          (498)                  40               (1,058)
                                                                              ----------           ----------           ----------
TOTAL STOCKHOLDERS' EQUITY                                                    $  387,909           $  250,618           $  223,819
                                                                              ==========           ==========           ==========
COMPREHENSIVE INCOME:
  Net income                                                                  $   62,155           $   44,588           $   37,124
                                                                              ----------           ----------           ----------
  Other comprehensive income (loss), net of income tax:
  Unrealized net gains (losses) on securities available for sale:
    Arising during the period                                                         (1)                 804               (1,070)
    Reclassification adjustment included in net income                              (351)                 422                 (113)
                                                                              ----------           ----------           ----------
                                                                                    (352)               1,226               (1,183)
                                                                              ----------           ----------           ----------
Cash flow hedges:
   Adoption of SFAS 133, net of income tax                                           135
   Unrealized net derivative loss arising during the period                         (536)
                                                                              ----------           ----------           ----------

                                                                                    (401)
                                                                              ----------           ----------           ----------
Income tax effect                                                                    215                 (128)                  97
                                                                              ----------           ----------           ----------
  Net change in other comprehensive income (loss), net of income tax                (538)               1,098               (1,086)
                                                                              ----------           ----------           ----------
TOTAL COMPREHENSIVE INCOME                                                    $   61,617           $   45,686           $   36,038
                                                                              ==========           ==========           ==========

</TABLE>


See notes to consolidated financial statements


                                       37
<PAGE>




W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                               2001                   2000                 1999
<S>                                                                        <C>                    <C>                   <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                               $     62,155           $    44,588           $    37,124
  Adjustments to reconcile net income to net cash provided
    by operating activities:
      Provision for:
        Loan losses                                                              12,278                 8,700                14,000
        Foreclosed real estate held for sale                                         20                    20                    15
      Depreciation and amortization on:
        Premises and equipment                                                    5,797                 6,377                 5,341
        Foreclosed real estate held for sale                                         61                    57                    85
        Mortgage servicing rights                                                   477                   347                   320
      Deferred income tax credit                                                 (3,246)               (1,920)               (4,326)
      Amortization of premium (discount) on:
         Investment securities available for sale                                  (160)                    9                     7
         Investment securities held to maturity                                 (14,068)              (12,021)               (8,423)
         Mortgage-backed securities held to maturity                             (1,634)                  (63)                   24
         Loans                                                                    1,166                   476                   668
         Deposits                                                                   780
      Amortization of excess of cost over net assets acquired                       134                    63                   355
      Amortization of deferred loan origination fees, net                        (4,710)               (3,905)               (4,728)
      Net loss (gain) on sale and valuation of:
         Investment securities available for sale                                  (351)                  422                  (113)
         Mortgage loans held for sale                                                26                   (43)                  (74)
         Loans                                                                                                                   50
         Derivative instruments                                                     838
         Foreclosed real estate held for sale                                       (89)                  (57)                  (20)
      Originations of mortgage loans held for sale                              (47,446)              (44,389)              (63,812)
      Proceeds from sales of mortgage loans held for sale                         2,148                 3,123
      Decrease (increase) in:
         Trading securities                                                      41,728                37,417                67,970
         Accrued interest receivable                                             14,131               (13,640)               (9,858)
         Other assets                                                            (5,793)                 (528)                2,284
      Increase (decrease) in:
         Accrued interest on deposits and borrowings                             (8,496)               20,425                 9,838
         Other liabilities                                                        3,824                  (490)                2,712
                                                                           ------------           -----------           -----------
           Net cash provided by operating activities                             59,570                44,968                49,439
                                                                           ------------           -----------           -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net increase in interest-bearing deposits in banks                            (14,909)               (2,034)               (1,484)
  Net decrease (increase) in federal funds sold                                  23,463               (27,100)              (16,400)
  Net increase in securities purchased under agreements to resell               (10,287)               (5,154)              (29,443)
  Investment securities available for sale:
     Purchases                                                                 (449,227)               (9,889)              (60,391)
     Proceeds from sales                                                        162,556                 3,552                55,297
     Proceeds from principal repayment                                           32,954                 1,511                 1,244
  Investment securities held to maturity:
    Purchases                                                               (11,453,430)           (2,426,084)           (3,340,222)
    Proceeds from redemption and repayment                                   10,998,040             2,033,788             3,027,764
  Mortgage-backed securities held to maturity:
    Purchases                                                                  (420,790)              (96,454)              (17,502)
    Proceeds from principal repayment                                           178,795                18,680                35,675
  Loans receivable:
    Purchases                                                                  (420,459)             (261,829)             (375,475)
    Proceeds from sales                                                                                                      20,051
    Other increase                                                             (224,004)              (77,817)             (169,940)
  Purchases of options                                                             (331)
  Proceeds from sales of foreclosed real estate held for sale                       434                   142                   587
  Additions to premises and equipment                                            (4,671)              (10,342)              (10,024)
  Purchase of Federal Home Loan Bank stock                                       (8,650)              (17,000)               (7,000)
  Purchase of companies, net of cash acquired                                    (1,070)                                       (109)
                                                                           ------------           -----------           -----------
           Net cash used in investing activities                             (1,611,586)             (876,030)             (887,372)
                                                                           ------------           -----------           -----------
  Forward                                                                  $ (1,552,016)          $  (831,062)          $  (837,933)
                                                                           ------------           -----------           -----------

                                                                                                                        (continued)

</TABLE>




                                       38
<PAGE>

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                2001                  2000                  1999
<S>                                                                         <C>                   <C>                   <C>
Forward                                                                     $(1,552,016)          $  (831,062)          $  (837,933)
                                                                            -----------           -----------           -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                                      616,097               374,693               549,325
  Net increase in securities sold under agreements to repurchase                365,447                16,293               123,212
  Securities sold under agreements to repurchase  with original
    maturities over three months:
      Proceeds                                                                  792,500             1,508,886               418,339
      Payments                                                                 (277,374)           (1,076,074)             (317,908)
  Term notes payments                                                            (5,000)              (31,000)               (5,000)
  Advances from Federal Home Loan Bank:
      Proceeds                                                                   64,000                50,000                39,000
      Payments                                                                  (64,000)
  Net increase in advances from borrowers for taxes
    and insurance                                                                   659                    82                   198
  Repurchase of common stock for retirement                                         (28)               (4,781)               (1,222)
  Issuance of preferred stock                                                    96,341                                      48,273
  Dividends paid                                                                (20,148)              (16,773)              (10,041)
                                                                            -----------           -----------           -----------
        Net cash provided by financing activities                             1,568,494               821,326               844,176
                                                                            -----------           -----------           -----------
NET CHANGE IN CASH AND DUE FROM BANKS                                            16,478                (9,736)                6,243

CASH AND DUE FROM BANKS,  BEGINNING OF YEAR                                      45,936                55,672                49,429
                                                                            -----------           -----------           -----------
CASH AND DUE FROM BANKS, END OF YEAR                                        $    62,414           $    45,936           $    55,672
                                                                            ===========           ===========           ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Cash paid during the year for:
    Interest on deposits and other borrowings                               $   226,765           $   171,712           $   120,968
    Income taxes                                                                  8,200                11,104                11,424
  Noncash activities:
    Accrued dividends payable                                                     1,419                   935                 3,602
    Net decrease (increase) in other comprehensive loss                            (538)                1,098                (1,086)
    Mortgage loans securitized and transferred to:
      Trading securities                                                         44,176                38,289                64,169
      Investment securities available for sale                                                                                4,181
      Transfers from loans to foreclosed real estate held for sale                1,017                   569                   291
    Mortgage loans originated to finance the sale of  foreclosed
      real estate held for sale                                                      32                   185                   663
    Capitalized mortgage servicing rights                                           483                   454                   837
    Unpaid additions to premises and equipment                                       19                    80                   739
    Transfer from undivided profits to reserve fund                               6,174                 4,459                 3,712
    Effect in valuation of derivatives and their hedged items:
      Decrease in other assets                                                        8
      Decrease in deposits                                                       13,666
      Increase in other liabilities                                              14,965

                                                                                                                         (concluded)
</TABLE>


See notes to consolidated financial statements.


                                       39
<PAGE>

W HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------


1.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         W Holding Company, Inc. (the "Company") is a financial holding company
         offering a full range of financial services through its wholly-owned
         subsidiaries, Westernbank Puerto Rico ("Westernbank") and Westernbank
         Insurance Corp. The Company was organized under the laws of the
         Commonwealth of Puerto Rico in February 1999 to become the bank holding
         company of Westernbank.

         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, which was founded as a savings institution in 1958, is a
         Puerto Rico-chartered commercial bank. Westernbank offers a full array
         of consumer and business financial services, including banking and
         trust services. Westernbank operates through 35 full service branch
         offices located throughout Puerto Rico, primarily in the Southwestern
         part of the island, and a fully functional banking site on the
         Internet. In addition, it operates three divisions: Westernbank
         International Division, which offers, commercial banking and related
         services outside of Puerto Rico; Westernbank Trust Division, which
         offers a full array of trust services; and Westernbank Business Credit,
         a new division specializing in commercial business loans secured
         principally by accounts receivable, inventory and equipment, created on
         June 15, 2001 when Westernbank acquired the entire loan portfolio of
         the Puerto Rico branch of Congress Credit Corporation, a subsidiary of
         First Union National Bank N.A. 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, 2001 and 2000 and for
         each of the three years in the period ended December 31, 2001 are not
         significant.

         On July 1, 2001, the Company acquired 100% of the voting shares of a
         general insurance agency headquartered in Mayaguez, Puerto Rico. The
         new corporation is a wholly-owned subsidiary of the Company, and
         operates as a general agent by placing property and casualty insurance,
         as well as life and disability insurance. The assets, liabilities,
         revenues and expenses of this subsidiary at December 31, 2001 and for
         the year then ended are not significant.

         The accounting and reporting policies of W Holding Company, Inc.
         conform to accounting principles generally accepted in the United
         States of America ("GAAP") 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.


                                       40
<PAGE>

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

         SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - Most of the Company's
         business activities are with customers located within Puerto Rico.
         Notes 2 and 3 discuss the types of securities that the Company invests
         in. Note 4 discusses the types of lending that the Company engages in.
         The Company does not have any significant concentration in any one
         industry or customer.

         CASH AND CASH EQUIVALENTS - For purpose of presentation in the
         consolidated statements of cash flows, cash and cash equivalents are
         those amounts included in the statements of financial condition as
         "cash and due from banks".

         INTEREST-BEARING DEPOSITS IN BANKS AND FEDERAL FUNDS SOLD -
         Interest-bearing deposits in banks and federal funds sold are recorded
         at cost and mature as follows: $44,751,000 the next business day and
         $1,500,000 in April 2002.

         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. 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.

         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.


                                       41
<PAGE>


         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 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, collateral value or market price 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 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 for commercial and consumer loans 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.


                                       42
<PAGE>


         FORECLOSED REAL ESTATE HELD FOR SALE - Foreclosed real estate held for
         sale are carried at the lower of fair value minus estimated costs to
         sell or cost.

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

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

         IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically reviews
         long-lived assets for impairment whenever events or changes in
         circumstances indicate that the carrying amount of an asset may not be
         recoverable. No indications of impairment are evident as a result of
         such review.

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

         MORTGAGE SERVICING RIGHTS - The Company recognizes as separate assets
         the rights to service mortgage loans for others, regardless of how
         those servicing rights are acquired and assesses the capitalized
         mortgage servicing rights for impairment based on the fair value of
         those rights. Servicing assets are evaluated for impairment based upon
         the fair value of the rights as compared to amortized cost. Fair value
         is determined using prices for similar assets with similar
         characteristics. Impairment is recognized through a valuation allowance
         for an individual servicing right, to the extent that fair value is
         less than the capitalized 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 18 to the
         consolidated financial statements, the Company has two stock option
         plans. The Company follows the intrinsic value-based method of
         accounting for measuring compensation expense, if any. Compensation
         expense 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.

         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 loss and tax
         credit carryforwards. 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.


                                       43
<PAGE>



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 accounts.

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

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

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

      The effect of implementing these statements on the Company's financial
      condition 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 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.


                                       44
<PAGE>


      OTHER OFF-BALANCE SHEET INSTRUMENTS - In the ordinary course of business,
      the Company enters into off-balance sheet instruments consisting of
      commitments to extend credit, commitments under credit card arrangements
      and stand-by letters of credit. Such financial instruments are recorded in
      the financial statements when they are funded or related fees are incurred
      or received. The Company periodically evaluates the credit risks inherent
      in these commitments and letters of credit, and establishes loss
      allowances for such risks if and when these are deemed necessary.

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

      -     CASH AND DUE FROM BANKS - The carrying amounts of cash and due from
            banks approximate their fair value.

      -     MONEY MARKET INSTRUMENTS - Money market instruments have been valued
            at their carrying amount given the relatively short period of time
            between origination of the instruments and their expected
            realization.

      -     TRADING SECURITIES - For securities held for trading purposes, fair
            values are based on quoted market prices.

      -     INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - The
            fair values of investment securities available for sale and held to
            maturity are estimated based on bid prices published in financial
            newspapers or bid quotations received from securities dealers. If a
            quoted market price is not available, fair value is estimated using
            quoted market prices for similar securities.

      -     FEDERAL HOME LOAN BANK (FHLB) STOCK - FHLB stock is valued at its
            redemption value.

      -     LOANS - Fair values are estimated for portfolios of loans with
            similar financial characteristics. Loans are segregated by type such
            as residential mortgage, commercial, consumer, credit cards and
            other loans. Each loan category is further segmented into fixed and
            adjustable interest rate terms and by performing, nonperforming and
            loans with payments in arrears.

            The fair value of performing loans, except residential mortgages and
            credit card loans is calculated by discounting scheduled cash flows
            through the estimated maturity dates using estimated market discount
            rates that reflect the credit and interest rate risk inherent in the
            loan. For performing residential mortgage loans, fair value is
            computed using an estimated market rate based on secondary market
            sources adjusted to reflect differences in servicing and credit
            costs. For credit card loans, cash flows and maturities are
            estimated based on contractual interest rates and historical
            experience and are discounted using estimated market rates.

            Fair value for significant nonperforming loans and certain loans
            with payments in arrears is based on recent external appraisals of
            collateral. If appraisals are not available, estimated cash flows
            are discounted using a rate that is commensurate with the risk
            associated with the estimated cash flows. Assumptions regarding
            credit risk, cash flows, and discount rates are judgmentally
            determined using available market information and specific borrower
            information.

      -     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).


                                       45
<PAGE>

      -    DEPOSITS - The fair value of deposits with no stated maturity, such
           as passbook accounts, money market and checking accounts is equal to
           the amount payable on demand. The fair value of fixed maturity
           certificates of deposit is based on the discounted value of
           contractual cash flows. The discount rate is estimated using the
           rates currently offered for deposits of similar remaining maturities.

      -    SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, TERM NOTES AND
           ADVANCES FROM FHLB - The fair value of securities sold under
           agreements to repurchase, term notes and advances from FHLB 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 STANDBY LETTERS OF CREDIT - The fair
           value of commitments to extend credit and standby letters of credit
           are based on fees currently charged to enter into similar agreements,
           taking into account the remaining terms of the agreements and the
           counterparties' credit standings.

           The fair value estimates are made at a discrete point in time based
           on relevant market information and information about the financial
           instruments. Because no market exists for a portion of the Company's
           financial instruments (loans and financial liabilities), fair value
           estimates are based on judgments regarding future expected loss
           experience, current economic conditions, risk characteristics of
           various financial instruments, and other factors. These estimates are
           subjective in nature and involve uncertainties and matters of
           significant judgment and, therefore, cannot be determined with
           precision.

           In addition, the fair value estimates are based on existing on and
           off-balance sheet financial instruments without attempting to
           estimate the value of anticipated future business and the value of
           assets and liabilities that are not considered financial instruments
           such as premises and equipment and goodwill. In addition, the tax
           ramifications related to the realization of the unrealized gains and
           losses can have a significant effect on fair value estimates and have
           not been considered in the estimates.

     EARNINGS PER SHARE - Basic earnings per share represents income
     attributable to common stockholders divided by the weighted average
     number of common shares outstanding during the period. Diluted earnings
     per share reflect additional common shares that would have been
     outstanding if dilutive potential common shares had been issued, as
     well as any adjustment to income that would result from the assumed
     issuance. Potential common shares that may be issued by the Company
     relate to the outstanding convertible preferred stock, which are
     determined using the if-converted method, and the outstanding stock
     options, which are determined using the treasury stock method. The
     effect of convertible preferred stock (1,212,905 shares) was
     antidilutive thus basic equals diluted earnings per common share in
     2001, 2000 and 1999. In 2000, the options were not included in the
     computation of diluted earnings per share because the common stock
     average market price did not exceed the option exercise price.


                                       46
<PAGE>


         Basic and diluted earnings per share were computed as follows:

<TABLE>
<CAPTION>
                                                                   2001                   2000                   1999
                                                                        (Dollars in thousands, except share data)
         <S>                                                   <C>                    <C>                    <C>
         Basic and diluted earnings per share:
           Net income                                          $     62,155           $     44,588           $     37,124
           Less preferred stock dividends                           (10,264)                (5,799)                (4,307)
                                                               ------------           ------------           ------------
           Income attributable to common stockholders          $     51,891           $     38,789           $     32,817
                                                               ============           ============           ============
           Weighted average number of common
             shares outstanding for the year                     41,501,695             41,630,259             42,012,116

           Effect of dilutive stock options                         117,202
                                                               ------------           ------------           ------------
         Total                                                   41,618,897             41,630,259             42,012,116
                                                               ============           ============           ============
         Basic and diluted earnings per share                  $       1.25           $       0.93           $       0.78
                                                               ============           ============           ============

</TABLE>



         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 April 1, 2001, the Company adopted Statement of Financial
         Accounting Standards ("SFAS") No. 140 ("SFAS 140") ACCOUNTING FOR
         TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
         LIABILITIES ("SFAS 140"). SFAS 140 replaces FASB Statement No. 125,
         ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
         EXTINGUISHMENTS OF LIABILITIES ("SFAS 125"). SFAS 140 revises the
         standards for accounting for securitizations and other transfers of
         financial assets and collateral and requires certain disclosures. SFAS
         140 supersedes SFAS 125, although it retains most of SFAS 125's
         provisions without modification. Adoption of SFAS 140 did not have an
         effect on the Company's consolidated financial statements.

         Effective April 1, 2001, the Company adopted, Emerging Issues Task
         Force of the Financial Accounting Standards Board No. 99-20. This
         document, establishes guidance for (1) recognizing interest income
         (including amortization of premiums or discounts) on (a) all
         credit-sensitive mortgage and asset-backed securities and (b) certain
         prepayment-sensitive securities including agency interest-only strips
         and (2) determining when these securities must be written down to fair
         value because of impairment. Existing accounting principles generally
         accepted in the United States of America did not provide interest
         recognition and impairment guidance for securities on which cash flows
         change as a result of both prepayments and credit losses and, in some
         cases, interest rate adjustments. Implementation of EITF No. 99-20 did
         not have a significant effect on the Company's consolidated financial
         results.


                                       47
<PAGE>


         On July 20, 2001, the Financial Accounting Standards Board ("FASB")
         issued SFAS No. 141, BUSINESS COMBINATIONS ("SFAS 141") and SFAS No.
         142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"). Those
         statements will change the accounting for business combinations and
         goodwill in two significant ways. SFAS 141 requires that the purchase
         method of accounting be used for all business combinations initiated
         after June 30, 2001. Use of the pooling-of-interests method will be
         prohibited. SFAS 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,
         will cease upon adoption of that statement, which for the Company, will
         be January 1, 2002. Implementation of SFAS 142 is not expected to have
         a material effect on the Company's financial position or results of
         operations.

         In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
         RETIREMENT OBLIGATIONS ("SFAS 143"). SFAS 143 addresses financial
         accounting and reporting for obligations associated with the retirement
         of tangible long-lived assets and the associated asset retirement cost.
         SFAS 143 becomes effective January 1, 2003, and is not expected to have
         a significant effect on the Company's consolidated financial condition
         or results of operations.

         In August 2001, the FASB issued SFAS 144, ACCOUNTING FOR THE IMPAIRMENT
         OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"). SFAS 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. SFAS 144 becomes effective January 1, 2002, and
         is not expected to have a significant effect on the Company's
         consolidated financial statements.

         RECLASSIFICATIONS - Certain reclassifications have been made to prior
         year's financial statements to conform with the current year
         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, 2001 and 2000, securities purchased under agreements to
         resell (classified by counterparty) were as follows:

<TABLE>
<CAPTION>

                                                                 2001                 2000
                                                                       (In thousands)
         <S>                                                  <C>                 <C>
         Doral Securities, Inc.                               $   65,059          $   60,341
         UBS PaineWebber Incorporated of Puerto Rico              45,034              55,070
         Popular Securities, Inc.                                 26,003              10,398
                                                              ----------          ----------
         Total                                                $  136,096          $  125,809
                                                              ==========          ==========

</TABLE>


                                       48
<PAGE>


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

<TABLE>
<CAPTION>

                                                               2001                                   2000
                                                 ------------------------------          -------------------------------
                                                                             (In thousands)
                                                                        Fair                                    Fair
                                                                      Value of                                Value of
                                                 Receivable          Underlying          Receivable          Underlying
         Underlying Collateral                     Balance           Collateral            Balance           Collateral
         <S>                                     <C>                 <C>                 <C>                 <C>
         Investment securities:
           U.S. Government and
             agencies obligations                $   48,114          $   48,838          $   48,076          $   48,984
           Puerto Rico Government and
             agencies obligations                    18,059              18,390
         Mortgage-backed securities -
            Guaranteed by Government
               agencies                              69,923              71,877              77,733              79,837
                                                 ----------          ----------          ----------          ----------
         Total - excluding accrued
             interest receivable                 $  136,096          $  139,105          $  125,809          $  128,821
                                                 ==========          ==========          ==========          ==========
         Accrued interest receivable
             on securities purchased
             under agreements to resell          $       11                              $       82
                                                 ==========                              ==========

</TABLE>

         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, 2001, all repurchase
         agreements mature the next business day. 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 if the agreement is due the next business day.

         Average outstanding balances and maximum month-end outstanding balances
         during the years ended December 31, 2001 and 2000, and weighted average
         interest rates for the year and at year end are indicated below:

<TABLE>
<CAPTION>

                                                                    2001                2000
                                                                     (Dollars in thousands)
         <S>                                                   <C>                  <C>
         Monthly average outstanding balance                   $   126,355          $   123,240
         Maximum outstanding balance at any month-end              145,747              143,121
         Weighted average interest rate:
           For the year                                               4.36%                6.20%
           At year end                                                1.78                 6.75

</TABLE>


                                       49
<PAGE>

3.      INVESTMENT SECURITIES:

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

<TABLE>
<CAPTION>
                                                                                    Gross              Gross
                                                             Amortized            Unrealized         Unrealized              Fair
          December 31, 2001                                    Cost                  Gains             Losses                Value
                                                                                        (In thousands)
          <S>                                               <C>                   <C>                <C>                <C>
          Trading securities:
            Mortgage-backed securities:
              Government National Mortgage
                 Association (GNMA) certificates            $      2,554          $      25          $                  $      2,579
              Fannie Mae (FNMA) certificates                       2,070                                    40                 2,030
                                                            ------------          ---------          ---------          ------------
          Total                                             $      4,624          $      25          $      40          $      4,609
                                                            ============          =========          =========          ============
          Available for sale:
            U.S. Government and agencies obligations        $    196,600          $                  $     154          $    196,446
            Corporate notes                                       56,301                 22                243                56,080
            Mortgage-backed securities -
            Collateralized mortgage obligations (CMO)             29,062                 94                                   29,156
                                                            ------------          ---------          ---------          ------------
          Total                                             $    281,963          $     116          $     397          $    281,682
                                                            ============          =========          =========          ============
          Held to maturity:
            U.S. Government and agencies obligations        $  1,788,000          $   2,721          $   6,360          $  1,784,361
            Puerto Rico Government and
              agencies obligations                                22,607                249                 15                22,841
            Commercial paper                                      59,992                                                      59,992
            Corporate notes                                       66,460              1,064              1,269                66,255
                                                            ------------          ---------          ---------          ------------
          Total                                                1,937,059              4,034              7,644             1,933,449
                                                            ------------          ---------          ---------          ------------
            Mortgage and other asset-backed
              securities:
              Federal Home Loan Mortgage
                Corporation (FHLMC) certificates                  13,475                455                                   13,930
              GNMA certificates                                   18,500                594                                   19,094
              FNMA certificates                                   10,011                332                                   10,343
              CMO certificates                                   319,386                369              1,799               317,956
              Other                                               71,344                                 3,280                68,064
                                                            ------------          ---------          ---------          ------------
          Total                                                  432,716              1,750              5,079               429,387
                                                            ------------          ---------          ---------          ------------
          Total                                             $  2,369,775          $   5,784          $  12,723          $  2,362,836
                                                            ============          =========          =========          ============

</TABLE>


                                       50
<PAGE>

<TABLE>
<CAPTION>
                                                                           Gross               Gross
                                                    Amortized            Unrealized          Unrealized             Fair
December 31, 2000                                    Cost                   Gains              Losses               Value
                                                                                (In thousands)
<S>                                                 <C>                   <C>                <C>                <C>
Trading securities:
  Mortgage-backed securities:
    FNMA certificates                               $      2,095          $      16          $                  $      2,111
    GNMA certificates                                         51                                     1                    50
                                                    ------------          ---------          ---------          ------------
Total                                               $      2,146          $      16          $       1          $      2,161
                                                    ============          =========          =========          ============
Available for sale:
  Mortgage-backed securities -
    GNMA certificates                               $     27,735          $     194          $     123          $     27,806
                                                    ============          =========          =========          ============
Held to maturity:
  U.S. Government and agencies obligations          $  1,367,417          $     707          $  35,546          $  1,332,578
  Puerto Rico Government and
    agencies obligations                                  13,769                281                                   14,050
  Commercial paper                                        34,994                                                      34,994
  Corporate notes                                         51,420                688              2,557                49,551
                                                    ------------          ---------          ---------          ------------
Total                                                  1,467,600              1,676             38,103             1,431,173
                                                    ------------          ---------          ---------          ------------
  Mortgage and other asset-backed
    securities:
    FHLMC certificates                                    16,986                225                 61                17,150
    GNMA certificates                                     23,113                162                 10                23,265
    FNMA certificates                                     12,705                154                 11                12,848
    CMO certificates                                      66,184                423                124                66,483
    Other                                                 70,099                                   754                69,345
                                                    ------------          ---------          ---------          ------------
Total                                                    189,087                964                960               189,091
                                                    ------------          ---------          ---------          ------------
Total                                               $  1,656,687          $   2,640          $  39,063          $  1,620,264
                                                    ============          =========          =========          ============

</TABLE>


                                       51
<PAGE>


         The amortized cost and fair value of investment securities available
         for sale and held to maturity at December 31, 2001, by contractual
         maturity (excluding mortgage-backed securities), are shown below.

<TABLE>
<CAPTION>
                                                                 Available for Sale                         Held to Maturity
                                                           Amortized             Fair              Amortized                Fair
                                                             Cost                Value               Cost                   Value
                                                                                      (In thousands)
            <S>                                           <C>                 <C>                 <C>                   <C>
            Due within one year                                                                     $  259,189            $  259,217
            Due after one year through five years         $  196,600          $  196,446             1,273,889             1,273,529
            Due after five years through ten years                                                     268,597               267,992
            Due after ten years                               56,301              56,080               135,384               132,711
                                                          ----------          ----------          ------------          ------------
            Total                                            252,901             252,526             1,937,059             1,933,449
            Mortgage and other asset-backed securities        29,062              29,156               432,716               429,387
                                                          ----------          ----------          ------------          ------------
            Total                                         $  281,963          $  281,682          $  2,369,775          $  2,362,836
                                                          ==========          ==========          ============          ============

</TABLE>

         Proceeds from sales of investment securities available for sale and the
         respective gross realized gains and losses for the years ended December
         31, 2001, 2000 and 1999, were as follows:

<TABLE>
<CAPTION>
                                             2001              2000              1999
                                                          (In thousands)
         <S>                            <C>                 <C>               <C>
         Proceeds from sales            $  162,556          $  3,552          $  55,297
         Gross realized gains                  426                                  137
         Gross realized losses                  75               422                 24

</TABLE>

         Unencumbered investment securities held to maturity at December 31,
         2001, amounted to $320,269,000 after taking into account the investment
         securities pledged (Notes 7, 10 and 19), those sold under agreements to
         repurchase (Note 8), those pledged to the Federal Reserve Bank of
         $4,989,000, and those pledged to the Puerto Rico Treasury Department
         (for the Westernbank International Division) of $350,000.

         Nontaxable interest income on investments for the years ended December
         31, 2001, 2000 and 1999, amounted to $131,112,000, $93,122,000, and
         $72,012,000, respectively. Nontaxable interest income relates mostly to
         interest earned on government obligations of the United States and
         Puerto Rico, certain mortgage-backed securities, and investments of the
         Westernbank International division.


                                       52
<PAGE>

4.       LOANS:

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

<TABLE>
<CAPTION>
                                                                                   2001                     2000
                                                                                        (In thousands)
         <S>                                                                  <C>                     <C>
         REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
             Commercial real estate                                           $   1,117,451           $     887,084
             Conventional:
             One-to-four-family residences                                          827,110                 762,655
             Other properties                                                         2,734                   2,592
             Construction and land acquisition                                      125,047                  87,834
             Insured or guaranteed - Federal Housing Administration,
             Veterans Administration and others                                      16,896                  16,701
                                                                              -------------           -------------
             Total                                                                2,089,238               1,756,866
                                                                              -------------           -------------
             Plus (less):
               Undisbursed portion of loans in process                               (5,624)                 (5,963)
               Premium on loans purchased                                             2,036                   2,712
               Deferred loan fees - net                                              (4,531)                 (4,412)
                                                                              -------------           -------------
             Total                                                                   (8,119)                 (7,663)
                                                                              -------------           -------------
             Real estate loans - net                                              2,081,119               1,749,203
                                                                              -------------           -------------
         OTHER LOANS:
             Commercial loans                                                       376,408                 100,487
             Loans on deposits                                                       35,140                  37,108
             Credit cards                                                            63,108                  35,556
             Consumer loans                                                         318,509                 311,062
          Plus (less):
             Premium on loans purchased                                               4,169
             Deferred loan fees - net and unearned interest                          (1,685)                   (828)
                                                                              -------------           -------------
              Other loans - net                                                     795,649                 483,385
                                                                              -------------           -------------
         TOTAL LOANS                                                              2,876,768               2,232,588

         ALLOWANCE FOR LOAN LOSSES                                                  (38,364)                (28,928)
                                                                              -------------           -------------
         LOANS - NET                                                          $   2,838,404           $   2,203,660
                                                                              =============           =============

</TABLE>

         The Company originated commercial real estate loans during 2001
         amounting to $542,814,000, totalling $1,117,451,000 at December 31,
         2001. 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 $3,850,000 and $5,490,000 at
         December 31, 2001 and 2000, 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, determined on a net aggregate basis. At December 31, 2001 and
         2000, mortgage loans with a cost of $5,352,000 and $4,640,000,
         respectively, were designated as held for sale.


                                       53
<PAGE>


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

<TABLE>
<CAPTION>

                                                                    2001            2000            1999
                                                                              (In thousands)
         <S>                                                      <C>              <C>             <C>
         Outstanding principal balance
           at end of year                                         $14,113          $9,690          $6,955
                                                                  =======          ======          ======
         Interest which would have been recorded
           if the loans had been performing and not been
           classified as nonaccrual                               $ 1,123          $  979          $  514
                                                                  =======          ======          ======

</TABLE>

         Loans serviced for others are not included in the consolidated
         statements of financial condition. At December 31, 2001 and 2000, the
         unpaid principal balance of these loans amounted to $307,867,000 and
         $297,143,000, 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 $852,000 and $786,000 at December 31,
         2001 and 2000, respectively.

         Mortgage servicing rights, included as other assets, amounted to
         $2,091,000, $2,085,000 and $1,979,000 at December 31, 2001, 2000 and
         1999, respectively. In 2001, 2000 and 1999, the Company capitalized
         mortgage servicing rights amounting to $483,000, $454,000 and $837,000,
         respectively. Amortization of mortgage servicing rights was $477,000,
         $347,000, and $320,000 in 2001, 2000, and 1999, respectively. At
         December 31, 2001, 2000 and 1999, the carrying value of mortgage
         servicing rights approximates fair value.

         In the normal course of business, the Company engages in business
         transactions with its directors, executive officers, principal
         shareholders and organizations associated with them. Loans to related
         parties, mainly mortgage loans for purchase of the principal residence,
         are substantially on the same terms as loans to nonrelated parties. The
         aggregate amount of loans outstanding to related parties at December
         31, 2001 and 2000 totalled $708,000 and $614,000, respectively.

         Changes in the allowance for loan losses are summarized below:

<TABLE>
<CAPTION>

                                                        2001                2000              1999
                                                                      (In thousands)
         <S>                                          <C>                <C>                <C>
         Balance - at January 1                       $ 28,928           $ 23,978           $ 15,800
         Provision charged to income                    12,278              8,700             14,000
         Allowance acquired                              2,892
         Recoveries                                      1,304              1,613              1,536
         Write-off of uncollectible accounts            (7,038)            (5,363)            (7,358)
                                                      --------           --------           --------
         Balance - at December 31                     $ 38,364           $ 28,928           $ 23,978
                                                      ========           ========           ========

</TABLE>


                                       54
<PAGE>


         The total investment in impaired commercial and construction loans at
         December 31, 2001 and 2000 was $42,478,000 and $12,874,000,
         respectively. All impaired commercial and construction loans were
         measured based on the fair value of collateral at December 31, 2001 and
         2000. Impaired commercial and construction loans amounting to
         $21,996,000 and $8,040,000 at December 31, 2001 and 2000, respectively,
         were covered by a valuation allowance of $4,181,000 and $1,157,000,
         respectively. Impaired commercial and construction loans amounting to
         $20,482,000 and $4,834,000 at December 31, 2001 and 2000, respectively,
         did not require a valuation allowance in accordance with SFAS 114. The
         average investment in impaired commercial and construction loans during
         the years ended December 31, 2001, 2000 and 1999, amounted to
         $20,293,000, $11,873,000 and $14,919,000, respectively. The Company's
         policy is to recognize interest income related to impaired loans on a
         cash basis when they 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, 2001, 2000 and 1999, amounted to $1,716,000, $780,000 and
         $1,470,000, respectively.

5.       FORECLOSED REAL ESTATE HELD FOR SALE:

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

<TABLE>
<CAPTION>
                                                                   2001              2000              1999
                                                                                (In thousands)
         <S>                                                     <C>               <C>               <C>
         Balance, foreclosed real estate held for sale:
           Residential (1 - 4 units)                             $    934          $     90          $    159
           Commercial                                               2,397             2,662             2,371
                                                                 --------          --------          --------
         Total                                                      3,331             2,752             2,530
         Less valuation allowance                                     318               298               298
                                                                 --------          --------          --------
         Foreclosed real estate held for sale - net              $  3,013          $  2,454          $  2,232
                                                                 ========          ========          ========

</TABLE>

6.       PREMISES AND EQUIPMENT:

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

<TABLE>
<CAPTION>
                                                                    2001               2000
                                                                         (In thousands)
         <S>                                                     <C>                <C>
         Land                                                    $  13,153          $  12,802
         Buildings and improvements                                  7,747              7,788
         Furniture and equipment                                    23,190             23,761
         Leasehold improvements                                     11,542             10,776
         Construction in progress                                    2,951              2,196
                                                                 ---------          ---------
         Total                                                      58,583             57,323
         Less accumulated depreciation and amortization             17,910             15,585
                                                                 ---------          ---------
         Total                                                   $  40,673          $  41,738
                                                                 =========          =========

</TABLE>


                                       55
<PAGE>


7.       DEPOSITS AND INTEREST EXPENSE:

         Deposits at December 31, consisted of the following:

<TABLE>
<CAPTION>

                                                     2001                 2000
                                                          (In thousands)
         <S>                                    <C>                   <C>
         Noninterest bearings accounts          $    123,932          $    120,559
         Passbook accounts                           465,267               416,684
         NOW accounts                                115,977                92,737
         Super NOW accounts                           18,609                18,284
         Money market accounts                         6,806                 6,360
         Certificates of deposit                   2,477,842             1,950,598
                                                ------------          ------------
         Total                                     3,208,433             2,605,222
         Accrued interest payable                     25,479                31,473
                                                ------------          ------------
         Total                                  $  3,233,912          $  2,636,695
                                                ============          ============

</TABLE>


         The weighted average interest rate of all deposits at December 31, 2001
         and 2000, was approximately 4.02% and 5.52%, respectively. At December
         31, 2001, the aggregate amount of deposits in denominations of $100,000
         or more was $583,979,000 ($432,653,000 at December 31, 2000). Deposits
         include brokered deposits of $1,572,000,000 and $1,271,305,000 at
         December 31, 2001 and 2000, respectively. Deposits of directors,
         executive officers, principal shareholders and organizations associated
         with them amounted to $7,273,000 and $5,796,000 at December 31, 2001
         and 2000, respectively.

         At December 31, 2001, the scheduled maturities of certificates of
         deposit are as follows:

<TABLE>
<CAPTION>

         Year Ending                                    Amount
         December 31,                                (In thousands)
         <S>                                         <C>
         2002                                         $1,339,955
         2003                                            330,842
         2004                                            224,586
         2005                                             24,462
         2006                                             50,604
         Thereafter                                      507,393
                                                      ----------
         Total                                        $2,477,842
                                                      ==========

</TABLE>

         At December 31, 2001, the Company had pledged the following assets:

         (1)  Investment securities held to maturity with a carrying value
              of $16,007,000 and mortgage-backed securities held to maturity
              with a carrying value of $16,888,000 to secure public funds.

         (2)  Mortgage-backed securities held to maturity with a carrying
              value of $295,000 as bond requirement for individual
              retirement accounts.


                                       56
<PAGE>


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

<TABLE>
<CAPTION>

                                               2001               2000                1999
                                                            (In thousands)
         <S>                               <C>                 <C>                 <C>
         Passbook                          $   12,800          $   12,491          $  12,462
         NOW, Super NOW and Money
             Market accounts                    3,479               3,185              3,103
         Certificates of deposit              113,397             111,964             74,989
                                           ----------          ----------          ---------
         Total                             $  129,676          $  127,640          $  90,554
                                           ==========          ==========          =========

</TABLE>

         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 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, 2001 mature as follows:
         within 30 days $503,298,000; in 2002 $303,250,000; in 2005
         $164,650,000; in 2006 $47,500,000 and $1,040,948,000 thereafter. At
         December 31, 2001, with respect to reverse repurchase agreements
         amounting to $775,098,000, 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.

         Reverse repurchase agreements at December 31, consisted of the
         following:

<TABLE>
<CAPTION>
                                                2001                   2000
                                                      (In thousands)
         <S>                                <C>                   <C>
         Fixed rate                         $  2,059,646          $  1,134,048
         Variable rate                                                  45,025
                                            ------------          ------------
         Total                              $  2,059,646          $  1,179,073
                                            ============          ============

</TABLE>

         Reverse repurchase agreements include $200,000,000 of long-term
         agreements with fixed rate step-up schedule.


                                       57
<PAGE>


         At December 31, 2001 and 2000, securities sold under agreements to
         repurchase (classified by counterparty) were as follows:

<TABLE>
<CAPTION>

                                                                    2001                                       2000
                                                    -----------------------------------         -----------------------------------
                                                                            Fair Value                                  Fair Value
                                                      Borrowing           of Underlying            Borrowing          of Underlying
                                                       Balance              Collateral              Balance             Collateral
                                                                                   (In thousands)
           <S>                                      <C>                   <C>                   <C>                   <C>
           Lehman Brothers Inc. and affiliates      $    733,950          $    754,046          $    475,144          $    511,086
           Federal Home Loan Bank of New York            649,000               702,801               476,000               507,886
           UBS PaineWebber Incorporated
            of Puerto Rico                               255,730               262,177                69,214                74,908
           Morgan Stanley Dean Witter                    148,500               150,812                 4,335                 4,545
           Keefe, Bruyette and Woods, Inc.               113,700               118,346
           Merrill Lynch Government
             Securities Inc. and affiliates               95,483               101,175                89,380                96,576
           Salomon Smith Barney Inc. and affiliates       50,000                55,575                50,000                54,378
           Bear, Stearns and Company, Inc.                13,283                14,230
           The Conservation Trust Fund
             of Puerto Rico                                                                           15,000                15,467
                                                    ------------          ------------          ------------          ------------
           Total                                    $  2,059,646          $  2,159,162          $  1,179,073          $  1,264,846
                                                    ============          ============          ============          ============

</TABLE>

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

<TABLE>
<CAPTION>

                                                                  2001                                         2000
                                                    -----------------------------------         ----------------------------------
                                                       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)
           <S>                                      <C>                   <C>                   <C>                   <C>
           U.S. Government  and agencies
              obligations - held to maturity        $  1,657,001          $  1,654,518          $  1,195,157          $  1,164,678
           U.S. Government  and agencies
              obligations - available for sale           196,600               195,447
           Mortgage-backed securities - held
              to maturity                                280,443               280,042                61,573                61,908
           Mortgage-backed securities -
              available for sale                          29,062                29,155                23,402                23,534
           Other investments                                                                          17,170                14,726
                                                    ------------          ------------          ------------          ------------
           Total                                       2,163,106          $  2,159,162             1,297,302          $  1,264,846
                                                                          ============                                ============
           Accrued interest receivable
             of underlying securities                     10,211                                     19,424
                                                    ------------                                ------------
           Total                                    $  2,173,317                                $  1,316,726
                                                    ============                                ============


</TABLE>


                                       58
<PAGE>
         Average outstanding balances and maximum month-end outstanding balances
         during the years ended December 31, 2001 and 2000, and weighted average
         interest rates for the year and at year-end are indicated below:

<TABLE>
<CAPTION>
                                                                                     2001             2000
                                                                                    (Dollars in thousands)

         <S>                                                                         <C>               <C>
         Monthly average outstanding balance                                         $ 1,521,005       $ 862,994
         Maximum outstanding balance at any month-end                                  2,059,646       1,179,073
         Weighted average interest rate:
           For the year                                                                   5.38 %            6.37%
           At year end                                                                    4.19              6.10
</TABLE>

9.       LINES OF CREDIT:

         As of December 31, 2001 and 2000, Westernbank had line of credit
         agreements with three commercial banks permitting Westernbank to borrow
         a maximum aggregate amount of $75,000,000 and $35,000,000,
         respectively, (there were no borrowings during the years ended December
         31, 2001 and 2000, 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. The credit
         agreements are renewable annually.

10.      TERM NOTES AND ADVANCES FROM FEDERAL HOME LOAN BANK:

         Term notes and advances from Federal Home Loan Bank ("FHLB") at
         December 31, consisted of the following:

<TABLE>
<CAPTION>

                                                                     2001                          2000
                                                                -----------------            -----------------
                                                                         Weighted                  Weighted
                                                                         Interest                   Interest
                                                                Amount     Rate              Amount   Rate
                                                                            (Dollars in thousands)
         <S>                                                    <C>      <C>                <C>      <C>
         TERM NOTES -
           Variable rate notes
             (83% to 89% of three
             month LIBID rate)                                 $ 43,000    1.66%            $ 48,000   5.59%
                                                               ========    ====             ========   ====
         ADVANCES FROM FHLB:
           Variable rate convertible advances
             (88 % to 94 % of three month LIBID rate)                                       $ 64,000
           Fixed rate convertible advances
             (4.10 % to 6.66 %)                                $120,000                       56,000
                                                               --------                       ------

           Total advances from FHLB                            $120,000    5.10%            $120,000   6.41%
                                                               ========    ====             ========   ====
</TABLE>


                                       59
<PAGE>

         Term notes amounting to $40,000,000 are secured by irrevocable stand-by
         letters of credit issued by a commercial bank (the "issuer") with
         credit values amounting to $40,900,000. Under the letters of credit
         securities pledge agreements, the Company has delivered to the issuer
         specific investment securities having a fair value, determined monthly,
         of at least 105% of the face amount of the letters of credit. At
         December 31, 2001, the carrying value of the specific collateral held
         by the issuer consisted of investment securities held to maturity of
         $44,500,000.

         Term notes amounting to $3,000,000 are secured by a pledge of certain
         collateral pursuant to pledge agreements. Under the pledge agreements,
         the Company has delivered to the note holders investments and
         mortgage-backed securities having a fair value determined every two
         weeks of at least 105% of the aggregate principal amount of the current
         notes outstanding. At December 31, 2001, the carrying value of the
         specific collateral held by the note holders consisted of investment
         securities held to maturity of $3,600,000.

         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, 2001, convertible advances
         were secured by investment securities held to maturity amounting to
         $8,690,000 and mortgage notes amounting to $145,516,000. At the
         advance's and reverse repurchase agreement's first anniversary date and
         each quarter thereafter, the FHLB has the option to convert them into
         replacement funding for the same or a lesser principal amount based on
         any funding then offered by FHLB at then current market rates, unless
         the interest rate has been predetermined between FHLB and the Company.
         If the Company chooses not to replace the funding, it will repay the
         convertible advance and reverse repurchase agreement, including any
         accrued interest, on such optional conversion date.

         Term notes and advances from FHLB by contractual maturities at December
         31, 2001, were as follows:

<TABLE>
<CAPTION>
         Year Ending              Term             Advances
         December 31,             Notes           from FHLB
                                     (In thousands)
         <S>                     <C>             <C>
         2002                    $ 43,000
         2003                                    $   14,000
         2005                                        14,000
         2006                                        50,000
         2010                                        42,000
                                 ---------       ----------

         Total                   $  43,000       $  120,000
                                 =========       ==========
</TABLE>

11.   INCOME TAXES:

      Under the Puerto Rico Internal Revenue Code (the "Code"), all companies
      are treated as separate taxable entities and are not entitled to file
      consolidated tax returns. The Company, Westernbank and Westernbank
      Insurance Corp. are subject to Puerto Rico regular income tax or
      alternative minimum tax ("AMT") on income earned from all sources. The AMT
      is payable if it exceeds regular income tax. The excess of AMT over
      regular income tax paid in any one year may be used to offset regular
      income tax in future years, subject to certain limitations.


                                       60
<PAGE>
      The Code provides a dividend received deduction of 100%, on dividends
      received from wholly-owned subsidiaries subject to income taxation in
      Puerto Rico. The income on certain investments is exempt for income tax
      purposes. Also, activities relating to the Westernbank International
      division are exempt for income tax purposes. As a result of the above, the
      Company's effective tax rate is substantially below the statutory rate.

      The provision for income taxes for the years ended December 31, consisted
      of the following:

<TABLE>
<CAPTION>
                                                                           2001         2000          1999
                                                                                 (In thousands)

      <S>                                                                <C>           <C>           <C>
      Current                                                            $ 11,750      $  7,734      $ 13,806
      Deferred                                                             (3,246)       (1,920)       (4,326)
                                                                         --------      --------      --------
      Total                                                              $  8,504      $  5,814      $  9,480
                                                                         ========      ========      ========
</TABLE>

      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:

<TABLE>
<CAPTION>
                                                                             2001         2000         1999

                                                                                   (IN THOUSANDS)

      <S>                                                                   <C>          <C>           <C>
      Computed at Puerto Rico statutory rate                                $27,557      $19,657       $ 18,176
      Effect on provision of:
          Exempt interest income, net                                       (20,791)     (13,864)        (9,794)
          Net nondeductible expenses                                             26          105            413
          Other                                                               1,712          (84)           685
                                                                            -------      -------       --------
      Provision for income taxes as reported                                $ 8,504      $ 5,814       $  9,480
                                                                            =======      ========      ========


      Statutory tax rates                                                     39%          39%           39%
                                                                              ==           ==            ==
</TABLE>

      Deferred income tax assets (liabilities) as of December 31, 2001 and 2000,
      consisted of the following:

<TABLE>
<CAPTION>

                                                                                         2001          2000
                                                                                            (IN THOUSANDS)
      <S>                                                                              <C>           <C>
      Allowance for loan losses                                                        $ 13,834      $ 11,282
      Unrealized losses in derivatives instruments                                          891
      Mortgage servicing rights                                                            (816)         (813)
      Allowance for foreclosed real estate held for sale                                     39            75
      Other temporary differences                                                           (47)          (60)
                                                                                       --------      --------

      Total                                                                              13,901        10,484
      Less valuation allowance                                                               39            39
                                                                                       --------      --------

      Deferred income taxes, net                                                       $ 13,862      $ 10,445
                                                                                       ========      ========
</TABLE>


                                       61
<PAGE>
         Changes in the valuation allowance for deferred income tax assets were
         as follows:

<TABLE>
<CAPTION>
                                                                                     2001        2000       1999
                                                                                            (IN THOUSANDS)

         <S>                                                                        <C>         <C>         <C>
         Balance - at January 1                                                     $  39       $ 635       $ 400
         Increase (decrease) in valuation allowance                                              (596)        235
                                                                                    -----       -----       -----

         Balance - at December 31                                                   $  39       $  39       $ 635
                                                                                    =====       =====       =====
</TABLE>

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

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

         Net gain (loss) on sales and valuation of loans, securities and other
         assets for the years ended December 31, 2001, 2000 and 1999, consisted
         of the following:

<TABLE>
<CAPTION>
                                                                                        2001      2000       1999
                                                                                             (IN THOUSANDS)

         <S>                                                                          <C>       <C>        <C>
         Trading account securities, mainly related
           to loans securitized                                                       $ (192)   $ (204)    $  550
         Investment securities available for sale                                        351      (422)       113
         Mortgage loans held for sale                                                    (26)       43         74
         Other                                                                            27                  (47)
                                                                                      ------    ------     ------
         Total                                                                        $  160    $ (583)    $  690
                                                                                      ======    ======     ======
</TABLE>

13.      COMMITMENTS AND CONTINGENCIES:

         In the ordinary course of business, the Company has various outstanding
         commitments and contingent liabilities that are not reflected in the
         accompanying consolidated financial statements. In addition, the
         Company is a defendant in certain claims and legal actions arising in
         the ordinary course of business. In the opinion of management, after
         consultation with legal counsel, the ultimate disposition of these
         matters is not expected to have a material adverse effect on the
         Company's financial condition. The principal commitments of the Company
         are as follows:

         a.       LEASE COMMITMENTS:

                  At December 31, 2001, the Company is obligated under
                  noncancelable operating leases for banking premises. Certain
                  leases contain escalation clauses providing for increased
                  rental. Rent expense amounted to $1,938,000, $1,834,000, and
                  $1,652,000 for the years ended December 31, 2001, 2000 and
                  1999, respectively.


                                       62
<PAGE>
                  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:


<TABLE>
<CAPTION>
                     YEAR ENDING                                                        MINIMUM
                     DECEMBER 31,                                                         RENT
                                                                                      (IN THOUSANDS)
                     <S>                                                              <C>
                     2002                                                               $   1,726
                     2003                                                                   1,511
                     2004                                                                   1,545
                     2005                                                                   1,571
                     2006                                                                   1,482
                     Thereafter                                                            16,758
                                                                                        ---------

                     Total                                                              $  24,593
                                                                                        =========
</TABLE>

         b.       PURCHASE COMMITMENT:

                  In December 2001, the Company entered into a commitment to
                  purchase for $50.5 million a 23-story office building,
                  including a related parking facility, located in Hato Rey, San
                  Juan, Puerto Rico's central business district.

         See Note 19 for standby letters of credit.

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 provides
         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, 2001 and 2000. The accumulated benefit obligation under this Plan
         is $186,000 and $218,000 as of December 31, 2001 and 2000,
         respectively.

         PROFIT-SHARING AND DEFINED CONTRIBUTIONS PLANS

         The Company has a non-contributory deferred profit-sharing plan,
         covering substantially all of its employees, which provides for
         retirement and disability benefits. The Company's contribution to the
         profit-sharing plan is discretionary and is generally based on a
         formula related to net income. The Company's contributions for the
         years ended December 31 were as follows: 2001 - $250,000; 2000 -
         $250,000; 1999 - $753,000.


                                       63
<PAGE>

         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
         age twenty-one 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 five 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, 2001, 2000 and 1999,
         amounted to $286,000, $236,000 and $217,000, respectively.

15.      ACQUISITION

         On July 1, 2001, the Company acquired for $1.1 million the 100% of the
         voting shares of a general insurance agency headquartered in Mayaguez,
         Puerto Rico (the "Agency") from a related party. The net assets
         acquired were not significant. The new corporation is a wholly-owned
         subsidiary of the Company, and operates as a general agent by placing
         property and casualty insurance, as well as life and disability
         insurance. This transaction was approved by the regulatory authorities.

16.      MINIMUM REGULATORY CAPITAL REQUIREMENTS:

         The Company is subject to examination, regulation and periodic
         reporting under the Bank Holding Company Act of 1956, as amended, which
         is administered by the Board of Governors of the Federal Reserve
         System. Westernbank is regulated by the Federal Deposit Insurance
         Corporation ("FDIC") and by the Office of the Commissioner of Financial
         Institutions of Puerto Rico. Westernbank's deposits are insured by the
         Savings Association Insurance Fund and by the Bank Insurance Fund,
         which are administered by the FDIC, up to $100,000 per depositor.

         The Company (on a consolidated basis) and Westernbank (the "Companies")
         are subject to various regulatory capital requirements administered by
         the federal banking agencies. Failure to meet minimum capital
         requirements can initiate certain mandatory and possibly additional
         discretionary actions by regulators that, if undertaken, could have a
         direct material effect on the Companies' financial statements. Under
         capital adequacy guidelines and the regulatory framework for prompt
         corrective action, the Companies must meet specific capital guidelines
         that involve quantitative measures of their assets, liabilities, and
         certain off-balance-sheet items as calculated under regulatory
         accounting practices. The capital amounts and classification are also
         subject to qualitative judgments by the regulators about components,
         risk weightings, and other factors. Prompt corrective action provisions
         are not applicable to bank holding companies.

         Quantitative measures established by regulation to ensure capital
         adequacy require the Companies to maintain minimum amounts and ratios
         (set forth in the table below) of total and Tier I capital (as defined
         in the regulations) to risk-weighted assets (as defined), and of Tier I
         capital (as defined) to average assets (as defined). Management
         believes, as of December 31, 2001 and 2000, that the Companies met all
         capital adequacy requirements to which they are subject.

         As of December 31, 2001, 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,
         2001, there are no conditions or events that management believes have
         changed Westernbank's category.


                                       64
<PAGE>
         The Companies' actual capital amounts and ratios as of December 31,
         2001 and 2000 are also presented in the table below:

<TABLE>
<CAPTION>
                                                                                                            MINIMUM TO BE
                                                                                    MINIMUM             WELL CAPITALIZED UNDER
                                                                                    CAPITAL                PROMPT CORRECTIVE
                                                           ACTUAL                 REQUIREMENT              ACTION PROVISIONS
                                                      ------------------    ------------------------  ---------------------------
                                                      AMOUNT     RATIO         AMOUNT       RATIO         AMOUNT      RATIO
                                                                           (Dollars in thousands)
         <S>                                         <C>           <C>          <C>          <C>          <C>        <C>
         AS OF DECEMBER 31, 2001:

         Total Capital to Risk Weighted Assets:
              Consolidated                           $ 424,680     12.65%       $   268,657    8 %           N/A         N/A
              Westernbank                              407,793     12.15            268,594    8          $ 335,743      10 %

         Tier I Capital to Risk Weighted Assets:
              Consolidated                           $ 386,316     11.64%       $   132,794    4 %           N/A         N/A
              Westernbank                              369,429     11.13            132,763    4          $ 199,144      6 %

         Tier I Capital to Average Assets:
              Consolidated                           $ 386,316      7.17%       $   161,675    3 %           N/A         N/A
              Westernbank                              369,429      6.86            161,626    3          $ 269,377      5 %

         AS OF DECEMBER 31, 2000:

         Total Capital to Risk Weighted Assets:
              Consolidated                           $ 279,275     11.73%       $   190,409    8 %           N/A         N/A
              Westernbank                              279,275     11.73            190,409    8          $ 238,012      10 %

         Tier I Capital to Risk Weighted Assets:
              Consolidated                           $ 250,347     10.65%       $    94,048    4 %           N/A         N/A
              Westernbank                              250,347     10.65             94,048    4          $ 141,071      6 %

         Tier I Capital to Average Assets:
              Consolidated                           $ 250,347      6.02%       $   124,698    3 %           N/A         N/A
              Westernbank                              250,347      6.02            124,698    3          $ 207,830      5 %
</TABLE>

         The Company's ability to pay dividends to its stockholders and other
         activities can be restricted if its capital falls below levels
         established by the Federal Reserve guidelines. In addition, any bank
         holding company whose capital falls below levels specified in the
         guidelines can be required to implement a plan to increase capital.


                                       65
<PAGE>
17.      COMMON AND PREFERRED STOCK TRANSACTIONS:

         During 2001, 2000 and 1999, the Company acquired and retired shares of
         common stock as follows: $28,000 (1,700 shares) in 2001; $4,781,000
         (498,300 shares) in 2000; and $1,222,000 (80,309 shares) in 1999.

         The Company's Board of Directors approved the issuance of the following
         non-cumulative, monthly income preferred stock (liquidation preference
         $25 per share):


<TABLE>
<CAPTION>
                                                                    Issuance                   Proceeds From
         Issuance                                    Dividend      Price Per    Shares        Issuance, Net of   Issuance
           Year       Type of Preferred Stock          Rate          Share      Issued         Issuance Costs      Costs
        -------------------------------------------------------------------------------------------------------------------
        <S>         <C>                               <C>         <C>         <C>            <C>               <C>
           1998     Convertible, 1998 Series A         7.125 %       $25       1,219,000       $29,143,000     $ 1,332,000
           1999     Non-convertible, 1999 Series B      7.25          25       2,001,000        48,273,000       1,752,000
           2001     Non-convertible, 2001 Series C      7.60          25       2,208,000        53,103,000       2,097,000
           2001     Non-convertible, 2001 Series D      7.40          25       1,791,999        43,238,000       1,562,000
                                                                        -      ---------      ------------     -----------

                    Total                                                      7,219,999      $173,757,000     $ 6,743,000
                                                                               =========      ============     ===========
</TABLE>

        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 $25.125 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 1998 Series A, May 28 for 1999 Series B, March 30
        for the 2001 Series C and August 1 for the 2001 Series D of the years
        indicated below, plus accrued and unpaid dividends, if any, for the
        current period to the date of redemption:

<TABLE>
<CAPTION>
                                                                  REDEMPTION
        PRICE PER SHARE

                  YEAR                            SERIES A         SERIES B         SERIES C           SERIES D
        -------------------------------------------------------------------------------------------------------
        <S>                                       <C>              <C>               <C>                 <C>
        2002                                          $26.00               -               -                  -
        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
        2008 and thereafter                            25.00            25.00            25.00             25.00
</TABLE>

                                       66
<PAGE>
18.      STOCK COMPENSATION PLANS:

         In June 1999, the Board of Directors approved the 1999 Qualified Stock
         Option Plan (the "1999 Qualified Option Plan") and the 1999
         Nonqualified Stock Option Plan (the "1999 Nonqualified Option Plan"),
         for the benefit of employees of the Company and its subsidiaries. These
         plans offer to key officers, directors and employees an opportunity to
         purchase shares of the Company's common stock. Under the 1999 Qualified
         Option Plan, options for up to 4,200,000 shares of common stock can be
         granted. Also, options for up to 4,200,000 shares of common stock,
         reduced by any share issued under the 1999 Qualified Option Plan can be
         granted under the 1999 Nonqualified Option Plan. The option price for
         both plans is determined at the grant date. Both plans will remain in
         effect for a term of 10 years. The Board of Directors has sole
         authority and absolute discretion as to the number of stock options to
         be granted, their vesting rights, and the options' exercise price. The
         Plans provide for a proportionate adjustment in the exercise price and
         the number of shares that can be purchased in the event of a stock
         split, reclassification of stock and a merger or reorganization. At
         December 31, 2001 and 2000, the Company had outstanding 2,370,000 and
         2,295,000 options, respectively, under the 1999 Qualified Stock Option
         Plan. These options were granted to various executives' officers and
         employees, which will become fully exercisable after five years
         following the grant date. During 2001 and 2000, the Company granted
         75,000 and 2,295,000 options, respectively, to various executive
         officers and employees. None of these options were exercised or
         forfeited in 2001 and 2000.

         As describe in Note 1, the Company follows the intrinsic value-based
         method. Accordingly, no compensation expense was recognized at the
         measurement date. Had compensation cost for the Company's stock option
         plans been determined based on the fair value at the grant dates for
         awards under the plans consistent with the method prescribed by FASB
         Statement No. 123, the Company's net income and earnings per share
         would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                     2001                            2000
                                        AS REPORTED      PRO FORMA      AS REPORTED         PRO FORMA
                                          (DOLLARS IN THOUSANDS)            (DOLLARS IN THOUSANDS)
         <S>                             <C>             <C>             <C>                  <C>
         Net income                      $ 62,155        $ 61,373        $  44,588            $43,837
                                         ========        ========        =========            =======
         Basic and diluted
            earnings per share           $   1.25        $   1.23        $    0.93            $  0.91
                                         ========        ========        =========            =======
</TABLE>

         The fair value of the options granted in years 2001 and 2000 were $4.87
         and $2.68 per option, respectively. They were estimated on the grant
         date using the Black-Scholes option pricing model with the following
         weighted average assumptions: (1) the dividend yield was 2.14% (2.42%
         in 2000); (2) the expected life was 7 years; (3) the expected
         volatility was 41.95% (37.00% in 2000); and, (4) the risk-free interest
         rate was 5.40% (6.15% in 2000). The weighted market price of the stock
         at the grant date was $11.68 ($ 8.25 in 2000).


                                       67
<PAGE>

19.      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, standby letters of credit and derivative financial
         instruments. These instruments involve, to varying degrees, elements of
         credit and interest rate risk in excess of the amount recognized in the
         consolidated statements of financial condition. The contract or
         notional amounts of those instruments reflect the extent of involvement
         the Company has in particular classes of financial instruments.

         COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT

         The Company's exposure to credit loss in the event of nonperformance by
         the other party to the financial instrument for commitments to extend
         credit and standby 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.

         Unless noted otherwise, the Company does not require collateral or
         other security to support financial instruments with credit risk.

         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.

         Standby letters of credit are conditional commitments to guarantee the
         performance of a customer to a third party. The credit risk involved in
         issuing letters of credit is essentially the same as that involved in
         extending loan facilities to customers.

         The contract amount of financial instruments, whose amounts represent
         credit risk at December 31, 2001 and 2000, was as follows:

<TABLE>
<CAPTION>
                                                                                                2001           2000
                                                                                                   (IN THOUSANDS)
         <S>                                                                                  <C>            <C>
         Commitments to extend credit:
           Fixed rates                                                                        $ 11,839       $ 10,195
           Variable rates                                                                      151,757        133,141
         Unused lines of credit:
            Commercial                                                                          53,723         39,074
            Credit cards and other                                                              75,683         57,191
         Stand-by letters of credit                                                              2,340          1,180
</TABLE>


                                       68
<PAGE>
         DERIVATIVE FINANCIAL INSTRUMENTS

         The Company utilizes various derivative instruments for hedging
         purposes and other than hedging purposes such as asset/liability
         management. These transactions involve both credit and market risk. The
         notional amounts are amounts on which calculations and payments are
         based. Notional amounts do not represent direct credit exposures.
         Direct credit exposure is limited to the net difference between the
         calculated amounts to be received and paid, if any. The actual risk of
         loss is the cost of replacing, at market, these contracts in the event
         of default by the counterparties. The Company controls the credit risk
         of its derivative financial instrument agreements through credit
         approvals, limits and monitoring procedures.

         The Company enters into interest-rate swap contracts in managing its
         interest rate exposure. Interest-rate swap contracts generally involve
         the exchange of fixed and floating-rate interest-payment obligations
         without the exchange of the underlying principal amounts. Entering into
         interest-rate swap contracts involves not only the risk of dealing with
         counterparties and their ability to meet the terms of the contracts,
         but also the interest rate risk associated with unmatched positions.
         Interest rate swaps are the most common type of derivative contract
         that the Company utilizes. Situations in which the Company utilizes
         interest rate swaps are: a) to convert its fixed-rate certificates of
         deposit (liabilities) to a variable rate, and b) to convert its
         variable rate - term notes and FHLB advances (liabilities) to a fixed
         rate. By entering into the swap, the principal amount of the hedged
         item would remain unchanged but the interest payment streams would
         change.

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

         In addition, the Company offers its customers certificates of deposit
         which contain an embedded derivative tied to the performance of
         Standard & Poor's 500 Composite Stock Index that must be bifurcated
         from the host deposit and recognized in the statement of financial
         condition in accordance with SFAS 133. At the end of five years, the
         depositor will receive a specified percent of the average increase of
         the month-end value of the stock index. If such index decreases, the
         depositor receives the principal without any interest. The Company uses
         interest rate swap and option agreements with major broker dealer
         companies to manage its exposure to the stock market. Under the terms
         of the swap agreements, the Company will receive the average increase
         in the month-end value of the index in exchange for a quarterly fixed
         interest cost. Under the option agreements, the Company also will
         receive the average increase in the month-end value of the index but in
         exchange for the payment of a premium when the contract is initiated.
         Since the embedded derivative instrument of the certificates of deposit
         and the interest rate swap and option agreements do not qualify for
         hedge accounting, these derivative instruments are marked to market
         through earnings.

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

         Derivatives 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.


                                       69
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      NOTIONAL AMOUNT
                                                                                    2001           2000
          Type of Contract                                                            (In thousands)
         <S>                                                                     <C>             <C>
         HEDGING ACTIVITIES:
          FAIR VALUE HEDGE:
           Interest rate swaps used to hedge
             fixed rate certificates of deposit                                  $   548,347     $  730,739

         CASH FLOW HEDGE:
           Interest rate swaps used to hedge variable rate:
             Term notes                                                               40,000         40,000
             FHLB advances                                                                           50,000
                                                                                 -----------     ----------
          TOTAL                                                                  $   588,347     $  820,739
                                                                                 ===========     ==========
         DERIVATIVES NOT DESIGNATED AS HEDGE:

                  Interest rate swaps (unmatched portion)                        $    11,653     $   14,240
                  Interest rate swaps used to manage exposure
                    to the stock market                                               36,329
                  Embedded options on stock indexed deposits                          37,952
                  Purchased options used to manage exposure
                    to the stock market on stock indexed deposits                      1,623
                  Caps                                                               100,000        100,000
                                                                                 -----------     ----------
         TOTAL                                                                   $   187,557     $  114,240
                                                                                 ===========     ==========
</TABLE>

         At December 31, 2001, the fair value of the hedging instruments and the
         hedged deposits represented an unrealized net loss and gain,
         respectively of $10.8 million, and were recorded as "Other Liabilities"
         and as a decrease to "Deposits", respectively, in the accompanying
         December 31, 2001 statement of financial condition. For the year ended
         December 31, 2001, the net loss on fair value hedge derivative
         activities and the net gain on hedged deposits amounted to $8,165,000.

         At December 31, 2001, the fair value of the cash flow hedge derivatives
         activities represented an unrealized loss of $356,000 and was recorded
         as "Other Liabilities" in the accompanying December 31, 2001 statement
         of financial condition. Their effect on "Other Comprehensive Income" at
         December 31, 2001 was a decrease of $217,000, net of taxes of $139,000.

         At December 31, 2001 and 2000, the fair value of the derivatives not
         designated as hedge represented an unrealized net loss of $7,865,000
         and $326,000, respectively, and were recorded as a decrease in "Other
         Assets" ($8,000 in 2001), as an increase in "Deposits" ($3,821,000 in
         2001) and as an increase in "Other Liabilities" ($4,036,000 in 2001 and
         $326,000 in 2000) in the accompanying statements of financial
         condition. For the years ended December 31, 2001, 2000 and 1999 net
         gain (loss) on derivatives not designated as hedge amounted to
         ($838,000), $11,000, and ($323,000), respectively.


                                       70
<PAGE>

         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:

<TABLE>
<CAPTION>
                                                                                   2001            2000
                                                                                  (DOLLARS IN THOUSANDS)
<S>                                                                             <C>             <C>
Pay floating/received fixed:
  Notional amount                                                               $ 560,000       $ 744,979
  Weighted average receive rate at year end                                          6.13%           6.76%
  Weighted average pay rate at year end                                              2.21%           6.44%
   Floating rate in percentage of three month LIBOR,
      plus a spread ranging from minus .22% to plus .25%                              100%            100%
</TABLE>


<TABLE>
<CAPTION>
                                                                                   2001           2000
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                                            <C>             <C>
Pay fixed/receive floating:
  Notional amount                                                              $ 40,000        $  90,000
  Weighted average receive rate at year end                                        1.60%            5.65%
  Weighted average pay rate at year end                                            4.49%            5.32%
   Floating rate in percentage of
      three month LIBOR, minus .10%                                             85% to 100%    85% to 100%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                        2001           2000
                                                                                         (IN THOUSANDS)
<S>                                                                                  <C>            <C>
Beginning balance                                                                    $ 834,979      $ 509,479
New swaps                                                                              456,329        356,500
Matured swaps                                                                         (654,979)       (31,000)
                                                                                     ---------      ---------
Ending balance                                                                       $ 636,329      $ 834,979
                                                                                     =========      =========
</TABLE>


                                       71
<PAGE>
         At December 31, 2001, the maturities of interest rate swaps, cap
         agreement, embedded options and purchased options by year were as
         follows:

<TABLE>
<CAPTION>
          YEAR ENDING                                                                  EMBEDDED     PURCHASED
          DECEMBER 31,                                    SWAPS           CAP          OPTIONS       OPTIONS
                                                                      (IN THOUSANDS)
          <S>                                           <C>            <C>             <C>           <C>
          2002                                          $  40,000      $ 100,000
          2003                                             35,000
          2007 and thereafter                             561,329                      $ 37,952      $ 1,623
                                                        ---------      ---------       --------      -------

          Total                                         $ 636,329      $ 100,000       $ 37,952      $ 1,623
                                                        ==========     =========      =========     ========
</TABLE>
         Swap agreements amounting to $525,000,000 at December 31, 2001; provide
         the counterparties the option to cancel the swap agreement on any
         interest payment date after the first anniversary (matching the call
         option that the Company has on the hedged certificates of deposit).
         During the years ended December 31, 2001 and 2000, various
         counterparties of swap agreements exercised their option to cancel
         their swaps and immediately, the Company exercised its option to call
         the hedged certificates of deposit. No gains or losses resulted from
         above cancellations.

         At December 31, 2001, the carrying value of the specific collateral
         held by the counterparties consisted of investments securities held to
         maturity of $16,743,000.


                                       72
<PAGE>
      FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
                                                             2001                            2000
                                                 ------------------------------   ---------------------------
                                                    CARRYING          FAIR           CARRYING        FAIR
                                                      VALUE           VALUE            VALUE         VALUE
                                                                      (IN THOUSANDS)
<S>                                             <C>                <C>              <C>            <C>
FINANCIAL ASSETS:
  Cash and due from banks                             $ 62,414       $ 62,414         $ 45,936      $ 45,936
  Securities purchased under
     agreements to resell                              136,096        136,096          125,809       125,809
  Federal funds sold                                    20,037         20,037           43,500        43,500
  Interest-bearing deposits in banks                    26,214         26,214           11,305        11,305
  Trading securities                                     4,609          4,609            2,161         2,161
  Investment securities available for sale             281,682        281,682           27,806        27,806
  Investment securities held to maturity             2,369,775      2,362,836        1,656,687     1,620,264
  Federal Home Loan Bank stock                          38,450         38,450           29,800        29,800
  Mortgage loans held for sale                           5,253          5,253            4,640         4,695
  Loans (excluding allowance for loan losses)        2,876,768      2,924,974        2,232,588     2,236,855
  Accrued interest receivable                           32,820         32,820           46,951        46,951
  Mortgage servicing rights                              2,091          2,091            2,085         2,085
  Derivative options purchased                             323            323

FINANCIAL LIABILITIES:
  Deposits:
      Non-interest bearing                             123,931        123,931          120,559       120,559
      Interest bearing                               3,084,502      3,081,878        2,484,663     2,491,001
  Securities sold under
     agreements to repurchase                        2,059,646      2,164,736        1,179,073     1,183,400
  Advances from FHLB                                   120,000        133,227          120,000       120,020
  Term notes                                            43,000         43,438           48,000        47,495
  Accrued interest payable                              35,976         35,976           44,473        44,473
  Interest rate swaps in a net payable position         15,164         15,164
  Other                                                  2,435          2,435            1,776         1,776
</TABLE>

<TABLE>
<CAPTION>
                                                               2001                          2000
                                                     ------------------------       ------------------------
                                                     CONTRACT OR                     CONTRACT OR
                                                       NOTIONAL      FAIR              NOTIONAL     FAIR
                                                        AMOUNT       VALUE              AMOUNT      VALUE
                                                                       (IN THOUSANDS)
<S>                                                  <C>            <C>             <C>          <C>
OFF-BALANCE SHEET ITEMS
  Assets:
    Interest rate swaps in a
      net receivable position                             $ -          $ -             $ 419,000    $ 5,622

  LIABILITIES:
      Commitments to extend credit                        163,596     (1,622)            143,336     (1,071)
      Unused lines of credit:
           Commercial                                      53,723        (55)             39,074       (154)
           Credit cards and other                          75,683       (171)             57,191       (205)
      Stand-by letters of credit                            2,340        (23)              1,180        (12)
      Interest rate swaps in a
         net payable position                             636,329       (a)              415,979     (8,375)
</TABLE>

(a)  Effective January 1, 2001, derivatives instruments are recognized in
     the statement of financial condition at fair value.

                                       73
<PAGE>
20.      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.

21.      QUARTERLY FINANCIAL DATA (UNAUDITED):

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

<TABLE>
<CAPTION>
         2001                                 MARCH 31       JUNE 30       SEPT. 30       DEC. 31
         <S>                                 <C>            <C>            <C>            <C>
         Total interest income               $ 84,432       $ 87,416       $ 87,521       $ 83,966
         Total interest expense                55,816         55,525         55,301         51,627
                                             --------       --------       --------       --------
         Net interest income                   28,616         31,891         32,220         32,339
         Provision for loan losses              3,000          3,000          3,228          3,050
                                             --------       --------       --------       --------
         Net interest income after
            provision for loan losses          25,616         28,891         28,992         29,289
         Total other income, net                4,907          3,275          5,066          4,933
         Total operating expenses             (14,214)       (14,825)       (15,085)       (16,186)
                                             --------       --------       --------       --------
         Income before income taxes            16,309         17,341         18,973         18,036
         Provision for income taxes             2,569          1,987          2,079          1,869
                                             --------       --------       --------       --------
         Net income                          $ 13,740       $ 15,354       $ 16,894       $ 16,167
                                             ========       ========       ========       ========

         Basic and diluted earnings per
           common share                      $   0.30       $   0.31       $   0.33       $   0.31
                                             ========       ========       ========       ========

<CAPTION>
         2000                                MARCH 31       JUNE 30        SEPT. 30        DEC. 31
         <S>                                 <C>            <C>            <C>            <C>
         Total interest income               $ 65,766       $ 67,804       $ 74,607       $ 82,410
         Total interest expense                41,061         43,728         51,063         56,285
                                             --------       --------       --------       --------
         Net interest income                   24,705         24,076         23,544         26,125
         Provision for loan losses              2,000          2,000          2,000          2,700
                                             --------       --------       --------       --------
         Net interest income after
            provision for loan losses          22,705         22,076         21,544         23,425
         Total other income, net                3,229          3,011          3,753          3,875
         Total operating expenses             (13,323)       (12,559)       (11,559)       (15,775)
                                             --------       --------       --------       --------
         Income before income taxes            12,611         12,528         13,738         11,525
         Provision for income taxes             2,046          1,331          1,986            451
                                             --------       --------       --------       --------
         Net income                          $ 10,565       $ 11,197       $ 11,752       $ 11,074
                                             ========       ========       ========       ========

         Basic and diluted earnings per
           common share                      $   0.22       $   0.23       $   0.25       $   0.23
                                             ========       ========       ========       ========
</TABLE>


                                       74
<PAGE>
22.      SEGMENT INFORMATION:

         The Company's management monitors and manages the financial performance
         of two primary business segments, the operations of Westernbank in
         Puerto Rico and those of the division known as Westernbank
         International. The accounting policies of the segments are the same as
         those described in the summary of significant accounting policies. The
         Company evaluates performance based on net interest income and other
         income. 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. Operating expenses and provision for income taxes are
         analyzed on a combined basis. All other segments mainly include the
         transactions of the parent company only which mainly consists of the
         equity in subsidiaries.

         The financial information presented below was derived from the internal
         management accounting system and are based on internal management
         accounting policies. The information presented does not necessarily
         represent each segment's financial condition and results of operations
         as if they were independent entities.

<TABLE>
<CAPTION>
                                                                    AS OF AND FOR THE YEAR ENDED
                                                                         DECEMBER 31, 2001
                                                         --------------------------------------------------
                                                         IN PUERTO RICO     INTERNATIONAL          TOTAL
                                                                           (IN THOUSANDS)
         <S>                                             <C>                <C>                 <C>
         Interest income                                  $   255,456        $    79,840        $   335,296
         Interest expense                                     174,888             40,243            215,131
                                                          -----------        -----------        -----------
         Net interest income                                   80,568             39,597            120,165
         Provision for loan losses                            (12,070)                              (12,070)
         Other income, net                                     15,942                763             16,705
         Equity in loss of subsidiary                            (192)                                 (192)
                                                          -----------        -----------        -----------
         Total net interest income and other income       $    84,248        $    40,360        $   124,608
                                                          ===========        ===========        ===========

         Total assets                                     $ 4,514,001        $ 1,825,915        $ 6,339,916
                                                          ===========        ===========        ===========

<CAPTION>
                                                                    AS OF AND FOR THE YEAR ENDED
                                                                           DECEMBER 31, 2000
                                                         --------------------------------------------------
                                                         IN PUERTO RICO     INTERNATIONAL          TOTAL
                                                                           (IN THOUSANDS)
         <S>                                             <C>                 <C>                <C>
         Interest income                                  $   245,608        $    44,979        $   290,587
         Interest expense                                     167,040             25,097            192,137
                                                          -----------        -----------        -----------
         Net interest income                                   78,568             19,882             98,450
         Provision for loan losses                             (8,700)                               (8,700)
         Other income, net                                     13,839                 19             13,858
         Intersegment revenue                                                        266                266
         Intersegment expense                                    (266)                                 (266)
         Equity in loss of subsidiary                            (219)                                 (219)
                                                          -----------        -----------        -----------
         Total net interest income and other income       $    83,222        $    20,167        $   103,389
                                                          ===========        ===========        ===========

           Total assets                                   $ 3,344,581        $   916,815        $ 4,261,396
                                                          ===========        ===========        ===========
</TABLE>


                                       75
<PAGE>
<TABLE>
<CAPTION>
                                                                    AS OF AND FOR THE YEAR ENDED
                                                                          DECEMBER 31, 1999
                                                          --------------------------------------------------
                                                          IN PUERTO RICO    INTERNATIONAL         TOTAL
                                                                           (IN THOUSANDS)
         <S>                                              <C>                <C>                <C>
         Interest income                                  $   202,290        $    30,697        $   232,987
         Interest expense                                     108,274             22,532            130,806
                                                          -----------        -----------        -----------
         Net interest income                                   94,016              8,165            102,181
         Provision for loan losses                            (14,000)                              (14,000)
         Other income, net                                     12,154                 84             12,238
         Intersegment revenue                                     116                                   116
         Intersegment expense                                                       (116)              (116)
         Equity in loss of subsidiary                            (395)                                 (395)
                                                          -----------        -----------        -----------
         Total net interest income and other income       $    91,891        $     8,133        $   100,024
                                                          ===========        ===========        ===========

         Total assets                                     $ 2,903,174        $   471,608        $ 3,374,782
                                                          ===========        ===========        ===========

<CAPTION>
                                                              2001               2000               1999
                                                                             (IN THOUSANDS)
         <S>                                              <C>                <C>                <C>
         Interest income:
           Reportable segments                            $   335,296        $   290,587        $   232,987
           All other                                            8,039
                                                          -----------        -----------        -----------

           Consolidated interest income                   $   343,335        $   290,587        $   232,987
                                                          ===========        ===========        ===========

         Total net interest income and other income:
           Reportable segments                            $   124,608        $   103,389        $   100,024
           All other                                           68,381             44,789                967
                                                          -----------        -----------        -----------

           Total                                              192,989            148,178            100,991
           Less eliminations                                  (62,020)           (44,560)              (571)
                                                          -----------        -----------        -----------

           Consolidated total net interest income and
               other income                               $   130,969        $   103,618        $   100,420
                                                          ===========        ===========        ===========

         Total assets:
           Reportable segments                            $ 6,339,916        $ 4,261,396        $ 3,374,782
           All other                                          642,398            253,312            228,499
                                                          -----------        -----------        -----------

           Total                                            6,982,314          4,514,708          3,603,281
           Less eliminations                               (1,094,120)          (253,851)          (228,710)
                                                          -----------        -----------        -----------

           Consolidated total assets                      $ 5,888,194        $ 4,260,857        $ 3,374,571
                                                          ===========        ===========        ===========
</TABLE>


                                       76
<PAGE>

23.      CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

         Condensed financial information pertaining only to W Holding Company,
         Inc. is as follows:

         CONDENSED STATEMENT OF FINANCIAL CONDITION
         (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                           DECEMBER 31, 2001
                                                             (IN THOUSANDS)
         <S>                                               <C>
         ASSETS
         Cash                                                   $       1
         Dividends and other accounts receivable
           from bank subsidiary                                     1,599
         Investment in bank subsidiary                            371,022
         Investment in nonbank subsidiary                           1,773
         Advances to bank subsidiary                               15,000
                                                                ---------
         TOTAL ASSETS                                           $ 389,395
                                                                =========
         LIABILITIES AND STOCKHOLDERS' EQUITY
         LIABILITIES:
         Dividends payable                                      $   1,419
         Income tax payable                                            67
                                                                ---------
         TOTAL LIABILITIES                                          1,486
         STOCKHOLDERS' EQUITY                                     387,909
                                                                ---------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $ 389,395
                                                                =========
</TABLE>

         CONDENSED STATEMENT OF INCOME
         (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                           DECEMBER 31, 2001
                                                            (IN THOUSANDS)
         <S>                                               <C>
         Dividends from bank subsidiary                         $  22,138
         Interest on advances to bank subsidiary                      720
                                                                ---------
             Total income                                          22,858
         Operating expenses                                           512
                                                                ---------
         Income before income taxes and change
             in undistributed earnings of subsidiaries             22,346
         Provision for income taxes - current                          67
                                                                ---------
         Income before change in undistributed
             earnings of subsidiaries                              22,279
         Increase in undistributed earnings from:
         Bank subsidiary                                           39,603
         Nonbank subsidiary                                           273
                                                                ---------

         Net income                                             $  62,155
                                                                =========
</TABLE>

                                       77
<PAGE>

         CONDENSED STATEMENT OF CASH FLOW
         (PARENT COMPANY ONLY)

<TABLE>
<CAPTION>
                                                                        YEAR ENDED
                                                                    DECEMBER 31, 2001
                                                                      (IN THOUSANDS)
         <S>                                                        <C>
         CASH FLOWS FROM OPERATING ACTIVITIES:
         Net income                                                      $  62,155
         Adjustments to reconcile net income
             to net cash provided by operating activities:
             Increase in undistributed earnings of subsidiaries            (39,876)
             Increase in dividends and other accounts
                receivable from bank subsidiary                               (700)
             Increase in income tax payable                                     67
                                                                         ---------
                 Net cash provided by operating activities                  21,646
                                                                         ---------

         CASH FLOWS FROM INVESTING ACTIVITIES:
             Increase in advances to bank subsidiary                       (15,000)
             Capital contributions in subsidiaries                         (81,740)
             Purchase of nonbank subsidiary, net of cash acquired           (1,070)
                                                                         ---------
                 Net cash used in investing activities                     (97,810)
                                                                         ---------

         CASH FLOWS FROM FINANCING ACTIVITIES:
             Issuance of preferred stock                                    96,341
             Repurchase of common stock for retirement                         (28)
             Dividends paid                                                (20,148)
                                                                         ---------
         Net cash provided by financing activities                          76,165
                                                                         ---------

         NET INCREASE IN CASH                                                    1
         CASH AT JANUARY 1, 2001
                                                                         ---------
         CASH AT DECEMBER 31, 2001                                       $       1
                                                                         =========
</TABLE>

                                       78
<PAGE>

         The principal source of income for the Company consists of dividends
         from its bank subsidiary, Westernbank. As a member subject to the
         regulations of the Federal Reserve Board, the Company must obtain
         approval from the Federal Reserve Board for any dividend if the total
         of all dividends by it in any calendar year would exceed the total of
         its consolidated net profits for the year, as defined by the Federal
         Reserve Board, combined with its retained net profits for the two
         preceding years. The payment of dividends by Westernbank to the Company
         may also be affected by other regulatory requirements and policies,
         such as the maintenance of certain regulatory capital levels. Up to
         December 31, 2000, the Company had no other operations other than those
         from its investment in Westernbank Puerto Rico and the stockholders'
         equity transactions. Cash dividend paid by Westernbank to the Company
         amounted to $18,886,184 and $4,085,000 for the years ended December 31,
         2000 and 1999, respectively.

                                     ******


                                       79
<PAGE>
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

         The information required herein with respect to directors is
incorporated herein by reference from the definitive proxy statement of the
Company to be filed supplementary.

ITEM 11.  EXECUTIVE COMPENSATION

         The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required herein is incorporated by reference from the
definitive proxy statement to be filed supplementary.






                                       80
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required herein is incorporated by reference from the
definition proxy statement to be filed supplementary.


                                     PART IV

ITEM 14. 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, 2001 and 2000

         -        Consolidated Statements of Income for each of the three years
                  in the period ended December 31, 2001

         -        Consolidated Statements of Changes in Stockholders' Equity and
                  of Comprehensive Income for each of the three years in the
                  period ended December 31, 2001

         -        Consolidated Statements of Cash Flows for each of the three
                  years in the period ended December 31, 2001

         -        Notes to Consolidated Financial Statements

                  (2)      Not applicable.


                                       90
<PAGE>

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

<TABLE>
<CAPTION>
                  NO.                           EXHIBIT
                  ---      -----------------------------------------------------
                  <S>      <C>
                  3.1      Articles of Incorporation (incorporated by reference
                           herein to Exhibit 3.1 to the Company's Registration
                           Statement on Form S-4, File No. 333-76975)
                  3.2      Bylaws (incorporated by reference herein to Exhibit
                           4 to the Company's Registration Statement on Form
                           8-A, Filed on November 29, 2001
                  10.1     Form of 1999 Qualified Stock Option Plan
                           (incorporated by reference herein to Exhibit 10.1 to
                           the Company's Registration Statement on Form S-4 No.
                           333-76975)
                  10.2     Form of 1999 Nonqualified Stock Option Plan
                           (incorporated by reference herein to Exhibit 10.2 to
                           the Company's Registration Statement on Form S-4
                           333-76975)
                  10.3     Employment agreement between Westernbank Puerto Rico
                           and Mr. Miguel Vazquez.
                  10.4     Employment agreement between Westernbank Puerto Rico
                           and Mr. Alfredo Archilla
                  21.1     Subsidiaries of the Registrant
                  23.1     Independent Auditors' Consent
</TABLE>

(b)      No reports on Form 8-K were filed during the last quarter of the period
         covered by this report.

(c)      See (a) (3) above for all exhibits filed herewith and the Exhibit
         Index.

(d)      Not applicable.


                                       91
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

W Holding Company, Inc.



           By: /s/ FRANK C. STIPES
               ----------------------------------------
                                                         Date: March 28, 2002
               Frank C. Stipes, Chairman of the
               Board, Chief Executive Officer
               and President

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



           /s/ FRANK C. STIPES
           -------------------------------------------
           Frank C. Stipes, Chairman of the Board,       Date: March 28, 2002
           Chief Executive Officer and President



           /s/ ANGEL L. ROSAS
           -------------------------------------------
           Angel L. Rosas, Director                      Date: March 28, 2002



           /s/ CESAR A. RUIZ
           -------------------------------------------
           Cesar A. Ruiz, Director                       Date: March 28, 2002



           /s/ PEDRO R. DOMiNGUEZ
           -------------------------------------------
           Pedro R. Dominguez, Director                  Date: March 28, 2002



           /s/ CORNELIUS TAMBOER
           -------------------------------------------
           Cornelius Tamboer, Director                   Date: March 28, 2002



           /s/ FREDESWINDA G. FRONTERA
           -------------------------------------------
           Fredeswinda G. Frontera, Directress           Date: March 28, 2002



           /s/ FREDDY MALDONADO
           -------------------------------------------
           Freddy Maldonado                              Date: March 28, 2002
           Chief Financial Officer and Vice
           President of Finance and Investment


                                       92
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
                EXHIBIT
                  NO.                           EXHIBIT
                -------    ----------------------------------------------------
                <S>        <C>
                  3.1      Articles of Incorporation (incorporated by reference
                           herein to Exhibit 3.1 to the Company's Registration
                           Statement on Form S-4, File No. 333-76975)
                  3.2      Bylaws (incorporated by reference herein to Exhibit
                           4 to the Company's Registration Statement on Form
                           8-A, Filed on November 29, 2001
                  10.1     Form of 1999 Qualified Stock Option Plan
                           (incorporated by reference herein to Exhibit 10.1 to
                           the Company's Registration Statement on Form S-4,
                           File 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,
                           File No. 333-76975)
                  10.3     Employment agreement between Westernbank Puerto Rico
                           and Mr. Miguel Vazquez
                  10.4     Employment agreement between Westernbank Puerto Rico
                           and Mr. Alfredo Archilla
                  21.1     Subsidiaries of the Registrant
                  23.1     Independent Auditors' Consent
</TABLE>


                                       92