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 SEPTEMBER 30, 2003

OR

[ ]		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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Exchange Act). YES [X] NO [ ]

As of October 31, 2003, there were 69,152,247 shares outstanding of the Registrant’s Common Stock, $1.00 par value.

TABLE OF CONTENTS


Part I. Financial Information
	Item I. Financial Statements
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND OF COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 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 September 30, 2003 and December 31, 2002		1
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002		2
		Consolidated Statements of Changes in Stockholders’ Equity and of Comprehensive Income for the Nine Months Ended September 30, 2003 and 2002		3
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		4-5
		Notes to Consolidated Financial Statements		6-28
	Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		29-60
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		61-64
	Item 4.	Controls and Procedures		64
PART II OTHER INFORMATION:
	Item 6.	Exhibits and Reports on Form 8-K		65
SIGNATURES				66

Part I. Financial Information
Item I. Financial Statements

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)


		September 30,			December 31,
		2003				2002

ASSETS
Cash and due from banks		$	88,794			$	76,080
Money market instruments:
	Federal funds sold and securities purchased under agreements to resell		463,279				459,147
	Interest-bearing deposits with banks		61,402				17,459
Due from brokers			16,583				—
Trading securities, at fair vale			2,633				—
Investment securities available for sale, at fair value			81,841				160,887
Investment securities held to maturity, at amortized cost with a fair value of $5,263,310 in 2003 and $3,503,379 in 2002			5,300,929				3,501,057
Federal Home Loan Bank stock, at cost			39,750				43,322
Mortgage loans held for sale, at lower of cost or fair value			5,705				7,446
Loans, net of allowance for loan losses of $59,141 in 2003 and $47,114 in 2002			4,533,878				3,754,357
Accrued interest receivable			59,248				46,653
Premises and equipment, net			102,308				96,209
Deferred income taxes, net			25,937				16,327
Other assets			30,776				26,133

	Total	$	10,813,063			$	8,205,077

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits		$	5,000,846			$	4,298,744
Federal funds bought and securities sold under agreements to repurchase			4,755,538				3,097,341
Advances from Federal Home Loan Bank			146,000				120,000
Mortgage note payable			37,336				37,822
Other liabilities			75,594				66,422

	Total liabilities		10,015,314				7,620,329

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock $1.00 par value per share (liquidation preference $25 per share - $390,260,125 in 2003 and $223,574,975 in 2002); authorized 20,000,000 shares; issued and outstanding 15,610,405 shares in 2003 and 8,942,999 shares in 2002			15,610				8,943
Common stock - $1.00 par value per share; authorized 300,000,000 shares; issued and outstanding 68,651,651 shares in 2003 and 68,346,306 shares in 2002			68,651				68,346
Paid-in capital			478,793				319,106
Retained earnings:
	Reserve fund		39,538				32,011
	Undivided profits		196,722				157,442
Accumulated other comprehensive loss			(1,565	)			(1,100	)

	Total stockholders’ equity		797,749				584,748

TOTAL		$	10,813,063			$	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						Nine Months Ended
			September 30,						September 30,
			2003			2002			2003			2002

INTEREST INCOME:
	Loans, including loan fees		$	71,568		$	57,047		$	203,222		$	159,416
	Investment securities			31,607			28,226			89,327			84,556
	Mortgage and asset-backed securities			11,489			11,071			29,137			32,914
	Money market instruments			1,771			1,994			8,605			4,609

		Total interest income		116,435			98,338			330,291			281,495

INTEREST EXPENSE:
	Deposits			27,941			28,778			85,985			83,461
	Federal funds bought and securities sold under agreements to repurchase			24,867			25,498			71,612			72,751
	Advances from Federal Home Loan Bank			1,515			1,563			4,525			4,639
	Other borrowings			—			11			142			595

		Total interest expense		54,323			55,850			162,264			161,446

NET INTEREST INCOME				62,112			42,488			168,027			120,049
PROVISION FOR LOAN LOSSES				7,892			3,828			20,718			10,919

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES				54,220			38,660			147,309			109,130

OTHER INCOME (LOSS):
	Service charges on deposit accounts and other fees			7,506			6,245			20,597			16,579
	Unrealized loss on derivative instruments			(54	)		(276	)		(155	)		(542	)
	Net gain (loss) on sales and valuation of loans, securities and other assets			21			930			(20,983	)		851

		Total other income (loss), net		7,473			6,899			(541	)		16,888

TOTAL NET INTEREST INCOME AND OTHER INCOME				61,693			45,559			146,768			126,018

OPERATING EXPENSES:
	Salaries and employees’ benefits			8,267			7,479			24,808			20,405
	Equipment			2,318			2,449			6,714			7,115
	Occupancy			1,656			1,537			4,923			4,208
	Advertising			1,976			2,050			4,983			5,084
	Printing, postage, stationery and supplies			822			725			2,526			2,025
	Telephone			569			519			1,707			1,489
	Other			6,264			4,972			15,176			13,765

		Total operating expenses		21,872			19,731			60,837			54,091

INCOME BEFORE PROVISION FOR INCOME TAXES				39,821			25,828			85,931			71,927

PROVISION FOR INCOME TAXES:
	Current			6,657			3,591			20,351			13,712
	Deferred			(1,474	)		(438	)		(9,591	)		(2,422	)

		Total provision for income taxes		5,183			3,153			10,760			11,290

NET INCOME			$	34,638		$	22,675		$	75,171		$	60,637

NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS			$	28,469		$	19,348		$	60,402		$	50,656

BASIC EARNINGS PER COMMON SHARE			$	0.41		$	0.30		$	0.88		$	0.80

DILUTED EARNINGS PER COMMON SHARE			$	0.40		$	0.30		$	0.86		$	0.80

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)


					Nine Months Ended
					September 30,
					2003			2002

Changes in Stockholders’ Equity:
	Preferred stock:
		Balance at beginning of period			$	8,943		$	7,220
		Issuance of preferred stock				6,872			—
		Conversion of preferred stock				(205	)		—

		Balance at end of period				15,610			7,220

	Common stock:
		Balance at beginning of period				68,346			41,500
		Stock split				—			20,750
		Stock repurchased				—			(2	)
		Issuance of common stock				—			6,095
		Issuance of common stock upon conversion of preferred stock				305			—

		Balance at end of period				68,651			68,343

	Paid-in capital:
		Balance at beginning of period				319,106			187,628
		Effect of stock options granted to employees				795			—
		Issuance of common stock				—			91,741
		Issuance of preferred stock				158,992			—
		Issuance of common stock upon conversion of preferred stock				(100	)		—

		Balance at end of period				478,793			279,369

	Reserve fund:
		Balance at beginning of period				32,011			23,476
		Transfer from undivided profits				7,527			6,046

		Balance at end of period				39,538			29,522

	Undivided profits:
		Balance at beginning of period				157,442			128,583
		Net income				75,171			60,637
		Cash dividends on common stock				(13,595	)		(10,288	)
		Cash dividends on preferred stock				(14,769	)		(9,981	)
		Transfer to reserve fund				(7,527	)		(6,046	)
		Stock split				—			(20,750	)

		Balance at end of period				196,722			142,155

	Accumulated other comprehensive loss:
		Balance at beginning of period				(1,100	)		(498	)
		Other comprehensive loss for the period				(465	)		(994	)

		Balance at end of period				(1,565	)		(1,492	)

Total Stockholders’ Equity					$	797,749		$	525,117

Comprehensive income:
		Net income			$	75,171		$	60,637

		Other comprehensive income (loss), net of income tax:
			Unrealized net gains (losses) on securities available for sale:
				Unrealized holding (losses) gains arising during the period		(7,579	)		379
				Reclassification adjustment for losses (gains) included in net income		7,094			(1,590	)

						(485	)		(1,211	)

			Cash flow hedges:
				Unrealized net derivative gain arising during the period		—			356

		Income tax effect				20			(139	)

		Net change in other comprehensive loss, net of income taxes				(465	)		(994	)

Total Comprehensive Income					$	74,706		$	59,643

See notes to consolidated financial statements.

W HOLDING COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)


				Nine months ended
				September 30,
				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income				$	75,171		$	60,637
Adjustments to reconcile net income to net cash provided by operating activities:
	Provision (credit) for:
		Loan losses			20,718			10,493
		Foreclosed real estate held for sale			—			68
		Deferred income taxes			(9,591	)		(2,422	)
	Depreciation and amortization on:
		Premises, equipment and other			5,377			5,022
		Foreclosed real estate held for sale			244			45
		Mortgage servicing rights			546			546
	Stock options granted to employees				795			—
	Amortization of premium (discount) on:
		Investment securities available for sale			295			(423	)
		Investment securities held to maturity			(1,558	)		(8,263	)
		Mortgage-backed securities held to maturity			4,325			(725	)
		Loans			1,130			1,246
	Amortization of discount on deposit				1,998			1,344
	Amortization of net deferred loan origination fees				(6,253	)		(4,467	)
	Net loss (gain) on sale and in valuation of:
		Investment securities available for sale			22,795			(412	)
		Mortgage loans held for sale			(46	)		(257	)
		Derivative instruments			154			(806	)
		Foreclosed real estate held for sale			(48	)		(76	)
	Originations of mortgage loans held for sale				(39,647	)		(32,493	)
	Decrease (increase) in:
		Trading securities			19,771			78,578
		Accrued interest receivable			(12,595	)		(17,648	)
		Other assets			179			(22,648	)
	Increase (decrease) in:
		Accrued interest on deposits and borrowings			6,199			(4,418	)
		Other liabilities			671			16,276

			Net cash provided by operating activities		90,630			79,197

CASH FLOWS FROM INVESTING ACTIVITIES:
	Net (increase) decrease in interest bearing deposits with banks				(43,943	)		6,265
	Net increase in federal funds sold and securities purchased under agreements to resell				(4,131	)		(209,207	)
	Increase in due from brokers				(16,583	)		—
	Investment securities available for sale:
		Sales			67,623			667,172
		Purchases			(128,585	)		(772,110	)
		Proceeds from principal repayment			116,435			74,803
	Investment securities held to maturity:
		Purchases			(17,978,326	)		(9,926,491	)
		Proceeds from redemption and repayment			16,585,184			9,012,676
	Mortgage-backed securities held to maturity:
		Purchases			(1,399,767	)		(354,957	)
		Proceeds from principal repayment			990,269			161,429
	Loans:
		Purchases			(258,657	)		(159,022	)
		Sales of loans			69,915			—
		Other increase			(588,960	)		(464,954	)
	Purchase of derivative options				(3,332	)		(4,884	)
	Proceeds from sales of foreclosed real estate held for sale				518			245
	Additions to premises and equipment				(11,487	)		(6,437	)
	Purchase of Federal Home Loan Bank stock				—			(4,883	)
	Redemption of Federal Home Loan Bank stock				3,572			—
	Purchase of partnership interest, net of cash acquired				—			(11,496	)

		Net cash used in investing activities			(2,600,255	)		(1,991,851	)

Forward				$	(2,509,625	)	$	(1,912,654	)

(Continued)

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


				Nine Months Ended
				September 30,
				2003			2002

Forward				$	(2,509,625	)	$	(1,912,654	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net increase in deposits				700,221			688,246
	Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase				(156,533	)		583,537
	Securities sold under agreements to repurchase with original maturities over three months:
			Proceeds		2,045,765			881,493
			Payments		(231,035	)		(268,573	)
	Payments of term notes				—			(40,000	)
	Payments of mortgage note payable				(486	)		—
	Advances from Federal Home Loan Bank
			Proceeds		199,000			—
			Payments		(173,000	)		—
	Net decrease in advances from borrowers for taxes and insurance				(70	)		(246	)
	Repurchase of common stock for retirement				—			(41	)
	Dividends paid				(27,387	)		(19,885	)
	Issuance of common stock, net of issuance costs				—			98,175
	Issuance of preferred stock, net of issuance costs				165,864			—

		Net cash provided by financing activities			2,522,339			1,922,706

NET INCREASE IN CASH AND DUE FROM BANKS					12,714			10,052
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD					76,080			62,414

CASH AND DUE FROM BANKS, END OF PERIOD				$	88,794		$	72,466

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
	Cash paid during the period for:
		Interest on deposits and other borrowings		$	157,413		$	167,212
		Income tax			10,835			7,393
	Noncash activities:
		Other assets acquired on purchase of partnership interest			—			249
		Building acquired on purchase of partnership interest			—			49,852
		Mortgage note assumed on purchase of partnership interest			—			37,909
		Accrued dividends payable			2,908			1,808
		Increase in unrealized loss on investment securities available for sale			484			—
		Net increase in other comprehensive loss			(465	)		(994	)
		Mortgage loans securitized and transferred to trading securities			22,403			32,920
		Transfer from available for sale to trading securities			—			41,048
		Transfer from loans to foreclosed real estate held for sale			2,130			975
		Mortgage loans originated to finance the sale of foreclosed real estate held for sale			588			278
		Capitalized mortgage servicing rights			1,544			497
		Unpaid additions to premises and equipment			(11	)		82
		Transfer from undivided profits to reserve fund			7,528			6,046
	Effect in valuation of derivatives and their hedge items:
		Increase in other assets			3,178			1,402
		Decrease in deposits			1,673			6,399
		Increase in other liabilities			3,616			13,452
	Conversion of preferred stock into common stock:
		Preferred stock			(205	)		—
		Paid in capital			(100	)		—
		Common stock			305			—

See notes to consolidated financial statements.

(Concluded)

W HOLDING COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

W Holding Company, Inc. (the “Company”) is a financial holding company offering a full range of financial services through its wholly-owned subsidiaries, Westernbank Puerto Rico (“Westernbank” or the “Bank”) and Westernbank Insurance Corp. The Company was organized under the laws of the Commonwealth of Puerto Rico in February 1999 to become the bank holding company of Westernbank. The Bank, which was founded as a savings institution in 1958, is a Puerto Rico chartered commercial bank, deposits in which are insured to applicable limits by the United States Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a full range of business and consumer financial services, including banking, trust and brokerage services. Westernbank Insurance Corp. is a general insurance agent placing property, casualty, life and disability insurance. The assets, liabilities, revenues and expenses of Westernbank Insurance Corp. at September 30, 2003 and December 31, 2002, and for the three and nine month periods ended September 30, 2003, were not significant.

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

The Company is the third largest bank holding company in Puerto Rico, as measured by total assets as of September 30, 2003. As of September 30, 2003, it had total assets of $10.81 billion, a loan portfolio-net of $4.53 billion, an investment portfolio of $5.95 billion, deposits of $5.00 billion and stockholders’ equity of $797.7 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 the Puerto Rico Act No. 52 of August 11, 1989, as amended, known as the International Banking Regulatory Act, which activities consist of commercial and related services, and treasury and investment activities outside of Puerto Rico; Westernbank Business Credit, which specializes in commercial business loans secured principally by accounts receivable, inventory and equipment; Westernbank Trust Division, which offers a full array of trust services; and Expresso of Westernbank, a new division created in July 2002, which specializes in small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $75,000 through 19 full-service branches. Westernbank owns 100% of the voting shares of SRG Net, Inc., a Puerto Rico corporation that operates an electronic funds transfer network. The assets, liabilities, revenues and expenses of SRG Net, Inc., at September 30, 2003 and December 31, 2002, and for the three and nine month periods ended September 30, 2003, were not significant.

On March 18, 2002, Westernbank, through Westernbank World Plaza, Inc. (“WWPI”), a newly created wholly-owned subsidiary of Westernbank Puerto Rico, and its wholly-owned subsidiary Westernbank One Percent, Inc. (“WOPI”), acquired 99% (as Limited Partner) and 1% (as General Partner), respectively, of the partnership interests 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 accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and banking industry practices (See Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – on the Company’s Consolidated Financial Statements as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, included in the Company’s Annual Report on Form 10K). 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 September 30, 2003 and December 31, 2002 and the results of operations and cash flows for the three and nine months ended September 30, 2003 and 2002. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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 and nine months ended September 30, 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.

Following is a summary of the most recent accounting policies adopted by the Company:

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 cardholder’s intangible assets. SFAS No. 147 was effective for acquisitions or impairment measurement of such intangibles effective on or after October 1, 2002. SFAS No. 147 did not have a significant effect on the Company’s financial condition or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, the Company changed the method of accounting for employee stock options from the intrinsic value method to the fair value method. Under the modified prospective method selected by the Company under the provisions of SFAS No. 148, compensation cost 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 three and nine month periods ended September 30, 2003 was a charge of $265,000 and $795,000, respectively.

Prior to January 1, 2003, the Company followed the intrinsic value-based method of accounting prescribed by Accounting Principles Board 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 have an exercise price equal to the market value of the underlying common stock at the grant date, no compensation expense was recognized at the measurement date.

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


		Three months ended						Nine months ended
		September 30,						September 30,
		2003			2002			2003			2002

Net income as reported		$	34,638		$	22,675		$	75,171		$	60,637
	Add: Stock based employee compensation expense included in reported net income		265			—			795			—
	Deduct: Total stock based employee compensation expense determined under fair value based method for all options		(265	)		(229	)		(795	)		(687	)

	Pro-forma net income	$	34,638		$	22,446		$	75,171		$	59,950

Earnings per share:
	Basic - as reported	$	0.41		$	0.30		$	0.88		$	0.80

	Diluted - as reported	$	0.40		$	0.30		$	0.86		$	0.80

	Basic - pro forma	$	0.41		$	0.30		$	0.88		$	0.79

	Diluted - pro forma	$	0.40		$	0.29		$	0.86		$	0.78

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 provision of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after December 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 was effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Implementation of SFAS No. 149 did not have a significant effect on the Company’s financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 is effective for all freestanding financial instruments entered into or modified after May 31, 2003. For all other freestanding financial instruments, it will become effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 applies to three categories of freestanding financial instruments (mandatorily redeemable instruments, instruments with repurchase obligations and instruments with obligations to issue a variable number of shares). Instruments within the scope of SFAS No. 150 must be classified as liabilities in the statement of condition. Certain provisions of SFAS No. 150 related to mandatorily redeemable financial instruments have been subsequently deferred indefinitely by the FASB. The Company does not have mandatorily redeemable financial instruments outstanding. Implementation of SFAS No. 150 is not expected to have a significant effect on the Company’s financial position or results of operations.

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

2. EARNINGS PER SHARE AND CAPITAL TRANSACTIONS

Basic and diluted earnings per common share for the three and nine months ended September 30, 2003 and 2002, were computed by dividing the net 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				Nine Months Ended
		September 30,				September 30,
		2003		2002		2003		2002

		(Dollars in thousands, except share data)
Basic and diluted earnings per share:
	Net income	$	34,638	$	22,675	$	75,171	$	60,637
	Less preferred stock dividends		6,169		3,327		14,769		9,981

	Income attributable to common stockholders - Basic		28,469		19,348		60,402		50,656
	Plus convertible preferred stock dividends		467		—		—		—

Total		$	28,936	$	19,348	$	60,402	$	50,656

	Weighted average number of common shares outstanding for the period		68,650,613		64,617,097		68,507,516		63,047,703
	Dilutive potential common shares - Stock options		2,157,804		847,388		2,134,729		637,182
	Assumed conversion of preferred stock		1,511,016		—		—		—

Total			72,319,433		65,464,485		70,642,245		63,684,885

Basic earnings per share		$	0.41	$	0.30	$	0.88	$	0.80

Diluted earnings per share		$	0.40	$	0.30	$	0.86	$	0.80

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 26 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 issuance of common stock amounted to $97,875,213, net of $5,739,787 of issuance costs.

On May 30 and June 16, 2003, the Company issued 3,680,000 and 552,000 shares, respectively, of the Company’s Series F Preferred Stock. The Series F Preferred Stock was issued at a price of $25.00 per share. Proceeds from issuance of the Series F Preferred Stock amounted to $102,192,300, net of $3,607,700 of issuance costs.

On August 29, 2003, the Company issued 2,640,000 shares of the Company’s Series G Preferred Stock. The Series G Preferred Stock was issued at a price of $25.00 per share. Proceeds from issuance of the Series G Preferred Stock amounted to $63,921,000, net of $2,329,000 of issuance costs.

During the three and nine month periods ended September 30, 2003, 3,000 and 204,594 shares of the Company’s convertible preferred stock series A were respectively converted into 4,474 and 305,345 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 nine months ended September 30, 2003 and 2002 were as follows:


RECORD DATE		PAYABLE DATE	AMOUNT PER SHARE ⁽¹⁾

	2003
	January 31, 2003	February 15, 2003	$	0.01833
	February 28, 2003	March 15, 2003		0.02250
	March 31, 2003	April 15, 2003		0.02250
	April 30, 2003	May 15, 2003		0.02250
	May 30, 2003	June 16, 2003		0.02250
	June 30, 2003	July 15, 2003		0.02250
	July 31, 2003	August 15, 2003		0.02250
	August 29, 2003	September 15, 2003		0.02250
	September 30, 2003	October 15, 2003		0.02250

Total			$	0.19833

	2002 ⁽²⁾
	January 31, 2002	February 15, 2002	$	0.01778
	February 28, 2002	March 15, 2002		0.01778
	March 31, 2002	April 15, 2002		0.01778
	April 30, 2002	May 15, 2002		0.01778
	May 31, 2002	June 15, 2002		0.01778
	June 30, 2002	July 15, 2002		0.01778
	July 31, 2002	August 15, 2002		0.01834
	August 30, 2002	September 13, 2002		0.01834
	September 30, 2002	October 15, 2002		0.01834

Total			$	0.16170

⁽¹⁾		Dividend amounts in the table are rounded.

⁽²⁾		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.

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
September 30, 2003		Cost		Gains		Losses		Value
		(In thousands)
Trading securities:
	Mortgage-backed securities- Government National Mortgage Association certificates (GNMA)	$	2,502	$	131	$	—	$	2,633

Available for sale:
	Collateralized mortgage obligations (CMO)	$	65,432	$	—	$	1,051	$	64,381
	Other investments		17,964		80		584		17,460

Total		$	83,396	$	80	$	1,635	$	81,841

Held to maturity:
	U.S. Government and agencies obligations	$	3,938,544	$	22,403	$	19,244	$	3,941,703
	Puerto Rico Government and agencies obligations		32,050		376		405		32,021
	Commercial paper		189,985		—		—		189,985
	Corporate notes		66,854		3,259		—		70,113

Subtotal			4,227,433		26,038		19,649		4,233,822

Mortgage and asset-backed securities:
	Federal Home Loan Mortgage Corporation (FHLMC) certificates		8,014		467		—		8,481
	GNMA certificates		10,510		445		—		10,955
	Federal National Mortgage Association (FNMA) certificates		5,188		340		—		5,528
	CMO		1,041,959		1,112		46,372		996,699
	Asset-backed securities		7,825		—		—		7,825

Subtotal			1,073,496		2,364		46,372		1,029,488

Total		$	5,300,929	$	28,402	$	66,021	$	5,263,310


				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
December 31, 2002		Cost		Gains		Losses		Value
		(In thousands)
Available for sale:
	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		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 September 30, 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		$	—	$	—	$	205,432	$	205,489
Due after one year through five years			—		—		817,236		823,168
Due after five years through ten years			—		—		3,181,994		3,179,860
Due after ten years			17,964		17,460		22,771		25,305

	Subtotal		17,964		17,460		4,227,433		4,233,822
Mortgage and other asset-backed securities			65,432		64,381		1,073,496		1,029,488

Total		$	83,396	$	81,841	$	5,300,929	$	5,263,310

The Company uses 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 each of the three years in the period ended December 31, 2002, included in the Company’s Annual Report on Form 10K.)

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, expectations of recoverability of its original investment, the employment of a systematic methodology that considers available evidence in evaluating potential impairment, available secondary market prices from broker/dealers, and the Company’s intention and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

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

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

In applying the foregoing analysis, management concluded that at March 31, 2003, its investments in corporate bond and loan obligations (“CBO’s and CLO’s”) were other-than-temporarily impaired. First, two tranches of a CBO with an amortized cost of $13.0 million were downgraded by two different rating agencies on April 3 and April 15, 2003, respectively. Second, the available secondary market prices for those two securities and the remaining portfolio of CBO’s and CLO’s with a carrying value of $56.0 million continued to deteriorate. In line with such decline, management concluded, based on these facts and the secondary market prices that a $15.7 million ($11.8 million net of tax) other-than-temporary impairment write-down adjustment was warranted. The same was recorded effective for the quarterly period ended March 31, 2003. As of March 31, 2003, there were no defaults within the securities portfolio underlying the CBO’s and CLO’s. In connection with the write-down, and in accordance with applicable accounting pronouncements, management also reassessed its intent to hold to maturity and reclassified the securities related to the CBO that were downgraded as available for sale as of March 31, 2003.

During the quarter ended June 30, 2003, the Company, based upon additional information available from trustees, further ratings downgrading, a default on the scheduled interest payment in one of the CBO tranches and further declines in quoted market prices for such investments, reclassified the remaining portfolio of CBO’s and CLO’s to available for sale and subsequently on June 6, 2003 sold its entire portfolio of CBO’s and CLO’s. The sale of the portfolio, with an original total investment of $62.9 million and adjusted to a fair value of $45.4 million as of March 31, 2003, was completed at an additional loss of $7.0 million ($5.2 million net of tax) which was recorded during the quarter ended June 30, 2003.

As of September 30, 2003 and 2002, management concluded that there was no other-than-temporary impairment on its investment securities portfolio.

5. LOANS

The loan portfolio consisted of the following:


		September 30,			December 31,
		2003			2002
		(In thousands)
REAL ESTATE LOANS SECURED BY FIRST MORTGAGES:
Commercial real estate		$	2,150,417		$	1,648,994
Conventional:
	One-to-four family residences		836,360			827,902
	Other properties		2,365			2,447
Construction and land acquisition			214,811			186,208
Insured or guaranteed - Federal Housing Administration, Veterans Administration, and others			17,047			17,201

Total			3,221,000			2,682,752

Plus (less):
	Undisbursed portion of loans in process		(4,713	)		(4,942	)
	Premium on loans purchased - net		1,130			1,485
	Deferred loan fees - net		(9,377	)		(5,624	)

Total			(12,960	)		(9,081	)

Real estate loans - net			3,208,040			2,673,671

OTHER LOANS:
Commercial loans			540,337			382,416
Loans on deposits			31,033			32,803
Credit cards			55,678			56,658
Consumer loans			759,784			655,713
Plus (less):
	Premium on loans purchased - net		2,517			3,225
	Deferred loan fees - net		(4,370	)		(3,015	)

Other loans - net			1,384,979			1,127,800

TOTAL LOANS			4,593,019			3,801,471
ALLOWANCE FOR LOAN LOSSES			(59,141	)		(47,114	)

LOANS - NET		$	4,533,878		$	3,754,357

The total investment in impaired commercial and construction loans at September 30, 2003 and December 31, 2002, was $54,919,000 and $50,589,000, respectively. All impaired commercial and construction loans were measured based on the fair value of collateral at September 30, 2003 and December 31, 2002. Impaired commercial and construction loans amounting to $28,928,000 and $26,074,000 at September 30, 2003 and December 31, 2002, respectively, were covered by a valuation allowance of $4,950,000 and $4,752,000, respectively. Impaired commercial and construction loans amounting to $25,991,000 at September 30, 2003 and $24,515,000 at December 31, 2002, did not require a valuation allowance in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan. The average investment in impaired commercial and construction loans for the nine-month periods ended September 30, 2003 and 2002, amounted to $45,888,000 and $45,958,000, respectively. The Company’s policy is to recognize interest income related to impaired loans on a cash basis, when these are over 90 days in arrears on payments of principal or interest. Interest on impaired commercial and construction loans collected and recognized as income for the nine-month periods ended September 30, 2003 and 2002, amounted to $2,044,000 and $3,093,000, respectively.

6. PLEDGED ASSETS

At September 30, 2003, residential mortgage loans and investment securities held to maturity amounting to $688,392,000 and $5,000,273,000, respectively, were pledged to secure public funds, individual retirement accounts, securities sold under agreements to repurchase, commercial 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 $4,993,773,000 at September 30, 2003, can be repledged.

7. DEPOSITS

A comparative summary of deposits as of September 30, 2003 and December 31, 2002, follows:


	2003		2002
	(In thousands)
Noninterest bearing accounts	$	217,788	$	156,143
Passbook accounts		660,079		560,549
NOW accounts		168,547		138,434
Super NOW accounts		28,037		24,868
Money market accounts		34,968		15,303
Certificates of deposit		3,866,990		3,379,628

Total		4,976,409		4,274,925
Accrued interest payable		24,437		23,819

Total	$	5,000,846	$	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 entitled to file consolidated tax returns. The Company, Westernbank and Westernbank Insurance Corp. are subject to Puerto Rico regular income tax or alternative minimum tax (“AMT”) on income earned from all sources. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.

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 for income taxes computed by applying the Puerto Rico income tax statutory rate to the tax provision as reported for the three and nine month periods ended September 30, 2003 and 2002 is as follows:


		Three months						Nine months

		2003			2002			2003			2002

					(Dollars in thousands)
Computed at Puerto Rico statutory rate		$	15,530		$	10,073		$	33,513		$	28,052
Effect on provision of:
	Exempt interest income, net		(9,958	)		(6,201	)		(24,505	)		(17,347	)
	Net nondeductible expenses		56			35			158			105
	Other		(445	)		(754	)		1,594			480

Provision for income tax as reported		$	5,183		$	3,153		$	10,760		$	11,290

Statutory tax rate			39	%		39	%		39	%		39	%

Effective tax rate			13	%		12	%		13	%		16	%

Deferred income tax assets (liabilities) as of September 30, 2003 and December 31, 2002, consisted of the following:


	2003			2002
	(In thousands)
Allowance for loan losses	$	21,937		$	17,247
Unrealized gain in valuation of derivative instruments		(602	)		(137	)
Mortgage servicing rights		(1,140	)		(751	)
Allowance for foreclosed real estate held for sale		6			6
Capital loss on sale of investment securities		5,699			—
Other temporary differences		43			(32	)

Total		25,943			16,333
Less valuation allowance		6			6

Deferred income tax assets, net	$	25,937		$	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 and hedging activities - The Company utilizes various derivative instruments for hedging purposes and other than hedging purposes such as asset/liability management. These transactions involve both credit and market risk. The notional amounts are amounts on which calculations and payments are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. The actual risk of loss is the cost of replacing, at market, these contracts in the event of default by the counterparties. The Company controls the credit risk of its derivative financial instrument agreements through credit approvals, limits and monitoring procedures.

The Company enters into interest-rate swap contracts in managing its interest rate exposure. Interest-rate swap contracts generally involve the exchange of fixed and floating-rate interest payment obligations without the exchange of the underlying principal amounts. Entering into interest-rate swap contracts involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts, but also the interest rate risk associated with unmatched positions. Interest rate swaps are the most common type of derivative contracts that the Company utilizes. 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 the Company’s fixed-rate certificates of deposit (liabilities) to a variable rate mature between one to twenty years with a right by the counterparty to call after the first anniversary. The Company has an identical right to call the certificates of deposit.

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

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

Information pertaining to the notional amounts of the Company’s derivative financial instruments as of September 30, 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	$	528,517	$	528,227

Derivatives not designated as hedge:
		Interest rate swaps (unmatched portion)	$	1,483	$	1,773
		Interest rate swaps used to manage exposure to the stock market		36,329		36,329
		Embedded options on stock indexed deposits		85,674		65,134
		Purchased options used to manage exposure to the stock market on stock indexed deposits		49,994		28,773

	Total		$	173,480	$	132,009

At September 30, 2003, the fair value of derivatives qualifying for fair value hedge represented an unrealized net loss of $12.8 million, which was recorded as “Other Liabilities” and as a decrease to the hedged “Deposits” in the accompanying September 30, 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 September 30, 2003, the fair value of derivatives not qualifying as a hedge represented an unrealized net loss of $4.8 million and was recorded as part of “Other Assets” $4.7 million, “Deposits” $4.7 million, and “Other Liabilities” $4.8 million in the accompanying September 30, 2003 statement of financial condition.

At December 31, 2002, the fair value of derivatives not qualifying as a hedge represented an unrealized net loss of $6.1 million and was recorded as part of “Other assets” $1.4 million, “Deposits” $1.6 million and “Other liabilities” $5.9 million in the accompanying December 31, 2002 statement of financial condition.

A summary of the types of swaps used and their terms at September 30, 2003 and December 31, 2002, follows:


		2003			2002
		(In thousands)
Pay floating/received fixed:
	Notional amount	$	530,000		$	530,000
	Weighted average receive rate at period end		4.85	%		5.67	%
	Weighted average pay rate at period end		1.33	%		1.90	%
	Floating rate as a percentage of three month LIBOR, plus a spread ranging from minus .20% to plus .25%		100	%		100	%

The changes in notional amount of swaps during the nine months ended September 30, 2003 follows:


	(In thousands)
Balance at December 31, 2002	$	566,329
New swaps		307,500
Called and matured swaps		(307,500	)

Ending balance	$	566,329

During the nine months ended September 30, 2003, various counterparties of swap agreements exercised their option to cancel their swaps and the Company immediately exercised its option to call the hedged certificates of deposit. No gains or losses resulted from the above cancellations.

At September 30, 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	$	5,000	$	—	$	—
2004		25,000		—		—
2005		15,000		—		—
2006		46,329		37,952		1,623
2007 and thereafter		475,000		47,722		48,371

Total	$	566,329	$	85,674	$	49,994

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

Committed Resources. At September 30, 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	$	17,458	$	16,710
		Variable rates		188,039		161,902
Unused lines of credit:
		Commercial		72,275		64,037
		Credit cards and other		129,764		77,776
Commercial letters of credit				14,635		4,574
Commitments to purchase mortgage loans				150,000		100,000

	Total		$	572,171	$	424,999

Such commitments will be funded in the normal course of business from the Company’s principal sources of funds. At September 30, 2003, the Company had $2.68 billion in deposits that mature during the following twelve months. The Company does not anticipate any difficulty in retaining such deposits. The Company also has on-going commitments to repay borrowings, fund maturing certificates of deposit and meet obligations under long-term operating leases for certain branches. No material changes are anticipated in regards to such commitments.

10. STOCK OPTION PLANS

The Company has two stock option plans, the 1999 Qualified Stock Option Plan (the “1999 Qualified Option Plan”) and the 1999 Nonqualified Stock Option Plan (the “1999 Nonqualified Option Plan”), for the benefit of employees of the Company and its subsidiaries. These plans offer to key officers, directors and employees an opportunity to purchase shares of the Company’s common stock. Under the 1999 Qualified Option Plan, options for up to 6,300,000 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 September 30, 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 and nine month periods ended September 30, 2003. No 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 September 30, 2003:


		Outstanding				Exercisable

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

$	6.67		3,442,000		6.38		2,052,000
	7.83		113,000		7.64		45,000
	15.85		123,000		8.81		25,000

Total			3,678,000				2,122,000

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 were not restated. The effect of implementing this Statement on the Company’s financial condition and results of operations for the three and nine months period ended September 30, 2003 was a charge of $265,000 and $795,000, respectively.

11. SEGMENT INFORMATION

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

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.

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 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 September 30, 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 September 30, 2003 and December 31, 2002, amounted to $74,490,000 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 of the Company’ Consolidated Financial Statements as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, included in the Company’s Annual Report on Form 10K.

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 nine months ended
		September 30, 2003

							Total major			Other
		Puerto Rico			International		segments			Segments			Eliminations			Total
		(In thousands)
Interest income:
	Consumer loans	$	55,381		$	—	$	55,381		$	—		$	—		$	55,381
	Commercial loans		86,057			3,245		89,302			—			—			89,302
	Asset-based loans		—			—		—			23,725			—			23,725
	Mortgage loans		34,815			—		34,815			—			—			34,815
	Treasury and investment activities		62,154			64,286		126,440			1,865			(1,237	)		127,068

Total interest income			238,407			67,531		305,938			25,590			(1,237	)		330,291
Interest expense			124,288			31,892		156,180			7,321			(1,237	)		162,264

Net interest income			114,119			35,639		149,758			18,269			—			168,027

Provision for loan losses			(17,979	)		—		(17,979	)		(2,739	)		—			(20,718	)

Other income, net:
	Service charges on deposits and other fees		15,761			402		16,163			165			(165	)		16,163
	Trust account fees		—			—		—			590			—			590
	Insurance commission fees		—			—		—			1,609			—			1,609
	Asset-based lending related fees		—			—		—			2,235			—			2,235
	Other		(21,138	)		—		(21,138	)		—			—			(21,138	)

Total other income, net			(5,377	)		402		(4,975	)		4,599			(165	)		(541	)

Equity in income of subsidiaries			610			—		610			76,167			(76,777	)		—

Total net interest income and other income		$	91,373		$	36,041	$	127,414		$	96,296		$	(76,942	)	$	146,768

Total assets as of September 30, 2003		$	8,501,963		$	2,797,569	$	11,299,532		$	1,185,161		$	(1,671,630	)	$	10,813,063


		For the three months ended
		September 30, 2003

							Total major			Other
		Puerto Rico			International		segments			Segments			Eliminations			Total
		(In thousands)

Interest income:
	Consumer loans	$	18,858		$	—	$	18,858		$	—		$	—		$	18,858
	Commercial loans		30,877			1,359		32,236			—			—			32,236
	Asset-based loans		—			—		—			9,311			—			9,311
	Mortgage loans		11,164			—		11,164			—			—			11,164
	Treasury and investment activities		21,270			23,417		44,687			627			(448	)		44,866

Total interest income			82,169			24,776		106,945			9,938			(448	)		116,435
Interest expense			40,714			11,289		52,003			2,768			(448	)		54,323

Net interest income			41,455			13,487		54,942			7,170			—			62,112

Provision for loan losses			(7,263	)		—		(7,263	)		(629	)		—			(7,892	)

Other income, net:
	Service charges on deposits and other fees		5,593			307		5,900			55			(55	)		5,900
	Trust account fees		—			—		—			252			—			252
	Insurance commission fees		—			—		—			722			—			722
	Asset-based lending related fees		—			—		—			632			—			632
	Other		(33	)		—		(33	)		—			—			(33	)

Total other income, net			5,560			307		5,867			1,661			(55	)		7,473

Equity in income of subsidiaries			(110	)		—		(110	)		35,040			(34,930	)		—

Total net interest income and other income		$	39,642		$	13,794	$	53,436		$	43,242		$	(34,985	)	$	61,693


		As of December 31, 2002 and for the nine months ended
		September 30, 2002

							Total major			Other
		Puerto Rico			International		segments			Segments			Eliminations			Total
		(In thousands)

Interest income:
	Consumer loans	$	36,162		$	—	$	36,162		$	—		$	—		$	36,162
	Commercial loans		73,784			1,751		75,535			—			—			75,535
	Asset-based loans		—			—		—			11,015			—			11,015
	Mortgage loans		36,704			—		36,704			—			—			36,704
	Treasury and investment activities		46,123			75,422		121,545			865			(331	)		122,079

Total interest income			192,773			77,173		269,946			11,880			(331	)		281,495
Interest expense			117,348			39,739		157,087			4,690			(331	)		161,446

Net interest income			75,425			37,434		112,859			7,190			—			120,049

Provision for loan losses			(9,224	)		—		(9,224	)		(1,695	)		—			(10,919	)

Other income, net:
	Service charges on deposits and other fees		13,915			210		14,125			149			(149	)		14,125
	Trust account fees		—			—		—			244			—			244
	Insurance commission fees		—			—		—			984			—			984
	Asset-based lending related fees		—			—		—			1,226			—			1,226
	Other		(206	)		515		309			—			—			309

Total other income, net			13,709			725		14,434			2,603			(149	)		16,888

Equity in income of subsidiaries			233			—		233			60,726			(60,959	)		—

Total net interest income and other income		$	80,143		$	38,159	$	118,302		$	68,824		$	(61,108	)	$	126,018

Total assets as of December 31, 2002		$	6,649,595		$	2,083,259	$	8,732,854		$	1,292,391		$	(1,820,168	)	$	8,205,077


		For the three months ended
		September 30, 2002

							Total major			Other
		Puerto Rico			International		segments			Segments			Eliminations			Total
		(In thousands)

Interest income:
	Consumer loans	$	14,777		$	—	$	14,777		$	—		$	—		$	14,777
	Commercial loans		24,704			774		25,478			—			—			25,478
	Asset-based loans		—			—		—			4,740			—			4,740
	Mortgage loans		12,053			—		12,053			—			—			12,053
	Treasury and investment activities		18,313			22,800		41,113			187			(10	)		41,290

Total interest income			69,847			23,574		93,421			4,927			(10	)		98,338
Interest expense			41,227			12,744		53,971			1,889			(10	)		55,850

Net interest income			28,620			10,830		39,450			3,038			—			42,488

Provision for loan losses			(2,724	)		—		(2,724	)		(1,104	)		—			(3,828	)

Other income, net:
	Service charges on deposits and other fees		5,159			70		5,229			50			(50	)		5,229
	Trust account fees		—			—		—			114			—			114
	Insurance commission fees		—			—		—			505			—			505
	Asset-based lending related fees		—			—		—			396			—			396
	Other		(15	)		670		655			—			—			655

Total other income, net			5,144			740		5,884			1,065			(50	)		6,899

Equity in income of subsidiaries			(53	)		—		(53	)		22,716			(22,663	)		—

Total net interest income and other income		$	30,987		$	11,570	$	42,557		$	25,715		$	(22,713	)	$	45,559

12. SUBSEQUENT EVENT

On November 4, 2003, the Company declared a three-for-two stock split in the form of a stock dividend on its common stock, for stockholders of record as of November 28, 2003, to be distributed on December 10, 2003. Also, on November 11, 2003, the Company declared a two percent (2%) stock dividend, for stockholders of record as of November 28, 2003, to be distributed on December 10, 2003. The stock dividend will have the effect of permanently capitalizing a portion of the Company’s retained earnings. The Company will pay cash to the stockholders in lieu of fractional shares.

On October 21, 2003, one of the Company’s executive officers exercised 500,000 options under the Company’s 1999 Qualified Option Plan (Note 10 Stock Option Plans) at an exercise price of $6.67.

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, 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” or the “Bank”) and Westernbank Insurance Corp. The Company was organized under the laws of the Commonwealth of Puerto Rico in February 1999 to become the bank holding company of Westernbank. Westernbank was founded as a savings institution in 1958 operating in the western and southwestern regions of Puerto Rico, focusing on retail banking and emphasizing long-term, fixed-rate residential mortgage loans on one-to-four family residential properties. In 1994, Westernbank changed its charter to become a full-service commercial bank. Westernbank offers a full range of business and consumer financial services, including banking, trust and brokerage services. Westernbank Insurance Corp. is a general insurance agent offering property, casualty, life and disability insurance. The assets, liabilities, revenues and expenses of Westernbank Insurance Corp. at September 30, 2003 and December 31, 2002, and for the three and nine month periods ended September 30, 2003 were not significant.

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

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

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 September 30, 2003, commercial loans were $2.69 billion or 58.58% of total loans (79.92% collateralized by real estate) and consumer loans were $844.6 million or 18.39% (74.28% collateralized by real estate) of the $4.59 billion loan portfolio. Investment securities totaled $5.95 billion at September 30, 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 81% of its loans collateralized by real estate as of September 30, 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 September 30, 2003), called “Expresso of Westernbank”, denoting the branches’ emphasis on small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $75,000.

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. On March 18, 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 expanding 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 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, and Westernbank World Plaza, Inc., which operates the Westernbank World Plaza, a 23-story office building located in Hato Rey, Puerto Rico.

The traditional banking operations of Westernbank Puerto Rico include retail operations, such as branches, including those 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 unsecured and 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 September 30, 2003, and December 31, 2002 and for the three and nine month periods ended September 30, 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 assets, liabilities, revenues and expenses of Westernbank Insurance Corp. at September 30, 2003 and December 31, 2002, and for the three and nine month periods ended September 30, 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 the 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 nine month period ended September 30, 2003 was mainly driven by increases in the loan and investment portfolios, primarily in the commercial and consumer loans portfolio, and in the investment securities held to maturity portfolio. Also, the Company has continued effective management of interest rate risk and a tight control of operating expenses. The efficiency ratio for the three and nine month periods ended September 30, 2003 was 31.62% and 32.49%, respectively. Net income for the three and nine months ended September 30, 2003, increased to $34.6 million or $0.41 earnings per basic common share ($0.40 on a diluted basis) and to $75.2 million or $0.88 earnings per basic common share ($0.86 on a diluted basis), respectively, up 52.76% and 23.97% when compared to $22.7 million or $0.30 earnings per common share (basic and diluted) and $60.6 million or $0.80 earnings per common share (basic and diluted), for the three and nine months ended September 30, 2002, respectively. The increase of $12.0 million and $14.5 million in net income for the three and nine month periods ended September 30, 2003, was mainly due to an increase in net interest income, as a result of higher average balances in interest-earning assets, and lower interest rates paid on interest-bearing liabilities. The increase in net interest income was partially offset by

increases in operating expenses and in the provision for loan losses and income taxes. The increase in net income for the nine month period ended September 30, 2003 resulted notwithstanding the effect of a special charge of $22.7 million ($17.0 million net of tax), resulting from the impairment charge recorded during the first quarter of 2003 and the final liquidation of the Company’s portfolio of corporate bond and loan obligations (“CBO’s” and “CLO’s”) on June 6, 2003 (See Note 4 – Investment Securities – Notes to consolidated financial statements (unaudited)). Net income attributable to common stockholders for the three and nine month periods ended September 30, 2003, increased to $28.5 million and to $60.4 million, respectively, up 47.14% and 19.24% when compared to $19.3 million and $50.7 million, for the same periods in 2002. The Company’s profitability ratios for the three and nine month periods ended September 30, 2003, represented returns on assets (ROA) of 1.36% and 1.05% and returns on common stockholders’ equity (ROCE) of 28.69% and 20.95%, respectively, compared with a ROA of 1.22% and 1.17% and a ROCE of 26.86% and 24.47%, respectively, for the same periods in 2002. These ratios are within management’s expectations considering the strong growth in assets, the additional capital infusions, the significant resources invested in new areas of business and the special charge to earnings recorded during the first half of the year.

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 increased $19.6 million or 46.19% for the three months ended September 30, 2003 and $48.0 million or 39.97% for the nine months ended September 30, 2003, when compared to the corresponding 2002 periods. The increase for the three and nine months ended September 30, 2003, was the result of significant increases in the average balance of interest-earning assets although at significant lower yields than the comparable prior year periods, as a result of a lower interest rate scenario. Interest income from loans and investment securities increased when compared to the three and nine month periods ended September 30, 2002.

Average interest-earning assets increased from $7.27 billion for the three months ended September 30, 2002 to $9.48 billion for the three months ended September 30, 2003, an increase of $2.21 billion or 30.34%. For the nine-month period, average interest-earning assets increased from $6.85 billion in 2002 to $8.86 billion in 2003, an increase of $2.02 billion or 29.46%. The increase in the average interest-earning assets is mainly related to a rise in the average loan portfolio, the higher yielding category of interest-earning assets, of $905.6 million and $932.0 million for the three and nine months ended September 30, 2003, respectively, primarily due to an increase in commercial and consumer loan portfolios, and an increase of $1.30 billion and $1.09 billion, respectively, in the average investment portfolio, mainly U.S. Government and agencies obligations and mortgage-backed securities. Average yields on interest-earning assets decreased from 5.36% and 5.50% for the three-month and nine-month ended September 30, 2002, respectively, to 4.87% and 4.98% for the comparable periods 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 and called securities, and lower yields on securities purchased.

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 $6.81 billion for the three months ended September 30, 2002, to $8.87 billion for the three months ended September 30, 2003, an increase of $2.06 billion or 30.19%. For the nine-month periods ended September 30, 2002 and 2003, average interest bearing liabilities increased from $6.40 billion to $8.32 billion, respectively, an increase of $1.92 billion or 29.93%. The increase in average interest-bearing liabilities for the three and nine months ended September 30, 2003, was mainly related to an increase in the average balance of deposits which grew from $3.75 billion for the three month period ended September 30, 2002, to $4.89 billion for the three month period ended September 30, 2003, an increase of $1.13 billion or 30.22%. For the nine month periods ended September 30, 2002 and 2003, the average balance of deposits increased from $3.58 billion in 2002 to $4.66 billion in 2003, an increase of $1.08 billion or 30.10%. The average balance of federal funds bought and reverse repurchase agreements also grew from $2.93 billion for the three month period ended September 30, 2002 to $3.84 billion for the same period in 2003, an increase of $904.0 million or 30.83%. For the nine month period ended September 30, 2003, the average balance of federal funds bought and reverse repurchase agreements also grew from $2.69 billion in 2002 to $3.53 billion, an increase of $839.7 million or 31.27%. 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, attributable to a lower interest rate scenario. For the three-month and nine-month periods, the average interest rates paid decreased from 3.28% and 3.40% in 2002, to 2.45% and 2.63% in 2003, respectively.

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


			Three months ended September 30,

			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)	$	71,568	$	4,383,246			6.48	%	$	57,047	$	3,477,629			6.51	%
		Mortgage and asset-backed securities (3)		11,489		1,196,542			3.81	%		11,071		857,586			5.12	%
		Investment securities (4)		31,607		3,328,556			3.77	%		28,226		2,595,368			4.31	%
		Money market instruments		1,771		573,853			1.22	%		1,994		344,377			2.30	%

	Total			116,435		9,482,197			4.87	%		98,338		7,274,960			5.36	%

	Interest-bearing liabilities:
		Deposits		27,941		4,889,213			2.27	%		28,777		3,754,697			3.04	%
		Fed funds bought and securities sold under agreements to repurchase		24,867		3,836,165			2.57	%		25,498		2,932,167			3.45	%
		Advances from FHLB		1,515		140,524			4.28	%		1,563		120,032			5.17	%
		Other borrowings		—		—			—			12		3,000			1.45	%

	Total			54,323		8,865,902			2.43	%		55,850		6,809,896			3.25	%

	Net interest income		$	62,112							$	42,488

	Interest rate spread								2.44	%							2.11	%

	Net interest-earning assets				$	616,295							$	465,064

	Net yield on interest-earning assets (5)								2.60	%							2.32	%

	Interest-earning assets to interest-bearing liabilities ratio					106.95	%							106.83	%

Tax equivalent spread:
	Interest-earning assets		$	116,435	$	9,482,197			4.87	%	$	98,338	$	7,274,960			5.36	%
	Tax equivalent adjustment			10,347		—			0.43	%		6,920		—			0.38	%

	Interest-earning assets - tax equivalent			126,782		9,482,197			5.30	%		105,258		7,274,960			5.74	%

	Interest-bearing liabilities			54,323		8,865,902			2.43	%		55,849		6,809,896			3.25	%

	Net interest income		$	72,459							$	49,409

	Interest rate spread								2.87	%							2.49	%

	Net yield on interest-earnings assets (5)								3.03	%							2.69	%

(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 $2.5 million and $1.5 million for the three-months ended September 30, 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.


			Nine months ended September 30,

			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)	$	203,222	$	4,150,723			6.55	%	$	159,416	$	3,218,713			6.62	%
		Mortgage and asset-backed securities (3)		29,137		966,352			4.03	%		32,914		831,223			5.29	%
		Investment securities (4)		89,327		3,221,270			3.71	%		84,556		2,520,421			4.49	%
		Money market instruments		8,605		526,511			2.19	%		4,609		277,384			2.22	%

	Total			330,291		8,864,856			4.98	%		281,495		6,847,741			5.50	%

	Interest-bearing liabilities:
		Deposits		85,985		4,656,115			2.47	%		83,461		3,578,920			3.12	%
		Fed funds bought and securities sold under agreements to repurchase		71,612		3,525,405			2.72	%		72,751		2,685,683			3.62	%
		Advances from FHLB		4,525		135,087			4.48	%		4,639		120,011			5.17	%
		Other borrowings		142		4,945			3.84	%		595		19,798			4.02	%

	Total			162,264		8,321,552			2.61	%		161,446		6,404,412			3.37	%

	Net interest income		$	168,027							$	120,049

	Interest rate spread								2.37	%							2.13	%

	Net interest-earning assets				$	543,304							$	443,329

	Net yield on interest-earning assets (5)								2.53	%							2.34	%

	Interest-earning assets to interest-bearing liabilities ratio					106.53	%							106.92	%

Tax equivalent spread:
	Interest-earning assets		$	330,291	$	8,864,856			4.98	%	$	281,495	$	6,847,741			5.50	%
	Tax equivalent adjustment			22,753		—			0.34	%		16,762		—			0.32	%

	Interest-earning assets - tax equivalent			353,044		8,864,856			5.32	%		298,257		6,847,741			5.82	%

	Interest-bearing liabilities			162,264		8,321,552			2.61	%		161,446		6,404,412			3.37	%

	Net interest income		$	190,780							$	136,811

	Interest rate spread								2.71	%							2.45	%

	Net yield on interest - earning assets (5)								2.88	%							2.67	%

(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 $6.2 million and $4.1 million as of September 30, 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 changes in interest rates.


		Three months ended September 30,									Nine months ended September 30,

		2003 vs. 2002									2003 vs. 2002

		Volume			Rate			Total			Volume			Rate			Total

		(In thousands)
Interest income:
	Loans (1)	$	14,785		$	(264	)	$	14,521		$	45,610		$	(1,804	)	$	43,806
	Mortgage and asset-backed securities (2)		1,188			(770	)		418			8,082			(11,859	)		(3,777	)
	Investment securities (3)		6,137			(2,756	)		3,381			12,677			(7,906	)		4,771
	Money market instruments		(744	)		521			(223	)		4,073			(77	)		3,996

Total increase (decrease) in interest income			21,366			(3,269	)		18,097			70,442			(21,646	)		48,796

Interest expense:
	Deposits		(5,294	)		4,457			(837	)		8,179			(5,655	)		2,524
	Fed funds bought and securities sold under agreements to repurchase		(3,616	)		2,985			(631	)		(5,694	)		4,555			(1,139	)
	Advances from FHLB		5,412			(5,460	)		(48	)		1,831			(1,945	)		(114	)
	Other borrowings		(11	)		—			(11	)		(595	)		142			(453	)

Total increase (decrease) in interest expense			(3,509	)		1,982			(1,527	)		3,721			(2,903	)		818

Increase (decrease) in net interest income		$	24,875		$	(5,251	)	$	19,624		$	66,721		$	(18,743	)	$	47,978

(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 amounted to $7.9 million for the quarter ended September 30, 2003, up from $3.8 million for the same period in the previous year, an increase of $4.1 million or 106.17%. Net charge-offs during the quarter ended September 30, 2003 amounted to $3.8 million, which when subtracted from the provision for loan losses of $7.9 million resulted in a net increase in the allowance for loan losses of $4.1 million. For the quarter ended September 30, 2002, net charge-offs amounted to $1.3 million, which when subtracted from the provision for loan losses of $3.8 million, resulted in a net increase in the allowance for loan losses of $2.5 million. For the nine month periods ended September 30, 2003 and 2002, net charge-offs amounted to $8.7 million and $3.2 million, respectively, which when subtracted from the provision for loan losses of $20.7 million in 2003 and $10.9 million in 2002, resulted in a net increase in the allowance for loan losses of $12.0 million and $7.7 million for the nine months ended September 30, 2003 and 2002, respectively.

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 $59.1 million as of September 30, 2003 and $47.1 million as of December 31, 2002. The increase in the provision for loan losses is attributable to the overall growth in the loan portfolio, particularly of the Westernbank Business Credit division, which specializes in commercial business loans secured principally by accounts receivable, inventory and equipment, and of the Expresso of Westernbank, which specializes in small, unsecured consumer loans up to $15,000 and real estate collateralized consumer loans up to $75,000. Westernbank Business Credit loan portfolio grew to $648.7 million at September 30, 2003, an increase of $217.7 million or 50.52%, when compared to December 31, 2002, or an increase of $260.2 million or 67.01%, when compared to September 30, 2002. The Expresso of Westernbank loan portfolio grew to $153.9 million at September 30, 2003, an increase of $35.9 million or 30.46%, from $118.0 million at December 31, 2002, or an increase of $83.3 million or 117.94%, when compared to September 30, 2002. The Expresso of Westernbank division began operations in July 2002. As a result of the increase in both portfolios, the provision for loan losses for Westernbank Business Credit and Expresso of Westernbank divisions amounted to $600,000 and $3.8 million, for the quarter ended September 30, 2003, respectively, and $2.7 million and $7.0 million, for the nine months ended September 30, 2003, respectively, contributing to the increase of $4.1 million and $9.8 million in the provision for loan losses when compared to the same periods in 2002.

Non-performing loans stand at $35.1 million or 0.76% (less than 1%) of the Bank’s loan portfolio at September 30, 2003, up from 0.51% or an increase of $15.7 million, from $19.4 million as of December 31, 2002. Excluding real estate collateralized loans, these ratios were 0.03% and 0.09% respectively, at September 30, 2003, and December 31, 2002, respectively. The increase in non-performing loans primarily comes from the Company’s commercial and regular consumer loan portfolios. Non-performing loans in the commercial loan portfolio increased by $11.9 million or 87.59%, when compared to December 31, 2002. This increase is mostly attributed to eight commercial loans with principal balances of $1.6 million, $1.5 million, $1.4 million, $1.1 million, and four other loans with outstanding principal balances below $1.0 million, all of which are collateralized by real estate properties. At September 30, 2003, only one of these loans with an outstanding balance of $1.1 million had a specific valuation allowance of $277,000. Total non-performing loans in the regular consumer loan portfolio (excluding the Expresso of Westernbank loan portfolio) grew by $1.9 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 September 30, 2003, the allowance for possible loan losses was 168.61% of total non-performing loans (reserve coverage), lower than our previous reserve coverage ratio but adequate considering that only $5.3 million is our estimated allowance for specific reserved loans and the remaining $53.8 million is for general and unallocated reserves.

Net charge-offs in the third quarter of 2003 were $3.8 million or 0.35% (annualized) to average loans, compared to $1.3 million or 0.15% (annualized) to average loans for the same period in 2002, an increase of $2.5 million or 20 basis point when compared to the same period in 2002. For the nine month period ended September 30, 2003, net charge-offs amounted to $8.7 million or 0.28% (annualized) to average loans, an increase of $5.5 million, when compared to $3.2 million or 0.10% (annualized) to average loans for the same period in 2002. Both increases were primarily due to loans charged-off in the ordinary course of business on our commercial and consumer loan portfolios. The increase in commercial loans charged-off for the nine months ended September 30, 2003, was primarily due to two loans charged-off with a principal balance of $699,000 and $165,000. The increase in consumer loans charged-off for the nine month period ended September 30, 2003, was principally due to loans charged-off by the Expresso of Westernbank division, amounting to $5.3 million or 5.17% (annualized) to average Expresso loans for the nine month period ended September 30, 2003. Delinquencies on our newest Expresso of Westernbank division portfolio at September 30, 2003, were 1.21%, including the categories of 60 days and over. These ratios are within management’s estimates for the operations of the Expresso of Westernbank division. For the three and nine month periods ended September 30, 2003, there were no charge-offs related to Westernbank Business Credit loan portfolio.

Other Income (Loss)

Other income was $7.5 million for the three month period ended September 30, 2003, compared to $6.9 million for the same period last year. The primary reason for the increase was the increase in service charges on deposit accounts and other fees, including fees associated with our trust division, insurance commissions earned by Westernbank Insurance Corp., a wholly-owned subsidiary of W Holding, and fees generated by our asset-based lending operation as well as increases in other areas resulting from the Company’s overall growing volume of business. The net effect of the above-mentioned factors, in addition to a decrease of $909,000 in net gain on sales and valuations of loans, securities and other assets, resulted in an increase of $574,000 or 8.32% in total other income for the quarter ended September 30, 2003, when compared to same quarter in year 2002.

For the nine month period ended September 30, 2003, other income (loss) was ($541,000), compared to $16.9 million for the same period in 2002. The $17.4 million decrease was mainly due to a net loss on sales and valuation of loans, securities and other assets of $22.7 million ($17.0 million net of tax) recorded during the six month period ended June 30, 2003, related to the CBO’s and CLO’s portfolio liquidated on June 6, 2003, as previously reported. See Note 4 – Investment Securities – Notes to consolidated financial statements (unaudited) and Management Discussion and Analysis of Results of Operations and Financial Condition – Investments (page 50).

Operating Expenses

Total operating expenses increased $2.1 million or 10.85% during the three months ended September 30, 2003, and $6.7 million or 12.47% for the nine months ended September 30, 2003, when compared to the corresponding periods in 2002. Salaries and employees’ benefits accounted for the majority of such increase, rising $788,000 or 10.54% for the third quarter of year 2003, and $4.4 million or 21.58% for the nine-month period ended September 30, 2003, as compared to the corresponding periods in 2002. Such increase is attributed to the continued expansion of the Company, including increases in personnel, normal salary increases and related employee benefits. At September 30, 2003, the Company had 1,071 full-time employees, including its executive officers, an increase of 121 employees or 12.74%, from September 30, 2002. New personnel and additional infrastructure were added to support the continued expansion of the Company. 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’s results of operations was an increase in salary expense in the amounts of $265,000 and $795,000 for the three and nine month periods ended September 30, 2003.

Operating expenses, as a group, excluding salaries and employees’ benefits, increased $1.4 million or 11.04% for the third quarter of 2003 and $2.3 million or 6.96%, for the nine months ended September 30, 2003, when compared to the prior year periods, resulting mostly from increases in occupancy, printing, postage, stationery and supplies, and other expenses, primarily associated with the new Expresso Division, launched in July 2002, as well as the costs associated with the additional investment in technology and general infrastructure to sustain and coordinate the Company’s expansion in all of its business areas.

The Company had an efficiency ratio of 31.62% for the third quarter of year 2003 and 32.49% for the nine months ended September 30, 2003, down from 40.87% and 39.98% for the same periods in 2002.

Net Income

Net income increased $12.0 million or 52.76%, and $14.5 million or 23.97% for the three and nine month periods ended September 30, 2003, respectively, as compared to the corresponding periods in 2002. The increase for the three and nine month periods ended September 30, 2003, primarily resulted from an increase in net interest income, which was partially offset by increases in total operating expenses and in the provisions for loan losses and income taxes. W Holding achieved this increase of 23.97% in earnings even though the nine months results include a total charge of $22.7 million ($17.0 million net of tax) on the liquidation of the Company’s portfolio of corporate bond and loan obligations (“CBO’s” and “CLO’s”) on June 6, 2003.

FINANCIAL CONDITION

The Company had total assets of $10.81 billion as of September 30, 2003, compared to $8.21 billion as of December 31, 2002, an increase of $2.61 billion or 31.79%. Loans receivable-net, grew by $779.5 million or 20.76%, 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. The investment portfolio increased $1.77 billion or 42.28%, from $4.18 billion as of December 31, 2002, to $5.95 billion as of September 30, 2003. As of September 30, 2003, total liabilities amounted to $10.02 billion, an increase of $2.39 billion or 31.43%, when compared to $7.62 billion as of December 31, 2002. Deposits increased $702.1 million or 16.33%, from $4.30 billion as of December 31, 2002. Federal funds bought and securities sold under agreements to repurchase grew by $1.66 billion or 53.54%, from $3.10 billion as of December 31, 2002 to $4.76 billion as of September 30, 2003.

Loans

Loans receivable-net were $4.53 billion or 41.93% of total assets at September 30, 2003, an increase of $779.5 million or 20.76% 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 $3.21 billion as of September 30, 2003, an increase of $534.4 million or 20.00%. Commercial real estate loans secured by first mortgages were $2.15 billion as of September 30, 2003, an increase of $501.4 million or 30.41% from December 31, 2002. The consumer loans portfolio (including credit cards and loans on deposits), commercial loans (not collateralized by real estate) and other loans increased from $1.13 billion as of December 31, 2002, to $1.39 billion as of September 30, 2003, an increase of $257.2 million or 22.80%.

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 September 30, 2003, commercial loans were 58.45% (79.92% collateralized by real estate) and consumer loans were 18.39% (74.28% collateralized by real estate) of the $4.59 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 81% of its loans collateralized by real estate as of September 30, 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 September 30, 2003, Westernbank Business Credit (asset-based) and the Expresso of Westernbank (generally unsecured consumer lending) divisions loan portfolios amounted to $648.7 million and $153.9 million, respectively. For the three-month period ended September 30, 2003, the average yield on Westernbank Business Credit division asset-based loan portfolio was 5.43% while for the Expresso of Westernbank division loan portfolio was 18.57%. The Expresso of Westernbank, Westernbank’s newest division, was created in July 2002.

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


		September 30, 2003						December 31, 2002

		Amount			Percent			Amount			Percent

		(Dollars in thousands)
Residential real estate:
	Mortgage	$	853,577			18.8	%	$	846,195			22.6	%
	Construction		210,098			4.6			181,266			4.8
Commercial, industrial and agricultural (1):
	Real estate		2,144,365			47.4			1,647,600			43.9
	Business and others		540,406			11.9			382,810			10.2
Consumer and others (2)			844,573			18.6			743,600			19.8

Total loans			4,593,019			101.3			3,801,471			101.3
Allowance for loan losses			(59,141	)		(1.3	)		(47,114	)		(1.3	)

Loan - net		$	4,533,878			100.0	%	$	3,754,357			100.00	%

(1)		Includes $648.7 million and $437.6 million at September 30, 2003 and December 31, 2002, respectively, of Westernbank Business Credit division outstanding loans.

(2)		Includes $153.9 million and $117.4 million at September 30, 2003 and December 31, 2002, respectively, of the Expresso of Westernbank division outstanding loans.

Residential real estate mortgage loans at September 30, 2003, are mainly comprised of loans secured by first mortgages on one-to-four family residential properties. At September 30, 2003, residential mortgage loans included $17.0 million of mortgages insured or guaranteed by government agencies of the United States or Puerto Rico.

The Bank originated $794.9 million of commercial real estate loans during the nine month period ended September 30, 2003. At September 30, 2003, commercial real estate loans totaled $2.15 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 September 30, 2003, consisted of consumer loans of $844.6 million, of which $627.3 million are secured by real estate, $217.3 million are unsecured consumer loans (including $153.9 million of the Expresso of Westernbank division loan portfolio), credit card loans of $55.7 million and loans secured by deposits in the Bank totaling $31.0 million.

The following table summarizes the contractual maturities of the Bank’s total loans, excluding mortgage loans held for sale, for the periods indicated at September 30, 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 at				Fixed
			September 30,		One Year or		interest		Variable interest		Fixed interest		Variable
			2003		Less		rates		rates		rates		interest rates

Residential real estate:
	Mortgage		$	853,577	$	5,318	$	11,558	$	164	$	325,164	$	511,373
	Construction			210,098		133,686		—		76,412		—		—
Commercial, industrial and agricultural:
	Real Estate			2,144,365		701,171		123,079		172,791		46,923		1,100,401
	Business and other			540,406		417,871		21,142		15,939		3,681		81,773
Consumer and other				844,573		112,175		206,050		—		526,348		—

		Total	$	4,593,019	$	1,370,221	$	361,829	$	265,306	$	902,116	$	1,693,547

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-month LIBOR rate. During the nine month period ended September 30, 2003, Westernbank purchased $228.7 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 September 30, 2003, the Bank’s commercial loan portfolio had a total delinquency ratio, including the categories of 60 days and over, of 0.88% (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 real estate collateralized consumer loans up to $75,000.

The Bank offers the service of VISA ™ and Master Card ™ credit cards. At September 30, 2003, there were approximately 26,063 outstanding accounts, with an aggregate outstanding balance of $55.7 million and unused credit card lines available of $81.6 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 September 30, 2003, the Bank’s consumer loan portfolio, including the Expresso of Westernbank loan portfolio, had a total delinquency ratio, including the categories of 60 days and over, of 1.15%.

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:


		September 30, 2003			December 31, 2002

		(Dollars in thousands)
Residential real estate mortgage and construction loans		$	3,143		$	2,026
Commercial, industrial and agricultural loans			25,451			13,567
Consumer loans			6,482			3,812

	Total non-performing loans		35,076			19,405
Foreclosed real estate held for sale			4,508			3,679

Total non-performing loans and foreclosed real estate held for sale		$	39,584		$	23,084

Interest which would have been recorded if the loans had not been classified as non-performing		$	2,196		$	1,102

Interest recorded on non-performing loans		$	415		$	775

Total non-performing loans as a percentage of loans receivable, including mortgage loans held for sale (1)			0.76	%		0.51	%

Total non-performing loans and foreclosed real estate held for sale as a percentage of total assets (2)			0.37	%		0.28	%

(1)		Computed using end of period loans.

(2)		Computed using end of period assets.

At September 30, 2003, total non-performing loans increased $15.7 million or 80.75%, from $19.4 million or 0.51% (less than 1%) of the Bank’s loan portfolio as of December 31, 2002, to $35.1 million or 0.76% (less than 1%) of the Bank’s loan portfolio as of September 30, 2003. Excluding real estate loans, these ratios were 0.03% and 0.09% at September 30, 2003 and December 31, 2002, respectively. The increase in non-performing loans primarily comes from the Company’s commercial and regular consumer loan portfolios. Non-performing loans on the commercial loan portfolio increased by $11.9 million, when compared to December 31, 2002. This increase is mostly attributed to eight commercial loans with principal balances of $1.6 million, $1.5 million, $1.4 million, $1.1 million, and four other loans with outstanding principal balances below $1.0 million, all of which are collateralized by real estate properties. At

September 30, 2003, only one of these loans with an outstanding balance of $1.1 million had a specific valuation allowance of $277,000. Total non-performing loans in the regular consumer loan portfolio (excluding the Expresso of Westernbank loan portfolio) grew by $1.9 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. At September 30, 2003, the allowance for possible loan losses was 168.61% of total non-performing loans (reserve coverage), lower than the previous reserve coverage ratio but adequate considering that only $5.3 million is the estimated allowance for specific reserved loans and the remaining $53.8 million is for general and unallocated reserves.

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 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 September 30, 2003, the Bank’s allowance for loan losses was $59.1 million, consisting of $51.9 million formula allowance, $5.3 million of specific allowances and $1.9 million of unallocated allowance. As of September 30, 2003, the allowance for loan losses equals 1.29% of total loans, and 168.61% 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 September 30, 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:


	September 30,			December 31,
	2003			2002

	(Dollars in thousands)
Balance, beginning of year	$	47,114		$	38,364
Loans charged-off:
Consumer loans (1)		8,373			4,576
Commercial, industrial and agricultural loans		2,151			3,389	(2,3)
Real estate-mortgage and construction loans		126			—

Total loans charged-off		10,650			7,965

Recoveries of loans previously charged-off:
Consumer loans		552			858
Commercial, industrial and agricultural loans		1,035			584
Real estate-mortgage and construction loans		372			190

Total recoveries of loans previously charged-off		1,959			1,632

Net loans charged-off		8,691			6,333
Provision for loan losses		20,718			15,083

Balance, end of period	$	59,141		$	47,114

Ratios:
Allowance for loan losses to total loans		1.29	%		1.24	%
Provision for loan losses to net loans charged-off		238.38	%		238.17	%
Recoveries of loans to loans charged-off in previous period		24.60	%		23.19	%
Net loans charged-off to average loans (4)		0.28	%		0.19	%
Allowance for loans losses to non-performing loans		168.61	%		242.80	%

(1)		Includes $5.3 million and $62,000 of Expresso of Westernbank charged-offs, for the periods ended September 30, 2003, and December 31, 2002, respectively.

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

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

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

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 42.


	September 30, 2003					December 31, 2002

	Amount		Percent			Amount		Percent

			(Dollars in thousands)
Commercial, industrial and agricultural loans	$	40,458		58.4	%	$	31,671		53.3	%
Consumer loans		16,375		18.4			12,004		19.5
Residential real estate mortgage and construction loans		449		23.2			443		27.2
Unallocated allowance		1,859		—			2,996		—

Total allowance for loan losses	$	59,141		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 or market are not evaluated for impairment. The portfolios of mortgage and consumer loans are considered homogeneous and are evaluated collectively for impairment.

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

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


	September 30, 2003		December 31, 2002

	(In thousands)
Investment in impaired loans:
Covered by a valuation allowance	$	28,928	$	26,074
Do not require a valuation allowance		25,991		24,515

Total	$	54,919	$	50,589

Valuation allowance for impaired loans	$	4,950	$	4,752


	September 30, 2003		September 30, 2002

Average investment in impaired loans	$	45,888	$	45,958

Interest collected in impaired loans	$	2,044	$	3,093

At September 30, 2003, the Bank’s investment in impaired loans increased $4.3 million or 8.56%, from $50.6 million as of December 31, 2002 to $54.9 million as of September 30, 2003. This increase is primarily attributed to two commercial loans classified as impaired with outstanding principal balances of $1.6 million and $1.5 million as of September 30, 2003, both of them collateralized by real estate properties. At September 30, 2003, none of these loans required a specific valuation allowance.

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 September 30, 2003 and December 31, 2002:


		September 30,		December 31,
		2003		2002

		(In thousands)
Held to maturity :
	US Government and agencies obligations	$	3,938,544	$	2,671,344
	Puerto Rico Government and agencies obligations		32,050		19,695
	Commercial paper		189,985		74,997
	Corporate notes		66,854		66,697
	Mortgage and other asset-backed securities		1,073,496		668,324

Total			5,300,929		3,501,057

Available for sale:
	Mortgage-backed securities		64,381		145,276
	Other investments		17,460		15,611

Total			81,841		160,887

Trading securities - mortgage-backed securities			2,633		—

Total investments		$	5,385,403	$	3,661,944

The carrying amount of investment securities at September 30, 2003, by contractual maturity (excluding mortgage and other 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	$	—		—	%
	Due after one year through five years		769,550		3.66
	Due after five years through ten years		3,168,994		4.04
	Due after ten years		—		—

			3,938,544		3.97

Puerto Rico Government and agencies obligations:
	Due within one year		—		—
	Due after one year through five years		17,700		6.00
	Due after five years through ten years		13,000		4.20
	Due after ten years		1,350		6.15

			32,050		5.28

Other:
	Due within one year		205,432		1.36
	Due after one year through five years		29,986		2.67
	Due after five years through ten years		—		—
	Due after ten years		38,881		6.40

			274,299		2.22

Total			4,244,893		3.86
Mortgage and other asset-backed securities			1,140,510		4.34

Total		$	5,385,403		3.96	%

Mortgage and other asset-backed securities at September 30, 2003, consist of:


			(In Thousands)
Trading securities - mortgage-backed securities			$	2,633

Available for sale - CMO’s certificates				64,381

Held to maturity:
	Federal Home Loan Mortgage Corporation certificates			8,014
	GNMA certificates			10,510
	FNMA certificates			5,188
	CMO certificates			1,041,959
	Other			7,825

		Total held to maturity		1,073,496

Total mortgage and other asset-backed securities			$	1,140,510

The Bank’s investment portfolio at September 30, 2003 had an average contractual maturity of 66 months, when compared to an average maturity of 50 months at December 31, 2002. The Bank’s interest rate risk model (refer to Part I, Item # 3 on page 61 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 September 30, 2003, had a remaining average maturity of 9 months. However, no assurance can be given that such levels will be maintained in future periods.

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

In applying the foregoing analysis, management concluded that at March 31, 2003, its investments in corporate bond and loan obligations (“CBO’s and CLO’s”) were other-than-temporary impaired. First, two tranches of a CBO with an amortized cost of $13.0 million were downgraded by two different rating agencies on April 3 and 15, 2003, 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 ($11.8 million net of tax) other than temporary impairment write-down was warranted. The same was recorded effective for the quarterly period ended March 31, 2003. In connection with the write-down, and in accordance with applicable accounting pronouncements, management also reassessed its intent to hold to maturity and reclassified the securities related to the CBO that were downgraded as available for sale as of March 31, 2003. As of March 31, 2003, there were no defaults within the securities portfolio underlying the CBO’s and CLO’s.

During the quarter ended June 30, 2003, the Company, based upon additional information available from trustees, further downgradings, a default on the scheduled interest payment of a CBO and further declines in quoted market prices for such investments, reclassified the remaining portfolio of CBO’s and CLO’s to available for sale and subsequently on June 6, 2003 sold its entire portfolio of CBO’s and CLO’s. The sale of the portfolio, with an original total investment of $62.9 million and adjusted to a fair value of $45.4 million as of March 31, 2003, was completed at a loss of $7.0 million ($5.2 million net of tax) recorded during the quarter ended June 30, 2003.

As of September 30, 2003, management concluded that there was no other-than-temporary impairment in its investment securities portfolio. (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 $660.1 million as of September 30, 2003, an increase of $99.6 million or 17.77%. 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 $4.32 billion as of September 30, 2003, an increase of $602.0 million or 16.21%. Brokered deposits amounted to $3.14 billion and $2.55 billion as of September 30, 2003 and December 31, 2002, respectively. These accounts have historically been a stable source of funds. The Bank also offers negotiable order of withdrawal (“NOW”) accounts, Super Now accounts, special checking accounts and commercial demand accounts.

At September 30, 2003, the Bank had total deposits of $4.98 billion (excluding accrued interest payable), of which $660.1 million or 13.26% consisted of savings deposits, $231.6 million or 4.65% consisted of interest bearing demand deposits, $217.8 million or 4.38% consisted of noninterest bearing deposits, and $3.87 billion or 77.71% consisted of time deposits. See Note 7 – Deposits – Notes to consolidated financial statements (unaudited).

At September 30, 2003, the scheduled maturities of time deposits in amounts of $100,000 or more are as follows:


		(In thousands)
3 months or less		$	834,539
over 3 months through 6 months			957,390
over 6 months through 12 months			886,373
over 12 months			714,167

	Total	$	3,392,469

The following table sets forth the average amount and the average rate paid on the following deposit categories for the nine months ended September 30, 2003 and for the year ended December 31, 2002:


	September 30, 2003					December 31, 2002

	Average		Average			Average		Average
	amount		rate			amount		rate

	(Dollars in thousands)
Time deposits	$	3,695,588		2.71	%	$	2,889,649		3.40	%
Savings deposits		588,298		2.14	%		509,114		2.46	%
Interest bearing demand deposits		153,217		2.56	%		124,127		2.90	%
Noninterest bearing demand deposits		219,012		—			167,352		—

	$	4,656,115		2.51	%	$	3,690,242		3.10	%

Borrowings

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


	September 30, 2003		December 31, 2002

	(In thousands)
Fed funds bought and securities sold under agreements to repurchase (1)	$	4,755,538	$	3,097,341
Advances from FHLB		146,000		120,000
Mortgage note payable		37,336		37,822

	$	4,938,874	$	3,255,163

(1)

Federal funds bought amounted to $25.0 million at September 30, 2003, at an interest rate of 1.19%, and mature within one day. No such borrowings were outstanding at December 31, 2002.

The Bank has made use of institutional federal funds bought and securities sold under agreements to repurchase in order to obtain funding, primarily through investment banks and brokerage firms. Securities sold under agreements to repurchase are collateralized with investment securities while federal funds bought do not require collateral. The Bank had $4.76 billion in federal funds bought and securities sold under agreements to repurchase outstanding at September 30, 2003, at a weighted average rate of 2.36%. Federal funds bought and securities sold under agreements to repurchase outstanding as of September 30, 2003, mature as follows: $967.7 million within 30 days; $1.14 billion in 2004; $832.2 million in 2005; $724.9 million in 2006; $73.4 million in 2007; and $1.02 billion thereafter.

Westernbank also obtains advances from FHLB of New York. As of September 30, 2003, Westernbank had $146.0 million in outstanding FHLB advances at a weighted average rate of 4.05%. Advances from FHLB mature as follows: $40.0 million within 30 days; $14.0 million in 2005; $50.0 million in 2006; and $42.0 million thereafter.

At September 30, 2003, Westernbank World Plaza, Inc., a wholly-owned subsidiary of Westernbank Puerto Rico, had outstanding $37.3 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 at a rate per year equal to the (1) greater of 13.05% or the Treasury Rate plus five percentage points or (2) 10.05%, depending on the fulfillment of certain conditions on the repricing date. Westernbank World Plaza has a prepayment option on the repricing date, without penalty. The mortgage note is collateralized by a 23-story office building, including its related parking facility, located in Hato Rey, Puerto Rico.

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


		September 30, 2003			December 31, 2002

		(Dollars in thousands)
Amount outstanding at period end		$	2,147,934		$	1,043,493
Monthly average outstanding balance			1,030,258			1,378,074
Maximum outstanding balance at any month end			2,147,934			2,104,599
Weighted average interest rate:
	For the nine months and period ended		1.35	%		1.51	%
	At the end of nine months and at period end		1.32	%		1.96	%

Stockholders’ Equity

As of September 30, 2003, total stockholders’ equity amounted to $797.7 million, an increase of $213.0 million or 36.43% when compared to $584.7 million as of December 31, 2002. The increase resulted from the issuance of 4,232,000 and 2,640,000 shares of the Company’s Series F and Series G Preferred Stock completed in June and August 2003, respectively, providing a net capital infusion of $165.9 million, plus the net income generated for the nine months ended September 30, 2003, partially offset by dividends paid during the nine month period ended September 30, 2003 of $13.6 million and $14.8 million on our common and preferred stock, respectively, and an increase of $465,000 in accumulated other comprehensive loss. The period-end number of common shares outstanding increased from 68,346,306 as of December 31, 2002 to 68,651,651 as of September 30, 2003, as a result of the three-for-two stock split in the form of a stock dividend on our common stock declared on November 4, 2003, and to be distributed on December 10, 2003, and for the conversion of 204,594 shares of the Company’s convertible preferred stock series A, into 305,345 shares of the Company’s common stock.

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						Nine months ended						Year Ended
		September 30,						September 30,						December 31,
		2003			2002			2003			2002			2002

Per share data:
	Dividend payout ratio		16.28	%		18.85	%		22.51	%		20.31	%		19.46	%
	Book value per common share	$	5.94		$	5.04		$	5.94		$	5.04		$	5.28
	Preferred stock outstanding at end of period		15,610,405			7,219,999			15,610,405			7,219,999			8,942,999
	Preferred stock equity at end of period (in thousands)	$	390,260		$	180,500		$	390,260		$	180,500		$	223,575
Performance ratios:
	Return on average assets (1)		1.36	%		1.22	%		1.05	%		1.17	%		1.22	%
	Return on average common stockholders’ equity (1)		28.69	%		26.86	%		20.95	%		24.47	%		25.39	%
	Efficiency ratio		31.62	%		40.87	%		32.49	%		39.98	%		39.15	%
	Operating expenses to end-of-period assets		0.81	%		1.00	%		0.75	%		0.91	%		0.90	%
Capital ratios:
	Total capital to risk-weighted assets		14.74	%		13.54	%		14.74	%		13.54	%		13.83	%
	Tier I capital to risk-weighted assets		13.86	%		12.59	%		13.86	%		12.59	%		12.93	%
	Tier I capital to average assets		8.06	%		7.58	%		8.06	%		7.58	%		7.21	%
	Equity-to-assets ratio		7.38	%		6.28	%		7.38	%		6.61	%		7.13	%
Other selected data:
	Total trust assets managed	$	317,606		$	248,927		$	317,606		$	248,927		$	255,794
	Branch offices		51			50			51			50			50
	Number of employees		1,071			950			1,071			950			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 is derived 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 September 30, 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 September 30, 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 September 30, 2003, are presented below:


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

					(In thousands)
Short-term borrowings	$	2,147,934	$	—	$	—	$	—	$	2,147,934
Long-term borrowings		—		1,621,006		73,400		1,096,534		2,790,940
Operating Lease Obligations		2,065		4,200		3,283		15,005		24,553

Total contractual obligations	$	2,149,999	$	1,625,206	$	76,683	$	1,111,539	$	4,963,427

Such commitments will be funded in the normal course of business from the Company’s principal source of funds. At September 30, 2003, the Company had $2.68 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 September 30, 2003, is presented below:


	PAYMENTS DUE BY PERIOD

			Less than one
	Total		year		2-5 years

			(In thousands)
Lines of credit	$	153,885	$	71,174	$	82,711
Commercial letters of credit		14,635		14,635		—
Commitments to extend credit		253,651		169,723		83,928
Commitments to purchase mortgage loans		150,000		150,000		—

Total	$	572,171	$	405,532	$	166,639

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, 2003 (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 September 30, 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 September 30, 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	$	855,531		14.83	%	$	461,570		8.00	%		N/A		N/A
	Westernbank		843,647		14.45	%		467,225		8.00	%		584,032		10.00	%
Tier I Capital to Risk Weighted Assets:
	Consolidated		796,390		13.95	%		228,419		4.00	%		N/A		N/A
	Westernbank		787,636		13.62	%		231,247		4.00	%		346,871		6.00	%
Tier I Capital to Average Assets:
	Consolidated		796,390		8.06	%		296,455		3.00	%		N/A		N/A
	Westernbank		787,636		8.03	%		294,300		3.00	%		490,500		5.00	%

The Company’s ability to pay dividends to its stockholders and other activities can be restricted if its capital falls below levels established by the Federal Reserve guidelines. In addition, any bank financial holding company whose capital falls below levels specified in the guidelines can be required to implement a plan to increase capital. 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 the full Board of Directors and certain senior management representatives. The ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Company’s balance sheet in part to minimize the potential impact on net portfolio value and net interest income despite changes in interest rates. The Company’s exposure to interest rate risk is reviewed on a quarterly basis by the ALCO. Interest rate risk exposure is measured using interest rate sensitivity analysis to determine the change in net portfolio value in the event of hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Company has implemented strategies to more closely match its balance sheet composition. Interest rate sensitivity is computed by estimating the changes in net portfolio of equity value, or market value over a range of potential changes in interest rates. The market value of equity is the market value of the Company’s assets minus the market value of its liabilities plus the market value of any off-balance sheet items. The market value of each asset, liability, and off-balance sheet item is its net present value of expected cash flows discounted at market rates after adjustment for rate changes. Given the fed fund rate of 1.00% at September 30, 2003 and 1.25% at December 31, 2002, a linear 50 basis points decrease for September 30, 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:

September 30, 2003:


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

			(Dollars in thousands)
+200 Basis Points	$	271,036	$	(13,026	)		(4.59	)%
Base Scenario		284,062		—			—
-50 Basis Points		275,662		(8,400	)		(2.96	)%

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.

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.

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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer concluded that, the Company’s disclosure controls and procedures are effective in timely alerting them to any material information relating to the Company and its subsidiaries required to be included in the Company’s Exchange Act filings.

There were no significant changes made in the Company’s internal controls over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

A – Exhibits

31.1 Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

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

32.2 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 August 28, 2003, the Company filed a Form 8-K to file certain documents in connection with its offering of shares of its Series G preferred stock.

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: November 13, 2003	By	/s/ Frank C. Stipes, Esq.

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

Date: November 13, 2003	By	/s/ Freddy Maldonado

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

Index to Exhibits

31.1 302 Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 302 Certification of Chief Financial Officer as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

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

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


		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 cardholder’s intangible assets. SFAS No. 147 was effective for acquisitions or impairment measurement of such intangibles effective on or after October 1, 2002. SFAS No. 147 did not have a significant effect on the Company’s financial condition or results of operations.

		In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.* This Statement amends SFAS No. 123, *Accounting for Stock-Based Compensation,* to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, the Company changed the method of accounting for employee stock options from the intrinsic value method to the fair value method. Under the modified prospective method selected by the Company under the provisions of SFAS No. 148, compensation cost 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 three and nine month periods ended September 30, 2003 was a charge of $265,000 and $795,000, respectively.

		Prior to January 1, 2003, the Company followed the intrinsic value-based method of accounting prescribed by Accounting Principles Board 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 have an exercise price equal to the market value of the underlying common stock at the grant date, no compensation expense was recognized at the measurement date.



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

		In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), *Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.* FIN 46 addresses consolidation by business enterprises of variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not issue voting interests (or other interests with similar rights) or (b) the total equity investment at risk is not sufficient to permit the entity to finance its activities. FIN 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 provision of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003, and are otherwise effective at the beginning of the first interim period beginning after December 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 Other*s, and (4) amends certain other existing pronouncements. This Statement was effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Implementation of SFAS No. 149 did not have a significant effect on the Company’s financial position or results of operations.

		In May 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity*. SFAS No. 150 is effective for all freestanding financial instruments entered into or modified after May 31, 2003. For all other freestanding financial instruments, it will become effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 applies to three categories of freestanding financial instruments (mandatorily redeemable instruments, instruments with repurchase obligations and instruments with obligations to issue a variable number of shares). Instruments within the scope of SFAS No. 150 must be classified as liabilities in the statement of condition. Certain provisions of SFAS No. 150 related to mandatorily redeemable financial instruments have been subsequently deferred indefinitely by the FASB. The Company does not have mandatorily redeemable financial instruments outstanding. Implementation of SFAS No. 150 is not expected to have a significant effect on the Company’s financial position or results of operations.

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

2.		EARNINGS PER SHARE AND CAPITAL TRANSACTIONS