W HOLDING CO INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of l934

For Quarter Ended June 30, 2002

Commission File No. 000-27377

W HOLDING COMPANY, INC.

Incorporated in the Commonwealth of Puerto Rico
IRS Employer Identification No. 66-0573197

Principal Executive Offices:

19 West McKinley Street
Mayagüez, Puerto Rico 00680
Telephone number: (787) 834-8000

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

Common Stock ($1.00 par value)
7.125% Noncumulative, Convertible Monthly Income Preferred Stock,
1998 Series A ($1.00 par value)

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

7.25% Noncumulative, Non-convertible Monthly Income Preferred Stock,
1999 Series B ($1.00 par value)
7.60% Noncumulative, Non-convertible Monthly Income Preferred Stock,
2001 Series C ($1.00 par value)
7.40% Noncumulative, Non-convertible Monthly Income Preferred Stock,
2001 Series D ($1.00 par value)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of l934 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 [ ]

The number of shares issued and outstanding of each of the registrant’s classes of stock, as of the latest practicable date (July 26, 2002), is:


Common Stock			62,250,000
7.125% Preferred Stock 1998 Series A			1,219,000
7.25% Preferred Stock 1999 Series B			2,001,000
7.60% Preferred Stock 2001 Series C			2,208,000
7.40% Preferred Stock 2001 Series D			1,791,999

TABLE OF CONTENTS


Part I. Financial Information
	Item I. Financial Statements
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
		CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONTENTS


			Page
PART I FINANCIAL INFORMATION:

	Item 1. Financial Statements (Unaudited)

		Consolidated Statements of Financial Condition as of June 30, 2002 and December 31, 2001		1

		Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001		2

		Consolidated Statements of Changes in Stockholders’ Equity and of Comprehensive Income for the Six Months Ended June 30, 2002 and 2001		3

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001		4-5

		Notes to Consolidated Financial Statements		6-22

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23-31

	Item 3. Quantitative and Qualitative Disclosures About Market Risk			31-32

PART II OTHER INFORMATION:

	Item 1. Legal Proceedings			33

	Item 2. Changes In Securities and Use of Proceeds			33

	Item 3. Defaults Upon Senior Securities			33

	Item 4. Submission of Matters to a Vote of Security Holders			33

	Item 5. Other Information			33

	Item 6. Exhibits and Reports on Form 8-K			33

SIGNATURES				34

Part I. Financial Information

Item I. Financial Statements

W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


		June 30,			December 31,
		2002			2001

ASSETS
Cash and due from banks		$	61,028		$	62,414
Money market instruments:
	Federal funds sold and securities purchased under agreements to resell		262,256			156,133
	Interest bearing deposits with banks		23,900			26,214
Trading securities, at fair value			40,983			4,609
Investment securities available for sale, at fair value			528,970			281,682
Investment securities held to maturity, with a fair value of $2,644,810 in 2002 and $2,362,836 in 2001			2,638,277			2,369,775
Federal Home Loan Bank stock, at cost			39,676			38,450
Mortgage loans held for sale, at lower of cost or market			5,866			5,253
Loans, net of allowance for loan losses of $43,508 in 2002 and $38,364 in 2001			3,217,878			2,838,404
Accrued interest receivable			41,939			32,820
Premises and equipment, net			90,826			40,673
Other assets			42,128			31,767

	Total	$	6,993,727		$	5,888,194

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits		$	3,791,773		$	3,233,912
Securities sold under agreements to repurchase			2,576,331			2,059,646
Term notes			3,000			43,000
Advances from Federal Home Loan Bank			120,000			120,000
Mortgage note			37,986			—
Other liabilities			52,437			43,727

	Total liabilities		6,581,527			5,500,285

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock $1.00 par value per share (liquidation preference $25 per share); authorized 20,000,000 shares; issued and outstanding 7,219,999 shares			7,220			7,220
Common stock — $1.00 par value per share; authorized 300,000,000 shares; issued and outstanding 62,250,000 shares in June 30, 2002 and 41,500,000 in December 31, 2001			62,250			41,500
Paid-in capital			187,628			187,628
Retained earnings:
	Reserve fund		27,255			23,476
	Undivided profits		128,722			128,583
Accumulated other comprehensive loss			(875	)		(498	)

	Total stockholders’ equity		412,200			387,909

TOTAL		$	6,993,727		$	5,888,194

See Notes to Consolidated Financial Statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)


			Three Months Ended						Six Months Ended
			June 30,						June 30,

			2002			2001			2002			2001

INTEREST INCOME:
	Loans, including loan fees		$	52,088		$	51,603		$	102,369		$	101,721
	Investment securities			28,980			26,098			56,330			51,670
	Mortgage and asset-backed securities			11,973			7,458			21,843			13,384
	Money market instruments			1,428			2,257			2,615			5,074

		Total interest income		94,469			87,416			183,157			171,849

INTEREST EXPENSE:
	Deposits			28,684			33,111			55,583			67,295
	Securities sold under agreements to repurchase			24,344			20,270			47,253			39,491
	Advances from Federal Home Loan Bank			1,546			1,609			3,075			3,471
	Term notes			129			535			584			1,087

		Total interest expense		54,703			55,525			106,495			111,344

NET INTEREST INCOME				39,766			31,891			76,662			60,505
PROVISION FOR LOAN LOSSES				3,467			3,000			7,091			6,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES				36,299			28,891			69,571			54,505

OTHER INCOME:
	Service charges on deposit accounts and other fees			5,052			4,281			10,334			8,672
	Unrealized gain (loss) on derivative instruments			285			(1,032	)		633			(769	)
	Net gain on sale and valuation of loans, securities and other			1,093			26			1,183			327
	Loss on trading account securities			(1,143	)		—			(1,262	)		(47	)

		Total other income		5,287			3,275			10,888			8,183

TOTAL NET INTEREST INCOME AND OTHER INCOME				41,586			32,166			80,459			62,688

OPERATING EXPENSES:
	Salaries and employees’ benefits			6,599			5,541			12,926			10,721
	Equipment			2,401			2,285			4,667			4,525
	Occupancy			1,355			1,261			2,671			2,475
	Advertising			1,642			1,235			3,033			2,323
	Printing, postage, stationery and supplies			616			569			1,299			1,126
	Telephone			469			473			970			885
	Other			4,524			3,461			8,793			6,984

		Total operating expenses		17,606			14,825			34,359			29,039

INCOME BEFORE PROVISION FOR INCOME TAXES				23,980			17,341			46,100			33,649

PROVISION FOR INCOME TAXES:
	Current			4,672			2,964			10,121			6,455
	Deferred			(761	)		(977	)		(1,983	)		(1,899	)

		Total provision for income taxes		3,911			1,987			8,138			4,556

NET INCOME			$	20,069		$	15,354		$	37,962		$	29,093

NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS			$	16,742		$	12,901		$	31,308		$	25,191

BASIC AND DILUTED EARNINGS PER COMMON SHARE			$	0.27		$	0.21		$	0.50		$	0.40

See Notes to Consolidated Financial Statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND OF COMPREHENSIVE INCOME (UNAUDITED)
(IN THOUSANDS)


					Six Months Ended
					June 30,

					2002			2001

Changes in Stockholders’ Equity:
	Preferred stock:
		Balance at beginning of period			$	7,220		$	3,220
		Issuance of preferred stock				—			2,208

		Balance at end of period				7,220			5,428

	Common stock:
		Balance at beginning				41,500			41,502
		Stock split				20,750			—

		Balance at end of period				62,250			41,502

	Paid-in capital:
		Balance at beginning of period				187,628			95,313
		Issuance of preferred stock				—			50,895

		Balance at end of period				187,628			146,208

	Reserve fund:
		Balance at beginning of period				23,476			17,302
		Transfer from undivided profits				3,779			2,909

		Balance at end of period				27,255			20,211

	Undivided profits:
		Balance at beginning of period				128,583			93,241
		Net income				37,962			29,093
		Cash dividends on common stock				(6,640	)		(5,188	)
		Cash dividends on preferred stock				(6,654	)		(3,902	)
		Transfer to reserve fund				(3,779	)		(2,909	)
		Stock split				(20,750	)		—

		Balance at end of period				128,722			110,335

	Accumulated other comprehensive loss:
		Balance at beginning of period				(498	)		40
		Cumulative effect on change in accounting for derivative instruments				—			135
		Other comprehensive loss				(377	)		(1,933	)

		Balance at end of period				(875	)		(1,758	)

Total Stockholders’ Equity					$	412,200		$	321,926

Comprehensive income:
		Net income			$	37,962		$	29,093

		Other comprehensive loss, net of income tax:
				Unrealized net losses on securities available available for sale:
				Arising during the period		(567	)		(639	)
				Reclassification adjustment for gains included in net income		945			338

						378			(301	)

			Cash flow hedges:
				Adoption of SFAS 133, net of income tax		—			135
				Unrealized net derivative losses arising during the period		(1,056	)		(2,273	)

						(1,056	)		(2,138	)

	Income tax effect					301			641

	Net change in comprehensive income, net of income taxes					(377	)		(1,798	)

Total Comprehensive Income					$	37,585		$	27,295

See Notes to Consolidated Financial Statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)


				Six months ended
				June 30,

				2002			2001

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	37,962		$	29,093
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision (credit) for:
		Loan losses			7,091			6,000
		Foreclosed real estate held for sale			52			—
		Deferred income taxes			(1,983	)		(1,899	)
	Depreciation and amortization on:
		Premises, equipment and other			3,149			2,820
		Foreclosed real estate held for sale			30			30
		Mortgage servicing rights			339			218
	Amortization of premium (discount) on:
		Investment securities available for sale			(340	)		(3	)
		Investment securities held to maturity			(6,329	)		(6,627	)
		Mortgage-backed securities held to maturity			(483	)		(60	)
		Loans			796			280
	Amortization of discount on deposits				779			—
	Amortization of deferred loan origination fees and costs				(2,759	)		(2,372	)
	Net loss (gain) on sale and in valuation of:
		Investment securities available for sale			(945	)		(13	)
		Mortgage loans held for sale			(235	)		12
		Derivative instruments			(633	)		—
		Foreclosed real estate held for sale			(63	)		(55	)
	Originations of mortgage loans held for sale				(22,814	)		(19,038	)
	Decrease (increase) in:
		Trading securities			28,011			22,481
		Accrued interest receivable			(9,118	)		(5,282	)
		Other assets			(4,042	)		(21,379	)
	Increase (decrease) in:
		Accrued interest on deposits and borrowings			(2,926	)		(2,369	)
		Other liabilities			10,938			7,135

			Net cash provided by operating activities		36,477			8,972

CASH FLOWS FROM INVESTING ACTIVITIES:
	Net increase (decrease) in interest bearing deposits with banks				2,314			(3,265	)
	Net increase (decrease) in federal funds sold and securities purchased under agreements to resell				(106,123	)		5,685
	Investment securities available for sale:
		Sales			186,443			98,942
		Purchases			(521,497	)		(101,148	)
		Proceeds from principal repayment			48,111			8,597
	Investment securities held to maturity:
		Purchases			(6,471,499	)		(4,541,510	)
		Proceeds from redemption and repayment			6,188,943			4,335,565
	Mortgage-backed securities held to maturity:
		Purchases			(80,445	)		(236,462	)
		Proceeds from principal repayment			101,311			44,513
	Loans:
		Purchases			(71,402	)		(264,293	)
		Other increase			(313,696	)		(114,425	)
	Purchase of derivative options				(4,955	)		—
	Proceeds from sales of foreclosed real estate held for sale				181			136
	Additions to premises and equipment				(3,326	)		(1,888	)
	Purchase of Federal Home Loan Bank stock				(1,226	)		(8,650	)
	Purchase of partnership interest, net of cash acquired				(11,496	)		—

		Net cash used in investing activities			(1,058,362	)		(778,203	)

Forward				$	(1,021,885	)	$	(769,231	)

(Continued)

W HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)


				Six Months Ended
				June 30,

				2002			2001

Forward				$	(1,021,885	)	$	(769,231	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net increase in deposits				556,556			387,225
	Net increase in securities sold under agreements to repurchase				396,504			156,603
	Securities sold under agreements to repurchase with original maturities over three months:
			Proceeds		294,073			220,500
			Payments		(173,893	)		(32,350	)
	Payments of term notes				(40,000	)		—
	Net decrease in advances from borrowers for taxes and insurance				316			420
	Dividends paid				(13,057	)		(8,742	)
	Issuance of preferred stock				—			53,103

		Net cash provided by financing activities			1,020,499			776,759

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS					(1,386	)		7,528
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD					62,414			45,936

CASH AND DUE FROM BANKS, END OF PERIOD				$	61,028		$	53,464

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid during the period for:
		Interest on deposits and other borrowings		$	109,421		$	113,713
		Income tax			4,928			2,000
	Noncash activities:
		Other assets acquired on purchase of partnership interest			249			—
		Building acquired on purchase of partnership interest			49,852			—
		Mortgage note assumed on purchase of partnership interest			37,986			—
		Accrued dividends payable			1,661			1,281
		Net increase in other comprehensive loss			561			(1,798	)
		Mortgage loans securitized and transferred to trading securities			22,300			20,371
		Transfer from available for sale to trading securities			42,085			—
		Transfer from loans to foreclosed real estate held for sale			775			317
		Mortgage loans originated to finance the sale of foreclosed real estate held for sale			278			—
		Capitalized mortgage servicing rights			336			258
		Unpaid additions to premises and equipment			53			66
		Transfer from undivided profits to reserve fund			3,779			2,909
	Effect in valuation of derivatives and their hedge items:
		Increase in other assets			3			8,753
		Increase in deposits			7,605			7,936
		Increase in other liabilities			9,066			3,086
	Effect of three-for-two stock split				20,750

See Notes to Consolidated Financial Statements.

(Concluded)

W HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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” 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 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 range of business and consumer financial services, including banking, trust and brokerage services. Westernbank Insurance, Corp. is a general insurance agent placing property, casualty, life and disability insurance.

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’s executive office is located at 19 West McKinley Street, Mayagüez, Puerto Rico; its telephone number is (787) 834-8000; its internet email address is westernbank@wbpr.com; and its web page is at URL: http: //www.westernetbank.com. Information appearing on the Company’s website is not incorporated by reference into this report.

On March 18, 2002, Westernbank through Westernbank World Plaza, Inc. (“WWPI”), a newly created wholly-owned subsidiary of Westernbank Puerto Rico, and its wholly-owned subsidiary Westernbank One Percent, Inc. (“WOPI”), acquired 99% (as Limited Partner) and 1% (as General Partner), respectively, of the partnership interest of Apollo Hato Rey, L.P., a Delaware Limited Partnership (the “Partnership”). WWPI and WOPI were created for the purpose of owning, developing, managing and operating Westernbank World Plaza (formerly known as Hato Rey Tower) a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico, the main Puerto Rican business district. On March 23, 2002, the Partnership was dissolved and its net assets distributed to WWPI and WOPI. Immediately thereafter, Westernbank One Percent, Inc. was also dissolved by Westernbank World Plaza, Inc. Upon dissolution of Westernbank One Percent, Inc., Westernbank World Plaza, Inc. became the 100% owner of the net assets of the dissolved partnership. Westernbank World Plaza now serves as the Company’s San Juan metropolitan area headquarters for Westernbank’s regional commercial lending office and for Westernbank Business Credit and Expresso of Westernbank divisions.

In June 2001, Westernbank acquired the asset-based lending portfolio of the Puerto Rico branch of Congress Credit Corporation for $163.8 million. In July 2002, Westernbank launched a new banking division focused on offering consumer loans through 17 full-service branches, called “Expresso of Westernbank,” denoting the branches’ emphasis on small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000.

The unaudited Consolidated Financial Statements accompanying the Quarterly Report on Form 10-Q have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the unaudited Consolidated Financial Statements include all adjustments (which consist of normal recurring accruals) necessary, to present fairly the consolidated financial condition as of June 30, 2002 and December 31, 2001, and the results of operations and cash flows for the three and six months ended June 30, 2002 and 2001. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. Financial information as of December 31, 2001 has been derived from the audited Consolidated Financial Statements of the Company. The results of operations and cash flow for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the Consolidated Financial Statements and footnotes thereto for the year ended December 31, 2001, included in the Company’s Annual Report on Form 10-K.

2. EARNINGS PER SHARE AND CAPITAL TRANSACTIONS

Basic and diluted earnings per common share for the three and six months ended June 30, 2002 and 2001 were computed by dividing the income attributable to common stockholders for such periods by the weighted average number of shares of common stock outstanding during the same periods (which reflect the stock split refer to below), as follows:


		Three Months Ended				Six Months Ended
		June 30,				June 30,

		2002		2001		2002		2001

		(Dollars in 000's, except per share data)
Basic and diluted earnings per share:
	Net income	$	20,069	$	15,354	$	37,962	$	29,093
	Less preferred stock dividends		3,327		2,453		6,654		3,902

	Income attributable to common stockholders	$	16,742	$	12,901	$	31,308	$	25,191

	Weighted average number of common shares outstanding for the period (as adjusted)		62,250,000		62,253,000		62,250,000		62,253,000
Effect of dilutive stock options			721,831		—		613,106		—

Total			62,971,831		62,253,000		62,863,106		62,253,000

Basic and diluted earnings per share (as adjusted)		$	0.27	$	0.21	$	0.50	$	0.40

On June 17, 2002, the Company declared a three-for-two stock split in the form of a stock dividend on its common stock, for stockholders of record as of June 28, 2002, that are distributed on July 10, 2002. The effect of the stock split was a decrease to retained earnings and an increase in common stock in the amount of $20.8 million. The computation of basic and diluted earnings per share were adjusted retroactively for the three and six months ended June 30, 2001, to reflect the change in capital structure.

3. DIVIDENDS DECLARED PER COMMON SHARE

The Company’s Board of Directors has adopted an ongoing policy that provides for the distribution of dividends to common stockholders on the basis of 25% of the average earnings for the last two preceding years. The same are paid monthly on the 15th day of each month for stockholders on record as of the last day of the preceding month.

On June 20, 2002, the Company's Board of Directors approved an additional increase of 3.125% in its annual dividend payments to the Company’s common stockholders in 2002 to $.22 per share, after the effect of a three-for-two stock split declared on June 17, 2002 ($.32 per share before effect of three-for-two stock split).

The Company’s cash dividends declared per share for the six months ended June 30, 2001 and 2002 were as follows:


RECORD DATE	PAYABLE DATE	AMOUNT PER SHARE ^{(1) (2) (3)}

YEAR 2002
January 31, 2002	February 15, 2002	$0.01778
February 28, 2002	March 15, 2002	0.01778
March 31, 2002	April 15, 2002	0.01778
April 30, 2002	May 15, 2002	0.01778
May 31, 2002	June 15, 2002	0.01778
June 30, 2002	July 15, 2002	0.01778

Total		$0.10668

YEAR 2001
January 31, 2001	February 15, 2001	$0.01386
February 28, 2001	March 15, 2001	0.01386
March 31, 2001	April 15, 2001	0.01393
April 30, 2001	May 15, 2001	0.01386
May 31, 2001	June 15, 2001	0.01386
June 30, 2001	July 15, 2001	0.01393

Total		$0.08333

⁽¹⁾		Adjusted to reflect the three-for-two stock split in the form of a stock dividend on our common stock declared on June 17, 2002 for stockholders of record as of June 28, 2002, distributed on July 10, 2002.

⁽²⁾		Dividend amounts in the table are rounded.

⁽³⁾		The dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations, and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced in the future.

4. INVESTMENTS SECURITIES

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


					Gross		Gross
			Amortized		Unrealized		Unrealized		Fair
June 30, 2002			Cost		Gains		Losses		Value

			(In thousands)
Trading securities:
		Mortgage-backed securities - Government National Mortgage Association (GNMA) certificates	$	25	$	—	$	—	$	25
		Corporate notes		42,058		—		1,100		40,958

Total			$	42,083	$	—	$	1,100	$	40,983

Available for sale:
	Mortgage-backed securities - Collateralized mortgage obligations (CMO)		$	276,018	$	818	$	1,071	$	275,765
	U.S. Government and agencies obligations			226,600		1,486		—		228,086
	Corporate notes			22,195		—		2,026		20,169
	Other investments			5,000		—		50		4,950

Total			$	529,813	$	2,304	$	3,147	$	528,970

Held to maturity:
	U.S. Government and agencies obligations		$	2,064,208	$	8,520	$	40	$	2,072,688
	Puerto Rico Government and agencies obligations			19,695		165		—		19,860
	Commercial paper			75,477		—		—		75,477
	Corporate notes			66,565		1,549		312		67,802

Subtotal				2,225,945		10,234		352		2,235,827

Mortgage and asset-backed securities:
	Federal Home Loan Mortgage Corporation (FHLMC) certificates			11,892		540		—		12,432
	GNMA certificates			15,865		580		—		16,445
	Fannie Mae (FNMA) certificates			8,300		395		—		8,695
	CMO certificates			304,473		1,149		1,097		304,525
	Other			71,802		50		4,966		66,886

Subtotal				412,332		2,714		6,063		408,983

Total			$	2,638,277	$	12,948	$	6,415	$	2,644,810


					Gross		Gross
			Amortized		Unrealized		Unrealized		Fair
December 31, 2001			Cost		Gains		Losses		Value

			(In thousands)
Trading securities:
	Mortgage-backed securities-
		GNMA certificates	$	2,554	$	25	$	—	$	2,579
		FNMA certificates		2,070		—		40		2,030

Total			$	4,624	$	25	$	40	$	4,609

Available for sale:
	U.S. Government and agencies obligations		$	196,600	$	—	$	154	$	196,446
	Corporate notes			56,301		22		243		56,080
	CMO Certificates			29,062		94		—		29,156

Total			$	281,963	$	116	$	397	$	281,682

Held to maturity:
	U.S. Government and agencies obligations		$	1,788,000	$	2,721	$	6,360	$	1,784,361
	Puerto Rico Government and agencies obligations			22,607		249		15		22,841
	Commercial paper			59,992		—		—		59,992
	Corporate notes			66,460		1,064		1,269		66,255

Subtotal				1,937,059		4,034		7,644		1,933,449

Mortgage and other asset-backed securities:
	FHLMC certificates			13,475		455		—		13,930
	GNMA certificates			18,500		594		—		19,094
	CMO certificates			319,386		369		1,799		317,956
	FNMA certificates			10,011		332		—		10,343
	Other			71,344		—		3,280		68,064

Subtotal				432,716		1,750		5,079		429,387

Total			$	2,369,775	$	5,784	$	12,723	$	2,362,836

The amortized cost and fair value of investment securities available for sale and held to maturity at June 30, 2002, by contractual maturity (excluding mortgage and asset-backed securities) are shown below:


	AVAILABLE FOR SALE				HELD TO MATURITY

	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

	(In thousands)
Due within one year	$	—	$	—	$	596,103	$	596,110
Due after one year through five years		226,600		228,086		1,418,463		1,427,125
Due after five years through ten years		—		—		72,000		72,351
Due after ten years		27,195		25,119		139,379		140,241

Subtotal		253,795		253,205		2,225,945		2,235,827

Mortgage and other asset-backed securities		276,018		275,765		412,332		408,983

Total	$	529,813	$	528,970	$	2,638,277	$	2,644,810

5. LOANS


The loan portfolio consisted of the following:		June 30,			December 31,
		2002			2001

		(In thousands)
REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
Commercial real estate		$	1,209,644		$	1,117,451
Conventional:
	One-to-four family residences		798,562			827,110
	Other properties		2,848			2,734
Construction and land acquisition			171,349			125,047
Insured or guaranteed — Federal Housing Administration, Veterans Administration, and others			14,936			16,896

Total			2,197,339			2,089,238

Plus (less):
	Undisbursed portion of loans in process		(5,787	)		(5,624	)
	Premium on loans purchased — net		1,727			2,036
	Deferred loan fees — net		(4,661	)		(4,531	)

Total			(8,721	)		(8,119	)

	Real estate loans — net		2,188,618			2,081,119

OTHER LOANS:
Commercial loans			499,685			376,408
Loans on deposits			33,816			35,140
Credit cards			59,461			63,108
Consumer loans			479,829			318,509
Plus (less):
	Premium on loans purchase — net		3,697			4,169
	Deferred loan fees — net and unearned interest		(3,720	)		(1,685	)

Other loans — net			1,072,768			795,649

TOTAL LOANS			3,261,386			2,876,768
ALLOWANCE FOR LOAN LOSSES			(43,508	)		(38,364	)

LOANS — NET		$	3,217,878		$	2,838,404

The total investment on impaired commercial and construction loans at June 30, 2002 and December 31, 2001, was $56,264,000 and $42,478,000, respectively. All impaired commercial and construction loans were measured based on the fair value of collateral at June 30, 2002 and December 31, 2001. Impaired commercial and construction loans amounting to $26,455,000 and $21,996,000 at June 30, 2002 and December 31, 2001, respectively, were covered by a valuation allowance of $4,250,000 and $4,181,000, respectively. Impaired commercial and construction loans amounting to $29,809,000 at June 30, 2002 and $20,482,000 at December 31, 2001, did not require a valuation allowance in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. The average investment on impaired commercial and construction loans during the six-month period ended June 30, 2002 and 2001 amounted to $43,616,000 and $12,672,000, 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 income on impaired commercial and construction loans collected and recognized as income for the six-month period ended June 30, 2002 and 2001, amounted to $1,862,000 and $555,000, respectively.

6. PLEDGED ASSETS

At June 30, 2002 residential mortgage loans and investment securities held to maturity amounting to $374,151,000 and $2,290,000,000, respectively, were pledged to secure public fund and individual retirement account deposits, securities sold under agreements to repurchase, letters of credit, advances and borrowings from the Federal Home Loan Bank and the Federal Reserve Bank of New York, term notes and interest rate swap agreements. Pledged investment securities held to maturity amounting to $2,224,000,000 at June 30, 2002 can be repledged.

7. DEPOSITS

A comparative summary of deposits as of June 30, 2002 and December 31, 2001, follows:


	2002		2001

	(In thousands)
Noninterest bearing accounts	$	157,927	$	123,932
Passbook		509,062		465,267
NOW accounts		128,723		115,977
Super NOW accounts		22,867		18,609
Money market		8,751		6,806
Certificates of deposit		2,943,709		2,477,842

Total		3,771,039		3,208,433
Accrued interest payable		20,734		25,479

Total	$	3,791,773	$	3,233,912

8. 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, except for income on certain investment securities of Westernbank and income from Westernbank International Division. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.

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

The Code provides a dividend received deduction of 100%, on dividends received from majority-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.

Deferred income tax assets (liabilities) as of June 30, 2002 and December 31, 2001, consisted of the following:


	2002			2001

	(In thousands)
Allowance for loan losses	$	15,840		$	13,834
Unrealized loss in valuation of derivative instruments		741			891
Allowance for foreclosed real estate held for sale		3			39
Mortgage servicing rights		(814	)		(816	)
Other temporary differences		(24	)		(47	)

Total		15,746			13,901
Less valuation allowance		39			39

Deferred income tax assets, net	$	15,707		$	13,862

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.

9. FINANCIAL INSTRUMENTS

Derivative financial instruments and hedging activities - 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.

Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (“SFAS 133”), Accounting for Derivative Instruments and Certain 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 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 derivative instruments that have been highly effective are recognized in other comprehensive income, until such time that 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 derivative instruments do not perfectly offset changes in the value of the hedged items. The Company does not currently have any foreign currency hedges. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in earnings.

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, $135,000, respectively. There was no effect on results of operations from the implementation of these Statements.

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 hedge item would remain unchanged but the interest payment streams would change.

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

In addition, the Company offers its customers certificates of deposit that contain an embedded derivative tied to the performance of the Standard & Poor’s 500 Composite Stock Index, which is bifurcated from the host deposit and recognized in the statement of financial condition in accordance with SFAS 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.

Information pertaining to the notional amounts of the Company’s derivative financial instruments as of June 30, 2002 and December 31, 2001, was as follows:


					Notional Amount

Type of Contract					2002		2001

					(In thousands)
Hedging activities:
		Fair value hedge:
			Interest rate swaps used to hedge fixed rate certificates of deposit		$	811,709	$	548,347
Cash flow hedge:
		Interest rate swaps used to hedge variable rate:
				Term notes		—		40,000

	Total				$	811,709	$	588,347

Derivatives not designated as hedge:
		Interest rate swaps (unmatched portion)			$	3,991	$	11,653
		Interest rate swaps used to manage exposure to the stock market				36,329		36,329
		Embedded options on stock indexed deposits				63,216		37,952
		Purchased options used to manage exposure to the stock market on stock indexed deposits				26,887		1,623
		Caps				—		100,000

	Total				$	130,423	$	187,557

At June 30, 2002, the fair value of derivatives qualifying for fair value hedge represented an unrealized net loss of $1.6 million, which was recorded as part of “Other Liabilities” and as a decrease to the hedged “Deposits” in the accompanying June 30, 2002, statement of financial condition.

At December 31, 2001, the fair value of the derivative qualifying for fair value hedge represented an unrealized net loss of $10.8 million, which was recorded as “Other Liabilities” and as a decrease to the hedged “Deposits”, in the accompanying December 31, 2001 statement of financial condition.

At December 31, 2001, the fair value of the cash flow hedge derivatives activities represented an unrealized loss of $356,000 and was recorded as part of “Other Liabilities” in the accompanying December 31, 2001 statement of financial condition. Their effect on “Other Comprehensive Income” at December 31, 2001 was a decrease of $217,000, net of taxes of $139,000. No such derivatives activities were outstanding as of June 30, 2002.

At June 30, 2002, the fair value of derivatives not qualifying as a hedge was $6,695,000 and was recorded as part of “Other assets” $3,184,000, “Deposits” ($3,878,000) and “Other liabilities” ($6,001,000) in the accompanying June 30, 2002 statement of financial condition.

At December 31, 2001, the fair value of the derivatives not designated as hedge represented an unrealized net loss of $7,865,000, and was recorded as a decrease in “Other Assets” of $8,000, as an increase in “Deposits” of $3,821,000 and as an increase in “Other Liabilities” of $4,036,000.

A summary of the types of swaps used and their terms at June 30, 2002 and December 31, 2001, follows:


			2002			2001

			(In thousands)
Pay floating/received fixed:
	Notional amount		$	815,700		$	560,000
	Weighted average receive rate at period end			5.88%			6.13%
	Weighted average pay rate at period end			1.99%			2.21%
		Floating rate in percentage of three month LIBOR, plus a spread ranging from minus .22% to plus .25%		100%			100%

			2002			2001

			(In thousands)
Pay fixed/receive floating:
	Notional amount		$	—		$	40,000
	Weighted average receive rate at period end			1.55	%		1.60%
	Weighted average pay rate at period end			4.46	%		4.49%
		Floating rate in percentage of three month LIBOR, minus .10%	85% to 100%			85% to 100%

The changes in notional amount of swaps during the six months ended June 30, 2002 follows:


	(In thousands)
Balance at December 31, 2001	$	636,329
New swaps		295,000
Called and matured swaps		(79,300	)

Ending balance	$	852,029

During the six months ended June 30, 2002, various counterparties of swap agreements exercised their option to cancel their swaps and the Company immediately exercised its option to call the hedged certificates of deposit. No gains or losses resulted from above cancellations.

At June 30, 2002, the interest rate swaps, embedded options and purchased options maturities by year were as follows:


Year Ending			Embedded		Purchased
December 31,	Swaps		Options		Options

	(In thousands)
2002	$	—	$	—	$	—
2003		80,000		—		—
2006 and thereafter		772,029		63,216		26,887

Total	$	852,029	$	63,216	$	26,887

Other off-balance sheet instruments. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, 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.

Committed Resources. At June 30, 2002 and December 31, 2001, the Company had outstanding the following contract amount of financial instruments whose amounts represent credit risk, in respect with the instruments described in the preceding paragraph:


			2002		2001

			(In thousands)
Commitments to extend credit:
		Fixed rates	$	15,374	$	11,839
		Variable rates		201,308		151,757
Unused lines of credit:
		Commercial		59,423		53,723
		Credit cards and other		81,201		75,683
Stand-by letters of credit				3,083		2,340

	Total		$	360,389	$	295,342

Such commitments will be funded in the normal course of business from the Company’s principal sources of funds. At June 30, 2002, the Company had $1.7 billion in deposits that mature during the following twelve months. The Company does not anticipate any difficulty in retaining such deposits. The Company also has on-going commitments to repay borrowings, fund maturing certificates of deposit and meet obligations under long-term operating leases for certain branches. No material changes are anticipated in regards to such commitments.

10. STOCK OPTION PLANS

The Company has two stock option plans, the 1999 Qualified Stock Option Plan (the “1999 Qualified Option Plan”) and the 1999 Nonqualified Stock Option Plan (the “1999 Nonqualified Option Plan”) for the benefit of employees of the Company and its subsidiaries. These plans offer to key officers, directors and employees an opportunity to purchase shares of the Company’s common stock. Under the 1999 Qualified Option Plan, options for up to 6,300,000 (adjusted to reflect the three-for-two stock split in the form of a stock dividend on our common stock declared on June 17, 2002 and distributed on July 10, 2002) shares of common stock can be granted. Also, options for up to 6,300,000 (as adjusted) shares of common stock, reduced by any shares issued under the 1999 Qualified Option Plan can be granted under the 1999 Nonqualified Option Plan. The option price for both plan 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. During the year ended December 31, 2001, the Company granted 112,500 (as adjusted) options under the 1999 Qualified Stock Option Plan to two executive officers, which will become fully exercisable after five years following the grant date. No such options were granted for the six months ended June 30, 2002.

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 (the grant date) over the amount an employee must pay to acquire the stock. No compensation expense was recognized in the quarter June 30, 2002, because no options were granted. The compensation expense for the period ended June 30, 2002, based on the Fair Value Method described in SFAS No. 123 and its effect on earnings per share was not significant.

11. 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, Westernbank’s divisions and Westernbank Insurance Corp.

The financial information presented below was derived from the internal management accounting system and is 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.


		As of and for the Three Months Ended
		June 30, 2002
		(In thousands)

		In Puerto Rico			International			Total
Operations data:
	Interest income	$	62,683		$	28,131		$	90,814
	Interest expense		39,557			13,822			53,379

	Net interest income		23,126			14,309			37,435
	Provision for loan losses		(3,000	)		—			(3,000	)
	Other income, net		4,834			(32	)		4,802
	Equity in net gain of subsidiaries		141			—			141

	Total net interest income and other income	$	25,101		$	14,277		$	39,378

Total assets		$	4,815,559		$	2,363,321		$	7,178,880


		As of and for the Six Months Ended
		June 30, 2002
		(In thousands)

		In Puerto Rico			International			Total
Operations data:
	Interest income	$	122,926		$	53,599		$	176,525
	Interest expense		77,019			26,995			104,014

	Net interest income		45,907			26,604			72,511
	Provision for loan losses		(6,500	)		—			(6,500	)
	Other income, net		9,465			(15	)		9,450
	Equity in net gain of subsidiaries		286			—			286

	Total net interest income and other income	$	49,158		$	26,589		$	75,747

Total assets		$	5,152,004		$	2,252,301		$	7,404,305


		As of December 31, 2001 and for the Six
		Months ended June 30, 2001
		(In thousands)

		In Puerto Rico			International		Total
	Interest income	$	131,083		$	39,684	$	170,767
	Interest expense		91,178			19,746		110,924

	Net interest income		39,905			19,938		59,843
	Provision for loan losses		(6,000	)		—		(6,000	)
	Other income, net		8,593			229		8,822
	Equity in loss of subsidiary		(111	)		—		(111	)

	Total net interest income and other income	$	42,387		$	20,167	$	62,554

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


		Three Months Ended
		June 30,

		2002			2001

		(In thousands)
Interest income:
	Reportable segments	$	90,814		$	84,432
	All other		3,655			2,984

	Consolidated interest income	$	94,469		$	87,416

Total net interest income and other income:
	Reportable segments	$	39,378		$	30,411
	All other		22,504			13,835

	Total		61,882			44,246
	Less eliminations		(20,296	)		(12,080	)

	Consolidated total net interest income and other income	$	41,586		$	32,166


		Six Months Ended
		June 30,

		2002			2001

		(In thousands)
Interest income:
	Reportable segments	$	176,525		$	170,767
	All other		6,632			1,082

	Consolidated interest income	$	183,157		$	171,849

Total net interest income and other income:
	Reportable segments	$	75,747		$	62,554
	All other		43,106			29,976

	Total		118,853			92,530
	Less eliminations		(38,394	)		(29,842	)

	Consolidated total net interest income and other income	$	80,459		$	62,688


		June 30, 2002			December 31, 2001
		(In thousands)
Total assets:
	Reportable segments	$	7,404,305		$	6,339,916
	All other		1,041,674			642,398

	Total		8,445,979			6,982,314
	Less eliminations		(1,452,252	)		(1,094,120	)

	Consolidated total assets	$	6,993,727		$	5,888,194

12. RECENT ACCOUNTING DEVELOPMENTS

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards 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, ceased upon adoption of this statement. Adoption of SFAS 141 and 142 did not have a significant effect on the Company’s consolidated financial statements.

Effective January 1, 2002, the Company adopted 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. Implementation of SFAS 144 did not have a significant effect on the Company’s consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS 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 April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS 145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt—an amendment of APB Opinion No. 30, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses.

SFAS 145 amends SFAS 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale–leaseback transactions is accounted for in the same manner as sale-leaseback transactions. SFAS 145 is not expected to have a significant effect on the Company’s consolidated financial condition or results of operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I — Item 2

General

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

Westernbank operates through a network of 48 full service bank branches (including 17 Expresso of Westernbank branches opened in July 2002) located throughout Puerto Rico, primarily in the Southwestern portion of the island, and a fully functional banking site on the Internet. In addition, it operates four divisions: Westernbank International Division, which offers, commercial banking and related services outside of Puerto Rico; Westernbank Trust Division, which offers a full array of trust services, Westernbank Business Credit, a division specializing in commercial business loans secured principally by accounts receivable, inventory and equipment, created on June 15, 2001 when Westernbank acquired the entire asset-based commercial loan portfolio of the Puerto Rico branch of Congress Credit Corporation, a subsidiary of First Union National Bank N.A.; and Expresso of Westernbank, Westernbank’s newest division, which specializes in small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000. 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 June 30, 2002 and December 31, 2001 and for the six months ended June 30, 2002 and 2001, are not significant.

On March 18, 2002, Westernbank through Westernbank World Plaza, Inc. (“WWPI”), a newly created wholly-owned subsidiary of Westernbank Puerto Rico, and its wholly-owned subsidiary Westernbank One Percent, Inc. (“WOPI”), acquired 99% (as Limited Partner) and 1% (as General Partner), respectively, of the partnership interest of Apollo Hato Rey, L.P., a Delaware Limited Partnership (the “Partnership”). WWPI and WOPI were created for the purpose of owning, developing, managing and operating Westernbank World Plaza (formerly known as Hato Rey Tower) a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico, the main Puerto Rican business district. On March 23, 2002, the Partnership was dissolved and its net assets distributed to WWPI and WOPI. Immediately thereafter, Westernbank One Percent, Inc. was also dissolved by Westernbank World Plaza, Inc. Upon dissolution of Westernbank One Percent, Inc., Westernbank World Plaza, Inc. became the 100% owner of the net assets of the dissolved partnership. Westernbank World Plaza now serves as the Company’s San Juan metropolitan area head-quarters for the Company’s regional commercial lending office and for Westernbank Business Credit and Expresso of Westernbank divisions.

On July 2002, Westernbank launched its newest division, Expresso of Westernbank, a division specializing in making small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000 through 17 full-service branches (including 13 new branches and 4 re-designated branches).

The principal business of Westernbank consists of attracting deposits from the general public and utilizing such funds and proceeds from reverse repurchase agreements and other borrowings to invest in residential mortgage loans, commercial loans collateralized with real estate, asset based loans, consumer loans and other loans.

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 (the “Federal Reserve Board”). Westernbank is subject to examination and comprehensive regulation by the Puerto Rico Department of the Treasury, the Puerto Rico Commissioner of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). In addition, Westernbank is subject to the regulations of the Puerto Rico Regulatory Financial Board with respect to rates and fees charged on certain loans to individuals. Westernbank is a member of the Federal Home Loan Bank (“FHLB”) of New York, which is one of the twelve regional banks comprising the Federal Home Loan Bank System (“FHLB System”). Deposits with Westernbank are insured to the maximum extent provided by law through the Savings Association Insurance Fund (“SAIF”) and the Bank Insurance Fund (“BIF”), which are administered by the FDIC.

Overview

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 and Westernbank Insurance Corp.

The Company’s principal source of earnings is its net interest income. This is the difference between interest income on loans and invested assets (“interest-earning assets”) and its interest expense on deposits and borrowings, including reverse repurchase agreements, term notes and advances from the FHLB (“interest-bearing liabilities”). Loan origination and commitments fees, net of related costs, are deferred and amortized over the life of the related loans as a yield adjustment. Gains or losses on the sale of loans and investments, 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 and Liability Management program is to invest funds judiciously and reduce interest rate risks while optimizing net income and maintaining adequate liquidity levels. As further discussed in Item 3, the “Quantitative and Qualitative Disclosures About Market Risk”, 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 geared towards the preservation of capital with adequate returns. The Company’s Investment Committee, which includes members of the Board of Directors and senior management, is responsible for the asset-liability oversight. The Investment Department is responsible for implementing the policies established by the Investment Committee.

The policies established and practices followed are intended to retain depositors’ confidence, obtain a favorable match between the maturity of its interest-earning assets and its interest-bearing liabilities, and enhance the stockholders’ investment in the Company.

The Company’s growth during the first semester of 2002 is mainly related to an increase in the portfolios of investment securities available for sale and held to maturity, an increase in other loans, mainly consumer and commercial loan portfolios. Also the Company has continued effective management of interest rate risk and a tight control of operating expenses. Total net income for the three and six months ended June 30, 2002, increased to $20.1 million and to $38.0 million, respectively, up 30.71% and 30.48% when compared to $15.4 million and $29.1 million, for the three and six months ended June 30, 2001. Net income attributable to common stockholders for the three and six months ended June 30, 2002, increased to $16.7 million and to $31.3 million, respectively, up 29.77% and 24.28% when compared to $12.9 million and $25.2 million, for the same periods in 2001. The Company’s profitability ratios for the six months ended June 30, 2002, represented returns of 1.18% on assets (ROA) and 28.52% on common stockholders’ equity (ROCE), compared with a ROA and a ROCE of 1.25% and 28.28%, respectively, for the same period in 2001.

Different components that impacted the Company’s performance are discussed in detail in the following pages.

Financial Condition

The Company had total assets of $7.0 billion as of June 30, 2002, compared to $5.89 billion as of December 31, 2001, an increase of $1.10 billion or 18.78%. As of June 30, 2002, total liabilities amounted to $6.58 billion, an increase of $1.08 billion or 19.66% when compared to $5.50 billion as of December 31, 2001.

Interest-Earning Assets

Interest-earning assets amounted to $6.78 billion at June 30, 2002, an increase of $1.04 billion or 18.09% when compared to $5.74 billion as of December 31, 2001.

The increase as of June 30, 2002, was mainly due to an increase of $552.2 million or 20.79% in investment securities (primarily composed of securities available for sale and held to maturity) and $380.1 million or 13.37% in loans receivable — net (including mortgage loans held for sale).

The Company has continued its emphasis on the origination of commercial real estate loans, commercial loans as well as origination and purchase of residential mortgage loans. As a result, real estate loans secured by first mortgages portfolio, including mortgage loans held for sale, increased from $2.09 billion as of December 31, 2001, to $2.20 billion as of June 30, 2002, an increase of $108.10 million or 5.17%. Commercial loans secured by first mortgages increased from $1.12 billion as of December 31, 2001, to $1.21 billion as of June 30, 2002, an increase of $92.2 million or 8.25%. The consumer loan portfolio (including credit cards), commercial loans (not collateralized by real estate) and other loans increased from $795.6 million as of December 31, 2001, to $1.07 billion as of June 30, 2002, an increase of $277.1 million or 34.83%.

Investment securities available for sale, which principally include mortgage and asset-backed securities and United States Government and agencies obligations, increased from $281.7 million as of December 31, 2001, to $529 million as of June 30, 2002, an increase of $247.3 million or 87.79%. Investment securities held to maturity, which principally include United States Government and agencies obligations and mortgage and asset-backed securities, increased from $2.37 billion as of December 31, 2001, to $2.64 billion as of June 30, 2002, an increase of $268.5 million or 11.33%.

Federal funds sold and securities purchased under agreements to resell (“repurchase agreements”) increased from $156.1 million as of December 31, 2001, to $262.3 million as of June 30, 2002, an increase of $106.1 million or 67.97%.

Interest-Bearing Liabilities

Interest-bearing liabilities amounted to $6.35 billion at June 30, 2002, an increase of $1.07 billion or 20.21% when compared to $5.31 billion as of December 31, 2001.

The increase as of June 30, 2002, was mainly due to an increase of $528.6 million or 17.14% in deposits and $516.7 million or 25.09% in securities sold under agreements to repurchase (“reverse repurchase agreements”).

The Company offers a variety of specialized types of deposit accounts and certificates of deposit. Savings deposits increased from $465.3 million as of December 31, 2001, to $509.1 million as of June 30, 2002, an increase of $43.8 million or 9.41%. Also, other deposits (excluding accrued interest payable) represented mainly by time deposits, brokered deposits and Individual Retirement Account deposits (IRA’s), increased from $2.74 billion as of December 31, 2001, to $3.26 billion as of June 30, 2002, an increase of $518.8 million or 18.91%. Other deposits include brokered deposits amounting to $2.07 billion and $1.57 billion as of June 30, 2002 and December 31, 2001, respectively.

Stockholders’ Equity

As of June 30, 2002, total stockholders’ equity amounted to $412.2 million, an increase of $24.3 million or 6.26% when compared to $387.9 million as of December 31, 2001. The increase during the six months ended June 30, 2002, was mainly due to net income of $38.0 million, net of cash dividends declared on common and preferred stock of $13.3 million and a net change of $377,000 in other comprehensive income.

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

RESULTS OF OPERATIONS

Net Interest Income

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

Net interest income increased $7.9 million or 24.69% for the three months ended June 30, 2002 and increased $16.2 or 26.70% for the six months ended June 30, 2002, when compared to the corresponding 2001 period. The increase for the three and six months ended June 30, 2002, was the result of significant increases in the average balance of interest-earning assets although at lower yields than the comparable prior year period, as a result of a decreasing interest rate scenario. Interest income from loans, investment securities and mortgage and asset-backed securities all increased when compared to the three and six month period ended June 30, 2001.

Average interest-earning assets increased from $4.59 billion for the three months ended June 30, 2001 to $6.95 billion for the three months ended June 30, 2002, an increase of $2.36 billion or 51.51%. For the six-month periods average interest-earning assets increased from $4.44 billion in 2001 to $6.63 billion in 2002, an increase of $2.19 billion or 49.36%, being the principal reason for the increase in net interest income. The rise in average interest-earning assets is mainly related to increases in average investment securities and mortgage and other asset backed securities followed by a significant increase in average loans, which is the higher yielding category of interest-earning assets.

Interest income on loans increased $484,000 or .94% and $648,000 million or ..64% for the three and six month period ended, respectively, ended June 30, 2002, when compared to the same period in 2001. Average loans increased from $2.39 billion for the three months ended June 30, 2001, to $3.25 billion for the three months ended June 30, 2002, an increase of $860.5 million or 36.02%. For the six-month period, the average loans increased from $2.34 billion in 2001 to $3.09 billion in 2002, an increase of $752.4 million or 32.20%. For the three and six months period ended June 30, 2002, the loan portfolio average yield decreased from 8.66% to 6.43%, and from 8.78% to 6.68%, respectively.

Interest income on investment securities increased $2.8 million or 10.73% for the three months ended June 30, 2002, and $4.5 million or 8.80% for the six months ended June 30, 2002, as compared to the same periods in 2001. This increase resulted from a rise in the average balance of investment securities from $1.58 billion for the three months ended June 30, 2001, to $2.56 billion for the three months ended June 30, 2002, an increase of $979.0 million or 61.92%, and from $1.55 billion to $2.48 billion for the six month period ended June 30, 2001 and 2002, respectively, an increase of $935.2 million or 60.43%. The investment portfolio average yield decreased from 6.62% for the three months ended June 30, 2001, to 4.53% for the three months ended June 30, 2002. For the six-month period, the average yield of investments securities increased from 6.73% in 2001 to 4.57% in 2002.

Interest income on mortgage and other asset-backed securities increased $4.6 million or 61.55% for the three months ended June 30, 2002, as compared to the corresponding period in 2001. For the six-months ended June 30, 2002, interest income on mortgage and other asset-backed securities increased $8.5 million or 63.74% as compared to the same period in 2001. The average balance of mortgage and other asset-backed securities increased from $421.0 million for the three months ended June 30, 2001, to $885.0 million for the three months ended June 30, 2002, an increase of $463.5 million or 109.94%. For the six-month period, the average balance of mortgage and other asset-backed securities increased from $366.2 million in 2001 to $818.0 million for the six months ended June 30, 2002, an increase of $451.9 million or 123.40%. The increase in the average balance of mortgage and other asset-backed securities for the three and six months ended June 30, 2002, was partially offset by a decrease in the average yield from 7.11% to 5.47% for the three months ended June 30, 2001 and 2002, respectively, and from 7.38% to 5.41% for the six months ended June 30, 2001 and 2002, respectively.

Interest income on money market instruments decreased $829,000 or 36.7% and $2.44 million or 48.22% for the three and six months ended June 30, 2002, as compared to the corresponding periods in 2001. The decrease for the three and six-month period ended June 30, 2002, was mainly related to a decrease in the average yield on money market instruments from 4.56% and 5.33% for the three and six months ended June 30, 2001 to 2.20% and 2.16% for the three and six month period ended June 30, 2002. The decrease in the average yield was partially offset by an increase in the average balance from $198.6 million for the six months ended June 30, 2001, to $260.3 million for the three months ended June 30, 2002, an increase of $61.7 million or 31.09%. For the six months period ended June 30, 2002, the average balance of money market instruments increased to $243.9 million from $191.0 million for the six months ended June 30, 2001, an increased of $52.9 million or 27.67%.

The increase in average interest-earning assets was partially offset by an increase in average interest-bearing liabilities. Average interest-bearing liabilities increased from $4.36 billion for the three months ended June 30, 2001, to $6.47 billion for the three months ended June 30, 2002, an increase of $2.11 billion or 48.47%. For the six-month period ended June 30, 2001 and 2002, average interest bearing liabilities increased from $4.22 billion to $6.20 billion, respectively, an increase of $1.98 billion or 46.70%. The increase in average interest-bearing liabilities for the three and six months ended June 30, 2002, was mainly related to an increase in the average balance of reverse repurchase agreements, followed by a significant increase in average deposits. The increase in average interest-bearing liabilities was partially offset by a decrease in the average interest rates paid on interest-bearing liabilities during both periods. For the three months period, the average interest rates paid decreased from 5.11% in 2001 to 3.39% in 2002. For the six-month period, the average interest rates paid decreased from 5.31% in 2001 to 3.46% in 2002.

Interest expense on deposits decreased $4.4 million or 13.37% for the three months ended June 30, 2002, as compared to the corresponding period in 2001. For the six-month period interest expense on deposits decreased from $67.3 million in 2001 to $55.6 million in 2002, a decrease of $11.7 million or 17.40%. The decrease for the three and six months ended June 30, 2002, was due to a decrease in the average interest rates paid on deposits from 4.84% to 3.14% and from 5.07% to 3.21%, for the three and six month periods ended June 30, 2001, and 2002, respectively. The average balance of deposits increased from $2.74 billion for the three months ended June 30, 2001, to $3.66 billion for the three months ended June 30, 2002, an increase of $921.0 million or 33.60%. For the six month period ended June 30, 2002, the average balance on deposits increased from $2.68 billion in 2001 to $3.49 billion in 2002, an increase of $814.1 million or 30.41%. Certificates of deposits accounted for the majority of the increase in the average balance of deposits

Interest expense on reverse repurchase agreements increased $4.1 million or 20.10% for the three months ended June 30, 2002, as compared to the corresponding period in 2001. For the six-month period ended June 30, 2002, interest expense on reverse repurchase agreements increased from $39.5 million for the six months ended June 30, 2001, to $47.3 million in 2002, an increase of $7.8 million or 19.66%. The increase was due to a rise in the average balance of reverse repurchase agreements. The average balance of reverse repurchase agreements increased from $1.45 billion for the three months ended June 30, 2001, to $2.67 billion for the three months ended June 30, 2002, an increase of $1.2 billion or 84.62%. For the six-month period ended June 30, 2002, the average balance of reverse repurchase agreements increased from $1.38 billion in 2001, to $2.57 billion in 2002, an increase of $1.18 billion or 85.34%. For the three and six months ended June 30, 2002, the increase in average balance was partially offset by a decrease in the average interest rates paid on reverse repurchase agreements. For the three-month period, the average interest rates paid decreased from 5.61% in 2001, to 3.65% in 2002. For the six-month period, the average interest rates paid decreased from 5.76% in 2001, to 3.72% in 2002.

Interest expense on advances from FHLB decreased $63,000 or 3.94% for the three months ended June 30, 2002, as compared to the corresponding period in 2001. For the six months ended June 30, 2002, interest expense on advances from FHLB decreased $396,000 million or 11.40%, when compared to the same period in 2001. The decreases for the three and six month periods ended June 30, 2002, were mainly related to a decrease in the average interest rates paid on advances from FHLB. The average interest rate paid on advances from the FHLB for the three and six months ended June 30, 2002, decreased from 5.38% to 5.17% and from 5.83% to 5.17%, respectively.

Interest expense on term notes decreased $407,000 for the three months ended June 30, 2002, as compared to the corresponding period in 2001. For the six months ended June 30, 2002, interest expense on term notes decreased from $1.1 million in 2001, to $584,000 million in 2002, a decrease of $503,000 million or 46.29%. The decrease for the three and six month periods ended June 30, 2002, was mainly due to a combination of a decrease in the average interest rates paid in term notes, as well as in the average balance of term notes. The average balance of term notes for the three months ended June 30, 2002, decreased from $48.0 million in 2001 to $13.4 million in 2002, a decrease of $34.6 million or 72.10%. For the six months period ended June 30, 2002, the average balance of term notes decreased from $48.0 million in 2001 to $28.2 million in 2002, a decrease of $19.8 million or 41.26%. The average rate paid on term notes decreased from 4.47% for the three-month period ended June 30, 2001; to 3.85% for the three month period ended June 30, 2002. For the six months ended June 30, 2002, the average interest rates paid in term notes decreased from 4.57% for the same period in 2001, to 4.18% in 2002.

Provision For Loan Losses

The provision for loan losses increased $467,000 during the three months ended June 30, 2002, and $1.09 million during the six months ended June 30, 2002, as compared to the corresponding periods in 2001. The allowance for loan losses amounted to $43.5 million as of June 30, 2002, compared to $38.4 million as of December 31, 2001, an increase of $5.1 million or 13.41%. The allowance for loan losses is maintained at a level, which, in management’s judgment, is adequate to absorb possible credit losses inherent in the loan portfolio.

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 new 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. 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.

Other Income

Total other income increased $2.01 million or 61.44% for the three months ended June 30, 2002, and increased $2.71 million or 33.06% for the six months ended June 30, 2002, as compared to the corresponding periods in 2001. The increase was primarily the result of an increase in service fees associated with a growing volume of trust related activities and transactions, commissions and other retail financial services fees and positive valuation on derivative instruments.

Service charges on deposit accounts and other fees increased $771,000 or 18.00% and $1.66 million or 19.17% million for the three and six months ended June 30, 2002, respectively, as compared to the corresponding periods in 2001.

Operating Expenses

Total operating expenses increased $2.8 million or 18.76% for the three months ended June 30, 2002, and $5.3 million or 18.32% for the six months ended June 30, 2002, as compared to the corresponding periods in 2001.

Salaries and employees’ benefits, which is the largest component of total operating expenses, increased $1.1 million or 19.09% for the three months ended June 30, 2002, and $2.2 million or 20.57% for the six months ended June 30, 2002, as compared to the corresponding periods in 2001. Such increase was mainly due to an increase in personnel to support the continued expansion of the Company, including the inception of new lines of business, normal salary increases and related employee benefits.

Advertising expense increased $407,000 or 32.92% for the three months ended June 30, 2002, and $710,000 or 30.56% for the six months ended June 30, 2002, as compared to the same periods in 2001. The increase was due to promotional efforts launched in connection to the bank’s consumer loan campaign as well as to the IRA’s campaign.

Other expenses increased $1.3 million or 16.34% for the three months ended June 30, 2002, and $2.4 million or 15.03% for the six months ended June 30, 2002, as compared to the corresponding periods in 2001. The increase is primarily the result of an increase in the volume of operations and the opening of new businesses as well as the costs associated with additional investment in human resources, technology, and general infrastructure to sustain and coordinate Westernbank’s expansions.

Net Income

Net income increased $4.7 million or 30.71% and $8.9 million or 30.49% for the three and six months ended June 30, 2002, respectively, as compared to the corresponding periods in 2001. The increase for the three and six months ended June 30, 2002, 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.

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.

The Company (on a consolidated basis) and Westernbank (collectively, 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 June 30, 2002, 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 tables. At June 30, 2002, there are no conditions or events that management believes have changed Westernbank’s category.

The Companies’ actual capital amounts and ratios as of June 30, 2002, are also presented in the table below:


												Minimum To Be
							Minimum					Well Capitalized Under
							Capital					Prompt Corrective
		Actual					Requirement					Action Provisions

		Amount		Ratio			Amount		Ratio			Amount		Ratio

		(Dollars in Thousands)
Total Capital to Risk Weighted Assets:
	Consolidated	$	454,593		11.38	%	$	319,544		8.00	%		N/A		N/A
	Westernbank		437,438		10.96			319,237		8.00			399,047		10.00	%
Tier I Capital to Risk Weighted Assets:
	Consolidated		410,986		10.40	%		158,032		4.00	%		N/A		N/A
	Westernbank		393,930		9.98			157,878		4.00			236,817		6.00	%
Tier I Capital to Average Assets:
	Consolidated		410,986		5.79	%		213,011		3.00	%		N/A		N/A
	Westernbank		393,930		5.56			212,499		3.00			354,165		5.00	%

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

Sarbanes-Oxley Act of 2002

On July 30, 2002 President Bush signed into law the Sarbanes-Oxley Act of 2002, landmark legislation on accounting reform and corporate governance. Although much of the Act is still being assessed, the Company does not anticipate any significant changes in the operations of, and reporting by, the Company as a result of the Act. In accordance with the requirements of the Sarbanes-Oxley Act, written certifications for this quarterly report on Form 10-Q by the chief executive officer and chief financial officer accompany this report as filed with the SEC.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk and asset/liability management

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.

The Company is exposed to changes in the level of Net Interest Income (“NII”) in a changing interest rate environment. NII will fluctuate pursuant to changes in the levels of interest rates and of interest-sensitive assets and liabilities. If (1) the weighted average rates in effect at period end remain constant, or increase or decrease on an instantaneous and sustained change of plus 200 or minus 100 basis points, 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:

June 30, 2002:


Change in Interest Rate		*Expected NII ()**		Amount Change			% Change

				(Dollars in thousands)
+200 Basis Points		$	162,786	$	22,318			15.89	%
	Base Scenario		140,468		—			—
-100 Basis Points			127,447		(13,021	)		(10.22	)%

December 31, 2001:


Change in Interest Rate		Expected NII		Amount Change			% Change

				(Dollars in thousands)
+200 Basis Points		$	141,560	$	20,471			16.91	%
	Base Scenario		121,089		—			—
-100 Basis Points			100,279		(20,810	)		(17.19	)%

(*) The NII figures exclude the effect of the amortization of loan fees. Given the current fed fund rate of 1.75% at June 30, 2002, 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 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the opinion of the Company’s management, the pending and threatened legal proceedings of which management is aware will not have a material adverse effect on the financial condition and results of operations of the Company.

Item 2. Changes in Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders of W Holding Company, Inc. was held at Mayagüez Resort & Casino Hotel, located at Road 104, KM. 0.3, Mayagüez, Rico at 1:30 P.M. on May 14, 2002, pursuant due to notice, for the following purposes:

(1) to elect two member of the Company’s Board of Directors for a term of three years or until any successor is elected or qualified (Proposal 1);

(2) to ratify the appointment of Deloitte and Touche LLP as the Company’s independent auditors for the year ending December 31, 2002 (Proposal 2); and

(3) to transact any other business that properly comes before the annual meeting or any adjournments of the meeting.

The total number of votes eligible to be cast as of the record date of the meeting (April 5, 2002) was 41,500,000 eligible votes.

The results of the election, as certified by representatives of the Bank of New York, duly appointed inspectors of election for the annual meeting, were as follows:


	Proposal No. 1				Proposal No. 2

	Director 1		Director 2
FOR		36,248,554		36,248,744		35,814,249
AGAINST		490,163		489,973		921,692
ABSTAIN		—		—		2,776

TOTAL SHARES		36,738,717		36,738,717		36,738,717

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

A – Financial Statements Schedules

No schedules are presented because the information is not applicable or is included in the Consolidated Financial Statements or in the notes thereto described in 6(c) below.

B – Reports on Form 8-K

On June 17, 2002, the Company filed a current Report on Form 8-K, reporting that on June 17, 2002 its Board of Directors had declared a three-for-two stock split to be effected in the form of a stock dividend. The record date for the stock split was on June 28, 2002, and the distribution of the additional shares to take place on July 10, 2002.

On June 20, 2002, the Company issued a press release announcing that its Board of Directors approved a 3.125% increase in its cash dividend payment on the Company’s common stock. The new annual cash dividend payment will be $0.22 per share. The first cash dividend payment to be paid on July 15, 2002 to stockholders of record on July 1, 2002. Thereafter, the Company intends to pay cash dividends on the 15th day of each month to stockholders of record as of the last day of the preceding month.

On June 21, 2002, the Company issued a press release changing the record and payment dates for the first new dividend payment announced in the Company’s June 20, 2002 press release. The first new cash dividend payment will be paid on August 15, 2002 to stockholders of record on July 31, 2002.

On July 11, 2002, the Company filed a current Report Form 8-K, announcing the results of operations for the second quarter of 2002, and the opening of 17 new branches in Puerto Rico.

C – Exhibits

No exhibits are filed as part of this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Registrant:



		W HOLDING COMPANY, INC.



Date: August 14, 2002		By /s/ Frank C. Stipes Frank C. Stipes, Esq. Chairman of the Board, Chief Executive Officer and President



Date: August 14, 2002		By /s/ Freddy Maldonado Freddy Maldonado Chief Financial Officer and Vice President of Finance and Investment

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(1)		to elect two member of the Company’s Board of Directors for a term of three years or until any successor is elected or qualified (Proposal 1);

(2)		to ratify the appointment of Deloitte and Touche LLP as the Company’s independent auditors for the year ending December 31, 2002 (Proposal 2); and

(3)		to transact any other business that properly comes before the annual meeting or any adjournments of the meeting.