W HOLDING CO INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2003

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

		For the transition period from to

Commission File Number 000-27377

W HOLDING COMPANY, INC.

(Exact name of Registrant as Specified in its Charter)


Commonwealth of Puerto Rico (State or Other Jurisdiction of Incorporation or Organization)		66-0573197 (I.R.S. Employer Identification Number)

19 West McKinley Street
Mayagüez, Puerto Rico 00680
(Address of Principal Executive Offices) (Zip Code)

(787) 834-8000
(Registrant’s Telephone Number Including Area Code)

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 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

As of April 30, 2003, there were 68,569,312 shares of the Registrant’s Common Stock, $1.00 par value.

TABLE OF CONTENTS


Part I. Financial Information
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Part I — Item 2
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
SIGNATURES
CERTIFICATION
Index to Exhibits
EX-99.1 CERTIFICATION OF THE CEO
EX-99.2 CERTIFICATION OF THE CFO

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONTENTS


			Page

PART I FINANCIAL INFORMATION:
	Item 1.	Financial Statements (Unaudited)
		Consolidated Statements of Financial Condition as of March 31, 2003 and December 31, 2002		1
		Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002		2
		Consolidated Statements of Changes in Stockholders’ Equity and of Comprehensive Income for the Three Months Ended March 31, 2003 and 2002		3
		Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002		4-5
		Notes to Consolidated Financial Statements		6-25
	Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		26-55
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		56-58
	Item 4.	Controls and Procedures		59
PART II OTHER INFORMATION:
	Item 6.	Exhibits and Reports on Form 8-K		60
SIGNATURES				61

Part I. Financial Information

Item 1. Financial Statements

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


					March 31,			December 31,
					2003			2002

ASSETS
	Cash and due from banks				$	77,154		$	76,080
	Money market instruments:
		Federal funds sold and securities purchased under agreements to resell				367,727			459,147
		Interest bearing deposits with banks				22,784			17,459
	Investment securities available for sale, at fair value					97,940			160,887
	Investment securities held to maturity, with a fair value of $4,072,780 in 2003 and $3,503,379 in 2002					4,058,925			3,501,057
	Federal Home Loan Bank stock, at cost					39,807			43,322
	Mortgage loans held for sale, at lower of cost or fair value					4,423			7,446
	Loans, net of allowance for loan losses of $51,454 in 2003 and $47,114 in 2002					3,972,405			3,754,357
	Accrued interest receivable					45,581			46,653
	Premises and equipment, net					95,594			96,209
	Deferred income taxes, net					21,641			16,327
	Other assets					42,271			26,133

				TOTAL	$	8,846,252		$	8,205,077

LIABILITIES AND STOCKHOLDERS’ EQUITY
	LIABILITIES:
	Deposits				$	4,536,091		$	4,298,744
	Securities sold under agreements to repurchase					3,499,933			3,097,341
	Advances from Federal Home Loan Bank					120,000			120,000
	Mortgage note payable					37,724			37,822
	Other liabilities					61,561			66,422

			Total liabilities			8,255,309			7,620,329

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 8,926,829 and 8,942,999 shares at March 31, 2003 and December 31, 2002, respectively					8,927			8,943
	Common stock — $1.00 par value per share; authorized 300,000,000 shares; issued and outstanding 68,370,486 and 68,346,306 at March 31, 2003 and December 31, 2002, respectively					68,370			68,346
	Paid-in capital					319,363			319,106
	Retained earnings:
		Reserve fund				33,507			32,011
		Undivided profits				162,431			157,442
	Accumulated other comprehensive loss					(1,655	)		(1,100	)

		Total stockholders’ equity				590,943			584,748

TOTAL					$	8,846,252		$	8,205,077

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
			March 31,

			2003			2002

INTEREST INCOME:
	Loans, including loan fees		$	63,418		$	50,281
	Investment securities			28,584			27,350
	Mortgage and asset-backed securities			8,746			9,870
	Money market instruments			2,600			1,187

		Total interest income		103,348			88,688

INTEREST EXPENSE:
	Deposits			29,497			26,899
	Securities sold under agreements to repurchase			23,134			22,909
	Advances from Federal Home Loan Bank			1,529			1,529
	Term notes			—			455

		Total interest expense		54,160			51,792

NET INTEREST INCOME				49,188			36,896
PROVISION FOR LOAN LOSSES				6,228			3,624

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES				42,960			33,272

OTHER INCOME (LOSS):
	Service charges on deposit accounts and other fees			6,097			5,282
	Unrealized gain on derivative instruments			498			348
	Net loss on sales and valuation of loans, securities and other assets			(14,444	)		(29	)

		Total other income (loss), net		(7,849	)		5,601

TOTAL NET INTEREST INCOME AND OTHER INCOME				35,111			38,873

OPERATING EXPENSES:
	Salaries and employees’ benefits			8,355			6,327
	Equipment			2,116			2,232
	Occupancy			1,669			1,349
	Advertising			1,229			1,392
	Printing, postage, stationery and supplies			932			683
	Telephone			571			501
	Other			4,327			4,270

		Total operating expenses		19,199			16,754

INCOME BEFORE PROVISION FOR INCOME TAXES				15,912			22,119

PROVISION FOR INCOME TAXES:
	Current			6,324			5,450
	Deferred			(5,291	)		(1,223	)

		Total provision for income taxes		1,033			4,227

NET INCOME			$	14,879		$	17,892

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS			$	10,814		$	14,565

BASIC AND DILUTED EARNINGS PER COMMON SHARE			$	0.16		$	0.23	(1)

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

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)


					Three Months Ended
					March 31,

					2003			2002

Changes in Stockholders’ Equity:
	Preferred stock:
		Balance at beginning of period			$	8,943		$	7,220
		Conversion of preferred stock				(16	)		—

		Balance at end of period				8,927			7,220

	Common stock:
		Balance at beginning of period				68,346			41,500
		Issuance of common stock upon conversion of preferred stock				24			—

		Balance at end of period				68,370			41,500

	Paid-in capital:
		Balance at beginning of period				319,106			187,628
		Issuance of common stock upon conversion of preferred stock				257			—

		Balance at end of period				319,363			187,628

	Reserve fund:
		Balance at beginning of period				32,011			23,476
		Transfer from undivided profits				1,496			1,767

		Balance at end of period				33,507			25,243

	Undivided profits:
		Balance at beginning of period				157,442			128,583
		Net income				14,879			17,892
		Cash dividends on common stock				(4,329	)		(3,320	)
		Cash dividends on preferred stock				(4,065	)		(3,326	)
		Transfer to reserve fund				(1,496	)		(1,767	)

		Balance at end of period				162,431			138,062

	Accumulated other comprehensive loss:
		Balance at beginning of period				(1,100	)		(498	)
		Other comprehensive loss				(555	)		(4,958	)

		Balance at end of period				(1,655	)		(5,456	)

Total Stockholders’ Equity					$	590,943		$	394,197

Comprehensive income:
		Net income			$	14,879		$	17,892

		Other comprehensive loss, net of income tax:
			Unrealized net losses on securities available for sale:
				Unrealized holding losses arising during the period		(578	)		(5,142	)

			Cash flow hedges:
				Unrealized net derivative gain arising during the period		—			282

		Income tax effect				23			(98	)

		Net change in other comprehensive loss, net of income taxes				(555	)		(4,958	)

Total Comprehensive Income					$	14,324		$	12,934

See notes to consolidated financial statements.

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


				Three months ended
				March 31,

				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	14,879		$	17,892
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision for:
		Loan losses			6,228			3,624
		Foreclosed real estate held for sale			—			21
	Depreciation and amortization on:
		Premises, equipment and other			1,721			1,477
		Foreclosed real estate held for sale			81			15
		Mortgage servicing rights			312			167
	Deferred income taxes				(5,291	)		(1,223	)
	Amortization of premium (discount) on:
		Investment securities available for sale			(146	)		(167	)
		Investment securities held to maturity			(601	)		(3,026	)
		Mortgage-backed securities held to maturity			1,225			(214	)
		Loans			410			368
	Amortization of discount on deposit				585			341
	Amortization of deferred loan origination fees, net				(1,546	)		(1,242	)
	Net loss (gain) on sale and in valuation of:
		Investment securities held to maturity			15,701			—
		Mortgage loans held for sale			2,689			(90	)
		Derivative instruments			(498	)		(348	)
		Foreclosed real estate held for sale			(10	)		(3	)
	Originations of mortgage loans held for sale				(9,153	)		(6,627	)
	Decrease (increase) in:
		Trading securities			6,665			12,807
		Accrued interest receivable			1,072			(15,459	)
		Other assets			(15,793	)		746
	Increase (decrease) in:
		Accrued interest on deposits and borrowings			5,102			(36	)
		Other liabilities			1,114			11,256

			Net cash provided by operating activities		24,746			20,279

CASH FLOWS FROM INVESTING ACTIVITIES:
	Net increase in interest bearing deposits with banks				(5,325	)		(4,883	)
	Net decrease in federal funds sold and securities purchased under agreements to resell				91,420			708
	Investment securities available for sale:
		Purchases			—			(489,605	)
		Proceeds from principal repayment			49,838			31,181
	Investment securities held to maturity:
		Purchases			(6,261,739	)		(3,249,676	)
		Proceeds from redemption and repayment			5,788,005			3,034,731
	Mortgage-backed securities held to maturity:
		Purchases			(342,717	)		(80,445	)
		Proceeds from principal repayment			255,052			68,787
	Loans:
		Purchases			(25,007	)		(25,016	)
		Other increase			(192,621	)		(91,924	)
	Purchase of options				(109	)		(435	)
	Proceeds from sales of foreclosed real estate held for sale				110			75
	Additions to premises and equipment				(1,095	)		(519	)
	Redemption (purchase) of Federal Home Loan Bank stock				3,515			(1,213	)
	Purchase of companies, net of cash acquired				—			(11,496	)

		Net cash used in investing activities			(640,673	)		(819,730	)

Forward				$	(615,927	)	$	(799,451	)

(Continued)

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


					Three Months Ended
					March 31,

					2003			2002

Forward					$	(615,927	)	$	(799,451	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net increase in deposits					223,459			154,694
	Net increase (decrease) in securities sold under agreements to repurchase					(193,573	)		440,656
	Securities sold under agreements to repurchase with original maturities over three months:
				Proceeds		725,100			199,393
				Payments		(128,935	)		—
	Payments on mortgage note payable					(98	)		—
	Net decrease in advances from borrowers for taxes and insurance					(841	)		(558	)
	Dividends paid					(8,111	)		(6,410	)

		Net cash provided by financing activities				617,001			787,775

NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS						1,074			(11,676	)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD						76,080			62,414

CASH AND DUE FROM BANKS, END OF PERIOD					$	77,154		$	50,738

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid during the period for:
		Interest on deposits and other borrowings			$	49,058		$	51,879
	Noncash activities:
			Building acquired on purchase of partnership			—			49,852
			Other assets acquired on purchase of partnership			—			249
			Mortgage note assumed on purchase of partnership interest			—			38,062
			Accrued dividends payable			2,214			1,661
			Net increase in other comprehensive loss			(555	)		(4,956	)
			Mortgage loans securitized and transferred to trading securities			6,665			8,411
			Transfer from held to maturity to available for sale			13,158			—
			Transfer from loans to foreclosed real estate held for sale			281			293
			Mortgage loans originated to finance the sale of foreclosed real estate held for sale			289			145
			Capitalized mortgage servicing rights			1,348			162
			Unpaid additions to premises and equipment			11			12
			Transfer from undivided profits to reserve fund			2,471			1,767
	Effect in valuation of derivatives and their hedge items:
			(Decrease) in other assets			(626	)		—
			Increase in deposits			(3,464	)		(8,420	)
			Increase in other liabilities			3,393			8,603
	Conversion of preferred stock into common stock:
			Preferred stock			(16	)		—
			Paid in capital			(257	)		—
			Common stock			14			—

See notes to consolidated financial statements.

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 offering property, casualty, life and disability insurance. The assets, liabilities, revenues and expenses of Westernbank Insurance Corp. at March 31, 2003 and December 31, 2002, and for the three month periods ended March 31, 2003 and 2002 were not significant.

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

The Company is the third largest public banking holding company in Puerto Rico, as measured by total assets as of March 31, 2003. As of March 31, 2003, it had total assets of $8.85 billion, an investment portfolio of $4.59 billion, a loan portfolio-net of $3.97 billion, deposits of $4.54 billion and stockholders’ equity of $590.9 million.

Westernbank operates through 51 full service branch offices located throughout Puerto Rico, primarily in the western and southwestern regions of the island, and a fully functional banking site on the Internet. In addition, it operates four divisions: Westernbank International Division, which is an International Banking Entity (IBE) under Puerto Rico Act No. 52 of August 11, 1989, as amended, known as the International Banking Regulatory Act, which activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico; Westernbank Business Credit, which specializes in commercial business loans secured principally by accounts receivable, inventory and equipment; Westernbank Trust Division, which offers a full array of trust services; and Expresso of Westernbank, a new division created in July 2002, which specializes in small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000 through 19 full-service branches (including 13 new branches and six re-designated branches). Westernbank owns 100% of the voting shares of SRG Net, Inc., a Puerto Rico corporation that operates an electronic funds transfer network. The assets, liabilities, revenues and expenses of SRG Net, Inc. at March 31, 2003 and December 31, 2002, and for the three months period ended March 31, 2003, and for the year ended December 31, 2002, were not significant.

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

The unaudited Consolidated Financial Statements 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 March 31, 2003 and December 31, 2002, and the results of operations and cash flows for the three months ended March 31, 2003 and 2002. 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 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, 2002, has been derived from the audited Consolidated Financial Statements of the Company. The results of operations and cash flow for the three months ended March 31, 2003 and 2002 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, 2002, 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 months ended March 31, 2003 and 2002, 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, as follows:


		Three Months Ended
		March 31,

		2003		2002

		(Dollars in thousands,
		except per share data)
Basic and diluted earnings per common share:
	Net income	$	14,879	$	17,892
	Less preferred stock dividends		4,065		3,327

	Income attributable to common stockholders	$	10,814	$	14,565

	Weighted average number of common shares outstanding for the period		68,348,653		62,250,000

	Dilutive potential common shares — Options		1,264,049		521,783


Total			69,612,702		62,771,783

Basic and diluted earnings per common share		$	0.16	$	0.23

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 of record as of June 28, 2002, distributed on July 10, 2002. The effect of the stock split was a decrease to retained earnings and an increase in common stock by $20.8 million.

On August 21 and 28, 2002, the Company issued 5,300,000 and 795,000 shares, respectively, of its Common Stock in an underwritten public offering. The common shares were issued at a price of $17.00 per share. Proceeds from the issuances of common stock amounted to $97,875,213, net of $5,739,787 in issuance costs.

During the first quarter ended March 31, 2003, 16,170 shares of the convertible preferred stock series A were converted for 24,130 shares of common stock.

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 shareholders on the basis of a percentage of the average earnings for the last two preceding years. The same are paid monthly on the 15th day of each month for stockholders of record as of the last day of the preceding month.

On January 31, 2003, the Company’s Board of Directors approved an increase in its annual dividend payments to stockholders in 2003 to $0.27 per share.

The Company’s cash dividends declared per share for the first three months of year 2003 and 2002 were as follows:


RECORD DATE	PAYABLE DATE	AMOUNT PER SHARE (2)

YEAR 2003 January 31, 2003	February 15, 2003	$	0.02250
February 28, 2003	March 15, 2003		0.02250
March 31, 2003	April 15, 2003		0.02250

Total		$	0.06750

YEAR 2002(1)
January 31, 2002	February 15, 2002	$	0.01778
February 28, 2002	March 15, 2002		0.01778
March 31, 2002	April 15, 2002		0.01778

Total		$	0.05334

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

(2)		Dividend amounts in the table are rounded.

4. INVESTMENT SECURITIES

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


				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
March 31, 2003		Cost		Gains		Losses		Value

		(In thousands)
Available for sale:
	Mortgage-backed securities- Collateralized mortgage obligations (CMO)	$	68,728	$	269	$	1	$	68,996
	Asset-back securities		13,159		—		—		13,159
	Other investments		17,702		50		1,967		15,785

Total		$	99,589	$	319	$	1,968	$	97,940

Held to maturity:
	U.S. Government and agencies obligations	$	3,199,586	$	9,988	$	300	$	3,209,274
	Puerto Rico Government and agencies obligations		19,695		451		—		20,146
	Commercial paper		25,000		—		—		25,000
	Corporate notes		66,768		2,576		—		69,344

Subtotal			3,311,049		13,015		300		3,323,764

Mortgage and asset-backed securities:
	Federal Home Loan Mortgage Corporation (FHLMC) certificates		9,574		585		—		10,159
	Government National Mortgage Association (GNMA) certificates		12,229		604		—		12,833
	Fannie Mae (FNMA) certificates		6,503		427		—		6,930
	CMO certificates		679,460		1,535		2,011		678,984
	Asset-backed securities		40,110		—		—		40,110

Subtotal			747,876		3,151		2,011		749,016

Total		$	4,058,925	$	16,166	$	2,311	$	4,072,780


				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
December 31, 2002		Cost		Gains		Losses		Value

		(In thousands)
Available for sale:
	Mortgage-backed securities - CMO	$	144,378	$	898	$	—	$	145,276
	Other investments		17,580		230		2,199		15,611

Total		$	161,958	$	1,128	$	2,199	$	160,887

Held to maturity:
	U.S. Government and agencies obligations	$	2,671,344	$	7,783	$	376	$	2,678,751
	Puerto Rico Government and agencies obligations		19,695		245		30		19,910
	Commercial paper		74,997		—		—		74,997
	Corporate notes		66,697		3,173		—		69,870

Subtotal			2,832,733		11,201		406		2,843,528

Mortgage and other asset-backed securities:
	FHLMC certificates		10,435		636		—		11,071
	GNMA certificates		13,657		686		—		14,343
	FNMA certificates		6,906		447		—		7,353
	CMO certificates		565,068		986		3,366		562,688
	Asset-backed securities		72,258		250		8,112		64,396

Subtotal			668,324		3,005		11,478		659,851

Total		$	3,501,057	$	14,206	$	11,884	$	3,503,379

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


		AVAILABLE FOR SALE				HELD TO MATURITY

		Amortized		Fair		Amortized		Fair
		Cost		Value		Cost		Value

		(In thousands)
Due within one year		$	—	$	—	$	45,107	$	45,390
Due after one year through five years			—		—		2,748,572		2,756,760
Due after five years through ten years			—		—		294,000		295,979
Due after ten years			17,702		15,785		223,370		225,635

	Subtotal		17,702		15,785		3,311,049		3,323,764
Mortgage and other asset-backed securities			81,887		82,155		747,876		749,016

Total		$	99,589	$	97,940	$	4,058,925	$	4,072,780

The Company use certain methods and assumptions in estimating fair values of financial instruments. (See Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Fair value of Financial Instruments of the Company’s Consolidated Financial Statements as of December 31, 2002 and 2001 and for the three years ended December 31, 2002.)

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

The impairment analysis on the mortgage and other asset-backed securities is done placing special emphasis on the analysis of the trustee and collateral manager monthly reports, as well as on sensitivity and expected cash flows analysis made by major brokerage houses. The Company also considers its intent and ability to hold these securities. If management believes, based on the analysis, that the principal, and available secondary market prices from broker/dealers and interest obligations on any mortgage and other asset-backed security will not be received on a timely manner, the security is written down to management’s estimate of fair value.

The equity securities impairment analyses are performed and reviewed quarterly based on the latest financial information and any supporting research report made by a major brokerage house. These analyses are very subjective and based, among other things, on relevant financial data such as capitalization, cash flow, liquidity, systematic risk, and debt outstanding. Management also considers the industry trends, the historical performance of the stock, as well as the Company’s intent to hold the security for an extended period. If management believes there is a low probability of achieving book value in a reasonable time frame, then impairment will be recorded by writing the security down to fair value.

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

Management will continue its ongoing monitoring of the Company’s investment securities to identify any other-than-temporary impairment.

5. LOANS

The loan portfolio consisted of the following:


		March 31,			December 31,
		2003			2002

		(In thousands)
REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
Commercial real estate		$	1,819,865		$	1,648,994
Conventional:
	One-to-four family residences		798,053			827,902
	Other properties		2,720			2,447
Construction and land acquisition			195,096			186,208
Insured or guaranteed — Federal Housing Administration, Veterans Administration, and others			20,833			17,201

Total			2,836,567			2,682,752

Plus (less):
	Undisbursed portion of loans in process		(4,716	)		(4,942	)
	Premium on loans purchased — net		1,373			1,485
	Deferred loan fees — net		(9,975	)		(5,624	)

Total			(13,318	)		(9,081	)

Real estate loans — net			2,823,249			2,673,671

OTHER LOANS:
Commercial loans			429,053			382,416
Loans on deposits			32,099			32,803
Credit cards			56,414			56,658
Consumer loans			684,391			655,713
Plus (less):
	Premium on loans purchased — net		2,989			3,225
	Deferred loan fees — net and unearned interest		(4,336	)		(3,015	)

Other loans — net			1,200,610			1,127,800

TOTAL LOANS			4,023,859			3,801,471
ALLOWANCE FOR LOAN LOSSES			(51,454	)		(47,114	)

LOANS — NET		$	3,972,405		$	3,754,357

The total investment in impaired commercial and construction loans at March 31, 2003 and December 31, 2002, was $42,509,000 and $50,589,000, respectively. All impaired commercial and construction loans were measured based on the fair value of collateral at March 31, 2003 and December 31, 2002. Impaired commercial and construction loans amounting to $25,009,000 and $26,074,000 at March 31, 2003 and December 31, 2002, respectively, were covered by a valuation allowance of $4,752,000 for both periods. Impaired commercial and construction loans amounting to $17,500,000 at March 31, 2003 and $24,515,000 at December 31, 2002, 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 in impaired commercial and construction loans for the three-month periods ended March 31, 2003 and 2002, amounted to $44,209,000 and $40,157,000, respectively. The Company’s policy is to recognize interest income related to impaired loans on a cash basis, when these are over 90 days in arrears on payments of principal or interest. Interest in impaired commercial and construction loans collected and recognized as income for the three-month periods ended March 31, 2003 and 2002, amounted to $577,000 and $804,000, respectively.

6. PLEDGED ASSETS

At March 31, 2003, residential mortgage loans and investment securities held to maturity amounting to $704,009,000 and $3,784,700,000, respectively, were pledged to secure public fund, 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, and interest rate swap agreements. Pledged investment securities held to maturity amounting to $3,725,226,000 at March 31, 2003, can be repledged.

7. DEPOSITS

A comparative summary of deposits as of March 31, 2003 and December 31, 2002, follows:


	2003		2002

	(In thousands)
Noninterest bearing accounts	$	165,898	$	156,143
Passbook accounts		571,842		560,549
NOW accounts		153,887		138,434
Super NOW accounts		26,146		24,868
Money market accounts		19,538		15,303
Certificates of deposit		3,570,884		3,379,628

Total		4,508,195		4,274,925
Accrued interest payable		27,896		23,819

Total	$	4,536,091	$	4,298,744

8. INCOME TAXES

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

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

The Code provides a dividend received deduction of 100% on dividends received from wholly-owned subsidiaries subject to income taxation in Puerto Rico. The income on certain investments is exempt for income tax purposes. Also, Westernbank International operates as an International Banking Entity (IBE) under Puerto Rico Act No. 52, of August 11, 1989, as amended, known as the International Banking Regulatory Act. Under Puerto Rico tax law, an IBE can hold non-Puerto Rico assets, and earn interest on these assets, as well as generate fee income outside of Puerto Rico on a tax-exempt basis. As a result of the above, the Company’s effective tax rate is substantially below the statutory rate.

A reconciliation of the provision of income taxes computed by applying the Puerto Rico income tax statutory rate to tax provision as reported for the three-month periods ended March 31, 2003 and 2002 is as follows:


		2003			2002

		(In thousands)
Computed at Puerto Rico statutory rate		$	6,206		$	8,626
Effect on provision of:
	Exempt interest income, net		(6,860	)		(3,034	)
	Net nondeductible expenses		(48	)		(35	)
	Other		1,735			(1,330	)

Provision for income taxes as reported		$	1,033		$	4,227

Statutory tax rate			39	%		39	%

Effective tax rate			7	%		19	%

Deferred income tax assets (liabilities) as of March 31, 2003 and December 31, 2002, consisted of the following:


	2003			2002

	(In thousands)
Allowance for loan losses	$	18,939		$	17,247
Unrealized gains on derivative instruments		(294	)		(137	)
Mortgage servicing rights		(1,155	)		(751	)
Allowance for foreclosed real estate held for sale		6			6
Other temporary differences		4,151			(32	)

Total		21,647			16,333
Less valuation allowance		6			6

Deferred income tax asset, net	$	21,641		$	16,327

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

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

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

In addition, the Company offers its customers certificates of deposit which contain an embedded derivative tied to the performance of Standard & Poor’s 500 Composite Stock Index that must be bifurcated from the host deposit and recognized in the statement of financial condition in accordance with SFAS No. 133. At the end of five years, the depositor will receive a specified percent of the average increase of the month-end value of the stock index. If such index 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.

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

Information pertaining to the notional amounts of the Company’s derivative financial instruments as of March 31, 2003 and December 31, 2002, was as follows:


				Notional Amount

Type of Contract				2003		2002

				(In thousands)
Hedging activities:
		Fair value hedge:
			Interest rate swaps used to hedge fixed rate certificates of deposit	$	503,464	$	528,227

Derivatives not designated as hedge:
		Interest rate swaps (unmatched portion)		$	1,536	$	1,773
		Interest rate swaps used to manage exposure to the stock market			36,329		36,329
		Embedded options on stock indexed deposits			65,560		65,134
		Purchased options used to manage exposure to the stock market on stock indexed deposits			29,382		28,773

	Total			$	132,807	$	132,009

At March 31, 2003, the fair value of derivatives qualifying for fair value hedge represented an unrealized net loss of $3.3 million, which was recorded as “Other Liabilities” and as an decrease to the hedged “Deposits” in the accompanying March 31, 2003 statement of financial condition.

At December 31, 2002, the fair value of derivatives qualifying for fair value hedge represented an unrealized net loss of approximately $8.0 million, which was recorded as “Other Liabilities” and as a decrease to the hedged “Deposits” in the accompanying December 31, 2002, statement of financial condition.

At March 31, 2003, the fair value of derivatives not qualifying as a hedge represented an unrealized net loss of $5,655,000 and was recorded as part of “Other assets” $978,000, “Deposits” $1,003,000 and “Other liabilities” $5,630,000 in the accompanying March 31, 2003, statement of financial condition.

At December 31, 2002, the fair value of the derivatives not qualifying as a hedge represented an unrealized net loss of $6,056,000 and was recorded as part of “Other Assets” $1,495,000, “Deposits” $1,618,000 and “Other Liabilities” $5,933,000 in the accompanying December 31, 2002, statement of financial condition.

A summary of the types of swaps used and their terms at March 31, 2003 and December 31, 2002, follows:


			2003			2002

			(In thousands)
Pay floating/receive fixed:
	Notional amount		$	505,000		$	530,000
	Weighted average receive rate at period end			4.95	%		5.67	%
	Weighted average pay rate at period end			1.46	%		1.90	%
		Floating rate in percentage of three month LIBOR, plus a spread ranging from minus .22% to plus ..25%		100	%		100	%

The changes in notional amount of swaps during the three months ended March 31, 2003 follows:


	(In thousands)
Balance at December 31, 2002	$	566,329
New swaps		187,500
Called and matured swaps		(212,500	)

Ending balance	$	541,329

During the three months ended March 31, 2003, various counterparties of swap agreements exercised their option to cancel their swaps and immediately, the Company exercised its option to call the hedged certificates of deposit. No gains or losses resulted from above cancellations.

At March 31, 2003, 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)
2003	$	60,000	$	—	$	—
2004		25,000		—		—
2005		15,000		—		—
2006		46,329		37,952		1,623
2007 and thereafter		395,000		27,608		27,759

Total	$	541,329	$	65,560	$	29,382

Off-balance sheet instruments. In the ordinary course of business the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements and commercial letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Committed Resources. At March 31, 2003 and December 31, 2002, the Company had outstanding the following contract amount of financial instruments whose amounts represent credit risk:


			2003		2002

			(In thousands)
Commitments to extend credit:
		Fixed rates	$	19,634	$	16,710
		Variable rates		144,225		161,902
Unused lines of credit:
		Commercial		73,196		64,037
		Credit cards and other		109,571		77,776
Commercial letters of credit				9,151		4,574
Commitments to purchase mortgage loans				74,688		100,000

	Total		$	430,465	$	424,999

Such commitments will be funded in the normal course of business from the Company’s principal sources of funds. At March 31, 2003, the Company had $2.60 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.

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 shares (as 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) of common stock can be granted. Also, options for up to 6,300,000 shares (as adjusted) of common stock, reduced by any share issued under the 1999 Qualified Option Plan can be granted under the 1999 Nonqualified Option Plan. The option price for both plans is determined at the grant date. Both plans will remain in effect for a term of 10 years. The Board of Directors has sole authority and absolute discretion as to the number of stock options to be granted, their vesting rights, and the options’ exercise price. The Plans provide for a proportionate adjustment in the exercise price and the number of shares that can be purchased in the event of a stock split, reclassification of stock and a merger or reorganization. At March 31, 2003, the Company had outstanding 3,678,000 options (as adjusted) under the 1999 Qualified Stock Option Plan. These options were granted to various executive officers and employees, which will become fully exercisable after five years following the grant date. During the year ended December 31, 2002, the Company granted 122,500 options (as adjusted) to various executive officers. No options were granted during the three months ended March 31, 2003. None of the options were exercised or forfeited in 2003 and 2002.

The Company has only three exercise prices for options granted, all of them granted at three different dates. The following table summarizes the exercise prices and the weighted average remaining contractual life of the options outstanding at March 31, 2003:


		Outstanding				Exercisable

				Weighted
				Average
				Remaining
		Number of		Contract		Number of
Exercise Price		Options		Life (Years)		Options

	$6.67		3,442,000		6.88		2,013,000
	7.83		113,000		8.14		23,000
	15.85		123,000		9.56		—

Total			3,678,000				2,036,000

Effective January 1, 2003, the Company changed the method of accounting for employee stock options from the intrinsic value method to the fair value method. Under the modified prospective method selected by the Company under the provisions of SFAS No.148, compensation cost to be recognized in future years is the same that would have been recognized had the recognition provisions of FASB No.123 been applied from its original effective date. Results prior to 2003 will not be restated. The effect of implementing this Statement on the Company’s financial condition and results of operations for the quarter ended March 31, 2003 was a charge of $265,000.

10. SEGMENT INFORMATION

The Company’s management monitors and manages the financial performance of two reportable business segments, the traditional banking operations of Westernbank Puerto Rico and the activities of the division known as Westernbank International. Other operations of the Company not reportable in either segment include Westernbank Business Credit Division, which specializes in asset-based commercial business lending; Westernbank Trust Division, which offers trust services; SRG Net, Inc., which operates an electronic funds transfer network; Westernbank Insurance Corp., which operates a general insurance agency; Westernbank World Plaza, Inc., which operates the Westernbank World Plaza, a 23-story office building located in Hato Rey, Puerto Rico, and the transactions of the parent company only, which mainly consists of other income related to the equity in the net income of its two subsidiaries.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organizational structure by divisions, nature of the products, distribution channels, and the economic characteristics of the products were also considered in the determination of the reportable segments. The Company evaluates performance based on net interest income and other income. Operating expenses and the provision for income taxes are analyzed on a combined basis.

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

Westernbank International operates as an International Banking Entity (IBE) under Puerto Rico Act No. 52, of August 11, 1989, as amended, known as the International Banking Regulatory Act. Under Puerto Rico tax law, an IBE can hold non-Puerto Rico assets, and earn interest on these assets, as well as generate fee income outside of Puerto Rico on a tax-exempt basis. Westernbank International’s business activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. As of March 31, 2003 and December 31, 2002, and for the periods then ended, substantially all of Westernbank International’s business activities consisted of investment in securities and purchasing of loans. Loans outstanding at March 31, 2003 and December 31, 2002, amounted to $60,931,000 and $56,833,000, respectively.

Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

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


		As of and for the three months ended
		March 31, 2003

							Total Major			Other						Total
		Puerto Rico			International		Segments			Segments			Eliminations			Consolidated

		(In thousands)
Interest income:
	Consumer loans	$	18,011		$	—	$	18,011		$	—		$	—		$	18,011
	Commercial loans		27,011			809		27,820			—			—			27,820
	Asset-based loans		—			—		—			5,715			—			5,715
	Mortgage loans		11,871			—		11,871			—			—			11,871
	Treasury and investment activities		20,102			19,626		39,728			571			(368	)		39,931

Total interest income			76,995			20,435		97,430			6,286			(368	)		103,348
Interest expense			42,362			10,149		52,511			2,017			(368	)		54,160

Net interest income			34,633			10,286		44,919			4,269						49,188

Provision for loan losses			(5,536	)		—		(5,536	)		(692	)		—			(6,228	)

Other income (loss), net:
	Service charges on deposits and other fees		4,849			36		4,885			55			(55	)		4,885
	Trust account fees		—			—		—			149			—			149
	Insurance commission fees		—			—		—			458			—			458
	Asset-based lending related fees		—			—		—			605			—			605
	Other		(13,946	)		—		(13,946	)		—			—			(13,946	)

Total other income (loss), net			(9,097	)		36		(9,061	)		1,267			(55	)		(7,849	)

Equity in income of subsidiaries			244			—		244			25,705			(25,949	)		—

Total net interest income and other income		$	20,244		$	10,322	$	30,566		$	30,549		$	(26,004	)	$	35,111

Total assets		$	7,109,089		$	2,190,242	$	9,299,331		$	1,438,295		$	(1,891,374	)	$	8,846,252


		As of December 31, 2002 and for the
		three months ended March 31, 2002

							Total Major			Other						Total
		Puerto Rico			International		Segments			Segments			Eliminations			Consolidated

		(In thousands)
Interest income:
	Consumer loans	$	10,839		$	—	$	10,839		$	—		$	—		$	10,839
	Commercial loans		23,492			422		23,914			—			—			23,914
	Asset-based loans		—			—		0			2,806			—			2,806
	Mortgage loans		12,722			—		12,722			—			—			12,722
	Treasury and investment activities		13,191			25,046		38,237			321			(151	)		38,407

Total interest income			60,244			25,468		85,712			3,127			(151	)		88,688
Interest expense			37,462			13,173		50,635			1,308			(151	)		51,792

Net interest income			22,782			12,295		35,077			1,819						36,896

Provision for loan losses			(3,500	)		—		(3,500	)		(124	)		—			(3,624	)

Other income, net:
	Service charges on deposits and other fees		4,311			17		4,328			50			(50	)		4,328
	Trust account fees		—			—		—			60			—			60
	Insurance commission fees		—			—		—			208			—			208
	Asset-based lending related fees		—			—		—			686			—			686
	Other		319			—		319			—			—			319

Total other income, net			4,630			17		4,647			1,004			(50	)		5,601

Equity in income of subsidiaries			144			—		144			17,904			(18,048	)		—

Total net interest income and other income		$	24,056		$	12,312	$	36,368		$	20,603		$	(18,098	)	$	38,873

Total assets		$	6,649,595		$	2,083,259	$	8,732,854		$	1,292,391		$	(1,820,168	)	$	8,205,077

11. RECENT ACCOUNTING DEVELOPMENTS

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. The provisions of this Statement were effective for exit or disposal activities initiated after December 31, 2002. Implementation of SFAS No. 146 did not have a significant effect on the Company’s consolidated financial condition or results of operations.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. In addition, SFAS No. 147 amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor-and-borrower-relationship intangible assets and credit cardholders intangible assets. SFAS No. 147 was effective for acquisitions or impairment measurement of such intangibles effective on or after October 1, 2002. SFAS No. 147 did not have a significant effect on the Company’s financial condition or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financials statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, the Company changed the method of accounting for employee stock options from the intrinsic value method to the fair value method. Under the modified prospective method selected by the Company under the provisions of SFAS No. 148, compensation cost to be recognized in future years is the same that would have been recognized had the recognition provisions of FASB No. 123 been applied from its original effective date. Results prior to 2003 will not be restated. The effect of implementing this Statement on the Company’s financial condition and results of operations for the quarter ended March 31, 2003 was a charge of $265,000.

Prior to January 1, 2003, the Company followed the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stocks Issued to Employees, and related interpretations. Compensation expense under this method was generally recognized for any excess of the quoted market price of the Company’s stock at the measurement date over the amount an employee must pay to acquire the stock. Since all options granted under those plans has an exercise price equal to the market value of the underlying common stock at the grant date, no compensation expense was recognized at the measurement date.

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding options in each period:


			Three months ended March 31,

			2003			2002

Net income as reported			$	14,879		$	17,892
	Add: Stock based employee compensation expense included in reported net income			265			—

	Deduct: Total stock based employee compensation expense determined under fair value based method for all options			(265	)		(140	)

		Pro-forma net income	$	14,879		$	17,752

Earnings per share:
	Basic and diluted — as reported		$	0.16		$	0.23

	Basic and diluted — pro forma		$	0.16		$	0.23

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

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

year or interim period beginning after June 15, 2003. FIN 46 is not expected to have a significant effect on the Company’s financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and (4) amends certain other existing pronouncements. This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The effect of implementing this Statement on the Company’s financial condition and results of operations has not been determined.

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

Part I — Item 2

FORWARD LOOKING STATEMENTS

Certain statements in this filing and future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, contain forward-looking statements, as defined in the Private Securities Litigation Reform Act. These statements may be identified by the use of phrases such as “anticipate,” “believe,” “expect,” “forecasts,” “projects,” or other similar terms. There are a number of factors, many of which are beyond the Company’s control that could cause actual results to differ materially from those contemplated by the forward looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) competitive pressures among depository and other financial institutions may increase significantly; (2) revenues may be lower than expected; (3) changes in the interest rate environment may reduce interest margins; (4) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit; (5) legislative or regulatory changes, including changes in accounting standards and applicable tax codes, may adversely affect the businesses in which the Company is engaged; and (6) adverse changes may occur in the securities markets or with respect to inflation.

Various factors, including those described above, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.

Unless required by law, the Company does not undertake, and specifically disclaims any obligations to publicly release the result of any revisions that may be made to any forward-looking statements to reflect statements to the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

GENERAL

W Holding Company, Inc. (the “Company”) is a financial holding company offering a full range of financial services through its wholly owned subsidiaries, Westernbank Puerto Rico (“Westernbank”) and Westernbank Insurance Corp. The Company was organized under the laws of the Commonwealth of Puerto Rico in February 1999 to become the bank holding company of Westernbank. Westernbank was founded as a savings institution in 1958 operating in the western and southwestern regions of Puerto Rico, focusing on retail banking and emphasizing long-term, fixed-rate residential mortgage loans on one-to-four family residential properties. In 1994, Westernbank changed its charter to become a full-service commercial bank. Westernbank offers a full range of business and consumer financial services, including banking, trust and brokerage services. Westernbank Insurance Corp. is a general insurance agent offering property, casualty, life and disability insurance. The assets, liabilities, revenues and expenses of Westernbank Insurance Corp. at March 31, 2003 and December 31, 2002, for the three months period ended March 31, 2003, and the year ended December 31, 2002, were not significant.

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

Westernbank operates through a network of 51 bank branches, including 19 Expresso of Westernbank branches opened, located throughout Puerto Rico, and a fully functional banking site on the Internet. In addition to its services Westernbank operates four divisions: Westernbank Business Credit, which specializes in asset-based lending; Expresso of Westernbank, which specializes in small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000; Westernbank Trust Division, which offers a full array of trust services; and Westernbank International Division, which activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. In addition, Westernbank offers a broad array of fee income products including credit cards, merchant card services, letters of credit, and brokerage services, among others.

The Company continues to emphasize on growing Westernbank’s commercial loan portfolio through commercial real estate, asset-based, unsecured business and construction lending, as well as its consumer loan and investment securities portfolios. As a result, the Company has shifted its asset composition from primarily traditional long-term fixed rate residential loans to assets with shorter maturities and greater repricing flexibility. As of March 31, 2003, commercial loans were $2.23 billion or 56.19% of total loans (76.27% collateralized by real estate) and consumer loans were $772.4 million or 19.42% (66.29% collateralized by real estate) of the $3.97 billion loan portfolio. Investment securities totaled $4.59 billion at March 31, 2003. These loans and securities tend to have shorter maturities and reprice more rapidly than traditional residential mortgage loans. The Company also continues to diversify and grow Westernbank’s sources of revenue, while maintaining its status as a secured lender, with approximately 83% of its loans collateralized by real estate as of March 31, 2003. As part of this strategy, Westernbank has selectively entered into several new business lines, including asset-based and small unsecured consumer lending as well as trust services. In July 2002, Westernbank launched a new banking division focused on offering consumer loans through 17 full-service branches (19 at March 31, 2003), 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.

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

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

The Company’s financial performance is reported in two primary business segments, the traditional banking operations of Westernbank Puerto Rico and the activities of the Bank’s division known as Westernbank International. Other operations of the Company not reportable in either segment include Westernbank Business Credit Division, which specializes in asset-based commercial business lending; Westernbank Trust Division, which offers trust services; SRG Net, Inc., which operates an electronic funds transfer network; Westernbank Insurance Corp., which operates a general insurance agency; Westernbank World Plaza, Inc., which operates the Westernbank World Plaza, a 23-story office building located in Hato Rey, Puerto Rico, and the transactions of the parent company only, which mainly consists of other income related to the equity in the net income of its two subsidiaries.

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

Westernbank International operates as an International Banking Entity (IBE) under Puerto Rico Act No. 52, of August 11, 1989, as amended, known as the International Banking Regulatory Act. Under Puerto Rico tax law, an IBE can hold non-Puerto Rico assets, and earn interest on these assets, as well as generate fee income outside of Puerto Rico on a tax-exempt basis. Westernbank International’s business activities consist of commercial banking and related services, and treasury and investment activities outside of Puerto Rico. As of March 31, 2003, and December 31, 2002 and for the three-month periods ended March 31, 2003 and 2002,

substantially all of Westernbank International’s business activities have consisted of investment in securities and purchasing of loans.

Established in 2001, Westernbank Insurance Corp. is a general insurance agent placing property, casualty, life and disability insurance on which it earns commission income. Currently, most of the agency’s volume is derived from two areas — mortgage insurance on residential mortgage loans and credit life insurance for borrowers of personal loans. The Company intends to expand Westernbank Insurance Corp. in order to offer a broader line of insurance products to meet the needs of its customers. The assets, liabilities, revenues and expenses of Westernbank Insurance Corp. at March 31, 2003 and December 31, 2002, and for the three month periods ended March 31, 2003 and 2002 were not significant.

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

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 commitment fees, net of related costs, are deferred and amortized over the life of the related loans as a yield adjustment. Gains or losses on the sale of loans and investments, service charges, fees and other income, also affect income. In addition, the Company’s net income is affected by the level of its non-interest expenses, such as compensation, employees’ benefits, occupancy costs, other operating expenses and income taxes.

The main objective of the Company’s Asset 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; “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 assets growth during the quarter ended March 31, 2003, was mainly driven by increases in the investment and loan portfolios, primarily in the investment securities held to maturity

portfolio, and in the commercial and consumer loan portfolios. Also, the Company has continued effective management of interest rate risk and a tight control of operating expenses. Net income for the three months ended March 31, 2003, decreased to $14.9 million or $0.16 earnings per common share (basic and diluted) when compared to $17.9 million or $0.23 (split adjusted) per common share (basic and diluted) for the three months ended March 31, 2002. Net income attributable to common stockholders for the three months ended March 31, 2003, decreased to $10.8 million, when compared to $14.6 million, for the same period in 2002. The Company’s profitability ratios for the quarter ended March 31, 2003, represented returns of .70% on assets (ROA) and 11.87% on common stockholders’ equity (ROCE), compared with a ROA and a ROCE of 1.13% and 27.67%, for the respective period in 2002. Although the Company experienced a significant increase in net interest income over the comparable prior year quarter, a charge of $15.7 million for other-than-temporary impairment on the Company's investment securities portfolio (see Note 4 — Investment Securities — Notes to consolidated financial statements (unaudited)) negatively impacted the results of operations for the three month quarter ended March 31, 2003, when compared to prior year quarter.

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

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 for the first quarter ended March 31, 2003 was $49.2 million, an increase of $12.3 million, or 33.31%, from $36.9 million for the same quarter of last year. Such increase was primarily due to an increase of $106.0 million or 26.43% in the net average of interest earning assets for the quarter ended March 31, 2003, compared to same quarter in 2002.

Average interest-earning assets for the first quarter of 2003 increased by $1.8 billion, against the comparable quarter in the previous year, primarily driven by a rise in the average loan portfolio, the higher yielding category of interest-earning assets, of $929.5 million, diversified growth from all lines of loans and an increase of $856.0 million in the average investment portfolio, mainly U.S. Government and agencies obligations and mortgage-backed securities. Average yields decreased from 5.68% for the three months ended March 31, 2002 to 5.16% for the comparable period of 2003. The fluctuation on average yields was primarily due to a drop in market interest rates affecting our loan repricing, primarily our commercial loan portfolio with floating rates and reinvestment rates on matured, called and purchased securities.

The increase in the average interest-earning assets was in part offset by an increase in the average interest-bearing liabilities. Average interest-bearing liabilities increased from $5.93 billion for the quarter ended March 31, 2002, to $7.61 billion for the same period in 2003, an increase of $1.68 billion or 28.31%. The increase in average interest-bearing liabilities for the quarter ended March 31, 2003 was mainly related to an increase in the average balance of deposits which grew from $3.32 billion in 2002 to $4.34 billion in 2003, an increase of $1.02 billion or 30.66% followed by an increase in the average balance of reverse repurchase agreements, which also grew from $2.45 billion in 2002 to $3.15 in 2003, an increase of $704.5 million or 28.75%. The increase in average interest-bearing liabilities was partially offset by a

decrease in the average interest rates paid on interest-bearing liabilities during the quarter, also as a result of a lower interest rate scenario. For the three-month quarters, the average interest rates paid decreased from 3.54% in 2002 to 2.88% in 2003.

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


			Three months ended March 31,

			2003								2002

					Average			Average					Average			Average
			Interest		balance(1)			Yield/Rate			Interest		balance(1)			Yield/Rate

			(Dollars in Thousands)
Normal spread:
	Interest-earning assets:
		Loans, including loan fees(2)	$	63,418	$	3,879,192			6.63	%	$	50,281	$	2,949,710			6.91	%
		Mortgage and asset-backed securities(3)		8,746		809,023			4.38	%		9,870		751,039			5.34	%
		Investment securities(4)		28,584		2,973,453			3.90	%		27,350		2,405,802			4.61	%
		Money market instruments		2,600		457,773			2.30	%		1,187		227,443			2.12	%

	Total			103,348		8,119,441			5.16	%		88,688		6,333,994			5.68	%

	Interest-bearing liabilities:
		Deposits		29,497		4,337,684			2.76	%		26,899		3,319,721			3.29	%
		Securities sold under agreements to repurchase		23,134		3,154,865			2.97	%		22,909		2,450,354			3.79	%
		Term notes		—		—			—			455		43,000			4.29	%
		Advances from FHLB		1,529		120,000			5.17	%		1,529		120,000			5.17	%

	Total			54,160		7,612,549			2.88	%		51,792		5,933,075			3.54	%

	Net interest income		$	49,188							$	36,896

	Interest rate spread								2.28	%							2.14	%

	Net interest-earning assets				$	506,892							$	400,919

	Net yield on interest-earning assets(5)								2.46	%							2.36	%

	Interest-earning assets to interest-bearing liabilities ratio					106.66	%							106.76	%

Tax equivalent spread:
	Interest-earning assets		$	103,348	$	8,119,441			5.16	%	$	88,688	$	6,333,994			5.68	%
	Tax equivalent adjustment			6,859		—			0.34	%		4,399		—			0.28	%

	Interest-earning assets - tax equivalent			110,207		8,119,441			5.50	%		93,087		6,333,994			5.96	%

	Interest-bearing liabilities			54,160		7,612,549			2.89	%		51,792		5,933,775			3.54	%

	Net interest income		$	56,047							$	41,295

	Interest rate spread								2.62	%							2.42	%

	Net yield on interest - earning assets(5)								2.80	%							2.64	%

(1)		Average balance on interest-earning assets and interest-bearing liabilities is computed using daily monthly average balances during the periods.

(2)		Includes loans held for sale. Average loans exclude non-performing loans. Loans fees amounted to $1.2 million and $958,000 for the three-months ended March 31, 2003 and 2002, respectively.

(3)		Includes mortgage-backed securities available for sale and for trading purposes.

(4)		Includes trading account securities and investments available for sale.

(5)		Net interest income divided by average interest-earning assets.

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


		Three months ended March 31,

		2003 vs. 2002

			Volume			Rate			Total

		(In thousands)
Interest income:
	Loans(1)		$	15,099		$	(1,962	)	$	13,137
	Mortgage and asset-backed securities (2)			868			(1,992	)		(1,124	)
	Investment securities (3)			3,599			(2,365	)		1,234
	Money market instruments			1,318			95			1,413

Total increase (decrease) in interest income				20,884			(6,224	)		14,660

Interest expense:
	Deposits			5,461			(2,863	)		2,598
	Securities sold under agreements to repurchase			900			(675	)		225
	Advances from FHLB			—			—			—
	Term notes			(455	)		—			(455	)

Total increase (decrease) in interest expense				5,906			(3,538	)		2,368

Increase (decrease) in net interest income			$	14,978		$	(2,686	)	$	12,292

(1)		Includes loans held for sale.

(2)		Includes mortgage-backed securities available for sale and trading securities.

(3)		Includes investments available for sale.

Provision For Loan Losses

The provision for loan losses for the quarter ended March 31, 2003, was $6.2 million, an increase of $2.6 million or 71.85% from same quarter in 2002. Net charge-offs during the first quarter of 2003 amounted to $1.9 million, which when subtracted from the provision for loan losses of $6.2 million resulted in a net increase in the allowance for loan losses of $4.3 million. Net charge-offs during the quarter ended March 31, 2002, amounted to $657,000, which when subtracted from the provision for loan losses of $3.6 million, resulted in a net increase in the allowance for loan losses of $3.0 million. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature and volume of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and prevailing economic conditions. This

evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Although no assurance can be given, management believes that the present allowance for loan losses is adequate considering loss experience, delinquency trends and current economic conditions. Management regularly reviews the Company’s loan loss allowance as its loan portfolio grows and diversifies. See “— Financial Condition — Allowance for Loan Losses”.

The allowance for possible loan losses amounted to $51.4 million as of March 31, 2003 and $47.1 million as of December 31, 2002. The increase in the provision for loan losses is attributed to management’s policy of establishing reserves, principally taking into consideration the overall growth in the Company’s loan portfolio and particularly those of Westernbank’s newest divisions; Westernbank Business Credit, a division specializing in asset-based lending; and the Expresso of Westernbank, which specializes in small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000. Westernbank Business Credit loan portfolio grew to $555.5 million as of March 31, 2003, an increase of $122.9 million or 28.41%, when compared to December 31, 2002, an increase of $296.5 million or 114.48% when compared to March 31, 2002. The Expresso of Westernbank loan portfolio grew by $21.8 million from $116.4 million at December 31, 2002, or 18.73% to $138.2 million at March 31, 2003, net of repayments. This division began operations in July 2002. As a result of such increase in both portfolios and the overall growth in general in the loan portfolio, the provision for loan losses for Westernbank Business Credit and Expresso of Westernbank divisions amounted to $692,000 and $1.5 million, respectively, for the first quarter ended March 31, 2003, contributing to the increase of $2.6 million in the provision for loan losses between both periods.

Non-performing loans stand at $25.7 million or .64% (less than 1%) of the Company’s loan portfolio as of March 31, 2003, slightly up from .51% or an increase of $6.3 million, from $19.4 million as of December 31, 2002. Excluding real estate loans, these ratios were 0.05% and 0.02% respectively, as of the same periods. The increase primarily comes from the Company’s commercial and regular consumer loan portfolios. Non-performing loans in the commercial loan portfolio increased by $4.0 million, when compared to December 31, 2002. This increase is mostly attributed to three loans with principal balances of $1.6 million, $589,000 and $525,000, all of which are collateralized by real estate. At March 31, 2003, one of these loans with an outstanding balance of $1.6 million required a specific valuation allowance of $770,000. Total non-performing loans in the regular consumer loan portfolio (excluding the Expresso of Westernbank loan portfolio) grew by $1.6 million, when compared to December 31, 2002. Such increase was specifically due to consumer loans past due (over 90 days) which are fully collateralized by real estate properties. As of March 31, 2003, the allowance for possible loan losses was 200.49% (excluding real estate loans 2,849.19%) of total non-performing loans (reserve coverage).

Net charge-offs in the first quarter of 2003 were $1.9 million or 0.19% of average loans, compared to $657,000 or .09% of average loans for the same period in 2002 or .19% for the year ended December 31, 2002. Such increase was primarily due to loans charged-off on our consumer loan portfolio in the amount of $1.2 million. Loans charged-off associated to the Expresso of Westernbank Division amounted to $804,000 or 2.58%, on an annualized basis, to average Expresso loans as of March 31, 2003. Delinquencies on the Expresso of Westernbank division loan portfolio at March 31, 2003 were 0.87% (less than 1%) including the categories of 60 days and over. This ratio may increase prospectively, as this portfolio matures, to a rate within our estimate and current loan loss reserves. For the quarter ended March 31, 2003, there were no charge-offs related to Westernbank Business Credit loan portfolio.

Other Income (Loss)

Other operating income, excluding derivative transactions and sales and valuation of loans, securities and other assets, grew $815,000 or 15.43% during the three-months ended March 31, 2003, when compared to the similar period in prior year. Such increase was primarily driven by higher activity associated with service charges on deposit accounts and other fees as a result of the Company’s continued strategy to diversify and increase its fee income, increases in insurance commissions earned by Westernbank Insurance Corp., fees generated by our asset-based lending operation as well as strong increases in other areas resulting from the Company’s overall growing volume of business. This increase in other operating income was however offset by a net loss on sales and valuation of loans, securities and other assets of $14.4 million during the three months ended March 31, 2003, when compared to the year ago quarter. This increase resulted from a write-down of certain investments held to maturity (collateralized bond obligations), which management believes are other-than-temporarily impaired, in accordance with applicable accounting pronouncements. (See “note 4 — Investment securities — Notes to consolidated financial statements (unaudited)”). The net effect of the above-mentioned factors, in addition to an increase of $150,000 in unrealized gain on derivative instruments, resulted in a net decrease in total other operating income of $13.4 million for the quarter ended March 31, 2003, when compared to same quarter in year 2002.

Operating Expenses

Total operating expenses increased $2.4 million or 14.60% for the three months ended March 31, 2003, when compared to same quarter in 2002. Salaries and employees’ benefits accounted for the majority of such increase, rising $2.0 million or 32.06% for the first quarter of year 2003, when compared to the corresponding period in 2002. Such increase is attributed to the continued expansion of the Company, including increases in personnel, normal salary increases and related employees’ benefits. At March 31, 2003, the Company had 1,068 full-time employees, including its executive officers, an increase of 187 employees or 21.22%, when compared to the same period in prior year. New personnel and additional infrastructure were added to support the continued expansion of the Company, largely in connection with the inception of Westernbank’s new division, Expresso of Westernbank in July 2002, which accounted for 126 new employees between both periods. In addition, effective January 1, 2003, the Company changed the method of accounting for employee stock options from the intrinsic value method to the fair value method (modified prospective method) in accordance with Statement of Financial Accounting Standard No. 148. The effect of implementing this Statement on the Company results of operations was an increase in salary expense in the amount of $265,000 for the quarter ended March 31, 2003.

Other operating expenses, as a group, excluding salaries and employees’ benefits, increased $417,000 or 4.00% for the first quarter of 2003 against the comparable quarter of 2002, resulting mostly from increases in occupancy, printing, postage, stationery and supplies, and other expenses, primarily associated to the new Expresso Division, launched in July 2002, as well as the inherent costs associated with the additional investment in technology and general infrastructure to sustain and coordinate the Company’s expansion in all of its business areas.

The Company had an efficiency ratio of 34.73% for the first quarter of year 2003, compared to 39.72% for the same quarter in prior year.

Net Income

Net income decreased $3.0 million or 16.84% for the three month period ended March 31, 2003, as compared to the corresponding period in 2002. The decrease for the three month period ended March 31, 2003, primarily resulted from an increase in net interest income, which was offset by a decrease of $14.4 million in other income (loss), principally as a result of a $15.7 million charge for other-than-temporary impairment of certain securities (see Note 4 — Investment Securities — Notes to consolidated financial statements (unaudited), and increases in total operating expenses and in the provisions for loan losses.

FINANCIAL CONDITION

The Company had total assets of $8.85 billion as of March 31, 2003, compared to $8.21 billion as of December 31, 2002, an increase of $641.2 million or 7.81%. The investment portfolio increased $405.3 million or 9.69%, from $4.2 billion as of December 31, 2002, to $4.6 billion as of March 31, 2003. Loans receivable-net, grew by $218.0 million, resulting from the Company continued strategy of growing its loan portfolio through commercial real estate, asset-based and construction lending, as well as its consumer loan portfolio. As of March 31, 2003, total liabilities amounted to $8.26 billion, an increase of $635.0 million or 8.33%, when compared to $7.62 billion as of December 31, 2002. Deposits increased $237.3 million or 5.52%, from $4.30 billion as of December 31, 2002. Securities sold under agreements to repurchase grew by $402.6 million from $3.10 billion as of December 31, 2002 to $3.50 billion as of March 31, 2003.

Loans

Loans receivable, net was $3.97 billion or 44.88% of total assets at March 31, 2003, an increase of $218.0 million or 5.80% from December 31, 2002.

The Company continues to focus on growing its commercial loan portfolio through commercial real estate, asset-based, unsecured business and construction lending, as well as its consumer loan portfolios. As a result, the portfolio of real estate loans secured by first mortgages, increased from $2.67 billion as of December 31, 2002, to $2.82 billion as of March 31, 2003, an increase of $149.6 million or 5.59%. Commercial real estate loans secured by first mortgages were $1.82 billion as of March 31, 2003, an increase of $170.9 million or 10.36% from December 31, 2002. The consumer loans portfolio (including credit cards), commercial loans (not collateralized by real estate) and other loans increased from $1.1 billion as of December 31, 2002, to $1.2 billion as of March 31, 2003, an increase of $72.8 million or 6.46%.

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

As of March 31, 2003, commercial loans were 56.38% (76.27% collateralized by real estate) and consumer loans were 19.44% (66.69% collateralized by real estate) of the $3.97 billion loan portfolio. This has enabled Westernbank to shift its asset composition to assets with shorter maturities and greater repricing flexibility. The Company has also continued to diversify Westernbank’s sources of revenue, while maintaining its status as a secured lender, with approximately 83% of its loans collateralized by real estate as of March 31, 2003. Westernbank has selectively entered into several new business lines, including asset-based and small unsecured consumer lending as well as trust services. As of March 31, 2003, Westernbank Business Credit (asset-based) and the Expresso of Westernbank (generally unsecured consumer lending) divisions loan portfolios amounted to $555.5 million and $138.2 million, respectively. For the three-months period ended March 31, 2003, the average yield on Westernbank Business Credit division asset-based loans portfolio was 5.03% while for the Expresso of Westernbank division loans portfolio was 19.02%. The Expresso of Westernbank, Westernbank’s newest division, was created in July 2002.

The following table sets forth the composition of the Bank’s loan portfolio by type of loan at the dates indicated.


		March 31, 2003						December 31, 2002

		Amount			Percent			Amount			Percent

		(Dollars in thousands)
Residential real estate:
	Mortgage	$	826,359			20.8	%	$	846,195			22.6	%
	Construction		190,380			4.8			181,266			4.8
Commercial, industrial and agricultural:
	Real estate		1,821,238			45.9			1,647,600			43.9
	Business and others(1)		413,523			10.4			382,810			10.2
Consumer and others(2)			772,359			19.4			743,600			19.8

Total loans			4,023,859			101.3		$	3,801,471			101.3
Allowance for loan losses			(51,454	)		(1.3	)		(47,114	)		(1.3	)

Loans — net		$	3,972,405			100.0	%	$	3,754,357			100.00	%

(1)		Includes $555.5 million and $437.6 million at March 31, 2003 and December 31, 2002, respectively, of Westernbank Business Credit division outstanding loans.

(2)		Includes $138.2 million and $117.4 million at March 31, 2003 and December 31, 2002, respectively, of the Expresso of Westernbank division outstanding loans.

Residential real estate mortgage loans at March 31, 2003, are mainly comprised of loans secured by first mortgages on one-to-four family residential properties. At March 31, 2003, residential mortgage loans included $20.8 million of mortgages insured or guaranteed by government agencies of the United States or Puerto Rico.

The Bank originated $222.8 million of commercial real estate loans during the three months period ended March 31, 2003. At March 31, 2003, commercial real estate loans totaled $1.8 billion. In general, commercial real estate loans are considered by management to be of somewhat greater risk of uncollectibility than other loans due to the dependency on income production and future development of real estate. Commercial real estate loans are collateralized by various types of property, including warehouse, retail and other business properties.

The portfolio of Consumer and Other loans at March 31, 2003, consisted of consumer loans of $772.4 million, of which $515.1 million are secured by real estate, $257.3 million are unsecured consumer loans (including $138.2 million of the Expresso of Westernbank division loan portfolio, credit card loans of $56.4 million and loans secured by deposits in the Bank totaling $32.1 million).

The following table summarizes the contractual maturities of the Bank’s total loans for the periods indicated at March 31, 2003. Contractual maturities do not necessarily reflect the actual term of a loan, including prepayments.


				Maturities

						After one year to five years				After five years

		(In thousands)
		Balance
		outstanding				Fixed		Variable		Fixed		Variable
		at March 31,		One year or		interest		interest		interest		interest
		2003		less		rates		rates		rates		rates

Residential real estate:
	Mortgage	$	826,359	$	5,008	$	9,011	$	179	$	291,202	$	520,959
	Construction		190,380		109,584		—		80,796		—		—
Commercial, industrial and agricultural:
	Real estate		1,821,238		640,407		130,088		97,976		45,653		907,114
	Business and others		413,523		351,522		21,619		14,304		3,284		22,794
Consumer and others			772,359		107,443		192,528		—		472,388		—

Total		$	4,023,859	$	1,213,964	$	353,246	$	193,255	$	812,527	$	1,450,867

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

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

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

Westernbank originates most of its residential real estate loans as conforming loans, eligible for sale in the secondary market. The loan-to-value ratio at the time of origination on residential mortgages is generally 75%, except that the Bank may lend up to 90% of the lower of the

purchase price or appraised value of residential properties if private mortgage insurance is obtained by the borrower for amounts in excess of 80%.

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

In addition to its residential loan originations, the Bank also purchases residential first mortgage loans from other mortgage originators in Puerto Rico. Those loans carry a timely payment guaranty from the mortgage companies and are purchased at floating rates based on a negotiated spread over the three-months LIBOR rate. During the three month period ended March 31, 2003, Westernbank purchased $25.0 million of such loans.

The Bank originates primarily variable and adjustable rate commercial business and real estate loans. The Bank also makes real estate construction loans subject to firm permanent financing commitments. As of March 31, 2003, the Bank’s commercial loans portfolio had a total delinquency ratio, including the categories of 60 days and over, of 0.72% (less than 1%).

The Bank offers different types of consumer loans in order to provide a full range of financial services to its customers. Within the different types of consumer loans offered by the bank, there are various types of secured and unsecured consumer loans with varying amortization schedules. In addition, the Bank makes fixed-rate residential second mortgage consumer loans. In July 2002, Westernbank launched a new division focused on offering consumer loans through 19 full-service branches, called “Expresso of Westernbank”, denoting the branches’ emphasis on small, unsecured consumer loans up to $15,000 and collateralized consumer loans up to $75,000.

The Bank offers the service of VISA and Master Card credit cards. At March 31, 2003, there were approximately 26,130 outstanding accounts, with an aggregate outstanding balance of $56.4 million and unused credit card lines available of $80.9 million.

In connection with all consumer and second mortgage loans originated, the Bank’s underwriting standards include a determination of the applicants’ payment history on other debts and an assessment of the ability to meet existing obligations and payments on the proposed loan. As of March 31, 2003, the Bank’s consumer loan portfolio had a total delinquency ratio, including the categories of 60 days and over, of 1.06%.

Non-performing loans and foreclosed real estate held for sale

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

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

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


		March 31, 2003			December 31, 2002

		(Dollars in thousands)
Residential real estate mortgage and construction loans		$	2,220		$	2,026
Commercial, industrial and agricultural loans			17,503			13,567
Consumer loans			5,940			3,812

	Total non-performing loans		25,663			19,405
Foreclosed real estate held for sale			3,490			3,679

Total non-performing loans and foreclosed real estate held for sale		$	29,153		$	23,084

Interest which would have been recorded if the loans had not been classified as non-performing		$	1,602		$	1,102

Interest recorded on non-performing loans		$	82		$	775

Total non-performing loans as a percentage of loans receivable			0.64	%		0.51	%

Total non-performing loans and foreclosed real estate held for sale as a percentage of total assets			0.33	%		0.28	%

At March 31, 2003, total non-performing loans increased $6.3 million or 32.25%, from $19.4 million as of December 31, 2002, to $25.7 million as of March 31, 2003. The increase primarily comes from the Company’s commercial and regular consumer loan portfolios. Non-performing loans in the commercial loan portfolio increased by $4.0 million, when compared to December 31, 2002. This increase is mostly attributed to three loans with principal balances of $1.6 million, $589,000 and $525,000, all of which are collateralized by real estate. At March 31, 2003, one of these loans with an outstanding balance of $1.6 million required a specific valuation allowance

of $770,000. Total non-performing loans in the regular consumer loan portfolio (excluding the Expresso of Westernbank loan portfolio) grew by $1.6 million, when compared to December 31, 2002. Such increase was specifically due to consumer loans past due (over 90 days) which are fully collateralized by real estate properties. As of March 31, 2003, the allowance for possible loan losses was 200.49% (excluding real estate loans 2,849.19%) of total non-performing loans (reserve coverage).

Allowance for loan losses

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

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

• Loan loss factors for commercial loans, including construction and land acquisition loans, are based on historical loss trends for three years, as adjusted for management’s expected increase in the loss factors given the increase in such loan portfolios over the last few years.

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

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

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

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

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

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

At March 31, 2003, the Bank’s allowance for loan losses was $51.5 million, consisting of $42.5 million formula allowance, $5.1 million of specific allowances, and $3.9 million of unallocated allowance. As of March 31, 2003, the allowance for loan losses equals 1.28% of total loans, and 200.49% of total non-performing loans, compared with an allowance for loan losses at December 31, 2002, of $47.1 million, or 1.24% of total loans, and 242.80% of total non-performing loans.

As of March 31, 2003, there have been no significant changes in estimation methods or assumptions that affected our methodology for assessing the appropriateness of the allowance for loan losses.

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


	March 31, 2003			December 31, 2002

	(Dollars in thousands)
Balance, beginning of year	$	47,114		$	38,364
Loans charged-off:
Consumer loans		1,970	(1)		4,576	(1)
Commercial, industrial and agricultural loans		161			3,389	(2,3)
Real estate-mortgage and construction loans		63			—

Total loans charged-off		2,194			7,965

Recoveries of loans previously charged-off:
Consumer loans		130			858
Commercial, industrial and agricultural loans		86			584
Real estate-mortgage and construction loans		90			190

Total recoveries of loans previously charged-off		306			1,632

Net loans charged-off		1,888			6,333
Provision for loan losses		6,228			15,083

Balance, end of period	$	51,454		$	47,114

Ratios:
Allowance for loan losses to total loans		1.28	%		1.24	%
Provision for loan losses to net loans charged-off		329.87	%		238.17	%
Recoveries of loans to loans charged-off in previous period		15.32	%(4)		23.19	%
Net loans charged-off to average loans(5)		0.19	%(4)		0.19	%
Allowance for loans losses to non-performing loans		200.49	%		242.80	%

(1)		Includes $804,000 or 2.58%, on an annualized basis, of the Expresso of Westernbank loans charged-offs for the three month period ended March 31, 2003. Total charge-offs for the year ended December 31, 2002 amounted to $62,000. Expresso of Westernbank began operations in July 2002.

(2)		Includes $505,000 of Westernbank Business Credit division, consisting of one loan originally acquired in the purchased loan portfolio from Congress Credit Corporation, a subsidiary of First Union National Bank N.A in June 15, 2001. This loan was fully reserved at the acquisition date.

(3)		Includes $1,100,000, consisting of one loan fully collateralized by real estate and charged-off for regulatory purposes.

(4)		Net loans charged-offs ratios are annualized for comparison purposes.

(5)		Average loans were computed using beginning and ending balances.

The following table presents the allocation of the allowance for credit losses and the percentage of loans in each category to total loans, as set forth in the “Loans” table on page 37.


	March 31, 2003					December 31, 2002

	Amount		Percent			Amount		Percent

	(Dollars in thousands)
Commercial, industrial and agricultural loans	$	34,035		55.66	%	$	31,671		53.3	%
Consumer loans		13,063		19.19			12,004		19.5
Residential real estate mortgage and construction loans		449		25.15			443		27.2
Unallocated allowance		3,907		—			2,996		—

Total allowance for loan losses	$	51,454		100.0	%	$	47,114		100.0	%

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

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

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

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


	March 31, 2003		December 31, 2002

	(In thousands)
Investment in impaired loans:
Covered by a valuation allowance	$	25,009	$	26,074
Do not require a valuation allowance		17,500		24,515

Total	$	42,509	$	50,589

Valuation allowance in impaired loans	$	4,752	$	4,752


	March 31, 2003		March 31, 2002

Average investment in impaired loans	$	44,209	$	40,157

Interest collected in impaired loans	$	577	$	804

At March 31, 2003, the Bank’s investment in impaired loans decreased $8.1 million or 15.97%, from $50.6 million as of December 31, 2002, to $42.5 million as of March 31, 2003. This decrease is primarily attributed to one specific loan classified as impaired with a principal outstanding balance of $8.2 million as of December 31, 2002, that did not require a valuation allowance. This loan was declassified from impaired loans due to the borrower’s improved financial condition, and has been in accrual status since its inception.

Investments

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

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

The Investment Department is authorized to purchase and sell federal funds, interest bearing deposits in banks, banker’s acceptances of commercial banks insured by the FDIC, mortgage and assets-backed securities, Puerto Rico and U.S. Government and agency obligations,

municipal securities rated A or better by any of the nationally recognized rating agencies and commercial paper rated P-1 by Moody’s Investors Service, Inc. or A-1 by Standard and Poor’s, a Division of the McGraw-Hill Companies, Inc. In addition, the Investment Department is responsible for the pricing and sale of deposits and securities sold under agreements to repurchase.

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

The following table presents the carrying value of investments at March 31, 2003 and December 31, 2002:


		March 31,		December 31,
		2003		2002

		(In thousands)
Held to maturity :
	US Government and agencies obligations	$	3,199,586	$	2,671,344
	Puerto Rico Government and agencies obligations		19,695		19,695
	Commercial paper		25,000		74,997
	Corporate notes		66,768		66,697
	Mortgage and other asset-backed securities		747,876		668,324

Total			4,058,925		3,501,057

Available for sale:
	Asset-backed securities		13,159		—
	Mortgage-backed securities		68,996		145,276
	Other investments		15,785		15,611

Total			97,940		160,887

Total investments		$	4,156,865	$	3,661,944

The carrying amount of investment securities at March 31, 2003, by contractual maturity (excluding mortgage and others asset- backed securities), are shown below:


				Weighted
		Carrying		average
		amount		yield

		(Dollars in thousands)
US Government and agencies obligations:
	Due within one year or less	$	4,698		1.15	%
	Due after one year through five years		2,704,888		3.74
	Due after five years through ten years		290,000		4.10
	Due after ten years		200,000		3.90

			3,199,586		3.78

Puerto Rico Government and agencies obligations:
	Due within one year		—		—
	Due after one year through five years		13,700		6.28
	Due after five years through ten years		4,000		5.05
	Due after ten years		1,995		6.15

			19,695		6.02

Other:
	Due within one year		40,409		2.54
	Due after one year through five years		29,984		2.90
	Due after five years through ten years		—		—
	Due after ten years		37,160		5.97

			107,553		4.24

Total			3,326,834		3.81
Mortgage and other asset-backed securities			830,031		5.14

Total		$	4,156,865		4.08	%

Mortgage and other asset-backed securities at March 31, 2003, consists of:


			(In Thousands)

Available for sale — CMO’s certificates			$	68,996

Held to maturity:
	Federal Home Loan Mortgage Corporation certificates			9,574
	GNMA certificates			12,229
	FNMA certificates			6,503
	CMO certificates			679,460
	Other			40,110

		Total held to maturity		747,876

Total mortgage and other asset-backed securities			$	816,872

The Bank’s investment portfolio at March 31, 2003, had an average contractual maturity of 66 months, when compared to an average contractual maturity of 50 months at December 31, 2002. The Bank’s interest rate risk model (refer to Part I item # 3 on page 55 of this report) takes into consideration the callable feature of certain investment securities. Given the present interest rate scenario, and taking into consideration the callable features of these securities, the Bank’s investment portfolio as of March 31, 2003, had a remaining average contractual maturity of six (6) months. However, no assurance can be given that such levels will be maintained in future periods.

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

In applying the foregoing analysis, management concluded that at March 31, 2003, its investment in corporate bonds and loans obligations (“CBO’s and CLO’s”) were other-than-temporary impaired. First, two tranches of a CBO with an amortized cost of $13.0 million were downgraded by two different rating agencies on April 3 and 15, 2003, respectively. Second, the available secondary market prices for those two securities and the remaining portfolio of CBO’s and CLO’s with a carrying value of $56.0 million continued to deteriorate. In line with such decline, management concluded, based on these facts and the secondary market prices that a $15.7 million other than temporary impairment write-down was warranted. The same was recorded effective for the quarterly period ended March 31, 2003. As of March 31, 2003, no defaults have occurred within the securities portfolio underlying the CBO’s and CLO’s. In connection with the write-down, and in accordance with applicable accounting pronouncements, management also reassessed its intent to hold to maturity and reclassified the securities related to the CBO that were downgraded as available for sale as of March 31, 2003. Management will continue its ongoing monitoring of the Company’s investment securities to identify any other-than-temporary impairment. (See “Note 4 — Investment securities — Notes to Consolidated Financial Statements (unaudited)”).

Deposits

The Bank offers a diversified choice of deposit accounts. Savings deposits increased from $560.5 million as of December 31, 2002, to $571.8 million as of March 31, 2003, an increase of $11.3 million or 2.01%. Also, other deposits (excluding accrued interest payable) represented mainly by time deposits, brokered deposits and Individual Retirement Account deposits (IRA’s), increased from $3.71 billion as of December 31, 2002, to $3.94 billion as of March 31, 2003, an increase of $222.0 million or 5.98%. Other deposits include brokered deposits amounting to $2.74 billion and $2.55 billion as of March 31, 2003 and December 31, 2002, respectively. The Bank also offers negotiable order of withdrawal (“NOW”) accounts, Super Now accounts, special checking accounts and commercial demand accounts.

At March 31, 2003, the Bank had total deposits of $4.51 billion (excluding accrued interest payable), of which $571.8 million or 12.68% consisted of savings deposits, $180.0 million or 3.99% consisted of interest bearing demand deposits, $165.9 million or 3.68% consisted of noninterest bearing deposits, and $3.59 billion or 79.64% consisted of time deposits. Time deposits include $2.74 billion of brokered deposits. These accounts have historically been a stable source of funds. At March 31, 2003, the scheduled maturities of time certificates of deposit in amounts of $100,000 or more are as follows:


		(In thousands)

3 months or less		$	1,045,684
over 3 months through 6 months			678,863
over 6 months through 12 months			635,989
over 12 months			713,844

	Total	$	3,074,380

The following table sets forth the average amount and the average rate paid on the following deposit categories for the three months ended March 31, 2003, and for the year ended December 31, 2002:


	March 31, 2003					December 31, 2002

	Average		Average			Average		Average
	amount		rate			amount		rate

	(Dollars in thousands)
Time deposits	$	3,430,926		3.02	%	$	2,889,649		3.40	%
Savings deposits		565,570		2.15	%		509,114		2.46	%
Interest bearing demand deposits		148,435		2.51	%		124,127		2.90	%
Noninterest bearing demand deposits		192,753		—			167,352		—

	$	4,337,684		2.76	%	$	3,690,242		3.10	%

Borrowings

The following table sets forth the borrowings of the Company at the dates indicated:


	March 31, 2003		December 31, 2002

	(In thousands)
Securities sold under agreements to repurchase	$	3,499,933	$	3,097,341
Advances from FHLB		120,000		120,000
Mortgage note payable		37,724		37,822

	$	3,657,657	$	3,255,163

The Bank has made use of institutional securities sold under agreements to repurchase in order to obtain funding, primarily through investment banks and brokerage firms. Such agreements are collateralized with investment securities. The Bank had $3.5 billion in total securities sold under agreements to repurchase outstanding at March 31, 2003, at a weighted average rate of 2.66%. Securities sold under agreements to repurchase outstanding as of March 31, 2003, mature as follows: $663.2 million within 30 days; $97.5 million within 60 days; $315.8 million in 2004;

$758.0 million in 2005; $574.8 million in 2006, $73.4 million in 2007; and $1.02 billion thereafter.

Westernbank also obtains advances from FHLB of New York. As of March 31, 2003, Westernbank had $120.0 million in outstanding FHLB advances at a weighted average rate of 5.17%. Advances from FHLB mature as follows: $14.0 million within 30 days; $14.0 million in 2005; $50.0 million in 2006; and $42.0 million thereafter.

At March 31, 2003, Westernbank World Plaza, Inc., a wholly-owned subsidiary of Westernbank Puerto Rico, had outstanding $37.7 million of a mortgage note, at an interest rate of 8.05% per year up to September 11, 2009. Subsequent to September 11, 2009, the mortgage note will bear interest on the then outstanding principal balance (1) at a rate per year equal to the greatest of 13.05% or the Treasury Rate plus five percentage points or (2) at the rate of 10.05% per year depending on certain conditions on the repricing date. Westernbank World Plaza has a prepayment option on the repricing date, without penalty. The mortgage note is collateralized by a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico.

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


		March 31, 2003			December 31, 2002

		(Dollars in thousands)
Amount outstanding at period end		$	760,735			$	1,043,493
Monthly average outstanding balance			879,014				1,378,074
Maximum outstanding balance at any month end			1,029,373				2,104,599
Weighted average interest rate:
	For the three months and period ended		1.30	%			1.51	%
	At the end of three months and at period end		1.36	%			1.96	%

Stockholders’ Equity

As of March 31, 2003, total stockholders’ equity amounted to $590.9 million, an increase of $6.2 million or 1.06% when compared to $584.7 million as of December 31, 2002. The increase during the three months ended March 31, 2003, resulted from the net income of $14.9 million generated during the quarter, which was partially offset by dividends paid on common and preferred stock during the period of $4.3 and $4.1 million, respectively, and an increase of $555,000 million in other comprehensive loss.

SELECTED FINANCIAL RATIOS AND OTHER DATA

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


		Three months ended							Year Ended
		March 31,							December 31,
			2003			2002			2002

Per share data:
	Dividend payout ratio			40.04	%		22.80	%		19.46	%
	Book value per common share		$	5.38		$	5.15		$	5.28
	Preferred stock outstanding at end of period			8,926,829			7,200,000			8,942,999
	Preferred stock equity at end of period (in thousands)		$	223,171		$	180,500		$	223,575
Performance ratios:
	Return on average assets(1)			.70	%		1.13	%		1.22	%
	Return on average common stockholders’ equity(1)			11.87	%		27.67	%		25.39	%
	Efficiency ratio			34.73	%		39.72	%		39.15	%
	Operating expenses to end-of-period assets			0.86	%		0.99	%		0.90	%
Capital ratios:
	Total capital to risk-weighted assets			13.44	%		11.90	%		13.83	%
	Tier I capital to risk-weighted assets			12.50	%		10.90	%		12.93	%
	Tier I capital to average assets			7.09	%		6.19	%		7.21	%
	Equity-to-assets ratio			6.90	%		6.19	%		6.90	%
Other selected data:
	Branch offices			51			35			50
	Number of employees			1,068			881			1,031

(1)

The return on average assets is computed by dividing net income by average total assets for the period. The return on average common stockholders’ equity is computed by dividing net income less preferred stock dividends by average common stockholders’ equity. Average total assets are computed using beginning and ending balances.

CRITICAL ACCOUNTING POLICIES AND PRACTICES

The information required herein is incorporated by reference from page 30 of the annual report to securities holders for the year ended December 31, 2002.

LIQUIDITY

Liquidity refers to the Company’s ability to generate sufficient cash to meet the funding needs of current loan demand; savings deposit withdrawals, principal and interest payments with respect to outstanding borrowings and to pay operating expenses. The Company monitors its liquidity in accordance with guidelines established by the Investment Committee and applicable regulatory requirements. The Company’s need for liquidity is affected by loan demand, net changes in deposit levels and the scheduled maturities of its borrowings. Liquidity demand caused by net reductions in deposits is usually caused by factors over which the Company has limited control. The Company derives its liquidity from both its assets and liabilities. Liquidity from assets by receipt of interest and principal payments and prepayments, by the ability to sell assets at market prices and by utilizing unpledged assets as collateral for borrowings. Liquidity is derived from liabilities by maintaining a variety of funding sources, including deposits, advances from the FHLB of New York and other short and long-term borrowings.

The Company’s liquidity targets are reviewed monthly by the Investment Committee and are based on the Company’s commitment to make loans and investments and its ability to generate funds. The Committee’s targets are also affected by yields on available investments and upon the Committee’s judgment as to the attractiveness of such yields and its expectations as to future yields.

The Bank’s investment portfolio at March 31, 2003, had an average contractual maturity of 66 months. However, no assurance can be given that such levels will be maintained in future periods.

As of March 31, 2003, the Bank had line of credit agreements with four commercial banks permitting the Bank to borrow a maximum aggregate amount of $125.0 million. The agreements provide for unsecured advances to be used by the Company on an overnight basis. Interest rate is negotiated at the time of the transaction usually at Fed Fund rate. The credit agreements are renewable annually.

Payments due by period for the Company’s contractual obligations (other than deposit liabilities) at March 31, 2003, are presented below:


			Due after one		Due after three
	Due within one		year through		years through		Due after five
	year		three years		five years		years		Total

	(In thousands)
Short-term borrowings	$	774,735							$	774,735
Long-term borrowings				1,615,100		170,900		1,096,922		2,882,922
Operating Lease Obligations		2,041		4,291		3,625		15,694		25,651

Total contractual obligations	$	776,776	$	1,619,391	$	174,525	$	1,112,616	$	3,683,308

Such commitments will be funded in the normal course of business from the Company’s principal source of funds. At March 31, 2003, the Company had $2.6 billion in certificates of deposits that mature during the following twelve months. The Company does not anticipate any difficulty in retaining or replacing such deposits.

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


	PAYMENTS DUE BY PERIOD

			Less than one
	Total		year		2-5 years

	(In thousands)
Lines of credit	$	154,128	$	71,262	$	82,866
Commercial letters of credit		9,151		9,151
Commitments to extend credit		163,859		102,403		61,456
Commitments to purchase mortgage loans		74,688		74,688		—

Total	$	401,826	$	257,504	$	144,322

Due to the nature of the Company’s unfunded loan commitments, including unfunded lines of credit, the amounts presented above do not necessarily represent the amounts the Company anticipates funding in the periods presented above.

Minimum Regulatory Capital Requirements

The Federal Reserve Board has established guidelines regarding the capital adequacy of bank holding companies, such as the Company. These requirements are substantially similar to those adopted by the FDIC for depository institutions, such as Westernbank, as set forth below.

The Company (on a consolidated basis) and Westernbank (the “Companies”) are subject to risk-based capital guidelines issued by the federal banking agencies. These guidelines are used to evaluate capital adequacy based primarily on the perceived credit risk associated with balance sheet assets as well as certain off-balance sheet exposures such as unused loan commitments, letters of credit and derivatives.

Under the risk-based capital guidelines, qualifying total capital consists of two types of capital components. Tier 1 capital includes common shareholders’ equity, qualifying perpetual preferred stock (subject to limitations) and minority interest in consolidated subsidiaries less goodwill and certain other deductions. Tier 2 capital includes Tier 1 capital plus perpetual preferred stock not included in Tier 1 capital (subject to limitations), the general allowance for credit losses, qualifying senior and subordinated debt, and limited-life preferred stock less certain deductions.

The risk-based capital guidelines require a minimum ratio of Tier 1 capital to risk-weighted assets of 4.0% and a minimum ratio of combined Tier 1 and Tier 2 capital (“total risk-based capital”) to risk weighted assets of 8.0%. The risk-based capital guidelines are supplemented by a leverage ratio requirement. This requirement establishes a minimum leverage ratio of 3.0% for the highest rated banking organizations. Other banking organizations are expected to have ratios of at least 4.0 to 5.0% depending on their particular growth plans and condition (including diversification of risk, asset quality, earnings, and liquidity). The ratio is defined as Tier 1 capital divided by total average assets, less certain deductions, including goodwill.

As of March 31, 2002 (latest examination date), Westernbank qualified as a well capitalized institution under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and

Tier I leverage ratios as set forth in the following table. At March 31, 2003, there are no conditions or events that management believes have changed Westernbank’s category.

The following table reflects the Companies’ actual capital amounts and ratios, and applicable regulatory requirements at March 31, 2003:


												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	$	647,013		13.44	%	$	385,127		8.00	%		N/A		N/A
	Westernbank		629,367		13.08			384,934		8.00			481,167		10.00	%
Tier I Capital to Risk Weighted Assets:
	Consolidated		595,559		12.50	%		190,579		4.00	%		N/A		N/A
	Westernbank		577,913		12.14			190,416		4.00			285,624		6.00	%
Tier I Capital to Average Assets:
	Consolidated		595,559		7.09	%		252,000		3.00	%		N/A		N/A
	Westernbank		577,913		6.90			251,627		3.00			418,777		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 holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital. Management believes that the Company will continue to meet its cash obligations as they become due and pay dividends as they are declared.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk and asset/liability management

The Company’s financial performance is impacted by among other factors, interest rate risk and credit risk. Management considers interest rate risk the Company’s most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Company’s net interest income is largely dependent upon the effective management of interest rate risk. The Company does not utilize derivatives to mitigate its credit risk, relying instead on an extensive counterparty review process. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Allowance for Loan Losses” herein.

Interest rate risk is addressed by the Company’s Asset & Liability Committee (“ALCO”), which includes senior management and Board of Director representatives. The ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Company’s balance sheet in part to minimize the potential impact on net portfolio value and net interest income despite changes in interest rates. The Company’s exposure to interest rate risk is reviewed on a monthly basis by the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net portfolio value in the event of hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Company has implemented strategies to more closely match its balance sheet composition. Interest rate sensitivity is computed by estimating the changes in net portfolio of equity value, or market value over a range of potential changes in interest rates. The market value of equity is the market value of the Company’s assets minus the market value of its liabilities plus the market value of any off-balance sheet items. The market value of each asset, liability, and off-balance sheet item is its net present value of expected cash flows discounted at market rates after adjustment for rate changes. Given the fed fund rate of 1.25% at March 31, 2003 and December 31, 2002, a linear 50 basis points decrease for March 31, 2003 and December 31, 2002 was modeled in the estimated change in interest rate in place of the linear 200 basis points decrease. The Company measures the impact on market value for an immediate and sustained 200 basis point increase and 50 basis points decrease (shock) in interest rates.

The Company’s profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. The Company is subject to interest rate risk to the degree that its interest-earning assets reprice differently than its interest-bearing liabilities.

The Company manages its mix of assets and liabilities with the goals of limiting its exposure to interest rate risk, ensuring adequate liquidity, and coordinating its sources and uses of funds. Specific strategies have included securitization and sale of long-term, fixed-rate residential mortgage loans, shortening the average maturity of fixed-rate loans and increasing the volume of variable and adjustable rate loans to reduce the average maturity of the Company’s interest-earning assets. All long-term, fixed-rate single family residential mortgage loans underwritten

according to Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and Government National Mortgage Association guidelines are sold for cash upon origination. In addition, the Company enters into interest rate exchange agreements (swaps) to hedge 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 50 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:

March 31, 2003:


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

				(Dollars in thousands)
+200 Basis Points		$	207,594	$	(9,905	)		(4.78	)%
	Base Scenario		217,499		—			—
-50 Basis Points			205,357		(12,142	)		(5.59	)%

December 31, 2002:


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

		(Dollars in thousands)
+200 Basis Points		$	179,851	$	(8,672	)		(4.60	)%
	Base Scenario		188,523		—			—
-50 Basis Points			178,391		(10,132	)		(5.37	)%

(*) The NII figures exclude the effect of the amortization of loan fees. Given the fed fund rate of 1.25% at March 31, 2003 and December 31, 2002, a linear 50 basis points decrease for March 31, 2003 and December 31, 2002 was modeled in the estimated change in interest rate in place of the linear 200 basis points decrease.

The model utilized to create the information presented above makes various estimates at each level of interest rate change regarding cash flows from principal repayments on loans and mortgage-backed securities and/or call activity on investment securities. Actual results could differ significantly from these estimates which would result in significant differences in the calculated projected change. In addition, the limits stated above do not necessarily represent the level of change under which management would undertake specific measures to realign its portfolio in order to reduce the projected level of change.

The interest rate sensitivity (“GAP”) is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A GAP is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A GAP is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative GAP would tend to adversely affect net interest income, while a positive GAP would

tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. While the GAP is a useful measurement and contributes toward effective asset and liability management, it is difficult to predict the effect of changing interest rates solely on that measure. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The Company’s one-year cumulative GAP position at March 31, 2003, was positive $154.0 million or 1.74% of total assets. This is a one-day position that is continually changing and is not indicative of the Company’s position at any other time. While the GAP position is a useful tool in measuring interest rate risk and contributes toward effective asset and liability management, shortcomings are inherent in GAP analysis since certain assets and liabilities may not move proportionally as interest rates change.

Competition and economic conditions

The financial services and banking business are highly competitive, and the profitability of the Company will depend principally upon the Company’s ability to compete in its market area as well as to a significant extent upon general economic conditions in the island of Puerto Rico. The Company competes with other commercial and non-commercial banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, asset-based non-bank lenders and certain other non-financial institutions, including certain governmental organizations which may offer subsidized financing at lower rates than those offered by the Company. The Company has been able to compete effectively with other financial institutions by emphasizing technology and customer service, including local office decision-making on loans, establishing long-term customer relationships and building customer loyalty, and by providing products and services designed to address the specific needs of its customers. The success of the Company is also highly dependent on the economic strength of the Company’s general market area. Significant deterioration in the local economy or external economic conditions, such as inflation, recession, unemployment, real estate values and other factors beyond the Company’s control, could also substantially impact the Company’s performance. There can be no assurance that future adverse changes in the local economy would not have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

Changes in statutes and regulations, including tax laws and rules

The Company, as a Puerto Rico-chartered financial holding company, and its subsidiaries, are each subject to extensive federal and local governmental supervision and regulation relating to its banking and insurance business. The Company also benefits from favorable tax treatment under regulations relating to the activities of Westernbank International. In addition, there are laws and other regulations that restrict transactions between the Company and its subsidiaries. Any change in such tax or other regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the applicable local legislatures, could adversely affect the Company’s profits and financial condition.

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

A — Exhibits

99.1 Written statement of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Written statement of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

B — Reports on Form 8-K

On April 21, 2003, the Company filed a report 8-K, announcing the results of operations for the first quarter ended March 31, 2003.

On April 10, 2003, the Company filed a report 8-K, attaching a press release with instructions on when and how to access the company’s first quarter earnings call.

On January 15, 2003, the Company filed a report 8-K, announcing the results of operations for the fourth quarter and year ended December 31, 2002.

This information is being furnished pursuant to Item 12 of Form 8-K and is being presented under Item 9 as provided in the Securities and Exchange Commission’s interim guidance regarding the filing requirements for Items 11 and 12 of Form 8-K (See Release No. 34-47583).

SIGNATURES

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

Registrant:


	W HOLDING COMPANY, INC


Date: May 15, 2003	By	/s/ Frank C. Stipes

		Frank C. Stipes, Esq. Chairman of the Board, Chief Executive Officer and President

Date: May 15, 2003	By	/s/ Freddy Maldonado

		Freddy Maldonado Chief Financial Officer and Vice President of Finance and Investment

CERTIFICATION

I, Frank C. Stipes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of W Holding Company, Inc.

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

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

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

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

a) All significant deficiencies in the design or operations of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date:		May 15, 2003

By:		/s/ Frank C. Stipes

		Frank C. Stipes, Esq. Chairman of the Board, Chief Executive Officer and President

CERTIFICATION

I, Freddy Maldonado, certify that:

1. I have reviewed this quarterly report on Form 10-Q of W Holding Company, Inc.


Date:		May 15, 2003

By:		/s/ Freddy Maldonado

		Freddy Maldonado Vice President of Finance and Investment and Chief Financial Officer

Index to Exhibits

99.1 Written statement of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

99.2 Written statement of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

	•		Loan loss factors for commercial loans, including construction and land acquisition loans, are based on historical loss trends for three years, as adjusted for management’s expected increase in the loss factors given the increase in such loan portfolios over the last few years.

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

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

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

			a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

			b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

			c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

			a) All significant deficiencies in the design or operations of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

			b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

99.1		Written statement of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Written statement of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002.